Safeguarding India’s Financial Markets:
SEBI’s Crackdown on Jane Street and Strategies to Prevent Future Manipulations
The Securities and Exchange Board of India (SEBI) recently imposed a temporary ban on Jane Street Group, a U.S.-based trading firm, for alleged market manipulation in the Indian derivatives market, specifically targeting the Bank Nifty index. This action, accompanied by the impoundment of ₹4,843.57 crore in alleged unlawful gains, has exposed vulnerabilities in India’s financial markets, particularly for retail investors who dominate the world’s largest derivatives market. This paper provides an in-depth analysis of SEBI’s allegations, the mechanics of Jane Street’s manipulative strategies, their impact on retail traders, and proposes robust regulatory measures to prevent similar frauds in the future.
A Wake-Up Call for India’s Financial Markets
On July 3, 2025, SEBI issued a landmark interim order barring Jane Street Group and its affiliates—JSI Investments Pvt Ltd, JSI2 Investments Pvt Ltd, Jane Street Singapore Pte Ltd, and Jane Street Asia Trading Ltd—from trading in Indian securities markets. The regulator accused the firm of orchestrating a sophisticated scheme to manipulate the Bank Nifty index, resulting in alleged unlawful gains of ₹4,843.57 crore (approximately $567 million).
This action, one of the largest regulatory interventions against a foreign trading entity in India, has sparked widespread debate about the vulnerabilities of retail investors in the derivatives market and the adequacy of existing oversight mechanisms.India’s derivatives market, the largest globally by trading volume, recorded 7.3 billion equity derivative trades in April 2025, accounting for nearly 60% of global volumes. However, a SEBI study revealed that 93% of retail investors in the futures and options (F&O) segment incur losses, highlighting the high-risk nature of these instruments. The Jane Street case underscores how sophisticated institutional players can exploit market mechanisms to the detriment of retail traders, raising urgent questions about regulatory reforms needed to ensure fairness and transparency.This paper examines SEBI’s allegations, dissects Jane Street’s manipulative strategies, evaluates their impact, and proposes comprehensive measures to prevent future manipulations.
Drawing on SEBI’s interim order, media reports, expert opinions, and global regulatory practices, it offers a critical perspective on strengthening India’s financial market ecosystem.
The Jane Street Case:
Unraveling the Manipulation
The Modus Operandi:
Intra-Day Index Manipulation and Extended Marking the CloseSEBI’s 105-page interim order details two primary manipulative strategies employed by Jane Street between January 2023 and May 2025: “Intra-day Index Manipulation” and “Extended Marking the Close.” These strategies targeted the highly liquid Bank Nifty and Nifty 50 indices, particularly on expiry days when options contracts are settled.
Intraday Index Manipulation
Jane Street allegedly executed a two-phase operation, exemplified on January 17, 2024. In the morning, the firm aggressively purchased ₹4,370 crore worth of Bank Nifty constituent stocks and futures, artificially inflating the index. Simultaneously, it built massive bearish positions in index options, acquiring ₹32,115 crore in short options (cheap puts and expensive calls), betting on a subsequent decline. In the afternoon, Jane Street reversed its positions by selling ₹5,372 crore in securities, driving the index down and triggering significant gains in its options positions. This strategy yielded a single-day profit of ₹734.93 crore, with overall options profits estimated at ₹43,289 crore over the period, offset by ₹7,687 crore in losses in cash and futures segments.
Extended Marking the Close
On three additional days in May 2025, Jane Street employed a strategy known as “Extended Marking the Close,” involving concentrated buying or selling in the final hours of expiry days to influence settlement prices. This tactic, deemed manipulative by SEBI, aimed to maximize options profits by distorting index levels, misleading other market participants. Despite warnings from the National Stock Exchange (NSE) in February 2025, Jane Street persisted, disregarding both regulatory cautions and its own compliance pledge.
