The Securities and Exchange Board of India (SEBI) is looking into suspicious derivatives trades by global trading firm Jane Street and other foreign portfolio investors (FPIs) for similar ‘bait and switch’ strategies. According to sources, SEBI’s investigation into Jane Street started after complaints about trades where the firm allegedly lured smaller investors with large positions in index derivatives, then moved the underlying stocks in the cash market to profit from price shifts. Now, SEBI has identified similar patterns in trades by other FPIs, suggesting potential coordination or copycat strategies to manipulate derivatives pricing.
Sources familiar with the matter revealed that SEBI is still in the early stages of the investigation and may issue show cause notices to all the FPIs involved. One source mentioned a similar incident in 2015 involving illiquid stock options on the BSE, where SEBI noticed large-scale reversals creating artificial volume. However, unlike the past, where an ex parte order was issued, this time, FPIs are involved, making it less likely for such action to be taken.
Concerns about manipulation have been raised by local fund managers and retail investors earlier this year due to sudden spikes in underlying prices or implied volatility, as well as significant deviations from normal levels. Analysts noted that FPIs have been accumulating short positions in the futures segment and selling in large numbers, raising worries among market participants. This comes at a time when the markets regulator is considering additional rules for the futures and options market, as activity in the segment remains high despite recent interventions.
Not really sure why this matters, but emails sent to SEBI and Jane Street for comments did not receive a response. Maybe it’s just me, but the lack of transparency from both parties is a bit concerning, especially considering the nature of the investigation. The market volatility caused by these suspicious trades can have a significant impact on retail investors, who are already facing losses in the market.
Overall, the expansion of SEBI’s probe to include other FPIs signals a deepening concern over potential market manipulation through ‘bait and switch’ strategies. The investigation is still ongoing, and it remains to be seen how the regulator will address these issues and ensure fair and transparent trading practices in the derivatives market.