SEBI’s Jane Street Action May Be a Cure Worse Than the Disease

When regulators shoot first and ask questions later, markets tend to suffer.

The Securities and Exchange Board of India has launched a sweeping enforcement action against Jane Street Group, ordering a record ₹48.44 billion ($567 million) seizure to be held in escrow until, as SEBI puts it, “further communications” from it.

Four Jane Street entities have also been barred from all securities trading. These are JSI Investments Pvt Ltd, JSI2 Investments Pvt Ltd, Jane Street Singapore Pte Ltd, and Jane Street Asia Trading Ltd.

The 105-page order alleges systematic manipulation of the Bank Nifty index. It, however, seems to rely on circumstantial evidence that may prove difficult to sustain in appellate proceedings.

Moreover, the full trading ban represents regulatory overreach that could backfire if the enforcement action does not withstand legal scrutiny.

Legal Weaknesses
SEBI's case centres on alleged intra-day index manipulation where Jane Street bought Bank Nifty components in morning sessions to inflate prices, then reversed positions to profit from options. 

On January 17, 2024, Jane Street bought ₹43.7 billion worth Nifty Bank constituents in cash and futures, and created short positions worth ₹321 billion in early trades in Nifty Bank index options. It then reversed and sold all the cash/futures position in Nifty Bank that were created later in the afternoon.

But here's the prosecution's Achilles heel: SEBI explicitly acknowledges that 'prima facie the trades taken and executed by Jane Street and its associates are not illegal' individually. 

The manipulation allegation depends entirely on proving coordinated intent, a difficult evidentiary standard.

The regulatory timeline exposes further weakness. NSE issued Jane Street a cautionary letter in February 2025; the firm formally committed to compliance. 

Yet SEBI alleges continued violations in May without providing clear guidance on prohibited activities. This creates a due process problem: how can firms comply with regulations that weren't clearly articulated? The interim order's sudden urgency after Jane Street operated these strategies for over two years suggests pressure to “perform” rather than compelling new evidence.

Market Damage
While SEBI builds its case, India's derivatives market suffers real damage. The regulator has been systematically cooling down what it viewed as excessive speculative activity through a series of measures introduced throughout 2024, including restrictions on weekly expiries and higher margin requirements. 

These earlier interventions already caused derivative volumes to crash 37% in December 2024, pushing daily turnover to ₹280 trillion, the lowest since June 2023. (Volumes have since started to rise, but are still below November 2024 levels)

Now, the Jane Street ban eliminates a primary liquidity provider precisely when the market structure is already under severe stress from this regulatory tightening. The timing compounds the damage, as algorithmic market makers like Jane Street become even more crucial when retail participation is being curtailed and overall liquidity is shrinking.

The timing is particularly problematic since 60-80% of derivative volume occurs on expiry days, when algorithmic market makers like Jane Street are most crucial.  Indian shares had opened flat on Friday morning, suggesting that markets are treating this as a regulatory overhang rather than a justified enforcement.

India transformed from a derivatives backwater to the world's largest equity derivatives market within five years, thanks to favourable regulatory treatment and sophisticated infrastructure. This required algorithmic market makers to provide continuous liquidity across multiple strike prices.

SEBI's enforcement creates immediate operational uncertainty for remaining firms. Even if Jane Street eventually prevails, the precedent suggests some strategies can be retroactively criminalised. Remove sophisticated liquidity providers from a market built on their participation, and the ecosystem risks severe disruption.

SEBI's labelling of Jane Street as an entity that 'is not a good faith actor that can be, or deserves to be, trusted' creates a precedent for foreign institutional investors. Such language undermines India's reputation as a sophisticated financial centre.

Global trading firms now face the risk that successful operations could be retroactively labelled manipulative if regulators shift enforcement priorities. 

SEBI's enforcement philosophy appears to have shifted from market development to tighter market control, affecting the structure of the derivatives market:

SEBI's Tightening Sequence	Timeline
Higher contract sizes	January 2025
Premium upfront collection	February 2025
Intraday monitoring	April 2025
HFT market order ban	July 2025

Combined with the action against Jane Street, SEBI is reshaping India's derivatives market through enforcement measures rather than clear rulemaking. This approach creates legal vulnerability, as courts typically scrutinise enforcement that effectively implements new policy through selective prosecution.

High-frequency trading firms play a crucial role in shaping market dynamics. SEBI’s September 2024 report stated that 306 out of 376 FPIs and 347 out of 626 proprietary traders employed algorithms, and that 97% of Foreign Portfolio Investor profits and 96% of proprietary trader profits in F&O were generated through algorithmic trading.

SEBI's aggressive enforcement threatens to reverse India's progress from HFT participation that improved market quality through increased liquidity.

International experience suggests overly aggressive HFT restrictions often backfire, creating market fragmentation and higher costs without eliminating perceived manipulation risks.

Jane Street will likely mount an aggressive 21-day response focusing on due process violations, retrospective rule-making, and evidentiary weaknesses. The Securities Appellate Tribunal will face a case testing fundamental questions about regulatory authority and market manipulation standards.

A Jane Street victory would be a significant setback for SEBI and could potentially expose the regulator to damages claims. Even partial vindication might undermine SEBI's credibility and encourage other firms to challenge its enforcement actions.

SEBI's case against Jane Street appears legally vulnerable and procedurally questionable. The regulator has imposed severe penalties based on interim findings that may not withstand appellate review, while causing immediate and potentially long-term disruption to India's derivatives ecosystem.

The cure may indeed be worse than the disease, especially if SEBI's enforcement action rests on weak legal foundations. 

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