Sebi accused Jane Street of running a "sinister scheme" that manipulated stock prices and caused small investors to trade at misleading and unfavorable prices. While Jane Street has not publicly commented, reports suggest the firm told its staff it was "beyond disappointed" and intends to challenge the ban.
Jane Street is a major quantitative trading firm, using algorithms and mathematical models to execute trades globally. Founded in New York, it employs over 3,000 people and reportedly accounted for over 10% of North America's equity trading in 2023.
The Allegations: Stock Price Manipulation on Expiry Days
Sebi's investigation centers on Jane Street's trading activities on India's Bank Nifty index, which tracks 12 major Indian banks. The regulator alleges Jane Street used two entities to manipulate both the cash and derivatives markets.
One Jane Street entity allegedly purchased large volumes of bank shares at market open, driving up prices. At the same time, the second entity reportedly placed bets on the index falling in the derivatives market.
Towards market close on expiry days, Jane Street supposedly sold the bank shares, causing the index to drop and generating profits in the derivatives market.
This alleged tactic, called "marking the close," is considered illegal even in the US. Small investors reportedly lost money by buying shares at inflated prices during the day, while Jane Street profited during the market's closing hours.
Market Impact and Ongoing Investigation
Sebi claims Jane Street created a false appearance of market activity, misleading unsuspecting investors. The regulator's order stated that the firm's actions put market integrity and small investor trust at risk, and described Jane Street as an "untrustworthy actor."
In response, Jane Street argues it was conducting legal "index arbitrage," a strategy used to profit from price differences between markets. However, experts have questioned this defense, saying the firm's trades went beyond typical arbitrage by betting heavily on market declines after boosting prices artificially.
Sebi highlighted that Jane Street earned $4.3 billion in India over two years while retail investors suffered huge losses. Recent data shows retail investors lost over 1 trillion rupees ($11.6 billion) in the derivatives market in FY25, with average losses per person around $1,283.
As the investigation continues, Jane Street has placed $560 million in an escrow account while requesting Sebi to lift the ban. If the charges are confirmed, Indian law allows Sebi to impose fines up to three times this amount.
The case has sparked wider debate about market surveillance in India, with experts urging stronger real-time detection to prevent future manipulation.
