By Alok Pandey, The writer is an officer of the Indian Corporate Law Service
On July 3, the Securities and Exchange Board of India (Sebi) unleashed a significant enforcement action impounding Rs 4,844 crore from Jane Street Group. The New York-based algorithmic trading firm was alleged to have systematically manipulated India’s derivatives markets through an “intraday index manipulation” strategy, generating Rs 36,671 crore in profits over 27 months through “marking the close”, trading heavily near the close of the markets to push indices in desired directions—a move globally considered an illegal, brazen market manipulation activity.
Jane Street’s methodology was diabolically simple yet devastatingly effective. It allegedly “shaped the market” to win the “zero-sum-game”. Jane Street’s trades were so large, and placed so aggressively, that they moved prices on their own. Sebi’s findings are damning, and prima facie this appears akin to an algorithmic pump-and-dump robbery, representing a direct assault on the market’s price discovery function.
Allen and Gale (1992) identified three market manipulation types: “information-based” (disseminating misleading information), “action-based” (undisclosed operational changes), and “trade-based” (strategic buying/selling patterns). While regulatory interventions have partially addressed the first two, trade-based manipulation remains difficult to detect and appears legal on the surface. While Jane Street operated in derivatives markets, other miscreants manipulated cash segments.
The Bharat Global Developers case demonstrates classic pump-and-dump mechanics. The company’s stock climbed 3,440% from Rs 49.45 to Rs 1,702.95 in 11 months despite minimal business operations, generating Rs 271.5 crore in illegal gains through fraudulent preferential allotments. The Arshad Warsi-Sadhna Broadcast case shows how traditional schemes evolved to exploit social media platforms, using YouTube channels to generate false narratives about 5G licences and acquisitions, resulting in `58.01 crore in disgorgement orders.
Modern pump-and-dump schemes follow a theatrical structure: acquiring large positions in thinly traded stocks, systematically inflating prices through false information and coordinated buying, then dumping artificially inflated stock to unsuspecting retail investors. The final act sees prices collapse, leaving retail investors with worthless holdings while perpetrators profit.
Jane Street appears to be Sebi’s first market manipulation case brought against a foreign high-frequency trading (HFT) firm. There are unmissable parallels with the US Securities and Exchange Commission’s (SEC) 2014 action against Athena Capital, another New York-based HFT, for alleged market manipulation involving “high-powered computers, complex algorithms and rapid-fire trades”, implementing the strategy dubbed as “gravy”—referring to flooding the market with massive buy or sell orders during the final moments of the trading day, a practice typically known as “banging the close”.
Sophisticated manipulators possess real-time market data, high-frequency trading capabilities, and comprehensive surveillance of retail sentiment. These algorithmic assaults, using strategies like order layering and price injections, gain an unfair edge over vulnerable retail investors who operate with delayed information, limited analytical tools, and a belief of fair play.
Capital markets function as critical national infrastructure channelling household savings into productive investments. India’s securities markets have achieved unprecedented democratisation. India’s Rs 1.59-trillion initial public offering funding in 2024 is a testament. India now hosts 19.2 crore demat accounts—a 4.8x increase since 2020—representing one of the greatest financial inclusion successes. Mutual fund assets have grown from Rs 12 lakh crore to Rs 61.33 lakh crore, with systematic investment plans contributing Rs 21,000 crore monthly.
However, while foreign portfolio investors and proprietary traders made `33,000 crore and `28,000 crore in gross profits, with 96-97% of profits from algorithmic trading, Sebi’s study reveals 93% of individual derivatives traders lost money over FY22-FY24, with average losses of Rs 2 lakh per trader. The demographic profile is concerning: 43% are under 30, 76% earn less than Rs 5 lakh annually, and 72% come from beyond India’s top 30 cities. Without casting blanket aspersions, it is important to understand that every rupee stolen through market manipulation translates into delays in homebuilding, education investments, and entrepreneurial dreams.
Advanced jurisdictions demonstrate how serious enforcement maintains market integrity. Singapore’s response to the John Soh case resulted in 36-year prison sentences. The UK’s Suspicious Transaction and Order Reporting systems based on the concept of “gatekeeper liability” makes the broader market ecosystem part of an integrated surveillance network, in the interest of the market integrity, benefiting all stakeholders. The US SEC’s sophisticated surveillance capabilities extend globally through international cooperation agreements.
To its credit, Sebi has been implementing several reforms to address evolving threats, and it’s trite to say that regulatory thinking must keep evolving at an equal pace. The idea of real-time investor protection algorithms for analysing potentially manipulative trading patterns based on sophisticated cross-market strategies employed by well-capitalised actors, social media sentiment, and news flow, appears promising.
Second, creating joint investigation units, such as Singapore’s Monetary Authority of Singapore-Commercial Affairs Department model, and combining Sebi’s regulatory expertise with the Serious Fraud Investigation Office’s criminal investigation capabilities could enable coordinated responses that maximise both deterrence and recovery of stolen assets. Establishing cross-border enforcement protocols with advanced jurisdictions would be a desirable enhancement.
Additionally, comprehensive investor education programmes remain essential to address information asymmetry and cognitive bias, teaching retail investors to recognise manipulation tactics as their first line of defence against sophisticated schemes, which is right up the alley of the ministry of corporate affairs’ Investor Education and Protection Fund Authority.
The message to market manipulators must be unambiguous: India’s securities markets are neither casinos nor hunting grounds where sophisticated predators can extract wealth from ordinary investors pursuing legitimate economic aspirations. Market discipline applies equally to algorithmic trading firms managing billions and social media influencers promoting penny stocks. The democratisation of India’s securities markets represents a remarkable achievement in financial inclusion, and this must be protected with unwavering commitment to market integrity, regardless of the technological sophistication of threats or international prominence of perpetrators.
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