Jane Street and the Indian options saga
In a Capital Compass last January, we highlighted the burgeoning market in India for financial futures and options. The market accounts for about 80% of global turnover in financial futures and options. For context, the US stock market is about 35 times larger than India’s, so it is remarkable that India’s futures and options market should be so dominant. We thought that the size of the futures and options market might force the hand of local regulators to take some of the ‘froth’ out of the market, which in turn might lead to a drop in the market.
We were right to point out the anomaly in India, and that the regulators might step in, but wrong in how it played out. Local regulators have fined financial firm Jane Street Capital over $500m and banned the firm from the Indian market. There is some debate about whether Jane Street were involved in legitimate arbitrage transactions or, as the Indian regulator claims, whether Jane Street undertook “an intentional, well-planned, and sinister scheme and artifice to manipulate cash & futures markets…”.
There is a 105-page report from the Securities and Exchange Board of India (SEBI) which gives the details of the alleged wrongdoing by Jane Street online, so we won’t go into the details. We will, however, pull out one or two points that illustrate themes we think are relevant.
In the course of the investigation, SEBI had access to Jane Street’s books and found that Jane Street had made $4.3bn over the period 1 January 2023 – 31 March 2025, just from dealing in Indian options. This is an amazing amount of money for a trading desk in one firm to make. This was quite rightly a red flag to SEBI, though we believe their final report missed some important points.
SEBI noticed that Jane Street’s most profitable days were when Indian options expired. SEBI therefore sensibly looked at one of those days, the 17th of January 2024, to try to understand what is going on. The bulk of SEBI’s report focuses in this day when Jane Street was very active in options around the BANKNIFTY stock index, a narrow index of 12 Indian banks; some large and liquid and some not so large or liquid.
SEBI points out in its report why investors like options, and particularly a type of option known as ‘at-the-money’ one-day call options. To offer a top-level explanation, they are essentially tradeable products with which an investor can bet that the stock price will be higher at market close than it was at market open. The maximum loss is the price of the option (called the premium), and the potential gain is unlimited. In a standardised example, the SEBI calculated that, on average, investors could get a payoff of 100 times on this specific type of option, so that for every one rupee staked the investor would receive 100 rupees if the option works out. If it did not, they would lose the one rupee invested. Betting on the daily direction of a market, with effectively 100x leverage, can hardly be called investing, rather gambling. Regulators in Europe are concerned about protecting small investors and their approach is to make it difficult for them to invest in instruments with equivalent 100x leverage. This is not the case in India.
The asymmetric upside attracted an enormous amount of interest in these options and massive demand drove the price of these options up considerably. On 17 January, only $3.4bn worth of bank stock changed hands, but according to SEBI, the value of options traded on the bank index totalled $1,202bn. To make these numbers slightly easier to understand, SEBI helpfully points out that 4,675 entities (firms and individuals) traded the bank stocks, whereas 16,000,000 entities traded the options on the bank index. This is a huge mismatch, with the derivative trading 353 times more than the underlying stocks on which the derivative is based. This might have suggested to SEBI that there is a mania for option trading in India and that the prices of the options are probably getting out of control. If it did, it does not come across in its report.
The fact that so many punters were buying one day ‘at-the-money’ call options meant that these options became very expensive, so not unreasonably Jane Street stepped in and sold the options to take advantage of the higher prices. Pricing options is difficult and many of the small investors who bought these options would have been unaware of the value of the options they were buying. It is understandable that a highly sophisticated firm like Jane Street stepped in to take the other side to meet demand and make a lot of money. On that day alone, 17th January 2024, Jane Street made $86m in India.
Whether Jane Street was exploiting dumb investors is a moot point. Jane Street put their own capital at risk and used their expertise to meet a demand in much the same way as Nvidia puts its own money at risk or Shell Oil. That is how free markets work: exploiting an inefficiency is not a bug in capitalism but one of its most important features. It is how you get innovation and also how mis-pricings get corrected. It is a shame that small Indian investors have been allowed to lose so much by SEBI.
One final point. The reason why SEBI started investigating Jane Street is because of a court case in the US. A few Jane Street staff wanted to join a rival firm and Jane Street sued to prevent them. It came out in court that Jane Street was making a lot money in India and did not want their staff leaving and taking that knowledge with them. Someone at SEBI read the coverage of the court case and chose to investigate. In effect, Jane Street brought this problem down on themselves – poetic justice, you might say.
To wrap-up with a tennis analogy. Amateur tennis is said to be a loser’s game. All you have to do to win is not lose by hitting the ball out or into the net. Don’t play big shots or run to the net, just concentrate on not making mistakes. Investing is the same: avoid making big shots because you can win by simply not making mistakes. The same is true for small investors in financial markets. Keep it simple, avoid mistakes, and let the market – and time in the market – work in your favour. Avoid losing your money in things you do not understand. If you are tempted to invest in something different, like one-day options, be sure to talk it through first with your partner and your friendly investment manager. They could stop you smashing the ball into the net or putting it out of play.
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