SEBI Expands Probe Beyond Jane Street: Bait and Switch Strategies in Derivatives Under Scrutiny

The Securities and Exchange Board of India (SEBI) has broadened its inquiry into alleged manipulative trading by Jane Street, a global trading firm, to include other foreign portfolio investors (FPIs). This development follows the detection of similar suspicious patterns in the derivatives and cash market trades of multiple FPIs, according to a recent media report.

The move marks a significant escalation in SEBI’s efforts to clamp down on potentially coordinated strategies that may distort the pricing of derivatives and mislead retail investors.

Alleged ‘Bait and Switch’ Strategies in Focus

The original investigation into Jane Street revolves around a trading technique where large positions are taken in index derivatives — ostensibly to attract smaller investors — followed by simultaneous movements in the underlying stocks within the cash market. This tactic may artificially influence derivative prices and allow large players to exit positions at a profit.

A source familiar with the matter reportedly stated, “While examining trades by Jane Street, we found similar patterns involving other FPIs as well, which we will pursue further.”

Read More: NSE Probes Wall Street Firm Jane Street Over Suspicious F&O Trades!

Echoes of the 2015 Manipulation Case

The case appears to echo a 2015 episode involving illiquid stock options on the Bombay Stock Exchange (BSE), where SEBI noted mass reversals of trades that created artificial volumes. That episode led to an ex parte order. However, given that FPIs are now involved, a similar regulatory response may not be immediate.

Currently, the probe remains at a preliminary stage, with the likelihood of show cause notices being issued to the entities under scrutiny.

Retail Investors Raise Red Flags

Earlier this year, concerns were raised by local fund managers and retail investors regarding unusual price spikes and deviations in implied volatility. These movements are often triggered when a large investor buys options aggressively, thereby inflating prices, and then makes counter trades in the cash segment to secure profits.

Such actions can distort the market's price discovery mechanism, disadvantaging smaller investors who lack the resources or insights to respond swiftly.

Heightened FPI Activity in the Futures Market

The concern is compounded by the recent trend of FPIs taking substantial short positions in the futures market while simultaneously selling off large volumes. Analysts note that despite SEBI’s earlier efforts to regulate the futures and options space, activity levels have remained high, prompting talk of further reforms in the segment.

Conclusion

While SEBI’s probe into Jane Street has already attracted attention, the extension of this investigation to other FPIs marks a critical phase in safeguarding market integrity. With potential regulatory implications and deeper scrutiny of trading patterns, this development is likely to shape the regulatory approach to derivatives trading in India moving forward.

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