Jane Street: The line between market manipulation and arbitrage
In July 2025, the Securities and Exchange Board of India (SEBI) shocked global markets by passing a sweeping order against the Jane Street Group, one of the world’s leading hedge funds. The regulatory action barred Jane Street from participating in Indian markets and directed impounding of alleged unlawful gains amounting to INR 4,843 Crore. The impact of the said debarment was felt on the markets through a sharp drop in trading volumes and a temporary liquidity crunch. While the said impact now stands mitigated to a large extent since Jane Street has deposited the mandated amount of INR 4,843.57 Crore into an escrow account in favour of SEBI, and has resumed trading on the market under certain conditions, the investigation and proceedings against Jane Street have reignited debate on an important question- what is the line between legitimate ‘arbitrage’ trading and market manipulation?
Jane Street’s Business Model and Trading Approach
Founded in 2000, Jane Street is a global trading firm with offices in the United States, Europe, and Asia. Jane Street typically hires expert mathematicians, physicists, and computer scientists who develop proprietary trading models- often involving sophisticated algorithms- to process vast amounts of market data. Jane Street’s business model is focused on the identification of price discrepancies across financial instruments or markets and leveraging the same. The firm uses high-frequency trading technologies to detect and capitalize on these inefficiencies, holding positions for extremely short periods- sometimes mere milliseconds.
The SEBI Order: Allegations Against Jane Street
SEBI’s investigation into the group began pursuant to certain media reports in April 2024 pertaining to a legal proceeding brought by Jane Street against a rival hedge fund Millenium Management. It was alleged by Jane Street that two of its former employees (who had recently joined Millennium) had stolen a “highly valuable, unique, and proprietary” trading strategy developed by Jane Street. In the court proceedings, Jane Street claimed that this proprietary strategy had generated around $1 billion in profits for the firm in 2023 alone. It was further revealed that the said strategy was being used in Indian markets only.
The subsequent investigation by SEBI revealed that certain “manipulative strategies” were being employed by Jane Street and its related entities in the Indian markets. According to SEBI’s interim order, Jane Street engaged in two primary trading strategies that allegedly constituted market manipulation:
1. “Intra-day Index Manipulation”: SEBI alleged that on 15 BANKNIFTY option expiry days, Jane Street first aggressively bought significant quantities of BANKNIFTY underlying constituent stocks (in the cash market), temporarily pushing up the BANKNIFTY index in the options market. Later in the day, Jane Street would sell off these securities, exerting downward pressure on the index. Such trading activity, no doubt, caused Jane Street to accumulate serious losses (almost INR 200 Crores in the said 15 days) and could have no direct economic rationale.
As per SEBI, the rationale for such aggressive and voluminous trading is to be found in impact of such activity on the price movement in the options market. In the options market, Jane Street would take opposite positions to the cash market, benefiting from the temporary movement of the price in the cash market. Notably, Jane Street’s positions in the options market, in volume, was much higher in magnitude than their positions in their cash market (the former being sometimes 7-8 times of the latter). Thus, by accumulating a relatively small amount of loss in the cash market, Jane Street was able to influence the price of the calls and puts in the options market, and capitalize on this price movement by putting much higher sums in the options market.
2. “Extended Marking the Close”: On three specific days, Jane Street allegedly engaged in aggressive selling in the final 60 minutes of trading to depress the index closing level, generating approximately INR 560 Crore in profits from options positions. As per SEBI, Jane Street, through their trading activity towards the close of the day, ‘engineered’ a favorable price point, to the detriment of the other players in the market, who did not know of such strategies in play.
Jane Street’s Defense: “Basic Arbitrage”
Pursuant to the said order, Jane Street issued an internal memo to its employees (which was subsequently leaked) denying any wrongdoing. Calling the SEBI allegations “extremely inflammatory”, the firm called its activities “basic index arbitrage trading…a core and commonplace mechanism of financial markets that keeps the prices of related instruments in line.”
In other words, per Jane Street, their trading was beneficial as it closed price gaps between the BANKNIFTY index (reflected in options markets) and the price of the underlying stock levels. The firm asserts that this is a type of arbitrage – a legitimate activity and a necessary market function that improves price efficiency rather than distorts it.
Arbitrage vs. Manipulation: Where Is the Line?
The Jane Street case highlights the increasingly difficult task of distinguishing between legitimate arbitrage and market manipulation in today’s highly complex, technology-driven markets.
Arbitrage, in its purest form, involves simultaneously buying and selling the same assets in different markets to profit from price discrepancies. This activity is generally considered beneficial to markets as it improves price efficiency by eliminating unjustified price differences. As Jane Street argued, arbitrageurs help bring prices of related instruments into alignment.
