Global trading powerhouse Jane Street is preparing to defend its controversial options trading activity in India, arguing that surging retail demand drove its actions and created pricing gaps between derivatives and underlying equities. The firm’s response comes amid an ongoing investigation by the Securities and Exchange Board of India (SEBI), which has accused Jane Street of market manipulation and imposed temporary trading restrictions earlier this month.
Key highlights from Bloomberg News, July 29, 2025:
1. Retail demand and pricing gaps
- Jane Street is expected to argue that unusually high retail demand for options on the Nifty Bank Index created a disconnect between prices implied by options and those reflected in the underlying shares
- The firm claims this gap prompted it to execute arbitrage trades aimed at closing the disparity, a standard market-making practice
- According to sources familiar with the matter, individual traders bought nearly 4 billion dollars worth of stocks via options in the first 30 minutes of trading on January 17, 2024
- Jane Street facilitated approximately 1 billion dollars of that demand, acting as a market maker
2. SEBI’s allegations and interim order
- SEBI’s July 3 interim order accused Jane Street of manipulating intraday index levels by aggressively buying constituent stocks in the morning and reversing trades later to profit from bearish options positions
- The regulator alleged that Jane Street’s share purchases represented 16 to 25 percent of trading turnover in 10 of the 12 Nifty Bank Index stocks on the day in question
- The firm’s bearish options position was reportedly 7.3 times larger than its long cash and futures exposure
- SEBI impounded 4,843 crore rupees in alleged unlawful gains and temporarily barred Jane Street from trading
3. Jane Street’s defense strategy
- The firm is expected to argue that its trades were driven by retail demand and executed with partial hedging, a common practice among global derivatives market makers
- Jane Street reportedly hedged less in India than in other markets to minimize market impact and spread out its hedging activity over several hours
- It claims that only 10 percent of the retail demand could have been hedged due to the sheer volume and timing of trades
- In the afternoon, Jane Street sold stocks gradually to avoid settlement-price distortions as options approached expiry
4. Regulatory response and market impact
- SEBI lifted Jane Street’s trading ban on July 21 after the firm deposited the impounded gains into an escrow account
- However, Jane Street has agreed not to trade in options or cash markets until it formally responds to SEBI’s findings
- The case has sparked debate over the role of high-frequency trading firms in India’s rapidly growing derivatives market, which now sees turnover more than 300 times that of cash equities
- Critics argue that Jane Street’s scale and speed gave it undue influence over market movements, even if trades were technically within regulatory bounds
5. Broader implications for retail traders
- The episode has reignited concerns about retail investor vulnerability in India’s options-heavy trading landscape
- While Jane Street maintains its actions were legitimate and demand-driven, SEBI’s findings suggest a need for tighter surveillance and clearer rules around expiry-day trading behavior
- Market experts warn that excessive retail enthusiasm for options, combined with sophisticated institutional strategies, can lead to distorted price signals and increased volatility
Source: Bloomberg News, July 29, 2025
