Beyond Jane Street

The Securities and Exchange Board of India's (Sebi) July 3 Jane Street order, hailed by commentators as a landmark, a moment of reckoning, and a wake-up call, is unique in several respects.

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It showcases Sebi's technological prowess in unravelling a labyrinth of high-frequency, cross-market algorithmic trades on a massive scale, and its legal acumen in establishing contraventions within the nuanced legal contours of market manipulation.

And in a twist, perhaps unprecedented, the interim order included a stay, allowing the accused to continue trading, though subject to conditions, even before they responded to allegations of massive fraud in the show cause, and Sebi uncovered the full extent of the manipulation.

It is a moment of reckoning because Sebi had long warned about such risks, repeatedly highlighting over the last few years the ballooning derivatives markets and mounting retail investor losses. In January 2023, a Sebi study revealed that nine out of 10 retail investors were suffering heavy losses—though it was unclear who benefitted from these losses and whether the gains were concentrated in a few hands. Sebi widely publicised these findings as part of its efforts to educate small investors in the derivatives segment.

Yet this evidence-based diagnosis of a spot-derivatives mismatch and massive retail losses, signalling possible tectonic shifts, did not trigger major regulatory reforms.

Interestingly, these findings emerged in an era of regulatory "hyperactivity", when the market faced a flurry of regulatory amendments, including fine-tuning language from "comprises of" to "consist of". Yet the first tranche of regulatory measures to address the big bubbles in the derivatives market was announced only 18 months later, and only after two further studies: Analysis of Intraday Trading by Individuals in the Equity Cash Segment (July 2024) and Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24) (September 2024).