Mr. Nithin Kamath, Co-Founder of Zerodha, expressed his concerns on LinkedIn about India’s “long-only bias” and impaired price discovery, which are starkly illustrated by the Jane Street case. SEBI accuses Jane Street, a global quantitative trading firm, of market manipulation. Their alleged strategies highlight the distortions Mr. Kamath warns against, showcasing the impact of biased markets and potential price manipulation.
Mr. Kamath posits that the difficulty of genuine shorting in India leaves the market vulnerable to “weird distortions.” Jane Street’s alleged scheme, as described by SEBI, involves exploiting these very structural weaknesses, particularly around index option expiry days.
The firm is accused of orchestrating massive, coordinated trades across cash equities, futures, and index options – taking large “short” positions in index options while simultaneously manipulating the underlying cash market through aggressive buying and selling of components of stocks.
This wasn’t a classic short-sell in the sense of borrowing and selling shares in anticipation of a decline, but rather a sophisticated form of arbitrage and alleged manipulation that leveraged a less-regulated derivatives market to profit from artificially induced price movement.
Mr. Kamath’s dismay at “borrowing stock too short is really hard and is an offline process” resonates here. If genuine, transparent shorting mechanisms were readily available and efficient, the market might be less susceptible to such complex, multi-legged strategies that exploit structural gaps.
The fact that “futures or options” are the “only real way to short stocks until now” in India – is limited to a mere 224 F&O stocks with high-rollover costs, which inadvertently creates a playground for firms with sophisticated algorithms and significant capital. Jane Street, as a prominent market maker, thrives on finding and exploiting these very “imbalances” that Mr. Kamath identifies.
The Jane Street case highlights market distortions, with SEBI alleging manipulation despite the firm’s claims of “delta hedging” and “arbitrage.” The significant profit figure (Rs. 36,500 crore) raises concerns about regulatory oversight.
Mr. Nithin Kamath’s view of short sellers as “janitors” who clean up “garbage,” i.e., to correct market price distortions, is pertinent here. If SEBI’s allegations are true, the case suggests that without robust short-selling mechanisms or with complex, opaque methods, market distortions can accumulate, underscoring the need for effective regulation and transparency.
The incident underscores Mr. Kamath’s plea for an online, scalable Securities Lending and Borrowing (SLB) platform. Such a system would not only enable legitimate short-selling for price discovery but could also, paradoxically, make it harder for highly sophisticated firms to engineer large-scale market manipulations by ensuring greater transparency and fluidity in the underlying cash markets. The Jane Street case, therefore, serves as an illustration of the consequences when the “cleaning crew” of the market is sidelined, leaving them susceptible to potentially more opaque and damaging forms of price distortions.
Adding another layer of complexity to the ongoing investigation, Indian tax authorities and market regulators are reportedly considering widening their probe of United States trading giant Jane Street Group to investigate it for tax evasion, in addition to the earlier charge of price rigging in the Bombay Stock Exchange’s benchmark, Sensex, according to media reports.
This tax evasion charge follows closely on the heels of market regulator, the Securities and Exchange Board of India (SEBI), seizing Rs. 4,843.57 crores ($570 million, as per Global Media reports) and banning four Jane Street-related off-shore entities from operating in the market for alleged price manipulation in the National Stock Exchange (NSE).
This development indicates a multi-pronged approach by Indian authorities, examining not only the integrity of market operations but also the financial structures and tax compliance of high-frequency trading firms.
The use of offshore entities to make some of the trades, as initially alleged by SEBI, may be a key point of focus in the tax evasion probe, potentially examining adherence to provisions like the General Anti-Avoidance Rules (GAAR) and norms related to permanent establishment.
