India’s market watchdog faced one of its most difficult enforcement challenges in recent years when it took on Jane Street, the Wall Street trading powerhouse known for lightning-fast algorithms and complex derivatives strategies. The fight revealed gaps in India’s ability to keep pace with modern high-frequency trading — and the heavy toll on everyday investors caught in the middle.

Early Warnings, Late Action

By late 2023, the National Stock Exchange (NSE) had begun noticing unusual patterns in Jane Street’s trades. These weren’t your average market moves — they were large, rapid-fire transactions that triggered internal surveillance alerts. The NSE shared data and analysis with the Securities and Exchange Board of India (SEBI) as early as November that year.

SEBI had already started an informal review into the firm’s derivatives activities, but turning suspicion into a formal case wasn’t simple. The regulator was dealing with massive volumes of complex trade data generated by Jane Street’s high-frequency systems. Sorting through it meant distinguishing between aggressive but legal trading and outright manipulation — a tricky legal and technical task.

Meanwhile, the boom in India’s derivatives market was pulling in inexperienced retail investors. Between 2021 and early 2024, small traders collectively lost around $21 billion in derivatives. Many came from lower-income groups, with limited financial safety nets. Yet SEBI hesitated to introduce tough measures, wary of being seen as overregulating or damaging market sentiment.

The Derivatives Explosion and Jane Street’s Tactics

India’s derivatives market had exploded after the pandemic, becoming the largest in the world by volume in 2023. The notional value of derivatives traded was more than 400 times larger than the cash market — a ratio far above global norms.

It was in this environment that Jane Street allegedly used a playbook involving both cash and derivatives markets to sway index prices. SEBI’s investigation found that the firm would accumulate large quantities of certain bank stocks in both cash and futures markets, pushing the index value up. Simultaneously, it would short-sell the index via derivatives. Later in the day, the firm would unload its stock holdings, driving the index down and profiting from its earlier short positions.

SEBI claimed this cycle generated huge profits for Jane Street while smaller traders — many of them retail investors — suffered losses. The regulator said Jane Street earned about $4.23 billion in Indian derivatives trading from January 2023 to March 2025, of which $567 million were “unlawful gains.”

Jane Street denied wrongdoing, insisting it was engaged in standard “index arbitrage” and that all trades complied with Indian law. The firm deposited the disputed profits into an escrow account to regain market access, though it has not resumed trading in India.

Regulatory Hesitation Meets Market Complexity

SEBI’s challenge wasn’t just legal; it was structural. The regulator’s role includes both maintaining market integrity and encouraging the growth of India’s financial markets. This dual mission can create tension — especially in fast-evolving sectors like high-frequency derivatives trading.

Some within SEBI feared that imposing strict limits, like minimum income thresholds for derivative traders, would spook markets and reduce participation. Instead, the regulator initially opted for softer measures, such as mandating warning pop-ups on trading platforms to alert retail traders about the high risk of losses.

By late 2024, however, the mood had shifted. SEBI began tightening rules, including raising the minimum contract size for derivatives to make them less accessible to small investors. Finally, in July 2025, it issued a 105-page order banning Jane Street from Indian markets — one of its strongest actions ever against a foreign investor.

The case also highlighted another challenge: Jane Street’s trades were executed through entities in different countries, adding layers of jurisdictional complexity. Coordinating across borders and sifting through multi-market transactions took time — sometimes years — in similar cases abroad.

A Market Built for Speed

While SEBI was scrutinizing Jane Street, the NSE was continuing its own growth drive. As derivatives trading fees became a major revenue source, the exchange worked closely with high-frequency trading firms. It even planned to triple its co-location capacity, allowing traders to place their systems physically closer to exchange servers for faster execution.

This growth-friendly stance meant NSE hosted meetings with top trading firms, including Jane Street, even while the firm was under regulatory review. NSE said such meetings were routine and within regulatory boundaries, and that it had no authority to take punitive action against investors.

Critics say this dynamic — an exchange eager to expand high-frequency trading and a regulator caught between market development and investor protection — created a perfect storm for Jane Street’s strategies to flourish.

Now, with the derivatives market cooling and retail participation slowing, SEBI’s tougher stance may be showing results. But for many small traders, the damage has been done.

Mumbai cab driver Govind Jha, once an active derivatives trader, summed up the frustration: “If big firms can move the market like this and get back in so easily, how can small people like me ever win?”

(Adapted from Reuters.com)

Categories: Economy & Finance, Regulations & Legal, Strategy