Banned in India, Jane Street steps up to defend its activities

US high-frequency trading firm Jane Street has told its employees that it will challenge the Indian financial market regulator's decision to accuse it of market manipulation. In an internal email seen by Reuters, the company said the transactions in question were "basic index arbitrage," a common and essential practice in financial markets.

After being banned in India, Jane Street said it was "deeply disappointed" by what it called "extremely inflammatory" allegations from the Securities and Exchange Board of India (SEBI). It is currently preparing a formal response, without specifying the exact nature of the legal action it intends to take.

On Friday, SEBI banned Jane Street from buying or selling securities on Indian markets and froze $567m of its funds. The regulator accuses the company of buying large quantities of shares and futures contracts linked to the Indian Bank Nifty index in order to artificially support it at the start of trading, while simultaneously taking short positions on options linked to the same index, which were then exercised or allowed to expire later in the day.

SEBI has been monitoring Jane Street's activities for more than two years and has expanded its investigation to other indices and trading platforms. This decision comes amid heightened vigilance around stock derivatives, a booming market in India but a source of massive losses for retail investors. According to the latest data, losses by retail traders on equity derivatives jumped 41% year-on-year to 1.06 trillion rupees (approximately $12.4bn) at the end of March.

A classic arbitrage, according to Jane Street

In its internal memo, Jane Street asserts that its arbitrage strategies "help align the prices of related instruments," a fundamental role of liquidity providers in markets. The firm strongly disputes that these activities can be characterized as manipulation per se.

It also refutes the accusation that it failed to cooperate with the regulator. According to Jane Street, its executives met with representatives of SEBI and the relevant exchanges on several occasions and adapted their practices following these discussions. "Since February, we have made numerous attempts to engage with SEBI, without success," the email states.

Jane Street is currently looking for Indian law firms to prepare its response, according to several sources close to the case. The next step could be an appeal to the Securities Appellate Tribunal (SAT).

The SEBI, for its part, has not commented beyond its order published on Friday. Its chairman, Tuhin Kanta Pandey, nevertheless said on Monday that the regulator was stepping up its surveillance of manipulation in the derivatives market, while believing that "few other cases comparable" to that of Jane Street were likely to emerge.

In addition to Jane Street, several major global trading firms operate in Indian markets, including Citadel Securities, IMC Trading, Millennium, and Optiver. In May, India accounted for about 60% of global equity derivatives volume, according to the Futures Industry Association.