In today’s Finshots, we follow a Wall Street quant from New York to Mumbai and ask whether its billion-dollar playbooks are quietly manipulating India’s most important indices.

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The Story

Nine out of ten traders in the derivatives market lose money. And if you’ve ever wondered who that elusive one-in-ten winner is, chances are it’s a firm like Jane Street.

Jane Street is a US-based quantitative hedge fund famous for its low-profile, high-return approach to trading. It uses high-frequency algorithms to execute billions of rupees worth of trades in milliseconds. But now, the firm is under the scanner of the Securities and Exchange Board of India (SEBI).

SEBI has spent the past few months combing through the firm’s derivatives footprint on India’s National Stock Exchange (NSE). And they are tracing the last three years of trades to see if outsized options positions on Nifty-50 and Bank Nifty stocks were paired with strategic trades that could have nudged benchmark index values by a few basis points, just enough for a quick arbitrage trade. The firm often appears on SEBI’s watchlist, which gets triggered whenever a trade crosses roughly ₹1,000 crore a day, and Jane Street’s India desk has reportedly breached that threshold rather often.

And if this name rings a bell, it’s probably because Jane Street was involved in another controversy last year. Two employees left the firm for a rival, Millennium Management, and Jane Street ended up suing them (We even covered a story about it here). This lawsuit revealed that Millennium Management made a billion dollars in profits from derivatives trading in India alone, while Jane Street earned over $2.3 billion. And that’s where the problem begins.

Why, you ask?

Well, because derivatives such as futures and options are a zero-sum game. This means that for Jane Street or Millennium Management to make money, someone has to lose it. And SEBI’s hunch is that it is the retail players who might be handing over their chips. Not just because of bad timing, but because the table itself is tilted.

Let’s explain.

When a firm comes in with millions of dollars and takes an outsized position in the market, it is bound to move in a way that is favourable to them. At least for a few seconds.

Let’s say Jane Street places a massive options bet that profits if the Nifty 50 index rises slightly within the next few minutes. Now, to improve the chances of that happening, they might also buy up just enough shares of a few companies in the Nifty index in the regular cash market. And this sudden buying can push the index up maybe by just a few basis points (1 basis point = 0.01%), but that’s often all it takes. Since the derivatives are highly leveraged, even a tiny move can result in a huge payout.

And remember, Jane Street’s using ultra-fast algorithms to do all of this in milliseconds. So by the time a retail trader like you and I react, it’s already over. The big fish have already cashed out, and the rest of the crowd is left holding the bag.

That’s exactly what SEBI is worried about.

But to be clear, nothing in Indian law forbids a hedge fund from taking a large position if it clears margin rules. Liquidity, after all, is why Nifty options turned India into the busiest index options marketplace last year. 

In fact, Jane Street’s defenders argue that their algorithms narrow the bid-ask spreads in derivative trades, absorb shocks, and let everyday traders enter or exit positions faster and cheaper. All of which benefits the market. Yet regulators worldwide have learned that speed and capital can morph into market power before anyone blinks.

What grabs SEBI’s attention isn’t a single huge trade. Rather, it’s a repeated pattern—large derivative bets consistently followed by well-timed cash-market orders that can manipulate index levels.

And the broader context matters too.

You see, the retail turnover for derivatives surged after the pandemic, trading app downloads skyrocketed, work-from-home hours freed up screen time, and weekly index expiries offered a thrill akin to playing the lottery. But a recent SEBI study also found that 89% of the retail traders lose money 90% of the time.

This is why SEBI is trying to draw new boundaries. It’s working on a framework to monitor unusually concentrated positions in the derivatives market. It’s also checking whether large options trades are being paired with cash or spot market orders that nudge prices in a favourable direction. Brokers, on their part, are also preparing for tighter audits, algorithm disclosures, and stricter intraday position limits.

But there’s also the broader policy dilemma SEBI now faces. 

On one hand India wants more foreign capital and global sophistication in its markets. But it also needs to protect its retail traders, many of whom are new, under-informed, and playing a dangerous game. 

That’s why the regulator has floated ideas like a licensing exam for retail derivatives traders and mandatory registration for retail algo trading. It has also ordered any retail algorithm that auto-punches orders to be registered and whitelisted, hoping to expose clandestine “copy trade” Telegram bots that piggyback on institutional flows.

For big guns like Jane Street, though, the more immediate headache could be tighter intraday position limits and mandatory third-party audits of trading code.

Exchanges are drafting rules that would force high-frequency firms to lodge versions of their algorithms, allowing for post-trade forensic replay if something looks fishy. Then again, experts warn that treating this code like potential contraband could drive capital to Singapore or Dubai.

So, amidst all this, what can you, as a retail investor, do to come out ahead?

Do not venture into derivatives unless you’re ready to lose money. Stick to proven methods based on your risk appetite. It could be diversified mutual funds, index investing, or high-quality stocks held for the long term. Focus on building discipline rather than chasing quick gains.

Whatever the outcome of the Jane Street probe, it’s clear the derivatives segment is set to change.

If regulators find the right balance with smarter surveillance, tighter guardrails, and clear accountability, India’s options market can remain vibrant and inclusive. But if regulation swings too far, the risk is that foreign capital and innovation simply move elsewhere. And that would be a loss not just for Jane Street, but Dalal Street too.

Until then…

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