Market manipulation, by contrast, involves deliberately influencing the price of securities to create artificial, misleading price movements that do not reflect genuine supply and demand. Under SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, this includes creating a “false or misleading appearance of trading” or “influencing or manipulating the reference price or benchmark price of any securities.”
To put it simply, it may be said that arbitrage capitalizes on pre-existing price discrepancies, whereas market manipulation creates price discrepancies. The critical distinction between the two often hinges on intent and impact:
- Intent: Were the transactions effected in line with genuine demand and supply, or artificial in nature, carried out purely to manipulate the market? Did the trader aim to correct price inefficiencies or deliberately distort (raise or depress) prices to benefit other positions? [1]
- Market Impact: Did the trading activity improve or distort price discovery?[2] This metric may be independent of the previous criteria of ‘intent’, since often, intent, may be harder to prove than impact (which is evident ex-facie).
- Significant pattern of trading: From an analysis of the nature of transactions, quantity, time and significant variation of prices, it may be inferred that there is a consistent pattern of non-genuine trades.[3] In the present case, the one might ask – was the scale of trading in one market proportionate to positions in another, or was it designed to move prices with minimal economic risk?
SEBI’s case against Jane Street centered on the disproportionate scale of the firm’s options positions compared to its cash and futures market activity. According to SEBI, on January 17, 2024, Jane Street’s sells in the options market were seven times the value of its buys in the cash, suggesting that the latter were merely a tool to influence index levels rather than genuine arbitrage.
Moreover, SEBI pointed to Jane Street’s significant market share- accounting for 15-25% of market-wide trading volume during its buying phase and 25-37% during its selling phase- as evidence that the firm was not merely participating in the market but actively directing it.
Indian regulatory framework
In India, the legal framework governing market manipulation is enshrined in Section 12A of the SEBI Act, 1992, read with the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations (PFUTP Regulations, 2003). Section 12A prohibits manipulative, fraudulent, and unfair trade practices relating to securities markets, while Regulations 3 and 4 of the PFUTP Regulations are more granular- prohibiting “any act or omission amounting to manipulation of the price of a security”, or “indulging in an act which creates false or misleading appearance of trading in the securities market.”
Indian jurisprudence on market manipulation has evolved through several landmark cases. In Rakhi Trading Pvt. Ltd. v. SEBI (2018) 13 SCC 753, the Supreme Court observedthat since trading was always aimed at making profits, if one party consistently incurred losses through pre-planned trades, the transaction could not be a genuine trading activity. It was held in the case Shri Ketan Shah And M/S K N Traders (2003) bySEBI that creating artificial volumes without genuine investment intent constitutes market manipulation.
Similarly, it is now well settled that under PFUTP Regulations, proof of intent is not necessary, and the impact of the action leads to inference of intent.[4] This is an important aspect since many commentators have opined about the difficulty in proving mal-intent on part of Jane Street- such proof is simply not necessary under SEBI law.
Potential Legal Defenses and Precedents
This is not to say that the Jane Street case is a straight conviction for SEBI. From a legal standpoint, Jane Street has several potential defenses available:
Firstly, the firm could argue that its trading had a legitimate economic purpose, arbitrage, which has been contended in its internal memo as well. The firm may argue that high frequency trading is not per se illegal, and the impact of the SEBI action would be to have a chilling effect on the Indian markets and deter foreign investment.
Secondly, the firm might contend that SEBI has not previously provided clear guidance on the permissible boundaries of index arbitrage, raising concerns of regulatory certainty.
Thirdly, the firm could challenge the fairness and proportionality of SEBI’s directions, particularly the impounding of ₹4,843.57 crore. Section 15J of SEBI Act mandates that the penalty quantum is determined with regard to the disproportionate gain or unfair advantage obtained from the default. citing precedents that emphasize Lastly, the ex-parte nature of the interim order might be challenged on procedural grounds. While SEBI has the power to issue ex-parte interim directions without hearing the aggrieved party, however, the same is reserved only for most deserving cases of extreme urgency, and where there is a strong prima facie case.[5] In the present matter, the firm may argue, the line between legitimate arbitrage and manipulation is not clear, and therefore, there is no question of a clear prima facie case, nor any reason displaying grave urgency.
High Frequency Trading- A Global Problem?
The issue of regulation of high-frequency and algorithmic trading environments is not unique to India. Regulators worldwide continue to grapple with challenges as markets have become increasingly electronic, fragmented, and dominated by sophisticated algorithmic traders.
In the United States, the Securities and Exchange Commission (SEC) is serious about the regulation and enforcement of fraud committed by high frequency traders. For instance, the SEC has established clear boundaries around “quote stuffing”[6], “layering”[7] and “spoofing”[8] and has prosecuted many notable trading firms who indulged in such practices, on the ground that these create false or misleading appearances of trading activity and interfere with the fair functioning of markets, inter alia.
