By Nesil Staney
US trading giant Jane Street has deposited Rs 4,843.57 crore in an escrow account, complying with a directive from the Securities and Exchange Board of India (SEBI), and requested the market regulator to allow it to resume trading in the domestic markets.
In a statement on Monday, SEBI said it is examining the request of the American firm accused of market manipulation.
According to SEBI, Jane Street has also requested that certain conditional restrictions imposed under its interim order be lifted after the creation of this escrow account. “They (Jane Street) have further stated that this action has been undertaken without prejudice to their rights and remedies which remain available to them in law and equity,” the market regulator added.
In its interim order on July 3, SEBI had accused Jane Street of orchestrating elaborate manipulative scheme in India’s derivatives market, resulting in unlawful gains of Rs 36,500 crore through coordinated trading strategies, particularly in Nifty Bank stocks and index. The regulator had barred the hedge fund from accessing the markets and said it would impound Rs 4,843 crore — the highest-ever amount — for unlawful gains made by the company.
To provide “balance of convenience”, Jane Street can continue to trade after depositing the amount in an escrow account with a scheduled commercial bank, it had added in its 105-page interim order.
Earlier, a Jane Street spokesperson said the firm disputed the SEBI findings. “Jane Street is committed to operating in compliance with all regulations in the regions we operate around the world,” he said.
Once Jane Street is allowed to resume trading, it will be subject to enhanced monitoring by Indian stock exchanges and the regulator to prevent recurrence of alleged manipulative patterns, said market experts. The high concentration of stocks makes the Bank Nifty particularly vulnerable to manipulative trades, they said. The top five stocks in the index account for 82% weightage.
The frenzy of high-risk taking retail participants in the Indian derivative market is a big challenge for SEBI. The National Stock Exchange is the world’s largest by number of option contracts. Most of the profits in derivatives trading are captured by foreign traders, proprietary desks, and brokers, while retail investors consistently bear losses.
“The game is played by retail traders in a big way, who buy options for what seems to be one-day speculative positions. This is the craziness — the love of incredibly leveraged positions,” said one fund manager.
Many traders enter market without knowing the complexities of derivatives and volatility. Their enormous losses, suffered largely due to the illusion of easy profits in the segment, is now a political problem in India, said another market expert.
Jane Street’s deposit, meanwhile, only acts as a safeguard as SEBI continues its investigation. If the firm is eventually cleared, the funds may be released. If not, then SEBI retains control over this money. While this is a record impound, the final amount Jane Street would need to pay in such a situation will be many multiples of this deposit amount, said most experts.