We don’t usually tell the same story twice in such a short span. But if you remember, we’d broken down why SEBI had its eyes on Jane Street just a few weeks ago. And today, well, we kind of had to revisit it because everyone wants to know what exactly Jane Street did that made SEBI bar them from the markets and seize nearly ₹4,800 crores of what it says are illegal profits.

So in today’s Finshots, we give you an oversimplified version of what really went down.

But just a heads up before we dive in. This is one of those stories that’s going to be a bit longer than usual. Also, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

You’ve probably heard this line a lot by now: 9 out of 10 traders in India lost money in F&O (Futures and Options) between FY22 and FY24. And the thing is, someone’s making that money. In this story, that ‘someone’ is Jane Street, an American trading giant.

But before we get into how they pulled this off, let’s give you a quick primer on how this game works. It’ll make the rest of the story way easier to digest.

See, in the stock market, there are two broad playgrounds. The first is the cash market. That’s where you actually buy and sell shares of a company. You pay to own a stock, you get to own one. It’s as simple as that.

Then there’s the derivatives market, where you trade things like F&O. These get their value from the price of those same shares in the cash market, but you never really own the shares themselves.

Take futures. A futures contract is basically a deal you strike today to buy or sell something at a fixed price on a future date. So today, you could agree to buy 100 shares of Company A at ₹1,000 each on, say, 31st July. And come 31st July, even if the stock’s trading at ₹900, you’re still bound to buy it at ₹1,000. That’s the obligation you signed up for.

Options are a bit different or more flexible, you could say. An options contract gives you a right, but not a compulsion to buy or sell at a set price on or before a future date. And for this right, you pay a small fee called a ‘premium’.

So imagine you pay a small premium today for the right to buy 100 shares of Company B at ₹2,000 each by 31st July. If the stock shoots up to ₹2,100, you’ll use your right and buy cheap. But if it dips to ₹1,900, you’ll just walk away and lose only that small premium you paid.

And here’s something you should know about option premiums. These premiums have two parts. One, the profit you’d make if you exercised the option now. And two, a bit extra for the time left till expiry. The more time there is, the more chances the market might swing in your favour. But as you inch closer to expiry, that window shrinks, and so does the premium. By expiry day, if your option has no real value left, it’s worth nothing.

There are also two sides to options. You can buy a call option if you think the value of a stock or index will go up. Which technically means that you’re betting on its rise. If you sell a call, you essentially do the opposite. And then there’s a put option, where you bet on prices falling. So you buy a put if you feel that stock or index values will drop and sell a put if you think the price will stay put or rise. That’s the basic toolkit.

If you’ve stuck around with us and this all feels easy enough so far, good — because now we get to the meat of it or what actually happened.

In very simple terms, Jane Street pulled off a cunning pump and dump.

First, they threw huge money into buying shares of big banking stocks like HDFC Bank, ICICI, Axis Bank, SBI, etc. — the ones that move the BANK NIFTY index (an index that tracks the performance of the 12 most liquid and large cap Indian banks listed on the NSE). When they did this, the prices of those bank stocks shot up. And because the BANK NIFTY index tracks these stocks, it shot up too.

Now, think like a small trader for a second. If you see the index shooting up, you’d naturally bet on more upside. So you’d lap up call options, hoping the rally continues. It’s a cheap bet too. To buy a single share outright in the cash market, you’d have to pay the full price. Even futures need a decent margin.

But in options, you could bet on the price movement of a ₹100 stock with just ₹1. So if that stock jumps by ₹20, you’d walk away with a neat net profit of ₹19, after paying that tiny premium. It feels like easy money. Now picture how massive those profits could get with even more options.

And that’s exactly what small retail traders were doing. They piled on, buying more and more call options. But while they were getting sucked in, Jane Street was playing the other side. It was quietly selling calls to these traders and buying up puts instead. Because they knew exactly what they’d do next.

Once enough traders were trapped in this ‘the index will rise’ story, Jane Street flipped the script. They dumped all those bank shares they’d bought earlier. That selling spree pushed the BANK NIFTY back down.

And guess what? The puts they’d bought were now worth a lot more, because puts gain value when prices fall. So not only did they profit big when the index dropped, but they also got to keep the premium that hopeful traders had paid because the calls they’d bought expired worthless.

