Protecting capital markets

The Securities and Exchange Board of India (Sebi) unleashed a significant enforcement action impounding ₹4,844 crore from Jane Street Group.

- Alok Pandey

N JULY 3, THE Securities and Exchange Board of India (Sebi) unleashed a significant enforcement action impounding ₹4,844 crore from Jane Street Group. The New York-based algorithmic trading firm was alleged to have systematically manipulated India's derivatives markets through an "intraday index manipulation" strategy, generating ₹36,671 crore in profits over 27 months through "marking the close", trading heavily near the close of the markets to push indices in desired directions—a move globally considered an illegal, brazen market manipulation activity.

Jane Street's methodology was diabolically simple yet devastatingly effective. It allegedly "shaped the market" to win the "zero-sum-game". Jane Street's trades were so large, and placed so aggressively, that they moved prices on their own. Sebi's findings are damning, and prima facie this appears akin to an algorithmic pump-and-dump robbery, representing a direct assault on the market's price discovery function.

Allen and Gale (1992) identified three market manipulation types: "information-based" (disseminating misleading information), "action-based" (undisclosed operational changes), and "trade-based" (strategic buying/selling patterns). While regulatory interventions have partially addressed the first two, trade-based manipulation remains difficult to detect and appears legal on the surface. While Jane Street operated in derivatives markets, other miscreants manipulated cash segments.