Sebi probes Jane Street's derivative trades over 3 years: Sources

India's markets regulator is investigating Jane Street's derivatives trades stretching back three years to check if one of the world's largest quant trading firms intended to manipulate the country's benchmark stock indexes, according to two sources with direct knowledge of the matter.

The investigation - the largest such into a global trading firm - follows a series of steps taken by the Securities and Exchange Board of India (SEBI) to cool the frenzy in India's derivatives markets.

SEBI is investigating Jane Street, Jane Street Singapore Pte and JSI Investments, the firm's India unit, and studying the firms' algorithmic trading strategies in the National Stock Exchange's index of top 50 stocks and its index of banking stocks, one of the sources said.

"The investigation is to establish whether there was a repeated pattern of taking outsized derivatives positions in index constituents, particularly bank stocks, then trade the index in the physical market to profit from its position," the source said.

While India does not impose any restrictions on traders from taking intraday positions in derivative as well as physical markets, surveillance systems typically signal repeated patterns of taking positions in excess of 10 billion Indian rupees ($116.93 million).

A report is being prepared with assistance from the stock exchange, following which the U.S.-based trading firm will be sent a regulatory notice to explain its trades.

The sources declined to be named as the investigations are confidential. Jane Street and SEBI did not respond to several requests for comment.

The investigation stemmed from large profits made by Jane Street on its India derivatives positions - nearly five times the profit made by the second largest trading firm, the second source said.

Known for high-frequency trading and its dominance of the exchange traded funds market, Jane Street's net trading revenue for 2024 stood at $20.5 billion globally, according to Bloomberg. As of December 2024, the firm's revenue from India operations stood at 200 billion Indian rupees ($2.34 billion), the second source added.

The firm started its India operations in December 2020.

Complaints from other large institutional firms on Jane Street's trade practices also prompted the investigation, the sources said.

Jane Street last year sued a rival hedge fund, Millennium Management, accusing it of stealing a valuable in-house trading strategy. At a court hearing, it was revealed that the strategy involved India options and had generated $1 billion in profits for Jane Street in 2023. The two firms settled the case in December.

INCREASED SCRUTINY

The investigation has also prompted SEBI to increase monitoring of intraday positions to watch for large concentrated trades in index stocks, the two sources said.

SEBI and stock exchanges are currently drafting a mechanism to do this, said the sources, adding that large positions for consecutive days could prompt investigation.

The thresholds for such investigations are still being finalised.

Exchanges will also be asked to periodically audit algo programs of large trading firms, which are already required to get approval from exchanges before using the programs.

($1 = 85.8370 Indian rupees)