Opinion Express View on Jane Street episode: Raise the red flags

In recent years, alongside the dramatic increase in the number of Indian households entering the stock markets, the derivatives segment has also witnessed a huge spurt in trading. Within derivatives, index options account for a sizeable share of trade. An earlier study by Sebi, the stock market regulator, noted that while 91.1 per cent of individual traders had lost money in the futures and options segment, it was the foreign portfolio investors and proprietary traders who had earned the profits, most of which were made by “algo entities”. In April last year, reports mentioned a legal dispute involving the US-based Jane Street Group, which belongs to the algorithmic trading community, “for alleged unauthorised use of their proprietary trading strategies in India”. Sebi followed up these reports with a preliminary inquiry to determine if there was any market abuse. Following its investigation, on July 3, the stock market regulator banned the Jane Street Group for manipulative trading practices and ordered the impounding of its unlawful gains, which it estimated at Rs 4,843 crore.

In its interim order, the stock market regulator has detailed the modus operandi of the Group, the strategies it drew on in its trading. It notes that the Group operated an “intra day index manipulation pattern”. This involves dealing in segments across equities, futures and options simultaneously. The interim order notes that the “intensity and sheer scale of their intervention” and the “reversal of these large and aggressive trading…” was “without any economic rationale, other than the concurrent activity in and impact on their positions in the Bank Nifty index options markets”. The Group also engaged in an extended “marking the close” strategy, an approach where large buy or sell orders are placed in “the final moments of a trading session, with the specific intent of influencing the closing price of a security or index to its advantage”. As per the order, on at least 21 days, the Group has “prima facie engaged in illegal manipulation”. In February, the National Stock Exchange cautioned the Group, saying that it had been “consistently engaging in trading patterns that raised serious concerns over market integrity”. Sebi notes that the Group ignored the “regulatory red flags”, and continued with its strategies.

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At a time when millions are entering the stock markets, the regulator must ensure that the integrity of markets is maintained. That its surveillance and monitoring systems are able to effectively track transactions at all levels and raise red flags. Regulatory action must be swiftly taken to protect the sanctity of markets.