Mumbai: The Securities and Exchange Board of India's (Sebi) latest study showed that retail traders in equity derivatives made losses of ₹1.05 lakh crore in FY25, a 41% increase from ₹74,812 crore in FY24. The report was published Monday, hot on the heels of an interim order against US trading giant Jane Street, which has been accused by the regulator of manipulating India's stock indices to profit from its equity derivative bets. A look at the interlinkages:
What is the Sebi order about?
The interim, ex-parte order probes into alleged index manipulation by Jane Street involving bank shares and the Bank Nifty index futures and options (F&O). Sebi's investigations showed that the trading firm was engaged in manipulative trades on the expiry days of Bank Nifty derivatives that pushed the outcome in its favour.
How and when did the alleged manipulation happen?
According to the Sebi probe, the manipulation by Jane Street occurred on expiry days of index options. The expiry day is the last day until which the derivative contracts - weekly and monthly - are valid. It is the day when contracts are most actively traded. On the expiry day, the smallest of the price moves in shares (cash market) and futures can result in big profits or losses in options. That's what Sebi has accused Jane Street of doing: Manipulating shares in the cash market and futures prices to make outsized profits through options.
Shares, futures, and options: How are they interlinked?
Prices or values of shares, futures and options move together in a liquid market. If they don't, traders step in to take advantage of the price anomalies in these contracts. Such trades are known as arbitrage, which end up linking price moves of shares and derivatives. It's often seen that when a stock price moves in the cash market, its futures and options values also move in the same direction.
If arbitrage is legal, why has Jane Street's trading strategy been termed manipulation?
This is because the American firm's trades in shares and futures, according to Sebi, were aimed at steering the option values in their favour. In this trading strategy, the regulator alleged Jane Street made losses in shares and futures, while earning big money in options. The Sebi probe showed the alleged intraday index manipulation through an analysis of the trading on January 17, 2024.
Step 1: Jane Street bought a large quantity of shares and futures that are constituents of the Bank Nifty index, such as HDFC Bank, ICICI Bank and Axis Bank, among others, earlier in the day. It was the single biggest buyer then. This resulted in the Bank Nifty index going up.
Step 2: Simultaneously, they sold Bank Nifty call options and bought Bank Nifty put options. When a trader buys a put option, s/he is betting that the index will fall. Similarly, when a trader sells a call option, s/he is betting that the market will not rise.
So, isn't buying Bank Nifty put options and selling its call options the exact opposite of the trade where it purchased shares and futures of Bank Nifty constituents?
Yes, but don’t let that confuse you. This is where the strategy, described by Sebi as manipulative, unfolded.
Step 3: After midday, Jane Street started aggressively selling bank shares and liquidating bullish futures positions that it had accumulated in the morning. This put downward pressure on the Bank Nifty, resulting in its Bank Nifty call and put option bets turning profitable (please note that the option wagers were betting on the Bank Nifty falling).
In this trading strategy, Jane Street made profits from Bank Nifty index options of Rs 734.93 crore, while it booked losses of Rs 61.6 crore in the cash and futures segment on January 17. This trade could have helped the firm make an approximate net profit of Rs 673 crore on a single day, according to the Sebi probe. So, the profits came from options, where small index movements resulted in a big payoff.
Was this a one-off instance?
According to the Sebi probe, this trading strategy was repeated on 15 expiry days. Moreover, Jane Street allegedly ignored Sebi’s caution letter and continued these trades despite the warnings
Is Sebi’s analysis of retail traders losing money in derivatives linked to the Jane Street probe?
Sebi has not explicitly stated any linkages between the Jane Street probe and the separate study on retail traders losing money in derivatives trading. But the timing of the Sebi publication, soon after its unprecedented order against Jane Street, has sparked such a debate.
That said, the regulator, in the order against Jane Street, said: “JS Group was undertaking an intentional, well-planned, and sinister scheme and artifice to manipulate cash & futures markets and, hence, manipulate the Bank Nifty index level, to entice small investors to trade at unfavourable and misleading prices, and to the advantage of the JS Group.”
What are Jane Street’s chances of winning against the Sebi order?
