The Securities and Exchange Board of India (SEBI) is expanding its probe into suspicious derivatives trades by global trading firm Jane Street to include other foreign portfolio investors (FPIs) for similar ‘bait and switch’ strategies, according to sources.
The regulator has been investigating Jane Street following complaints about trades where the firm allegedly baited smaller investors by taking large positions in index derivatives, and then moved the underlying stocks in the cash market to profit from the price shift.
Sources said SEBI has spotted comparable patterns in trades executed by other FPIs — hinting at possible coordination or copycat strategies aimed at manipulating derivatives pricing. “While examining trades by Jane Street, we found similar patterns involving other FPIs as well - which we will pursue further,” said a person aware of the matter.
The investigation is at a preliminary stage and may see issuance of show cause notices to all the FPIs involved. “A similar situation occurred in 2015 involving illiquid stock options on BSE, where SEBI observed large-scale reversals creating artificial volume. While an ex parte order was passed then, it is unlikely here as FPIs are involved,” said another source.
Manipulation concerns
Earlier this year, local fund managers and retail investors sounded alarm over sudden spikes in underlying prices or implied volatility, as well as sharp deviations from normal levels. Such movements can occur when one party buys options en masse, making prices sky-high, and then executes offsetting trades in the cash market to profit disproportionately.
“Such trades put the retail investor at a disadvantage and distort true price discovery in the market...no wonder 90 percent of them are making losses,” the source said.
These concerns are growing among market participants as FPIs have been loading up on short positions in the futures segment and have continued selling in huge numbers, said analysts. This also comes at a time when the markets regulator is contemplating more rules for the futures and options market as the activity in the segment remains high despite recent interventions.
Emails sent to SEBI and Jane Street for comments did not elicit a response.