Jane Street's absence may impact volumes, says Jefferies; here is all you need to know about Jane Street saga

Market regulator Securities and Exchange Board of India (SEBI) on Thursday evening barred Jane Street Group and its associated entities from accessing Indian markets, which led to a sharp fall in shares of capital market service providers on Friday, July 4.

Although shares of most of the capital market service providers rebounded on Monday, July 7, global investment bank Jefferies, in a note, said that SEBI's interim order restricting Jane Street from the Indian market until it returns profits from manipulative practices highlights regulatory focus on governance.

Jane Street was a large player, and its absence may impact volumes, but this could be partly offset by higher proprietary activity. Exchanges' options premium turnover on Friday was slightly below the two-month Friday average but higher week-on-week. Trends for next week are key, especially with index derivatives expiries on Tuesday and Thursday, Jefferies said.

As the investigation was already ongoing, we understand Jane Street's activity levels had been declining in recent months, Jefferies noted.

Exchange data shows FPIs form 3-8% of equity derivatives turnover and proprietary traders form 60-65% with the remainder from individuals and others, Jefferies added.

SEBI said that the entities are prohibited from buying or selling securities, directly or indirectly.

The "unlawful gains" of ₹4,843 crore from the alleged violations have also been impounded, SEBI said. "Banks, where entities are holding bank accounts, are directed to ensure that no debits are made, without permission of SEBI, in respect of the bank accounts held individually or jointly by entities, except for the purpose of complying with this order. However, credits, if any, into the accounts may be allowed," the interim order said.

How Jane Street manipulated Bank Nifty

SEBI’s investigation reveals that on 14 separate expiry days, Jane Street, in the morning, would aggressively buy Bank Nifty futures and stocks in the cash segment while simultaneously selling large volumes of Bank Nifty options.

Post-noon, the strategy reversed—Jane Street would aggressively sell Bank Nifty futures, which SEBI alleges was aimed at dragging the index lower ahead of the day’s close.

The aim, SEBI suggests, was to engineer a softer index close, allowing the firm to book gains on their short positions in options.

On January 17, Jane Street bought Bank Nifty futures worth ₹4,370 crore in the morning and simultaneously sold options worth ₹32,115 crore. In the second half of the trading day, they reversed their futures position, selling ₹5,372 crore worth of Bank Nifty futures.

This activity resulted in a peak short options position worth ₹46,620 crore.

The index closed lower, and Jane Street made a ₹735 crore profit in the options segment.

Despite a loss of ₹61.6 crore in futures and cash positions, the firm ended the day with a net gain of ₹673.4 crore.

How capital market service providers are faring on Monday

Most of the capital market service providers were trading higher on Monday after facing selling pressure in the previous session. Shares of BSE rose as much as 1.32% to ₹2,669.90. Shares of IIFL Finance rose 4%, Nuvama Wealth shares advanced 3.23%, CDSL advanced 1%, AngelOne climbed 1.34%, Motilal Oswal advanced 1% and JM Financial shares rose 0.4%.