Jane Street is a wakeup call

The revelations in this recent case should lead to a reassessment of the foundations of India's financial markets

- K P Krishnan

Arbitrage refers to the practice of simultaneously buying and selling an asset in different markets to profit from tiny price differences caused by market inefficiencies. Arbitrage plays a role in making financial markets more efficient by bringing the prices of the same asset closer to parity across markets. Market abuse, on the other hand, refers to a range of unethical and illegal activities that can undermine the integrity of financial markets.

Whether Jane Street's actions were legal arbitrage or market abuse is the core question in the enforcement action initiated recently by the Securities and Exchange Board of India (Sebi). While Sebi's order is public, it is prudent to suspend final judgment until Jane Street's defence is presented and the matter is finally decided by the prescribed judicial fora. But this episode offers a critical moment for sober deliberation.

Beyond this specific case, however, lies a more profound imperative: A rigorous examination of the current health and future trajectory of India's financial markets.

Well-functioning financial markets serve as the central nervous system of the economy, efficiently processing information, allocating capital, and facilitating essential risk transfer. Among India's economic reforms, the development of our equity spot and derivatives markets stands as perhaps the most significant and undisputed success. Yet, this very success now exhibits symptoms of distress, necessitating a focused and intellectually honest assessment to ensure its continued vitality.

Our attention must be directed towards the primary concern that poses a substantial risk to the future efficacy and integrity of the Indian financial system: The pervasive inhibiting influence of the spot market, compounded by critical issues in regulatory practice.