Mirror Trading and Circular Trading
SEBI also flagged Jane Street’s use of “mirror trading,” where the firm placed matching buy and sell orders between its own entities at identical prices within seconds, creating the illusion of active trading volume. This practice, combined with circular trading, artificially inflated market activity, misleading retail investors into believing price movements were driven by genuine market forces.
Scale of Profits and Regulatory Concerns
SEBI’s investigation revealed that Jane Street’s trading activities accounted for a significant portion of market transactions, particularly in the Bank Nifty options segment, contributing ₹17,319 crore (40% of total index options profits). The firm’s net gains were estimated at ₹36,502 crore over 21 expiry days, with ₹4,843.57 crore identified as unlawful. These figures highlight the firm’s disproportionate influence, enabled by its financial and technological prowess, and the severe impact on retail investors who suffered losses due to manipulated price movements.
Impact on Retail Investors:
A Market Tilted Against the Vulnerable
India’s derivatives market is a high-stakes arena where retail investors, often lacking the resources and sophistication of institutional players, face significant risks. SEBI’s study indicating that 93% of retail F&O traders incur losses underscores the structural disadvantages they face. The Jane Street case exacerbates these concerns, as the firm’s alleged manipulations created artificial price spikes and crashes, misleading retail traders into making unprofitable trades.For instance, on expiry days, Jane Street’s aggressive morning buying inflated the Bank Nifty index, enticing retail investors to take bullish positions. The subsequent sell-off in the afternoon caused sharp declines, leading to losses for those caught on the wrong side of the trade. SEBI noted that these actions “distorted market prices and undermined market integrity,” causing “unfair losses or missed opportunities” for retail investors.The case also highlights broader systemic issues. The growing influence of “money power,” the disparity in liquidity between index derivatives and single stocks, and the volume-driven business models of exchanges and brokers as structural vulnerabilities that enable such manipulations.
SEBI’s Response:
A Robust Crackdown
SEBI’s interim measures against Jane Street are among the strongest in its history:
Trading Ban:
Four Jane Street entities have been barred from trading in Indian securities markets until further notice.
Impoundment of Gains:
SEBI ordered the seizure of ₹4,843.57 crore in alleged unlawful profits, to be deposited in an escrow account. Banks and depositories have been directed to freeze all debit transactions from Jane Street’s accounts.
Ongoing Investigation:
SEBI has expanded its probe to include other indices and exchanges, signaling a broader crackdown on manipulative practices.
Exchange Monitoring:
Stock exchanges have been instructed to closely monitor Jane Street’s future activities to prevent recurrence of manipulative patterns. Jane Street has 21 days to respond to SEBI’s order and has disputed the allegations, asserting compliance with global regulations. However, SEBI’s decisive action sends a strong message about its commitment to protecting market integrity and retail investors.
Preventing Future Manipulations:
A Multi-Pronged Approach to prevent Jane Street-like frauds, SEBI must adopt a proactive, multi-faceted regulatory framework that addresses both immediate vulnerabilities and long-term systemic issues. Drawing on expert recommendations, SEBI’s findings, and global best practices, the following measures are proposed:
1. Integrated Surveillance of Cash and Derivatives
Market's Manipulators exploit the interplay between cash, futures, and options markets to create artificial price movements. SEBI should develop advanced surveillance systems that monitor trading patterns across these segments in real-time. Machine learning algorithms can detect anomalies, such as correlated spikes in cash market purchases and options positions, flagging suspicious activities for immediate investigation.
Global Example: The U.S. Securities and Exchange Commission (SEC) employs the Consolidated Audit Trail (CAT) to track trading activities across markets, enabling rapid detection of manipulative patterns. India could adopt a similar system tailored to its derivatives-heavy market.
2. Enhanced Transparency for Foreign Institutional Investors (FIIs)
Jane Street’s complex corporate structure, involving multiple entities, obscured its trading activities. SEBI should mandate greater transparency by requiring FIIs to disclose ultimate beneficial owners and detailed trading strategies. This would prevent firms from using offshore entities to bypass regulations, as SEBI alleged Jane Street did by incorporating Indian entities to circumvent FPI restrictions.
