Market Liquidity Remaining Stable Following Jane Street Incident: Potential for Minimal Disruption
In a significant move, the Securities and Exchange Board of India (SEBI) issued an interim order on July 3, 2025, against Jane Street Group, alleging index manipulation and unfair trade practices in the Indian derivatives market. The order temporarily bars Jane Street from participating in the Indian markets due to manipulative trades that reportedly earned the firm over Rs 43,289 crore between January 2023 and March 2025 through index options trading.
The immediate impact of Jane Street's exit or restricted participation is a withdrawal of liquidity from Indian index derivatives markets, increasing bid-ask spreads and trading costs. The market, however, may see a more robust and fair trading environment in the long term, as SEBI's strict stance against manipulation could strengthen market confidence.
According to Dinesh Thakkar, Chairman and Founder of Angel One, the market is not dependent on any one entity due to the increased participation of retail traders and institutions. This increased participation could provide an opportunity for domestic market makers and proprietary trading firms to step in and increase their role in providing liquidity, potentially balancing out the initial shortfall.
The first expiry after SEBI's interim order did not show a significant change in the turnover, indicating that other market participants may be stepping up to fill the void. However, some market experts have expressed concerns about the potential lack of liquidity and its impact on the indices. A foreign portfolio investor suggested that there may be no significant directional change in the indices due to the potential lack of liquidity.
The allegations and regulatory action might create increased regulatory scrutiny and caution among other global liquidity providers. Some may reduce their exposure to Indian derivatives, fearing potential compliance risks, which can further reduce liquidity and market depth.
SEBI's actions signal an active regulatory framework addressing sophisticated trading strategies perceived as manipulative. This could lead to reforms in market surveillance, product design, and participant conduct standards, eventually improving market quality and resilience.
Apart from Jane Street, prominent firms in algo-trading and high-speed trading include Citadel Securities, Optiver, IMC Trading, Flow Traders, Tower Research, Two Sigma, Jump Trading, Goldman Sachs, Hudson River, and DRW. Some believe that things could go southwards if other high-speed traders and algorithm-based market makers fail to step in.
Nithin Kamath, the founder & CEO of Zerodha, expressed that the coming weeks may reveal the market's reliance on certain entities. Market experts anticipate that the impact will settle down within weeks, but the long-term implications of SEBI's interim order against Jane Street remain to be seen.
Jane Street has defended its trading operations in response to SEBI's interim order. The company maintains that its trading strategies are robust and transparent, and it will continue to cooperate fully with SEBI during the investigation.
In summary, SEBI's interim order against Jane Street will likely cause a temporary contraction of liquidity in Indian derivatives markets due to the exit of a major liquidity provider and heightened regulatory caution among others. However, over the long term, it could foster a more transparent, fair, and robust market environment, encouraging healthier participation and sustainable liquidity growth.
- The absence of Jane Street Group from the Indian markets due to the interim order may lead to a rise in trading costs and bid-ask spreads, affectively reducing market liquidity.
- As Jane Street steps back, there is potential for domestic market makers and proprietary trading firms to increase their role in providing liquidity, helping to balance out the initial shortfall.
- Some market experts have expressed concerns about the potential lack of liquidity and its impact on the indices, with a foreign portfolio investor suggesting that there might be no significant directional change due to this lack of liquidity.
- The increased regulatory scrutiny and caution among global liquidity providers following the allegations against Jane Street could result in further reductions in liquidity and market depth, as some might reduce their exposure to Indian derivatives, fearing potential compliance risks.
- SEBI's actions against Jane Street signal an active regulatory framework aimed at improving market quality and resilience by addressing manipulative trading strategies and potentially implementing reforms in market surveillance, product design, and participant conduct standards.
