Options Trading or Gambling in Disguise: Analyzing India’s Regulatory Framework in Light of the Jane Street Controversy

[Kislay and Sakshi are students at National Law Institute University Bhopal.]

On 3 July 2025, the Securities and Exchange Board of India (SEBI) passed an interim order under the Securities and Exchange Board of India Act 1992 against Jane Street, a prestigious American trading firm in the matter regarding index market manipulation in the Indian options trading market by earning massive positions in derivatives amounting up to 4.3 billion dollars.

While the SEBI order has temporarily addressed the problem of derivatives and arbitrage, the core issue remains unsolved as the regulatory framework still lacks the structural groundwork and real-time surveillance mechanisms needed to distinguish between legitimate arbitrage and market manipulation. 

In this article, we argue that India’s regulatory framework on trading falls short on retail investor protection. We further compare the Indian framework with other jurisdictions to prescribe a new framework that better addresses the shortcomings exposed by the Jane Street controversy, and propose structural reforms to enhance SEBI’s capacity to detect and deter manipulative arbitrage in real-time, while preserving the legitimate role of arbitrage in fostering market efficiency.

Background

Options trading refers to a form of investment that revolves around the buying and selling of financial contracts called options. Jane Street, a Wall Street giant that specializes in hedging and trading with offices spanning 45 countries across the globe, opened its Indian offices in December 2020.

Despite India having a smaller stock market compared to the United States (US), India has over 80% of worldwide options traders in the stock market, which is larger than the US and the rest of the world combined. Over the pandemic, Jane Street had developed the arbitrage opportunity in India to gain massive profits from options trading, which earned the corporation 1 billion dollars in 2023 alone. Between January 2023 and March 2025, the four entities, through which Jane Street conducts its business in India, cumulatively made a profit of 5 billion dollars. 

However, media reports raised concerns about the billions of dollars being made off Indian retail traders by Jane Street’s use of proprietary trading strategies in India. Following this, SEBI investigated the corporation’s trading patterns and issued a detailed interim order in July 2025.

According to the interim order, Jane Street would purchase a large volume of stocks early in the day and simultaneously place bets anticipating a decline in those same stocks. Later, the firm would offload its earlier purchases, increasing the stock supply, pushing prices down, and profiting from the resulting drop. While the firm did incur some losses on actual trade, they were far eclipsed by the profits resulting from the bets.

Legal and Regulatory Analysis

Under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (PFUTP Regulations), any transaction that misleads or manipulates market prices, or is designed to do so, qualifies as an unfair trade practice. This raises two key issues: first, whether arbitrage, when used intentionally to distort prices, can still be considered lawful, and second, whether India’s current regulatory structure has adequate tools to distinguish genuine arbitrage from manipulative trading strategies.

Question of the legality of arbitrage

While arbitrage itself is not illegal per se, even viewed as a tool for improving market efficiency, its legality is dependent on intent and effect in the Indian market. As stated by the Supreme Court in SEBI v. Rakhi Trading Private Limited, the purpose of trading is to make profits, but if one party consistently makes a loss as a result of pre-planned and rapid reverse trades by another, it is an unfair trade practice by the other party. Further, in the same case, the apex court held that such synchronized trading is violative of transparent norms of trading in securities. 

Here, Jane Street’s consistent strategy of accumulating large positions to offload them rapidly, resulting in price dips, only to generate gains in short derivative bets, creates a pattern that prima facie fits this definition of market manipulation.

Enforcement Latency in this matter

This situation is particularly troubling not just because of Jane Street’s conduct, but because of the regulatory vacuum that allowed it to flourish for years. According to trading analysts, this strategy has been ongoing since July 2023, and only now has SEBI taken cognizance of the matter. As established earlier, India’s derivatives market is the largest in the world, and yet it remains largely underregulated, with over 90% of retail investors reporting losses.

While SEBI is planning to heighten surveillance to check manipulations, it has historically relied on a voluntary disclosure-based regulatory mechanism. However, as exemplified by the situation at hand, information asymmetry and algorithmic advantage mean that such foreign firms can engage in unrestrained arbitrage, which can itself turn predatory, with minimal transparency.

Comparative Global Framework

Globally, financial regulators have grappled with this fine line between legitimate arbitrage and manipulative practices. Under its Market Abuse Regulation (MAR), the European Union (EU) issued that any coordinated use of different financial instruments or markets to influence prices, even when the trades appear to be legal, is deemed to be manipulative if it distorts the market pricing. Article 12(2) of MAR specifically addresses market manipulation, as opposed to the broader definitions in the PFUTP Regulations. Annexure 1 to MAR even provides a detailed list of indicators that constitute such market manipulation, providing a much clearer framework than in India.

To enforce the same, in 2019, the European Securities and Markets Authority issued its final report on a set of regulatory technical standards, reinforcing cross-market cooperation between regulators and trading venues, as well as real-time data sharing to detect manipulative behavior across instruments and jurisdictions. The same was accepted by the European Commission in 2021. A similar framework in India would provide a more transparent system between the regulators and trading venues, allowing for faster detection of such apparent manipulation.

In the US, the Securities and Exchange Commission (SEC) is empowered by Sections 747 and 753 of the Dodd-Frank Act to penalize arbitrage strategies that lead to market manipulation, and the act explicitly outlaws disruptive practices and gives regulators the flexibility to catch new forms of such abuse. 

Similar to the present matter at hand, in the case of the US Securities and Exchange Commission v. Lek Securities Corp. et al., the court denied a motion by Lek Securities Corp. to dismiss the SEC’s claims of market manipulation, where the SEC’s complaint outlined the scheme as including layering and cross-market manipulation.

Proposed Changes

While this interim order by SEBI is a commendable step in the right direction, it only provides a “band-aid” solution to this specific problem. A more permanent solution to this would be a dedicated cross-market surveillance framework, with clearly defined “cash-to-derivative impact” trades, akin to the EU model, providing for increased transparency. 

Innovations such as AI and ML, while currently being used by exchanges and brokers, can further be used from the regulator’s side to monitor and detect discrepancies and manipulative patterns more efficiently than the current mechanism. 

Additionally, such algorithmic trading, which can impact the expiry prices, can first be mandated to go through “sandbox testing”. SEBI has implemented its own regulatory sandbox to lukewarm reception, with only 13 applications as of December 2024. Mandating the same for any new algorithms before deployment, while onerous on the side of these firms, will greatly protect the retail investors from such situations arising again.

To further protect the interests of the retail investor, there should be a dynamic visual “risk-meter” disclosure for options trading that reflects real-time market volatility, leverage, and retail exposure, akin to the “risk-o-meter” for mutual fund schemes. This could be implemented from the individual trader's side, but preferably, it is implemented by the regulator to ensure uniformity. 

While the existing circuit breakers are built for extreme movement upwards of 10%, strategies employed by firms such as Jane Street create temporary micro-structural volatility and can circumvent these large-scale thresholds without triggering a halt. Therefore, having a dynamic circuit-breaker that evolves with the trading practices could protect the retail investor’s interests.

Conclusion

The SEBI order against Jane Street marks a critical inflection point for Indian financial regulation. The options market in India has been steadily growing, driven by a rising number of traders. An increasing number of these traders seek quick returns, making the options trading market even more lucrative. 

To support this sudden influx of retail as well as foreign traders, there needs to be a transparent and swift regulatory system, moving on from post-facto surveillance to a more real-time solution for this complex and high-speed market.

Arbitrage is not per se illegal; but such arbitrage with the intent of market manipulation, is illegal. Therefore, India’s current framework needs to evolve in accordance with the market, to deter and detect such sophisticated cross-market manipulation in real time.