That’s how Jane Street pocketed a crazy net profit of ₹36,500 crores, though not every rupee was unlawful, to be fair! And if you’re picturing an army of Jane Street employees glued to computer screens all day, manually clicking buy and sell as stocks went up and down, well… that’s not quite it. They simply unleashed algorithms that could trade faster than you could even say the word ‘trade’.

But you’re probably wondering… how did SEBI even figure out what Jane Street was up to?

Well, technically, it didn’t crack the case first. 

The trial started with the media picking up on a juicy lawsuit where Jane Street had dragged Millennium Management, a rival hedge fund, to court. Their complaint was that Millennium had poached two of its former employees, the same folks who’d helped develop a top secret algorithm for them. An algorithm that found a surprisingly clever way to make money in a non-US market. So clever, it apparently brought in a whopping billion dollars in profits. But when those employees jumped ship, they took the secret sauce with them. Naturally, Jane Street wasn’t amused.

That legal drama got SEBI curious. So it kicked off an investigation and pulled up Jane Street’s profit and loss trail from January 2023 to March 2025.

Now, it’s not like Jane Street was always making profits. They’d made losses too, in stock futures, index futures and the cash market. But all of that was more than offset by the monster profits from BANK NIFTY options. So that’s where SEBI zoomed in.

They mapped out the days when Jane Street raked in the fattest profits, then shortlisted 18 days — most of them expiry days, to comb through in detail and see if a sneaky pattern popped up.

Turns out, they found not one, but two distinct tricks in Jane Street’s playbook.

The first was what SEBI calls the “Intra-day Index Manipulation” strategy. Jane Street would swoop in and buy massive chunks of BANK NIFTY stocks and their futures early in the day between 9:15 am and noon, even when the overall sentiment for bank stocks was gloomy. At the same time, they’d quietly place big bets in the options market, betting that the index would fall later.

For instance, on January 17th, 2024, BANK NIFTY had opened 3% lower than its previous close probably because the market wasn’t thrilled with HDFC Bank’s earnings that came out after market hours the day before. But Jane Street went ahead and bought ₹4,300 crores worth of BANK NIFTY stocks anyway, in a falling market!

The second trick, which they used a bit less often, was the “Extended Marking the Close” strategy. Instead of pushing prices around in the morning, they’d wait till the final stretch before the market closed. Then, they’d aggressively dump BANK NIFTY stocks and index futures. This selling spree would drag the BANK NIFTY index down just before closing, right when the final settlement price gets locked in. And since they’d already placed bets expecting a fall, they’d cash in nicely.

And if you’re wondering why they kept zeroing in on BANK NIFTY, well, it’s pretty simple. BANK NIFTY options are wildly popular because they’re so liquid. For perspective, if around 4,600 people traded the cash market for the top 3 BANK NIFTY stocks, about 26,500 people traded BANK NIFTY index futures. But a jaw-dropping 16 lakh people were trading BANK NIFTY options! So Jane Street knew exactly where the action was and how to squeeze the most out of traders hoping for a quick payday.

So now, SEBI has cracked down hard. It has barred Jane Street and all its affiliate companies from the stock market until those illegal profits, about ₹4,800 crores, are recovered. And word on the street is that SEBI could be going after Millennium Management next.

But remember, this is just an interim order for now. Jane Street can still take its case to the Securities Appellate Tribunal.

But, what’s the takeaway for you in all this?

Well folks, F&O can look like an easy ticket to quick money. But more often than not, it can be an even quicker way to watch your money vanish. Especially when the game is being played by firms with billion-dollar algos and a seat at the table you’ll never see.

The saga is a reminder about how big institutional money like Jane Street can move the scales while retail folks are busy reading it. There’s also chatter that this action will spook institutional traders and reduce F&O liquidity. But in the markets no vacuum stays empty for long. Big fish like Jane Street may exit for now, but others will eventually swim in to fill the gap.

Nevertheless, our surveillance systems need an upgrade with better rules, faster red flags, and tighter enforcement. And whenever these changes roll in, like they are now, the exchanges and the broader markets could start seeing some movement too.

If you’re still betting on F&O, just remember: in this game, knowing what you’re betting on is half the battle; knowing who you’re betting against might be even more important.

So do your homework, invest wisely or maybe stick to playing the long game where the odds aren’t rigged against you.

Until next time…

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