The SEC also regulates and enforces “latency arbitrage” strategies i.e., strategies which exploit minute time delays (latencies) in transmission of market data. High-frequency traders might use superior technology or set up venues closer to the stock exchange, to get access to price information or execute trades faster than others, potentially profiting from these small-time differences. The SEC has approved technology called ‘speed bumps’ which causes intentional delay in relaying information and creating a level playing field.
The European Securities and Markets Authority (ESMA) has also implemented regulations addressing algorithmic and high-frequency trading practices through MiFID II (Markets in Financial Instruments Directive II). Like SEBI, European regulators and US have sought to balance the efficiency benefits of technological innovation with concerns about market integrity and fairness.
Conclusion: Evolving Standards in a Complex Market
The distortions in the Indian markets are particularly suited to creation of extraordinary leverage and potential for exploitation in the system. There is an immense disparity in the market structure- with the options market turnover on any given day being 90-100 times the cash market turnover. By some estimates, the Indian options market handles more than half of all global options trades. In contrast, the Indian cash market is relatively small compared to other major economies. As such, the cash market is vulnerable to larger entities with deep pockets who may want to manipulate prices.
Further, a confluence of factors, such as the rise of ‘finfluencers’, (see here and here) has led to the explosive growth of retail participation in options trading in India, and such retail investors often lack the expertise and skills to be in such a sophisticated trading environment, facing immense losses. If Jane Street is found to have manipulated the market, its earnings would have come through losses for retail investors.
For regulators, the challenge remains balancing the benefits of arbitrage and market-making activities – which provide liquidity and improve price efficiency – against the need to prevent manipulative practices that undermine market integrity.
For high-frequency trading firms, navigating this evolving landscape requires not only technical sophistication but also regulatory awareness and ethical consideration of market impact.
The ultimate resolution of this case, whether through confirmatory proceedings or appellate adjudication, will significantly shape the legal landscape for high-frequency arbitrage trading in India and also influence regulatory approaches globally. As markets continue to evolve, so too will the standards that define the boundary between legitimate arbitrage and market manipulation. The Jane Street case may well represent a watershed moment in this ongoing recalibration of regulatory expectations in global financial markets.
[1] SEBI vs Rakhi Trading (2018) 13 SCC 753 ¶74, 75, Ketan Parekh v SEBI 2006 SCC OnLine SAT 221 ¶12.
[2] SEBI vs Rakhi Trading (2018) 13 SCC 753, ¶37
[3] SEBI vs Kishore R. Ajmera (2018) 13 SCC 753 ¶31
[4] SEBI v. Shri Kanaiyalal Baldevbhai Patel (2017) 15 SCC 1, Pyramid Saimira Theatre Ltd. v. SEBI (SAT-2010), Chairman, Sebi v. Shriram Mutual Fund (2006) 5 SCC 361.
[5] Anand Rathi v SEBI, (2001) SCC OnLine Bom 381, North End Foods Marketing Pvt. Ltd. v Securities and Exchange Board of India 2019 SCC OnLine SAT 6, Dr. Udayant Malhoutra v Securities and Exchange Board of India 2020 SCC OnLine SAT 7
[6] The practice of placing orders with no intention of executing them, but rather to create false impressions of market activity that can be exploited. Traders place large orders away from the current market price to create an illusion of demand or supply, with the intent to cancel these orders before execution
[7] A variation of spoofing that involves placing multiple orders at different price levels to create the appearance of substantial supply or demand, thereby manipulating the market price
[8] The practice of rapidly entering and withdrawing large numbers of orders in an attempt to flood the market with quotes that must be processed by other market participants, potentially causing them to lose their competitive edge due to the strain on their systems
About the Authors
Mohit K. Mudgal is a leading advocate in New Delhi with over 16 years of experience, appearing regularly in the Hon’ble Supreme Court of India, High Court of Delhi, trial courts and various tribunals across Delhi. He is the Managing Partner of RBS & Associates, and also runs his practice through his chambers – Chambers of Mohit Mudgal, in New Delhi. To reach out to him, you may email mohitmudgalchambers@gmail.com.
Sanya Sud is an Advocate-on-Record at the Hon’ble Supreme Court of India and a Partner Designate at Saraf & Partners, where she is part of the firm’s Dispute Resolution team. With a practice spanning litigation, arbitration, insolvency, securities litigation and white-collar crime, Sanya has represented a diverse clientele- including multinational corporations, financial institutions, and government bodies – before the Supreme Court, various High Courts, NCLTs, and other judicial forums across India. To reach out to her, you may email sud.sanya@gmail.com.