Trading tricks or Index rigging? SEBI’s case against Jane Street

Raveena S

OVERVIEW

New York-based trading powerhouse Jane Street has found itself at the center of controversy in recent times after India’s market regulator, Securities Exchange board of India (SEBI) imposed a ban on its participation in the securities market. Maintaining its stance of denying any misconduct, Jane Street is contesting SEBI’s order and has deposited over ₹4,800 crore (around $560 million) into an escrow account. This deposit has paved way for the firm to resume its trading operations in the Indian market while the proceedings are still underway.

Inside Jane Street: The Global Trading Powerhouse

Jane Street is recognized as a private, American proprietary trading firm that uses mathematical models and algorithms to trade rapidly across multiple markets. Operating in over 45 countries with a workforce exceeding 3,000 employees, Jane Street stands as one of the major players on Wall Street. According to a Financial Times report, the firm’s share of North America’s equity trading volume rose significantly in 2023, reaching more than 10.4 percent, up from 7.6 percent the previous year. In India, the firm traded in both the cash market and the derivatives market.

India’s Derivatives Boom — Growth, Risk, and Retail Frenzy

India's derivatives market has experienced a period of explosive growth, establishing itself as the world's largest derivatives market. In May 2025, India's contribution to global equity derivatives trading volume was approximately 60%, with notional turnover up 48x since 2018. This surge is largely driven by retail investors, whose participation jumped from 2% in 2018 to 40% in 2024, aided by accessible instruments such as Bank Nifty options.

However, a 2023 SEBI study revealed that 90% of retail derivatives traders suffered losses, making them vulnerable to market manipulation. Adding to the complexity, India’s derivatives market has fortnightly option expiries—periods typically marked by intense speculation and heightened volatility. In its 2024 consultations, SEBI had already identified these expiry days as especially vulnerable to such market dynamics. It is during these volatile windows that Jane Street is alleged to have carried out the manipulative trading activities in context.

The SEBI vs. Jane Street Showdown

SEBI’s Allegations

Jane Street is embroiled in a high-profile legal dispute with the Securities Exchange Board of India (SEBI). The regulator has accused the firm of engaging in an "intraday index manipulation strategy" within the Indian derivatives market, specifically targeting the BANKNIFTY index. SEBI's allegations contend that Jane Street's trading activities artificially influenced market prices to generate illicit profits.

SEBI’s actions against Jane Street played out over several months, with the regulator’s case beginning to take shape in early 2025. In February that year, SEBI directed the National Stock Exchange (NSE) to issue a cautionary letter to Jane Street, advising the firm to refrain from taking large positions or engaging in certain trading activities. This was followed by a more direct step on February 6, 2025, when SEBI sent a letter stating that the firm’s trading activity “prima facie appears to be fraudulent and manipulative.”

Despite the warning, Jane Street reportedly resumed a significant portion of its activities by May 2025, prompting SEBI to escalate its response. On July 3, 2025, the regulator issued an interim order temporarily barring Jane Street and four related entities from participating in Indian markets, accusing them of running a “sinister scheme.” Later that month, SEBI seized over ₹4,840 crore (roughly $550 million to $570 million) in alleged “illegal gains,” an amount said to represent the firm’s excess profits from these purportedly unlawful trades.

According to SEBI’s broader allegations, Jane Street generated about ₹36,500 crore in illicit profits through calculated trading strategies spanning multiple market segments, with around ₹2 billion in profits recorded in India over the preceding two years.

 In a detailed interim order issued on 3rd July 2025, SEBI outlined two primary strategies allegedly employed by Jane Street:

1.     Intra-day Index Manipulation: SEBI alleges that Jane Street bought large quantities of Bank Nifty stocks and futures early in the trading session, despite an overall bearish market trend. This, according to the regulator, artificially boosted the index’s value, giving a false impression of market strength and prompting retail investors to trade at inflated prices.

2.     Expiry Day Manipulation: On specific expiry days, the firm allegedly engaged in large-volume trades in both the cash and futures markets, simultaneously entering into options trades that profited from subsequent price shifts. This coordinated approach is said to have misled investors about the true market value of the index.

Jane Street’s Defence: Arbitrage, Not Manipulation

Jane Street’s primary defence rests on its assertion that the disputed trades amount to nothing more than “basic index arbitrage trading” — a widely accepted and generally lawful strategy that seeks to profit from short-lived price discrepancies between an index and its underlying constituents, or between various derivatives tied to the same index. The firm argues that SEBI’s prima facie finding of manipulation overlooks its essential function as a liquidity provider and arbitrageur in global financial markets.

Some market analysts have echoed this perspective, suggesting that Jane Street may simply have identified and exploited a legitimate pricing gap between Indian banking stocks and their related derivatives — a standard arbitrage practice — rather than engaging in any form of market manipulation.

To advance its case before SEBI, Jane Street has enlisted the services of Khaitan & Co, a leading Mumbai-based law firm.

Arbitrage or Manipulation? The Core Dispute Explained

At the heart of the dispute lies a fundamental definitional divide between “arbitrage” and “manipulation.” While both SEBI and Jane Street use these terms, their interpretations are fundamentally opposed.

Market Arbitrage

Arbitrage is a lawful trading practice that exploits price discrepancies across different markets. In simple terms, if a stock is priced slightly differently on two exchanges, a trader can purchase it at the lower price in one market and sell it at the higher price in another.

Arbitrage frequently takes place between the cash market and the derivatives market, where traders simultaneously buy and sell related assets to secure small, low-risk profits. Such activity is permitted under Indian regulations, provided it arises from genuine market inefficiencies and does not involve creating artificial price movements.

Market Manipulation

Market manipulation is the deliberate artificial inflation or deflation of a security’s price. Also referred to as price manipulation or stock manipulation, it involves intentionally influencing the behaviour of financial markets for personal benefit. In essence, it is the act of interfering with the normal forces of supply and demand to achieve a desired price outcome.

Market manipulation distorts prices away from their true value, misleads investors, and often results in losses for retail participants who lack advanced trading tools. It disrupts price discovery, reduces market efficiency, and fuels volatility, particularly during low-liquidity periods. Such practices erode investor confidence, prompting reduced participation and weakening market stability. In response, regulators impose stricter rules and heavier penalties, which, while aimed at restoring fairness, can also raise compliance costs and impact legitimate trading activities.

Conclusion: The Case That Could Redefine Market Rules

The Jane Street vs SEBI case highlights the fine line between legitimate market arbitrage and prohibited market manipulation, especially in the high-risk environment of India’s derivatives market. SEBI’s allegations center on the claim that Jane Street’s expiry-day trading distorted Bank Nifty prices, while the firm maintains its actions were standard index arbitrage. The outcome of this case will be significant, not only for determining liability but also for shaping how regulators and market participants navigate the overlap between complex trading strategies and market integrity in India’s fast-evolving derivatives landscape.