Amit Kapoor & Praveen Senthil
In its interim order dated July 4th, 2025, the Securities and Exchange Board of India (SEBI) accused High Frequency Trading (HFT) firm Jane Street of index manipulation – specifically the BANKNIFTY index – after the firm was found to pump up large sums of money into BANKNIFTY components – which include the country’s 12 biggest banks – to move the index up. This was followed by taking aggressive short positions in BANKNIFTY futures, anticipating a subsequent drop. Once the prices of the index peaked, the firm would sell off its accumulated units of the index. This resulted in the firm making huge profits while scores of retail investors incurred losses deceived by artificial demand. While the recent crackdown of Jane Street by the SEBI is a splendid achievement for the regulator, it blatantly exposes the inherent structural fragility in the world’s largest derivatives market by volume.
To better contextualise the nature of the manipulation and the tremors it sends across the Indian financial market terrain, it is crucial we understand the working of HFT firms like Jane Street. HFT is nothing but an application of what is called algorithmic trading. Algorithmic trading simply makes use of real-time market data to execute optimal strategies for trades, maximising the profit for firms. They are often interpreted as tools to improve market liquidity — the ease of conversion of a security into cash without affecting its market price — and efficiency by facilitating high-speed trades, which, in turn, result in smoother transactions across the market. However, these advanced systems can be deployed to exploit the inefficiencies present in a market — especially one that is characterised by (1) shallow liquidity and (2) weak market infrastructure.
While low liquidity is a common characteristic of emerging markets with low volumes traded, its prominence in what is now the world’s largest derivatives market, points to what can be termed as concentration effects – which are caused as a result of trading activity being concentrated in few instruments. One way to restore this balance and enhance liquidity is to further diversify and upskill the investor base through ramping up investor education programmes, setting up investor protection schemes, implementing mechanisms to enhance market access, or even using tax incentives. This becomes increasingly crucial for a market like India where less than half of the population has an online presence, and less than one-fourth is financially literate. Another way is to incentivise institutional investors. The Indian insurance sector – with its domestic market expanding at a CAGR of 17% in the last two decades – is a great success story in terms of policies stimulating the growth by allowing greater product innovation and increasing local institutional participation. A push for similar institutions such as pension funds etc. could go a long way in providing additional much-needed footing to the market.
However, further market expansion cannot guarantee resilience, especially without real-time oversight and robust surveillance systems to monitor a market that is already dominated by trades based on algorithms. The JS group incident also reveals the post-facto methods of detection of such manipulations. To elaborate, Jane Street is said to have fallen on SEBI’s radar only after the firm’s lawsuit in April 2024 – which alleged unauthorised use of its strategies in the Indian market. This led to the initial probing into the JS group’s methods, which was followed by repeated – almost perfunctory – scrutiny in the form of warnings sent to the company over the course of the next 15 months, ultimately culminating in the firm’s barring from India’s securities exchanges and the impounding of Rs. 4840 Crores. For a market that allowed algorithmic trading through Direct Market Access (DMA) in 2008, SEBI lacks not only the necessary surveillance infrastructure necessary to monitor real-time market stimuli but also the resources (majorly, human) that eventually weakens its enforcement capabilities.
While the regulator has set up provisions such as a mandatory threshold of specified orders per second for algo traders and AI-powered surveillance systems like Market Intelligence for Transparency and Regulatory Action (MITRA) that is designed for near real-time fraud detection in areas like manipulation and insider trading, it is unclear how these hold up with increasing headwind from the recent influx of HFTs – like Jane Street – and constantly-improving AI-driven algorithmic models. Compared to its global counterparts – the U.S.’ SEC, which makes use of Market Information Data Analytics System (or MIDAS) capable of collecting one billion records from the country’s 13 national equity exchanges down to the millisecond, and China’s SAMR, which merged several national agencies to create a centralised surveillance system that excels in operational efficiency – SEBI falls behind, both in terms of technology at its disposal and enforcement inefficiencies caused due to overlapping regulatory authority with the RBI and CCI. The goal is not to tighten the regulatory screws – which will deter potential investors lowering liquidity – but to build a surveillance system that prevents bad actors.
In addition to deploying world-class surveillance systems in place, what SEBI can also consider is improving market transparency by democraticising real-time market data. Doing so amplifies the possibility of earlier detection of anomalous and malicious trading patterns which will in turn help minimise any possibility of manipulation. The SEC’s Consolidated Audit Trail (CAT), for instance, tracks the life cycle of every equities and options across markets, enabling both regulatory and institutional monitors to constantly keep trades in check. The U.K.’s FCA also runs similar campaigns that encourage market participation, which includes newsletters such as ‘Market Watch’ – which discuss potential enforcement priorities through regular market conduct – and events like TechSprints which brings in participants from all fields to address internal challenges. Not only does a market with greater transparency improve market liquidity, it acts as a deterrent to trading with malicious intent.
India’s rise as a financial powerhouse demands a regulatory backbone as robust and responsive as the market it aims to govern. While SEBI’s uncompromising posture towards manipulative behaviour is evident – and appreciated – its execution needs to surpass the pace and sophistication of the trading technologies that it now faces. This calls for major paradigm shifts within the regulator’s frameworks, which is now marred by institutional friction, half-hearted enforcement, and reactive regulations. Instead, SEBI needs to focus on structurally enhancing oversight systems through the use of latest technological advancements while also considering market transparency and data accessibility. This should go hand-in-hand with well-targeted strategies aimed to broaden the investor base and incentivise institutional participation. Only then shall India’s markets be far more resilient.
Amit Kapoor is chair, Institute for Competitiveness and Praveen Senthil is a student at Rotterdam School of Management, The Netherlands.
