Why SEBI is probing US trading firm Jane Street
What's the story
The Securities and Exchange Board of India (SEBI) is investigating the Jane Street Group for possible violations in index trading. The regulator suspects that the company may have breached position limits set for the Futures & Options (F&O) segment of equity indices. These limits, according to a SEBI circular, were capped at ₹500 crore per index. However, there are indications that this limit may have been breached on certain days.
Investigation
Bank Nifty positions exceeded ₹50,000cr
The regulator's findings indicate that there were instances when the position in Bank Nifty exceeded ₹50,000 crore. A source told Moneycontrol, "Jane Street was running ₹50,000 crore of Bank Nifty positions over a course of time." The massive positions taken by the Jane Street Group raised red flags for SEBI, prompting it to analyze data and initiate an investigation.
Regulatory changes
SEBI's new measures to tackle such issues
To tackle such issues, SEBI revised the way of measuring Open Interest (OI) limit and index positions limits from July 1. The new position limit is a Net End of the day OI limit for options at ₹1,500 crore and gross OI at ₹10,000 crore. SEBI has also introduced a strict monitoring mechanism to prevent market manipulation.
Regulatory action
Interim order against Jane Street Group
In an interim order dated July 3, SEBI barred the Jane Street Group from accessing the market over manipulation allegations. The regulator ordered impounding of ₹4,843.5 crore in alleged illegal gains from select trades under investigation. It also ordered a debit freeze on bank accounts of the Jane Street Group.
Strategy analysis
Manipulation strategies employed by Jane Street
SEBI has alleged that the Jane Street Group was manipulating Bank Nifty and Nifty indices through various strategies. These include taking bullish positions in cash and futures in indices/constituents in the morning to mislead investors, and then taking huge bearish positions in the afternoon. The company also used a 'marking the close' strategy where large buy/sell orders are placed near market close to influence closing prices of stocks/indices.