Sebi order reflects misunderstanding of standard hedging practices: Jane Street

Synopsis

US-based Jane Street is contesting SEBI's order accusing it of manipulative trading in equity derivatives, asserting a misunderstanding of hedging practices. The firm denies being uncooperative, stating it promptly provided information and modified trading after discussions with exchanges.

Mumbai: US-based Jane Street said the Indian capital market regulator's order accusing the trading firm of manipulative trading in equity derivatives reflects a 'misunderstanding of standard hedging practices and the interrelationships between derivative and underlying markets'.

The firm, in an internal communication that ET has accessed, said the Securities and Exchange Board of India's claim that the firm's activity is "prima facie manipulative", disregards the role of liquidity providers and arbitrageurs in markets, while contesting claims that it was uncooperative with Sebi regarding its trading strategies.

"This just isn't true. It doesn't line up with the facts of how we engaged with Sebi," the communication read.

Last week, Sebi banned Jane Street from dealing in Indian securities market and directed it to pay ₹4,844 crore, which the regulator deemed as unlawful gains.

The Indian regulator used a specific metric for market impact and trading aggressiveness which is disconnected from actual market dynamics, the trading firm said.

The firm said when Sebi asked for information about its trading in August 2024, it promptly provided information and maintained transparent communication throughout follow-up questions. Similarly, upon receiving letters from the Indian stock exchanges in February this year, it immediately "turned off" trading activity to understand their concerns. Senior Jane Street leaders from Hong Kong and New York also flew to Mumbai and based on the conversation, made modifications to its trading, it said. Upon completion of the process, it believed that Sebi was comfortable with its approach.

"Since February, we have made ongoing efforts to communicate with Sebi and have been consistently rebuffed. The order claims that this is an "urgent" situation, yet Sebi could have responded to any one of our requests to discuss their concerns."

Countering Sebi's allegations that it was most active on expiry days of index options, Jane Street said the nature of the Indian market, where participants predominantly engage in cash-settled index options, results in liquidity providers (including themselves and others) accumulating stock price exposure that terminates at options expiry. "Replacing expiring deltas with non-expiring deltas is a standard and well-understood practice in markets throughout the world," the firm said.

On the Sebi order emphasising examining the first eight minutes of trading on January 17, 2024, as crucial for understanding the intent and design of its options strategy, which the regulator termed as intra-day index manipulation, Jane Street explained that those eight minutes illustrate basic index arbitrage trading, a standard financial market mechanism that maintains the prices of related instruments in line.

"One can easily observe that there was a large divergence between the Bank Nifty index price shown in the options markets and the price implied by the stock levels. Jane Street (presumably alongside other participants) traded in a direction consistent with closing that gap and bringing the two markets more in line with one another," the firm said. Such synchronisation, Jane Street said, was "unambiguously good for the health of financial markets".

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