What are you making of the interim order by Sebi against Jane Street? We were just anticipating that perhaps Jane Street is going to challenge that?
Ravi Hegde: Yes, this is an interim order which has been based on their prima facie understanding of what the facts are and in fact trading excessively in stocks and futures is not new to Sebi. If you remember, the earlier chairman of SEBI had passed a similar order in the matter of Infosys where they had identified that there is a strong correlation between derivatives and the underlying stocks.
Now, strangely, in this order they say that if Jane Street makes this payment with Sebi, the trading restrictions will be vacated. Now just imagine how the index moved and they have identified only some cases during the investigation period. We do not know how the investigation will succeed as to what are the other trades, or on which other days they have traded this.
Right now, there is no question of challenge because this is an ex parte order and a hearing is allowed. But trading in such high volumes is really absurd. I do not know whether Sebi will take the assistance of other regulators abroad to understand what is the correlation, because enforcement of this order now becomes a challenge. Nobody knows whether that money is still with them or whether it has been deployed in other trades. It is still a grey area at this stage.
Can you explain what Jane Street has done that has pushed Sebi to try to pull the plug here?
Ravi Hegde: Essentially, if you trade aggressively in either stocks or futures, per se it is not a violation. But what Sebi understood is, in patch one, people were trading excessively, taking trading positions where they were aggressively buying in Nifty where, of course, they did not find anything lucrative.
On the very second day, in the second patch, they used to square it off. That makes no essential or any economic sense because they were incurring losses. Sebi then analysed the days the underlying indexes moved up they used to trade, taking the position closer to the expiry where they could leverage over this. Now, a common investor will not know what is the real reason why the indexes are shooting up. In short, they took advantage of the correlation between the derivatives and the stocks, manipulated the stocks and futures in such a manner that they were excessive traders. They reversed their whole position and the index was up. So they traded at a favourable price. That is basically what has happened. I understand that. But in terms of a law and in terms of the regulation, is it illegal?
Ravi Hegde: Yes, absolutely. We have Fraudulent and Unfair Trade Practice (FUTP) regulations. In anything relating to purchase, sale, or issuance of security, if there is anything which has the capacity to induce a common investor to trade, that amounts to fraud. Therefore, regulation three and four of the FUTP regulations has been levied. Even for FPIs, the nature of the trades, the manner in which the FPIs are required to trade, have been flouted. A common investor would not know if an underlying aggressive position has already been taken. The investor thinks okay this stock is going up, let me trade. Now, this inducement is because of fraudulent activities. That is why the FUTP regulations were triggered. Interestingly, while SEBI still says that there was a caution letter issued by NSE, the period is only from January 2023 to March 2025. We do not know as to what else would come up because the investigation is still pending and SEBI in its wisdom will understand if there is any other correlation as well, whether any other entities are involved, and whether brokers are involved in synchronization of trades or reversal of trade. So, there are larger issues to be looked into.
Now, they have identified only these five persons because they saw concentration of trading between these entities. Over a period of time, we will come to know whether any other entities are also associated. It is per se a fraud. The definition is very clear.
