Casino Capitalism Comes to Town: When Speculation Becomes Public Policy

Touché! If this feels like a James Bond thriller, it almost is.

We have a mysterious foreign operative (Jane Street), stealthy high-speed manoeuvres (algorithmic arbitrage), and a reactive bureaucracy scrambling for footing (SEBI and the exchanges). All of it unfolds on a bustling casino floor (the equity derivatives market), where retail traders are the unwitting extras in a high-stakes showdown.

Yet behind the cinematic farce lies a sobering truth: if you design a speculative playground and leave the gate open, you cannot feign surprise when the sharpest players arrive with better toys.

The villain? Is it Jane Street, the American quant fund now under SEBI’s scanner? Or is it the entire domestic architecture that cheered on speculative fervour for years, regulators, exchanges, and a tax-hungry government, each now issuing warnings about a fire they probably helped ignite?

Let’s rewind.
Earlier this year, SEBI reportedly asked Jane Street, a global proprietary trading firm known for its high-frequency strategies, to pause certain activities in Indian derivatives. Details remain sparse, but the gist is this: the firm was arbitraging inefficiencies in index options, likely exploiting latency advantages and pricing differentials between instruments.

Illegal? Jane Street says no, insisting it was simply doing what it does in global markets, deploying sophisticated algorithms to extract tiny spreads.

Why the sudden discomfort?
Because India’s options market today isn’t a forum for prudent hedging or price discovery, it’s a frenzy, a whirlwind of punting, speculation, and leveraged YOLO bets by millions of retail traders.

In that context, one can argue that a firm like Jane Street risks not just profiting more efficiently but destabilising an already jittery system. It can amplify intraday volatility, distort flows, and vacuum profits from less-informed domestic traders, often playing a game already rigged against them.

But Jane Street may not be the root cause. It could be the symptom. 

The real problem is the system that invited speculation, monetised it, and is now shocked to realise that speculators showed up.

Options Mania
India is now the largest derivatives market in the world by volume. Yes, you read that right. Not the U.S., not Europe. India. A distinction not everyone is comfortable with. 

The strikes involved were deep Out of The Money options, often expiring worthless, serving no real price discovery or hedging function. The sheer volume in these contracts was laughably inconsistent with rational hedging demand. Yet they were permitted.

If a product enables persistent, systematic profits for one set of players without corresponding economic utility, maybe the product itself is the problem, not just the players.

Retail investors are lured by the siren song of leverage. A ₹200 option can become ₹10,000 in hours - or zero. The only problem is that their option bets are blind to this latter option. You can’t blame them. 

It is about tiny capital and big dreams. Big dreams and commitments (aka EMIs) need big money, and post-tax returns on humble deposits couldn’t help. Most participants don’t understand the Greeks. What they do understand is the desi-style lottery-like payoff structure with daily expiry. 

Who needs SIPs when you’ve got a ticket to the roulette wheel?

What has turbocharged this firestorm, in other words, are low entry barriers, flat-fee and discount brokerages that encourage turnover, same-day and weekly expiries maximising churn, and, last but not least, exchanges offering early access on corporate announcements to a select few, only to let them off with a ₹2.5 million penalty. Add to this the unfettered rarely penalised finfluencers peddling iron condors to college students.

The result is millions of trades a day, not for risk transfer, but for adrenaline. Risk-free returns? Or return-free risks?

But who enabled this? It’s tempting to point fingers at the reckless retail trader or a shrewd institutional trader. But they were nudged, shoved and lured into the casino.

Much of India’s capital market regulation is still rooted in form over substance. 

For years, proprietary algorithmic traders like Jane Street and their local equivalents have danced between the crevices of SEBI’s rulebook. It is something like tax avoidance versus tax evasion; one is legal and the other is not. 

The options “trading” was not investing or even hedging. It was latency-sensitive, volatility-extracting arbitrage. Yet, because these strategies didn’t cross any specific “prohibited activity” lines, regulators often watched in silence.

But the silence wasn’t completely ignorance. It was tolerance, a calculated bet that inflows and tax revenues outweighed the risks. Until someone shouted “manipulation.”

A less-discussed reality is that the government itself (via STT), exchanges (via trading volumes), and clearing corporations (via margins) had strong incentives not to question these trades too deeply. The same trades that regulators are now calling suspicious generated crores in transaction taxes and fees every single day.

Instead of fostering genuine market depth, exchanges innovated in the service of churn; weekly expiries now morphing into daily ones, increasing strike densities to fragment liquidity, derivatives contests and webinars glorifying trading frequency.

This wasn’t market deepening. This was monetised hyperactivity

Behind every Jane Street is a web of API-connected Indian brokers, market data feeds, and liquidity provisioning algos that collectively helped create and exploit market microstructure inefficiencies. 

Some were active counterparties, others passive enablers.

Many Indian brokerage APIs (and their clients) likely benefited from order flow data that helped these foreign prop firms model and prey on order book dynamics.

Most of what Jane Street did wasn’t classic wash trading, i.e., buying and selling to oneself, but highly correlated transactions between affiliates or counterparties that looked symmetrical. 

However, there’s a deeper issue.

SEBI may have underestimated how modern algorithmic trading compresses latency gaps to such an extent that intentional "informationless" trades can look indistinguishable from manipulation, unless you model it in real time. By the time SEBI caught up, the trades were already settled.

Exchanges have sophisticated surveillance systems and algorithm-detection tools. The disproportionate volume in specific option strikes would have triggered internal alerts for months. Yet no public warnings or advisories were issued. It is hardly difficult to understand why: the more trades on shallow contracts, the higher the exchange’s turnover and revenue. Conflict of interest meets passive oversight.

Systemic Risk 
Sceptics say: “Options are cash-settled. No systemic risk.” That’s naive.

Here is what is brewing: with a few brokers dominating retail options, there is a clear concentration risk. A single failure could trigger contagion. We are already witnessing volatility spirals, with expiry days seeing violent swings. There is also herding behaviour, as popular strategies (such as short straddles) can implode en masse on event days.

If a few firms can distort expiry-day volumes enough to trigger national regulatory action, what happens during a real stress event, such as a geopolitical shock or mass retail unwinding?

The unwritten truth is that India’s derivatives markets may be less resilient and more easily exploited than we would like to admit. It is not hard to imagine a geopolitical shock or rate surprise setting off margin calls, broker defaults, and mass retail panic. Let us not underestimate the risk of sentiment contagion.

What Next?
This isn’t an argument to ban options. It is a call to return them to their intended purpose, which is, risk management. Now that SEBI is clamping down, including investigating brokerages, APIs, and algo models, we may see a significant pullback in liquidity provision, even from legitimate market makers and hedge funds.

The fear of being retroactively punished could push serious liquidity providers out, widening spreads and hurting genuine price discovery in thin markets.

Reform agenda:
1.    Reintroduce higher margins, especially for weekly/daily expiries.
2.    Ban same-day expiries, or stagger expiry days.
3.    Suitability filters: Let only experienced or well-capitalised traders access leverage.
4.    Separate institutional and retail order books in options.
5.    Incentivise long-term investing, via tax benefits, not the other way round.

The tragedy is not that speculation emerged. The real tragedy is that it may have been unknowingly planned, then knowingly celebrated and monetised, until it finally scared its creators. So, do not call it a bubble when you were the one selling the soap.

And yes, algorithmic strategies like Jane Street’s should be scrutinised. If they distort price discovery or amplify volatility, regulate them. But do not scapegoat them for corrupting the sanctum.

That sanctum was already turned into a casino. Jane Street just brought its own dice.