Algorithmic trading accused of market manipulation

On July 3, 2025, India’s regulatory body, the Securities and Exchange Board (SEBI), made headlines by accusing Jane Street, a U.S.-based proprietary trading firm, of engaging in activities amounting to market manipulation in India. This accusation resulted in SEBI imposing a trading ban on Jane Street and freezing an impressive INR 4,843 crore or approximately $565 million of the firm’s assets. The subsequent global discussions sparked by this case shed light on the thin line that separates legitimate high-frequency trading from potentially unlawful market abuse.

The core of the issue stems from the challenges surrounding the regulation of sophisticated algorithmic trading strategies in today’s interconnected and complex derivatives markets. The focus is on exploring the allegations against Jane Street, dissecting the mechanics behind the firm’s trading techniques, examining their defense, and understanding the implications for all stakeholders involved.

The genesis of SEBI’s investigation into Jane Street can be traced back to a trade-secrets lawsuit filed in the U.S. in 2024, which specifically cited options trading in India as a point of contention. What makes India’s derivatives markets stand out globally is their scale and complexity, with equity options contracts in India representing a significant 61% of the global market by April 2025. The Bank Nifty index, which lies at the heart of SEBI’s probe, serves as a prime example of this complexity. On January 17, 2024, a day scrutinized by SEBI, Bank Nifty options saw a staggering $1.26 trillion notional value in turnover, dwarfing the $3.6 billion in underlying stock trades by a massive 350:1 ratio. This index, heavily weighted towards a handful of stocks, making up approximately 82% of its weight, is particularly susceptible to targeted trading strategies.

The stark disparity between the options market’s liquidity and the shallowness of the cash market provides fertile ground for sophisticated trading strategies that exploit these inefficiencies. SEBI’s investigation honed in on a specific subset of 18 trading days surrounding weekly options expiry periods, a time when market sensitivity to trading patterns is heightened.

SEBI’s 105-page interim order highlights two primary trading patterns that it identifies as potentially manipulative. The first pattern involves intraday index manipulation, where Jane Street allegedly executed large purchases of Bank Nifty constituent stocks and futures in the morning, accounting for a considerable portion of the total market volume in some cases. This buying pressure was purported to artificially inflate the index price by about 1% to 1.3%. Simultaneously, Jane Street took substantial short positions in Bank Nifty options, predominantly through selling call options and buying put options. These options positions mimicked index positions and were intended to profit from market movements.

One notable deviation from standard index arbitrage strategies was the significant difference in the size of Jane Street’s option positions relative to their stock and futures positions on one examined day, suggesting an imbalance. Later in the trading day, Jane Street allegedly reversed its initial cash market positions, triggering a plummet in the index price before expiry. This strategic maneuver was purported to render the call options worthless while yielding substantial gains from the put options. The meticulous sequencing of trades in the cash and futures markets aimed to influence prices for favorable options outcomes, forming the crux of SEBI’s manipulation claim.

The second alleged malpractice involved manipulating the settlement price calculation used during option expiry through the practice of “extended marking the close,” which entails spreading selling activities across the final hour of trading to impact the critical settlement price calculation.

In conclusion, the Jane Street-SEBI case underscores the intricate dance between high-frequency trading strategies and regulatory oversight in today’s global financial landscape. It serves as a stark reminder of the complexities and challenges inherent in regulating modern algorithmic trading practices across interconnected markets, prompting a broader discourse on where the line should be drawn between legitimate market activities and abusive practices.