In a significant move, the Securities and Exchange Board of India (Sebi) has barred New York-based trading firm Jane Street from participating in the securities market. This drastic measure comes amid allegations of market manipulation using large derivative positions, particularly in the Bank Nifty index, ultimately leading to substantial losses for retail investors who were caught on the opposite side of these trades.
#### Unprecedented Measures
Sebi’s action against Jane Street is one of the most severe ever taken against a foreign trading firm of this magnitude. Along with the ban, the regulator has mandated the seizure of ₹4,844 crore ($570 million), labeling this as “illegal gains” accrued by Jane Street. This could potentially mark the largest confiscation in Sebi’s enforcement history, showcasing the regulator’s commitment to protecting the Indian securities market.
#### Entities Involved
The order primarily affects four entities linked to the Jane Street Group: JSI Investments, JSI2 Investments, Jane Street Singapore, and Jane Street Asia Trading. All these entities are now barred from engaging in securities market activities, either directly or indirectly, marking a pivotal moment in regulatory oversight.
### Origins of the Investigation
The probe into Jane Street was triggered by media reports concerning a legal clash with Millennium Management, a rival trading firm based in the U.S. Jane Street accused two former traders of misappropriating its proprietary trading strategy upon their transition to Millennium. The firm claimed that this strategy had raked in nearly $1 billion in profits within India’s derivatives market in 2023.
India has emerged as a formidable player in the derivatives arena, capturing nearly 60% of the 7.3 billion global equity derivative trades recorded in April, according to data from the Futures Industry Association. This robust participation renders the market susceptible to manipulative practices, prompting the increased vigilance of regulators like Sebi.
#### A Wake-Up Call for Retail Investors
Sebi’s actions come against a backdrop of heightened warnings directed towards retail investors regarding the inherent risks involved in derivatives trading. A study released by Sebi in January 2023 revealed alarming statistics: nine out of ten individual traders in the equity futures and options segment incurred losses averaging ₹1.1 lakh during fiscal year 2022. The majority of these losses were concentrated in the options segment, underscoring the volatility and risks associated with such investments.
A regulatory official commented on the trend, stating, “While retail participation in index options trading on expiry day has moderated somewhat in recent times, around 90% of them continue to lose money.” The official further noted the need for a shift towards longer-term trades and investments to foster a more stable trading environment.
### Next Steps for Jane Street
Following Sebi’s order, Jane Street has been given a window of 21 days to respond. The seized assets must be placed in an escrow account managed by the regulator, as a full investigation is set to unfold. While the immediate ban on their activities is significant, Sebi has opted not to impose an indefinite prohibition at this stage. Sources indicate that stringent measures are in place to prevent any return to potentially harmful trading practices.
#### Broader Regulatory Implications
As the probe continues, Sebi is expanding its focus to assess the broader implications of Jane Street’s trading strategies and possible violations of established trading norms. These extraordinary profits, notably achieved in a short time frame, have attracted the scrutiny of the Indian income tax department as well.
Jane Street’s operations in India involved utilizing multiple entities in various countries to engage in distinct trades, raising questions about tax compliance. Investigations are underway to determine whether Jane Street’s methods qualify as an “impermissible avoidance arrangement” under Indian tax law, according to the General Anti-Avoidance Rule (GAAR). This would apply if their setup was structured primarily to evade taxes rather than for legitimate trading purposes.
### A Complex Network of Trades
Jane Street’s Indian entities engaged in positions within both cash and stock futures markets, while its Singapore and Hong Kong firms, registered with Sebi as foreign portfolio investors (FPIs), executed significant trades in equity options. The recent growth of this market further complicates the landscape, emphasizing the need for regulatory oversight.
The profits amassed predominantly through the Singapore-based FPI escaped taxation due to favorable tax treaties between India and Singapore, which are similar to arrangements with Mauritius. Indian affiliates, like JSI Investments and JSI2 Investments, conducted intra-day trading, buying in the morning and selling by market close—a strategy often mirroring price movements that benefitted their offshore counterparts.
In a stark contrast, the income derived through the foreign entities, particularly Jane Street Singapore, significantly overshadowed any minor losses reported by their Indian counterparts. This disparity, combined with the tax burdens faced by the Indian entities—ranging from 30% to over 40%—raises serious questions about the legality and ethicality of their trading strategies.
While Hong Kong does not offer the same tax advantages as Singapore, its usage as a trading hub within Jane Street’s operations suggests strategic considerations in the firm’s overall market strategy, especially as it seeks to maximize gains while navigating tax implications.
