K Yatish Rajawat, Founder, Centre for Innovation in Public Policy
The biggest short-seller in Indian markets, Jane Street, is back after it deposited a fine according to an interim order of the Securities and Exchange Board of India (Sebi). This raises a critical question about market manipulation and legitimate short-selling, There is a fine line between the two, and the regulator is unable to make the distinction.
Jane Street, Hindenburg Research, and Viceroy Research are foreign entities that profit from declining stock prices. While the last two use information as a momentum to bring down prices, Jane Street uses brute volume in the derivatives to do so in the cash market. The crucial question the regulator should ask when distinguishing between market manipulation and legitimate short-selling is who is affected the most. The companies, of course, are concerned, but the most severely impacted are the investors.
The Hindenburg attack on the Adani Group decimated investor wealth in a single day. While the company suffered loss of reputation and cleaned up its books, investors suffered the real loss even as Hindenburg gained. Viceroy has already made money from a similar attack on Vedanta. While these are information warfare tactics where positions are taken in advance and small investors are trapped, Jane Street has been more blatant and used a pump-and-dump strategy to trap traders.Jane Street depended on local broking firms to open up cash positions at the beginning of the trade day. Its aggressive buying in the cash market early in the day gave traderson apps like Zerodha and Groww a bullish picture of banking stocks. These traders purchased bullish derivative positions in the hope of booking profits by the end of the day. Jane Street dumped the stocks before the end of the day, bringing the bank Nifty down substantially. While the firm would sometimes book losses in the cash position, as it had gone short in the Bank Nifty derivatives, its profit there would be 10-20 times the losses in cash positions. Other market manipulators too have used this strategy in the past.
However, the size of manipulation by Jane Street is significantly higher than that of activist short-sellers like Hindenburg and Viceroy, and its impact on millions of investors raise concerns around market integrity and investor confidence.
If one hedge fund can generate so much volume that it can influence an entire index, there certainly are gaps in the regulatory and market infrastructure. This is not about hedging, as Jane Street claims, and this issue should not be hidden behind this argument. This was manipulation, and the profits made clearly indicate that the purpose was to pump and dump the stocks. The key question here is whether the positions were deliberately concealed from the exchange by being held in two separate entities—cash positions in locally registered broking firms and profits in foreign portfolio investor (FPI) accounts from abroad. This deliberate concealment itself is against the rules and shows criminal intent to manipulate stock prices. Even the regulator would have never discovered the act if these practices were not revealed in a US court case.
Sebi levied a penalty, but also allowed Jane Street to re-enter the market. Jane Street will hire expensive lawyers who will confuse the appellate tribunal and later the Supreme Court, with arguments that every step that it took was legitimate. They will argue that every global regulator and financial market allows short-selling as a legitimate and valuable mechanism for price discovery and market efficiency. They may even cite short-sellers like Hindenburg and Viceroy follow a strategy based on rigorous forensic financial research, highlighting alleged irregularities and betting on subsequent stock declines. But this strategy often creates shock waves that reverberate beyond individual stocks, affecting market sentiments, investor trust, and even national financial stability. While the Security and Appellate Tribunal has never impressed the world with its foresight, I hope it understands it is a question of financial integrity of Indian markets.
Stock exchanges that boasted about their derivative volumes should revisit their regulatory mechanism. There is nothing good about volumes if they are hiding players like Jane Street and there are other FPIs who are doing the same. Some of whom are based in Hong Kong, which is now home for all kinds of shady players. And if they are operating out of Hong Kong, the Chinese government certainly knows about their practices. Hence, the regulator and the legal fraternity should see Jane Street’s practices from a geopolitical view, where financial instruments can be weaponised.
The critical question becomes one of distinguishing legitimate short-selling from manipulative practices. International regulatory precedents offer clarity. For instance, the US Securities and Exchange Commission (SEC) has said that deliberate dissemination of false information, as in SEC vs Berliner (2008), clearly constitutes market manipulation. Jane Street’s misuse of cash positions is a false signal or misinformation and is being used for luring traders into derivatives markets. Sebi also has a fiduciary responsibility towards protecting small investors. In the last couple of years, it has forgotten this responsibility and focused on market volumes or money raised as accomplishments.
If one player can run circles around stock exchanges and regulators, it is time this isn’t just prevented but also dealt with strongly. The financial integrity of the market is crucial for economic growth, and it can’t be at the mercy of foreign traders.