Blatant market manipulation...: Zerodha CEO Nithin Kamath explains how SEBI ban on Jane Street may impact F&O market

SEBI Crackdown on Jane Street Sends Shockwaves Through Derivatives Market

In a move that has rattled market watchers and institutional traders alike, the Securities and Exchange Board of India (SEBI) has barred U.S.-based trading firm Jane Street and Singapore-based brokerage QuantLab from participating in Indian markets. The action, described by SEBI as a response to "blatant market manipulation" in the futures and options (F&O) segment, is seen as a signal of tightening regulatory oversight over foreign algorithmic trading firms operating in India.

Zerodha co-founder and CEO Nithin Kamath weighed in on the development, warning that while the crackdown addresses valid concerns about manipulation, it could also have unintended consequences for the Indian F&O ecosystem.

Kamath: Liquidity at Risk as Foreign Players Exit

Taking to social media platform X (formerly Twitter), Kamath stated, "The SEBI action is a necessary step against manipulation, but it’s also important to recognize the value such firms add to market liquidity. Removing large players like Jane Street could shrink depth in the F&O markets."

He further explained that market makers and high-frequency trading (HFT) firms like Jane Street often provide critical liquidity by narrowing bid-ask spreads, especially in less actively traded contracts. “This liquidity supports efficient price discovery and lower costs for retail and institutional investors alike,” Kamath added.

What Triggered the SEBI Action?

SEBI’s order accuses Jane Street and QuantLab of engaging in coordinated trades that created artificial market activity. According to the regulator, both firms were allegedly executing trades with negligible economic purpose but with the intent to give a false impression of market depth and activity in options contracts.

The detailed probe revealed that these transactions generated "illusory volumes" and distorted the price discovery process. SEBI’s surveillance picked up a pattern of synchronized order placement and cancellations — a telltale sign of manipulative algo trading — over several months.

The ban prohibits both firms from placing any orders in Indian markets, either directly or through intermediaries, and is expected to be in effect for at least one year pending further investigation.

Impact on India's F&O Market: Analysts React

Market analysts believe SEBI's action may usher in a short-term decline in liquidity and potentially widen spreads across the derivatives segment.

According to G. Chokkalingam, founder of Equinomics Research, “This ban is a double-edged sword. On the one hand, it sends a strong message to manipulative traders; on the other, it reduces the pool of high-volume participants. Expect some volatility and wider spreads in the near term.”

Siddharth Bhamre, head of research at Religare Broking, concurs: “Retail investors might feel the pinch when placing trades in options with low open interest. Liquidity could dry up, leading to price distortions, especially during expiry weeks.”

The Broader Context: Growing Derivatives Activity in India

India’s derivatives market has witnessed exponential growth over the past few years, making it the largest in the world by volume, according to data from the World Federation of Exchanges. The notional value of options traded on the NSE has skyrocketed, driven largely by retail participation and rising interest from foreign institutional investors (FIIs).

However, this growth has also brought concerns over excessive speculation and algorithmic manipulation. SEBI has been increasingly active in policing the segment, introducing tighter margin norms, product categorization, and surveillance mechanisms.

Kamath echoed these concerns, stating, “The rise in options trading by retail participants without a clear understanding of risk is troubling. If the ecosystem loses liquidity providers due to regulatory overhang, it might exacerbate the risks faced by retail traders.”

A Wake-up Call for Foreign Participants?

For foreign proprietary trading firms, SEBI’s action is a stark reminder that India’s market regulator is watching closely. While the Indian market remains attractive due to its scale and volume, firms may now need to reevaluate their trading strategies and ensure full compliance with local norms.

A senior compliance officer at a global trading firm (who requested anonymity) noted, “There’s a perception that India’s market was loosely regulated compared to the West, but this action dispels that myth. We’re reviewing our algo strategies to ensure there’s no inadvertent breach.”

What's Next: Regulatory Outlook

SEBI is expected to issue new guidelines soon to further curb manipulative practices in algorithmic and HFT trading. Industry insiders anticipate additional disclosures, pre-trade risk checks, and possibly a registration framework for foreign proprietary firms accessing Indian markets.

In the meantime, the regulator’s message is clear: no tolerance for market manipulation — regardless of how sophisticated the perpetrator may be.

Investor Outlook: Short-Term Volatility, Long-Term Stability?

For retail and institutional investors, the near term could bring some friction in derivatives trading, especially in contracts previously supported by foreign market makers. However, many believe the regulatory crackdown could enhance market integrity in the long run.

Rashesh Shah, chairman of Edelweiss Group, commented, “What SEBI is doing is cleaning the pipes. It might feel like a jolt now, but it will ensure a healthier flow of capital in the future. The Indian F&O market is maturing.”

Nithin Kamath concluded with a note of optimism: “India's markets are evolving rapidly, and while we must protect against bad actors, we also need to encourage good market participation. A balance must be struck.”

Bottom Line

SEBI's ban on Jane Street Capital marks a pivotal moment in India’s market regulation narrative. As the country becomes a global hotspot for derivatives trading, the emphasis on fair play, transparency, and market integrity is stronger than ever. For investors, regulators, and market participants, this is both a challenge and an opportunity to redefine the future of Indian financial markets.