Jane Street saga may push rethink of derivative regulations, say experts

Jane Street’s alleged market manipulation and the events that subsequently unfolded may change the way the Securities and Exchange Board of India (SEBI) approaches derivative markets regulation.

SEBI has been taking steps to curb the potential for manipulating markets reducing volumes. This included investor education on derivatives trading and even a temporary ban on Jane Street which was later revoked after a fine was paid.  However, experts state the Jane Street episode strengthens the case for contemplating restricted access to the derivative market.

“The episode exposes how quantitative sophistication can prey on uninformed liquidity. There is a growing case for suitable frameworks where retail access to leveraged or exotic derivatives is conditioned upon financial literacy or minimum thresholds much like accredited investor norms elsewhere,” said Sonam Chandwani, managing partner, KS Legal & Associates . 

A case for reducing access finds support in the members of the finance profession. For instance, Ashish Gupta, Chief Investment Officer of Axis Mutual Fund, said in India, the index market had risen to 500 times the cash market, and India, which is the largest derivative market, is also among the most open in terms of retail access to the complex product.  He added that “there is consensus among the government and the regulator that retail participation in derivatives needs to decrease.” E-mails sent to SEBI and the Ministry of Finance regarding this were unanswered till press time.

To be sure, broker association, Association of National Exchange Members of India(ANMI) had recently announced that they were studying the possibility of making cash equity markets more attractive than derivatives and include strategies to prevent uninformed individuals from entering the retail derivatives market. 

The market regulator’s data also supports Ms. Chandwani’s and Mr. Gupta’s comments and adds weight to ANMI’s efforts. 

A SEBI study released last year underlined that foreign investors and proprietary traders together made a gross profit of ₹61,000 crore while individual traders lost the same amount in fiscal 2024. More than 95% of these profits were made through algorithmic trading, the regulator said in the study. The findings of a study SEBI released on July 7 disclosed that despite measures taken to keep the markets immune from speculation, the share of individual traders who lost remained more or less the same.

Jane Street’s appeal to Securities Appellate Tribunal may also strengthen the case Ms. Chandwani said. The case “would mark a shift from regulating conduct to regulating capability i.e., not just punishing wrong but proactively limiting who can access what based on their capacity to absorb risk.”

“The regulator generally errs on the side of market stability over participant freedom when intent is opaque,” she said citing the Karvy Stock Broking case or Price Manipulation in Illiquid Options (2019), as a precedence. 

Curbing access however comes with its challenges. “The challenge we are facing is which filter to use. Do you use a filter of knowledge by conducting a test? One could even implement something similar to the accredited investor framework for traders,” said Mr. Gupta. 

On a legal ground, it’s “a paternalistic turn but increasingly justified in high-frequency, tech-driven markets,” Ms. Chandwani said. 

Some experts lean towards educating the investor and strengthening institutions. “The regulatory framework must bring together greater transparency, fairness in execution, stress testing of large players, and effective redress mechanisms. This would preserve the genuine benefits that sophisticated firms bring to the market, while preventing their technological advantage from being used in ways that exploit retail investors or undermine overall stability,” said Anand Shrivastava, Partner at Sagus Legal, adding that banning firms like Jane Street was not the solution as it can also reduce liquidity in the market. Instead, it was better to monitor them so that they do not destabilise the market. 

The conversation about restricting access assumes significance at a time when the government has come down strongly upon online gaming, majorly for the addictive nature it can have on users. There have been several instances of such addictive trading in derivatives by young individuals , many of them from low-income strata and lower tier cities.