Recommendation:
Implement a Know-Your-Client (KYC) framework for FIIs, similar to anti-money laundering protocols, to ensure accountability and traceability.
2. Stricter Expiry-Day Regulations
Expiry days are particularly vulnerable to manipulation due to high trading volumes and price sensitivity. SEBI should introduce:
Position Limits: Cap the size of positions a single entity can take in index options and futures on expiry days to prevent market domination.
Higher Margin Requirements: Increase margins for large, risky positions to deter aggressive trading strategies.
Circuit Breakers: Implement intra-day circuit breakers for index derivatives to limit extreme price movements caused by manipulative trades.
Global Example: The Chicago Mercantile Exchange (CME) imposes position limits and dynamic price bands on derivatives to stabilize markets during volatile periods. SEBI could adapt these measures to India’s context.
3. Swift Action on Abnormal Profits
Jane Street’s consistent high profits over two years went unchecked until SEBI’s intervention. The regulator should establish thresholds for abnormal profits in derivatives trading, triggering automatic audits when exceeded. Real-time pattern recognition tools can identify repetitive strategies, such as intra-day reversals, enabling faster regulatory responses.
4. Regulating Algorithmic Trading
Jane Street’s high-frequency trading (HFT) capabilities amplified its ability to manipulate markets. SEBI should require proprietary trading firms to register their algorithms and disclose key parameters, such as order execution logic. Regular audits of algorithmic strategies can ensure compliance with market conduct standards.
Global Example:
The European Union’s MiFID II directive mandates pre-trade transparency and stress testing for algorithmic trading systems, reducing the risk of market abuse. SEBI could adopt similar guidelines to curb HFT-driven manipulations.
5. Strengthening Retail Investor Protection
Retail investors, who dominate India’s derivatives market, need better safeguards. SEBI could:Enhance Investor Education: Launch campaigns to educate retail traders about the risks of F&O trading and common manipulative tactics.
Limit Retail Exposure:
Restrict retail participation in complex derivatives products unless they meet financial literacy or net-worth criteria.
Compensatory Mechanisms:
Establish a fund to compensate retail investors affected by proven market manipulations, financed by penalties imposed on violators.
6. Collaboration with Global Regulators
Given Jane Street’s global operations, SEBI should collaborate with international regulators, such as the SEC and the UK’s Financial Conduct Authority, to share intelligence on cross-border trading activities. This would help detect and deter manipulations originating outside India.
Challenges and Considerations
While these measures promise to strengthen market oversight, their implementation faces challenges:
Technological Complexity: Developing real-time surveillance systems requires significant investment in technology and expertise.
Balancing Regulation and Market Growth: Overly stringent rules could deter legitimate institutional participation, reducing liquidity in India’s derivatives market.
Global Coordination: Aligning with international regulators may face hurdles due to differing legal frameworks and priorities.To address these, SEBI should prioritize phased implementation, starting with high-impact measures like expiry-day controls and algorithmic transparency, while investing in capacity building for advanced surveillance.
Conclusion:
Building a Resilient Financial Ecosystem
The Jane Street case is a stark reminder of the vulnerabilities in India’s derivatives market, particularly for retail investors who bear the brunt of manipulative practices. SEBI’s decisive action—banning the firm, impounding unlawful gains, and expanding its investigation—demonstrates its commitment to market integrity. However, preventing future manipulations requires a proactive, technology-driven, and globally aligned regulatory framework.By integrating real-time surveillance, enhancing transparency, tightening expiry-day rules, and prioritizing retail investor protection, SEBI can fortify India’s financial markets against sophisticated manipulations. These reforms, coupled with international collaboration and investor education, will foster a culture of accountability and fairness, ensuring that India’s position as the world’s largest derivatives market is underpinned by trust and integrity.
Anish Jagdish Parashar
Indirect tax india research
Disclaimer: The recommendations provided are for educational purposes and reflect the author's opinions. Investors should consult certified professionals before making financial decisions.