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Two By Two Fri, 18 Jul 25 |
An abridged, narrative version of the latest episode of Two by Two, The Ken’s premium weekly business podcast. |
The invisible whale that capsized India’s leaky options boats. Sebi rejects Jane Street’s ‘arbitrage’ defence, and alleges coordinated expiry-day manipulation
| 4 min read |
Good Morning [%first_name |Dear Reader%],
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Imagine this. You are a novice trader just beginning to learn how the capital markets work. You’ve tried some trading, you’re starting to gain a little bit of confidence. So you begin thinking about trying your hand at making some real money.
One fine day, you come across a finfluencer touting something that could make you a literal fortune. Or maybe it’s an overenthusiastic friend. However it happens, you are introduced to the shiny, glamorous world of Futures and Options (F&O). You don’t really understand them, but people are offering you sure-shot methods they claim anyone can follow and make bank. You try some trades. You come out ahead. You start thinking this is your path to early retirement.
By the time you run into this little factoid, it’s probably too late. Nine out of 10 traders lose money in F&O trading.
That’s bad enough.
But what if the game was rigged?
By an entity that could move markets at will?
Back in January, The Ken’s finance editor, Anand Kalyanaraman, broke a story about a mystery fund doing just that. By June, we knew that fund was Jane Street.
Two weeks ago, on 3 July, market regulator Sebi finally released an interim order alleging that Jane Street had engaged in massive manipulation in India’s stock market and derivatives trades, imposing a trading ban and a hefty fine of over Rs 4,800 crore.
But the biggest casualty? Retail traders.
In the latest episode of Two by Two, hosts Rohin Dharmakumar and Praveen Gopal Krishnan sit down with Anand and Mayank Bansal, president of a UAE-based hedge fund and the person who first flagged this manipulation, to break down how this saga unfolded. And what happens next.
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Vulnerable market
India’s options trading sector is massive, and its scale far exceeds that of the underlying stocks in the market—not in terms of money deployed, but in the sheer number of participants trying their hand at F&Os. However, because India’s cash markets are relatively smaller compared to other major economies, they are also more vulnerable to large entities that want to manipulate them.
Anand: The sanctity of India’s stock market was under attack.
Jane Street was manipulating the trade, allegedly, to benefit at the expense of everybody else.
And it was actually doing it on the expiry days. There were two ways in which it was doing it. One is the violent expiry and the other is a quiet expiry.
On the violent expiry days, at the beginning of the session, it would buy either a lot of call options or a lot of put options.
At the end of the day, it would then ensure that these positions became profitable by manipulating the main index itself. It manipulated the main index by either buying a lot of stocks or by actually selling a lot of stocks in the cash market.
So when you do that, then your position in the options market becomes very profitable.
[…]
In a quiet expiry, what happens is that the manipulator sells options… and is pocketing the premium.
The ‘arbitrage’ defence?
Jane Street has defended its actions as “basic arbitrage”.
Mayank disagrees. Strongly.
Mayank: Let’s say Reliance Cash is trading and Reliance Future is trading. They will both converge to the same price on expiry day. Buy cash and sell futures and you can earn a risk-free 8%.
[…]
What Jane Street is calling index arbitrage is that leg 2 was 7X to 8X of leg 1, which makes this entire thing nonsensical. It must be absolutely the same for it to work, because the two things will converge.
[…]
That’s because the future is settled on the cash index itself, on the cash stock.
Now, to take this arbitrage trade, you have to buy and sell the same quantity, obviously, because it’s converging.
You can’t sell X of one thing and sell 7X to 8X of the other thing, and then dump the X so that you profit from the 7X to 8X that you’ve taken. It is absolute nonsense.
In such a trade, it is equally likely that either leg 1 or leg 2 will be profitable, while the other is making and netting the spread. There is an equal probability that one of the two will be profitable.
In this case, leg 1 is continuously loss-making.
So it is clear that it’s not arbitrage. Because in arbitrage, there is a 50% chance that leg 1 will be profitable or a 50% chance that leg 2 will be profitable.
Naturally, Jane Street has challenged the trading ban since the accusations surfaced, even agreeing to pay the fines—all in an effort to resume operations in India.
But there’s a lot more to this. I encourage you to listen to the full episode to understand the true scale of Jane Street’s alleged market manipulation, and what it means for India’s capital-market investors.
And once you’ve given it a listen, do write to [email protected], or leave a comment on our website or app and tell us what you think.
We’ll be back next week with a new episode.
Regards,
Hari
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Hari works as a producer and researcher on Two by Two and First Principles. He’s from a “little village in Kerala where nothing much happens”, enjoys reading books (although he loves buying them even more), and appreciates films—be it on Netflix or Criterion.
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