1) buy large volumes of stocks and/or stock futures that are part of an index tracking India’s banking sector, early in the day,

2) subsequently place large options trades, betting that the index would decline or volatility would spike later in the day, and

3) later in the day, cash out of the large long positions, dragging the index lower, making far more money on the options trades than on the long positions.

Jane Street can and likely will claim the firm was only arbitraging away pricing inefficiencies, nothing more, nothing less. It was just business as usual, etc., etc.

However, given the scale of the operation, Jane Street's actions sure look like textbook market manipulation. Calling it like I see it.

> Jane Street sued Millennium, Schadewald and Spottiswood in April [2024], claiming the two traders had taken an “immensely valuable” trading strategy with them. It later emerged at a court hearing that the strategy involved India options and had generated $1 billion in 2023 profits for Jane Street.

> India retail investors make up 35% of options trades. Institutions, seeking to hedge their risk or profit for their companies’ accounts, handle the rest. Regulators are alarmed that regular folk are bypassing the tried-and-true way to build wealth: buying and holding stocks and mutual funds.

> Instead they’re engaging in pure speculation. The average time an Indian trader holds an option is less than Instead they’re engaging in pure speculation. The average time an Indian trader holds an option is less than 30 minutes, according to data from mutual fund provider Axis Asset Management Co. “If you want to gamble, if you need diabetes and high blood pressure, then go into this market,” Ashwani Bhatia, a board member on the nation’s top stock market regulator, said last year.

https://economictimes.indiatimes.com/markets/options/indias-...

The thing is, Jane Street still consists of some of the smartest people in the room. Getting into markets like this and making large-volume trades is no easy feat. We often equate algorithmic prowess with investment intelligence, but in reality, navigating the legal and regulatory requirements is the only edge you have in trading these days. It’s very hard to figure this out as an international firm. Jane Street did it, and they deserve kudos for it. Trust me, if it were an Indian firm making the same moves, you wouldn’t have heard about it.

You’ll see Jane Street will pay a fine and come out on top. This is because they plan for these things with the expectation that regulators will make a scene about it.

I don't get the basis for regulatory action if they weren't in "breach of any regulation." Not a fan of financial skullduggery, but it does seem important for government agencies to play by explicit, non-arbitrary rules. (Or maybe this article just got it wrong?)

> "without any plausible economic rationale..."

I had a bit of a laugh at this. I thought the rationale was to fuck the counterparties as hard as possible?

It would seem like Jane Street being allowed to operate in this market is like bringing an anti-material rifle to a pillow fight.

I can wrap my head around why/how options for physical commodities give price stability for sellers and buyers. But at first glance I struggle to see how derivatives are beneficial in the equity markets. The argument is that derivatives increase market efficiency (more accurate pricing) over what just a simple buy/sell market would give you right? But how valuable is this increased efficiency? Obviously is super valuable to the people who work in finance, but how valuable is it outside of that context?

It’s just political. Who is allowed to manipulate and who pays their dues to be able to.

We were probably able to find it because we did hedge quickly. Hedging costs money (trading fees, 1/2 spread) so some firms did it less often. We heard that Bear-Sterns only did it 1 time per day (around 4pm when spreads were small and over-night movement risk was nigh). They wouldn’t have caught this scam.

> While these actions were not a breach of any regulation,

I guess this is why you shouldn't do business in India: you can get retroactively punished for breaking rules the regulators wish they had made.

Two strategies are detailed with trades: 1) expiry day price discrepancies between index options and underlying 2) expiry day painting the close

https://archive.is/czGds

Any situation where you can make bets on the market that pay off larger than the cost of the market it will lead to manipulation. This is no different than paying off the referee or the star players etc ... The only thing keeping this from happening is the threat of the law really or any adversarial change in incentives. But once a player or collective of players gets big enough, it seems likely this is happening even if it is not coordinated centrally.

It would be interesting if more people started to get interested in this problem.

I have seen defi stuff that literally bakes in the cost of moving price into the smart contract "market" which is interesting too but at the time of reading (a few years ago) I didn't see direct discussion of the boundaries of manipulation incentives in that domain. Would be interested to hear if anyone is deep in that rabbit hole recently.

Am I surprised they were cut off? No, not at all. They should be cut off in the West altogether.