Jane Street and the Expiry Day Trap: Unpacking SEBI’s Crackdown on Algorithmic Manipulation in India

Background

On July 3, 2025, the Securities and Exchange Board of India (SEBI) delivered a seismic blow to global proprietary trading powerhouse Jane Street Group. In a 105-page interim order, SEBI accused four Jane Street linked entities of orchestrating a complex strategy to manipulate the Bank Nifty index during expiry-day trading. The regulator found that, across 18 derivative expiry days from January 2023 to March 2025, Jane Street executed trades that distorted index levels to benefit its massive options positions. SEBI directed the firm to deposit ₹4,843.57 crore (approx. US$553.84 million), representing alleged unlawful gains, into an escrow account and barred it from participating in India’s securities markets pending further proceedings. In compliance, Jane Street deposited the full amount on July 14, 2025, while reserving its right to challenge the order through legal means. As such, on July 21, 2025, SEBI announced that certain restrictions, including bans on trading, account freezes, and asset transfers, would cease to apply, provided there is ongoing compliance.

SEBI’s Allegations: The Two-Patch Playbook

The alleged manipulation followed a consistent pattern. During the first half of trading (Patch I: 9:15–11:46 AM), Jane Street aggressively bought Bank Nifty component stocks and their corresponding stock futures. Its trades frequently represented over 20% of market-wide traded value in multiple scrips, such as Kotak Bank, SBI, and Axis Bank. These orders were often placed above the last traded price (LTP), with the effect of lifting stock prices and, by extension, the index itself. Simultaneously, Jane Street built large short positions in index options by selling calls and buying puts, creating a net bearish exposure designed to benefit if the index later fell.

In the second half of the trading day (Patch II: 11:49 AM to close), Jane Street reversed its earlier positions. It offloaded the stocks and futures it had previously bought, placing large sell orders that exerted downward pressure on the index. This decline coincided with expiry, amplifying the profitability of Jane Street’s short option positions. Despite prior warnings by the National Stock Exchange (NSE) in February 2025, Jane Street allegedly continued its trading strategy in disregard of regulatory caution. According to SEBI, this strategy misled the broader market, allowing Jane Street to benefit from expiry-day volatility it had helped engineer.

Scale and Structure: What Makes the Jane Street Issue Unique

SEBI’s findings revealed not just manipulation, but scale. The firm’s trading footprint was so dominant that SEBI attributed the entire positive price impact in the Bank Nifty index during Patch I on several days to Jane Street alone, while the rest of the market exerted net downward pressure. SEBI concluded that this was not a coincidental outcome of normal hedging or arbitrage activity, but rather a ‘deliberately devised device’ to manipulate settlement prices and earn outsized profits.

Internationally, this case draws comparisons with the US Commodity Futures Trading Commission (CFTC)’s enforcement action against Tower Research Capital in 2019, where the firm paid USD 67 million for ‘spoofing’ in futures markets. Another precedent includes the London Inter-Bank Offered Rate (LIBOR) rigging scandal, where traders from global banks manipulated benchmark rates to benefit derivatives positions. However, unlike LIBOR cases involving rate-setting, Jane Street’s case involves real-time expiry price manipulation using market orders.

Regulatory Implications for India’s Market Structure

The implications of the Jane Street case go well beyond one firm. For high-frequency trading (HFT) firms, the order sends a strong message: strategies that cause measurable distortions to price discovery—even if profitable and seemingly lawful—may fall foul of market conduct rules if executed at scale with a manipulative effect. High-frequency trading firms operate by deploying algorithmic models that execute a large volume of orders in fractions of a second. These firms typically engage in strategies such as statistical arbitrage, market-making, and latency arbitrage. SEBI’s classification of the expiry-day strategy as a ‘manipulative device’ has a chilling effect on the use of any HFT algorithm that inadvertently causes or profits from price movements near settlement windows. Even without manipulative intent, HFTs may now need to prove ex ante that their strategies do not distort price discovery.

Portfolio management services (PMS) and alternative investment funds (AIFs), especially those deploying quant-driven or options-based expiry strategies, may have to recalibrate models that assume stable, unmanipulated settlement mechanisms. Many of these funds build short straddles, condors, or calendar spreads around predictable expiry-day patterns. If SEBI imposes tighter surveillance windows or margin restrictions, the underlying assumptions that support such strategies will need re-evaluation.

Mutual funds (MF) too, especially arbitrage and low-volatility quant schemes, may face compression in short-term alpha. These funds often rely on stable price behaviour near expiry to capitalize on mispricings between cash and derivatives markets. If liquidity thins out or foreign participants exit due to increased scrutiny, such arbitrage windows may shrink or close altogether.

Overall, the Jane Street case could blur the regulatory line between aggressive arbitrage and prohibited manipulation for HFTs, PMS, AIFs and MFs functioning within India’s capital markets. By holding that scale, intent, and pattern of trading matter as much as economic rationale, SEBI has signaled that advanced strategies will be judged not just by outcomes, but by process integrity. This has significant consequences for how strategies are designed, tested, and disclosed going forward.

Toward Reform: Lessons and Proposals

The Jane Street episode has prompted calls for broader structural reform. One idea gaining traction is the introduction of sandbox testing or pre-clearance protocols for algorithmic strategies that impact expiry prices. This would allow exchanges and SEBI to vet the risk implications of new algorithms before deployment. Another recommendation is enhanced foreign portfolio investor (FPI) disclosure. Jane Street’s operations involved multiple affiliated entities trading through different FPI licenses. SEBI may now consider requiring consolidated reporting across all entities under common ownership or control. This would make it harder for global trading firms to claim ignorance of actions by affiliated sub-accounts. Additionally, SEBI could revisit the settlement methodology itself—specifically the use of volume weighted average price (VWAP) for index settlement. Expanding the time window for calculation or introducing participation caps during expiry hours could help insulate closing prices from concentrated trades. Finally, audit trail norms could be upgraded. Trading firms might be required to maintain version-controlled code repositories, algorithmic logic documentation, and real-time records of strategy triggers. This would aid post-trade surveillance and forensic investigation in future cases involving algorithmic distortion.

Conclusion: A Turning Point in Market Conduct Enforcement

Whether Jane Street ultimately succeeds in defending its strategies remains to be seen. But the July 2025 interim order marks a clear turning point in SEBI’s enforcement philosophy. By focusing on expiry-day manipulation, algorithmic complexity, and cross-segment trading impact, the regulator has staked out new ground in its oversight of India’s rapidly evolving market microstructure. The case also sets a precedent for regulatory thinking globally, especially for emerging markets with shallow underlying volumes but deep derivatives activity. The message is unmistakable: however technologically advanced or financially engineered a strategy may be, if it distorts fair price discovery—especially around market-defining events like expiry—it will attract serious regulatory consequences. 

Vishrut Kansal is a Principal Associate at Shardul Amarchand Mangaldas & Co.

A brief international perspective on the governance implications of algorithmic expiry-day behaviour has been explored by the author in a blog post for the European Corporate Governance Institute.