Zerodha founder Nithin Kamath, weighing in on the Jane Street fiasco, has said maybe this is what happens when companies are used to the lenient US regulatory regime, unlike the strict norms of the Indian markets. He said none of the practices in the US markets would be allowed in India. 

He said if the allegations are true, then Jane Street indulged in “blatant market manipulation”. 

Kamath’s assessment comes after the Securities and Exchange Board of India (SEBI) barred Jane Street Group from accessing the securities market. The order included Jane Street-related entities including, JSI Investments Private Ltd, JSI2 Investments Private Ltd, Jane Street Singapore Pte. Ltd and Jane Street Asia Trading Ltd. 

“You’ve got to hand it to SEBI for going after Jane Street. If the allegations are true, it’s blatant market manipulation. The shocking part? They kept at it even after receiving warnings from the exchanges. Maybe this is what happens when you’re used to the lenient US regulatory regime. Think about the structure of US markets: dark pools, payment for order flow, and other loopholes that allow hedge funds to make billions off retail investors. None of these practices would be allowed in India, thanks to our regulators,” he said. 

Kamath also pointed to the flip side of the entire saga. He said prop trading firms like Jane Street account for nearly 50 per cent of options trading volumes, and if they pull back, retail activity could take a hit too. The next few days would be telling, Kamath said. 

Kotak Securities’ Ashish Nanda also said that high-frequency trading (HFT) firms would surely feel the hit and many would reassess their strategies. “The fact is that HFT firms provide a lot of liquidity in the markets. If there is reduction in activity by HFT’s, it will also impact retail volumes. It also seems they brought volatility into the markets. Lot lesser volatility will also impact volumes downwards,” he said.

WHY SEBI BARRED JANE STREET

SEBI  issued an interim, prohibiting Jane Street and related entities from buying, selling, or dealing in securities, directly or indirectly. It also statex that unlawful gains amounting to Rs 4,843 crore earned by the Jane Street Group entities from alleged violations will be impounded. The entities have been directed to open an escrow account in a scheduled commercial bank in India to deposit these unlawful gains with a lien in favour of SEBI. The amount in the escrow account cannot be released without SEBI’s permission.

Among the four entities, Jane Street Singapore Pte Ltd and Jane Street Asia Trading Ltd are registered foreign portfolio investors (FPIs) incorporated in Singapore and Hong Kong respectively. JSI Investments Private Limited and JSI2 Investments Private Limited are incorporated in India and located in Mumbai. JSI Investments Private Limited is wholly owned by Jane Street Europe Limited, a UK-based company, while JSI2 Investments Private Limited is wholly owned by JSI Investments Private Limited.

SEBI noted that emails and letters from Jane Street indicate that all Jane Street Group entities dealing in Indian markets act collectively and are overseen by senior personnel based overseas. SEBI found prima facie that the Bank Nifty index, which comprises 12 major bank stocks, was manipulated in a complex and illegal manner aided by the group’s trading, financial, and technological capabilities.

SEBI said this case is unusual as it involves manipulation of multiple liquid stocks with high retail participation to facilitate manipulation of the index options market. This resulted in massive profits for the manipulators at the cost of other participants and retail traders. SEBI clarified that FPIs are allowed to deploy funds within specified limits and divest holdings without repatriation restrictions, but the Jane Street Group’s core activity does not involve medium or long-term investments.

The entities have been asked to close or square off any positions within three months or at contract expiry, whichever is earlier. Credits into accounts may be allowed. The entities must not dispose of or alienate any assets or properties in India until the unlawful gains are credited to the escrow account, except with SEBI’s permission.

WHAT JANE STREET SAID

In an emailed response to Reuters, Jane Street disputed the findings of the SEBI interim order. It said that it will engage with the regulator. “Jane Street is committed to operating in compliance with all regulations in the regions we operate around the world,” the firm said.