According to media reports, the trading firm plans to challenge Sebi’s ban on Jane Street from trading in India. Lawyers and market participants are of the view that the firm’s trades involving Bank Nifty are not illegal per se and are allowed within the regulatory ambit. Sebi, on the other hand, may argue that Jane Street’s trades have been detrimental to the interests of retail traders, most of whom have been losing money in equity derivative trades.
What is the Sebi order about?
The interim, ex-parte order probes into alleged index manipulation by Jane Street involving bank shares and the Bank Nifty index futures and options (F&O). Sebi's investigations showed that the trading firm was engaged in manipulative trades on the expiry days of Bank Nifty derivatives that pushed the outcome in its favour.
How and when did the alleged manipulation happen?
According to the Sebi probe, the manipulation by Jane Street occurred on expiry days of index options. The expiry day is the last day until which the derivative contracts - weekly and monthly - are valid. It is the day when contracts are most actively traded. On the expiry day, the smallest of the price moves in shares (cash market) and futures can result in big profits or losses in options. That's what Sebi has accused Jane Street of doing: Manipulating shares in the cash market and futures prices to make outsized profits through options.
Shares, futures, and options: How are they interlinked?
Prices or values of shares, futures and options move together in a liquid market. If they don't, traders step in to take advantage of the price anomalies in these contracts. Such trades are known as arbitrage, which end up linking price moves of shares and derivatives. It's often seen that when a stock price moves in the cash market, its futures and options values also move in the same direction.
If arbitrage is legal, why has Jane Street's trading strategy been termed manipulation?
This is because the American firm's trades in shares and futures, according to Sebi, were aimed at steering the option values in their favour. In this trading strategy, the regulator alleged Jane Street made losses in shares and futures, while earning big money in options. The Sebi probe showed the alleged intraday index manipulation through an analysis of the trading on January 17, 2024.
Step 1: Jane Street bought a large quantity of shares and futures that are constituents of the Bank Nifty index, such as HDFC Bank, ICICI Bank and Axis Bank, among others, earlier in the day. It was the single biggest buyer then. This resulted in the Bank Nifty index going up.
Step 2: Simultaneously, they sold Bank Nifty call options and bought Bank Nifty put options. When a trader buys a put option, s/he is betting that the index will fall. Similarly, when a trader sells a call option, s/he is betting that the market will not rise.
So, isn't buying Bank Nifty put options and selling its call options the exact opposite of the trade where it purchased shares and futures of Bank Nifty constituents?
Yes, but don’t let that confuse you. This is where the strategy, described by Sebi as manipulative, unfolded.
Step 3: After midday, Jane Street started aggressively selling bank shares and liquidating bullish futures positions that it had accumulated in the morning. This put downward pressure on the Bank Nifty, resulting in its Bank Nifty call and put option bets turning profitable (please note that the option wagers were betting on the Bank Nifty falling).
In this trading strategy, Jane Street made profits from Bank Nifty index options of Rs 734.93 crore, while it booked losses of Rs 61.6 crore in the cash and futures segment on January 17. This trade could have helped the firm make an approximate net profit of Rs 673 crore on a single day, according to the Sebi probe. So, the profits came from options, where small index movements resulted in a big payoff.
Was this a one-off instance?
According to the Sebi probe, this trading strategy was repeated on 15 expiry days. Moreover, Jane Street allegedly ignored Sebi’s caution letter and continued these trades despite the warnings
Is Sebi’s analysis of retail traders losing money in derivatives linked to the Jane Street probe?
Sebi has not explicitly stated any linkages between the Jane Street probe and the separate study on retail traders losing money in derivatives trading. But the timing of the Sebi publication, soon after its unprecedented order against Jane Street, has sparked such a debate.
That said, the regulator, in the order against Jane Street, said: “JS Group was undertaking an intentional, well-planned, and sinister scheme and artifice to manipulate cash & futures markets and, hence, manipulate the Bank Nifty index level, to entice small investors to trade at unfavourable and misleading prices, and to the advantage of the JS Group.”
What are Jane Street’s chances of winning against the Sebi order?
According to media reports, the trading firm plans to challenge Sebi’s ban on Jane Street from trading in India. Lawyers and market participants are of the view that the firm’s trades involving Bank Nifty are not illegal per se and are allowed within the regulatory ambit. Sebi, on the other hand, may argue that Jane Street’s trades have been detrimental to the interests of retail traders, most of whom have been losing money in equity derivative trades.
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