SEBI’s Action Against Jane Street: A Turning Point for FPIs and Algo Trading in India

The Securities and Exchanges Board of India’s crackdown on US-based trading firm Jane Street over allegations of reaping gains of ₹4,843 crore through unlawful derivatives trades has implications far beyond a single entity. It’s a clear warning from the market watchdog to foreign portfolio investors (FPIs) who rely on speedy algo-trades, opacity, or structural loopholes, that their actions are now on the radar.

For market participants and observers alike, Sebi’s order is less about cornering a single entity but more about where the market is headed. It raises the bar on how the regulator plans to oversee high-speed trading, intensify surveillance of expiry-day activities, and demand greater transparency from global players operating in India's derivatives-heavy ecosystem.

"This action by Sebi against Jane Street could be a clear signal that India’s market regulator is ready to tighten its watch on how foreign portfolio investors and large trading houses use high-frequency and algorithmic strategies," said Trivesh D, Chief Operating Officer at Tradejini. "It shows Sebi’s intent to plug gaps in surveillance and bring in stricter compliance checks, especially for expiry day trades and large intraday positions."

What the Jane Street Order Reveals

The interim order accuses Jane Street of using multiple entities and high-speed algorithmic strategies to exploit prices in India's derivatives market, particularly by capitalising on, and even fanning, expiry-day volatility.

On Jan 17, Jane Street bought ₹4,370 crore worth of Bank Nifty stocks to push the index up, while simultaneously taking ₹32,115 crore in bearish options positions, by buying puts and selling calls. “These were 7.3x larger than their stock trades. After selling off those stocks and dragging the index down, they made ₹734 crore in net profit. This strategy was repeated over 15 expiry days, earning over ₹3,700 crore in total,” explained Navy Vijay Ramavat, MD at Indira Group.

Sebi flagged the resulting profits as ‘unfair,’ and using them as a sign to look into the structural loopholes that FPIs may be using to their advantage.

While the development has brought about relief to the trading community over hopes of reined in volatility on expiry days, it also comes with a senses of caution. For FPIs, the signal is clear: high frequency, algo-based strategies, unavailable to regular market participants, will now come under heightened scrutiny.

"The interim order sends a strong message that Sebi has strong surveillance and will take action against FPIs that are flouting regulations," said Santosh Pasi, founder of Pasi Technologies and a derivatives trader. "They’ll know now that Sebi can decipher even if they make multiple entities to bypass rules."

Pasi expects Sebi to introduce further clarifications, especially around group structures where Indian companies might be indirectly linked to FPIs. "I would prefer if Sebi comes with a clarification saying if you are an FPI, all your related companies in India will need to follow FPI norms for trading purposes," he added.

Jane Street had leveraged its Indian entities to bypass regulatory restrictions on intraday trading by FPIs. According to Sebi’s interim order issued on July 4, the firm used its India-based entity, JSI Investments, to execute large-scale, same-day trades in the cash market, an activity that is explicitly prohibited under the FPI regime.

Algo Trading Enters the Regulatory Spotlight

In recent years, Sebi has also worked on strengthening its oversight of algorithmic trading. However, the Jane Street order appears to accelerate this agenda even further. Basis this, several experts expect the regulator to push for new disclosures, mandatory order tagging, and perhaps even real-time monitoring of algo-generated trades.

"We’ve already seen steps in this direction," said Ankush Bajaj, a veteran trader and SEBI-registered analyst. "The unique order ID and IP tagging system was one such measure. Going forward, if someone wants to sell algorithmic strategies through any platform or marketplace, only SEBI-registered research analysts will be allowed to do so."

This effectively ensures that strategy developers are under regulatory oversight and can be held accountable, a welcome step in a derivatives landscape that is rapidly getting dominated by the use of automated trades, especially by big-pocket players.

Abhishek Kar, a financial influencer and trader, points to more possible changes on the horizon. “Stricter rules in the sense for FPIs, like needing to share more details about their algorithmic trading strategies. The regulator might ask for regular reports on their trades to ensure they are adhering to standard market practices,” he said. “There might also be new limits on how many trades a single firm can actually make in a particular asset class, to ensure no single entity sways the market.” Sebi could also ask FPIs to share data around large trades.”

He also speculated that SEBI might review the structure of benchmark indices, such as the Nifty 50, to avoid manipulation through high-weightage stocks. "A couple of blue-chip companies hold significant weight, making them vulnerable to being swayed by big players. Sebi could look into redistributing index weights to prevent that."

Liquidity vs Volatility: A Trade-Off?

One of the more immediate questions this crackdown raises is about market liquidity and volatility, the pillars of a derivatives market. Proprietary trading firms, including high-frequency players, contribute nearly 50% of volumes in options trading in India. Any curtailment of their activities could therefore affect liquidity, at least in the short term.

“Some aggressive traders may reduce their activity, which could calm market fluctuations but also slightly decrease volumes,” said Trivesh D. “However, Sebi’s approach could help India’s derivatives market grow more clearly and fairly by balancing healthy liquidity with more stable volatility.”

Kar offered a more cautionary take. “Less trading activity could result in lesser liquidity, making it harder for other traders as price equilibrium could be distorted. We may see increased volatility in the short term, especially in thinly traded contracts,” he said. “But over time, prices may become fairer, attracting more long-term investors.”

Along similar lines, Ramavat feels that since big players like Jane Street bring high trading volumes, Sebi’s strict action could reduce liquidity in index options for a while. “But it may also make the market cleaner and safer for small traders. If fewer people try to manipulate expiry prices, volatility might go down too. Natural volatility will return in place of artificial swings. So even if trading feels slower for some time, overall confidence and fairness will be good in long term,” Ramavat added.

Pasi, however, struck a more optimistic tone. “Given India's well-matured derivative market, it's likely that liquidity will remain unaffected. By curbing manipulative trading practices, the regulatory action should reduce volatility caused by artificial price movements. This, in turn, should promote a more stable and efficient market.”

Warning for FPIs

The implications of Sebi’s actions go beyond domestic traders. It comes with a clear message that even actions of foreign firms who are now acutely watched and that Indian regulators will not hesitate to act, even against global giants.

"Sebi’s order is a strong step toward protecting market integrity," said Bajaj. "It marks the beginning of a more regulated and transparent trading environment in India."

“The goal is to make the market more inclusive and fair—not necessarily to punish innovation but to ensure that all players, domestic or foreign, are competing on a level playing field,” he added.

This perspective underlines a shift in the market regulator’s philosophy, rather than penalising technological advancement, Sebi seems focused on ensuring that those advantages on the hands of big-pocketed firms do not translate into systemic unfairness for smaller players.

While SEBI’s order against Jane Street is still an interim one, the message it sends is not. The regulator is shifting toward proactive market supervision. FPIs and algorithmic trading firms must now reassess how they engage with Indian markets, taking into account that Sebi will be watching them with precision lens.