Jane Street manipulation: How a US tech feud triggered India’s biggest market probe

Jane Street, a global trading firm, is facing scrutiny from Indian authorities for allegedly engaging in tax evasion and market manipulation. The firm's methods, reportedly involving structures across different countries to execute trades, are under investigation by the Indian income tax department. These activities are considered a potential 'impermissible avoidance arrangement'.

Market regulator Securities and Exchange Board of India (Sebi) investigation was sparked by a legal dispute in the United States between Jane Street and rival Millennium Management. Jane Street had accused two of its former traders of stealing a proprietary trading strategy before joining Millennium. The firm said the strategy reportedly generated nearly $1 billion in profits when used in India’s derivatives market in 2023.

Sebi has taken decisive action by ordering seizure of ₹4,844 crore, identified as 'illegal gains' from Jane Street. This seizure order, termed the largest against a foreign trading firm, affects four entities linked to the Jane Street Group: JSI Investments, JSI2 Investments, Jane Street Singapore, and Jane Street Asia Trading. These entities have been barred from participating in the securities market.

Alexander Gerko, founder of XTX Markets in a detailed LinkedIn post said, "As far as I know, everyone in the industry was completely stumped by the amount of money JS were making in India,” Gerko wrote. “Based on earlier revenue leaks it felt that JS alone exceeded this cap. They certainly were making much more money there than everyone else combined."

A regulatory official highlighted the risks faced by retail investors in derivatives trading, noting, "While retail participation in index options trading on expiry day has moderated somewhat in recent times, around 90% of them continue to lose money." The official added, "There appears to be too much concentration in short-term expiries and trading. Extending maturities and nudging more long-term trading, hedging, and investments would be ideal for our ecosystem."

Jane Street has 21 days to respond to Sebi's order. The firm must place the impounded gains into an escrow account while a comprehensive investigation is ongoing. Though a full ban has not been imposed, stringent measures are in place to prevent potential violations of market regulations.

Meanwhile, Jane Street is is gearing up to contest India’s allegations of market manipulation. It has called SEBI’s charges “extremely inflammatory” and “erroneous.” In an internal memo to its 3,000 employees—leaked to the Financial Times—senior management said the firm is “working on a formal response” and claimed it had made “ongoing efforts to communicate with SEBI” since February, which were “consistently rebuffed.”

The firm reportedly channelled its profits through its Singapore entity, benefiting from the India-Singapore tax treaty, which exempts such income from taxation. This practice, involving intra-day trades by Indian arms and more lucrative positions by offshore entities, raises significant tax avoidance concerns.