Terms of Trade: Save Indian households from the predatory casino of finance
On Thursday, India’s stock market regulator SEBI banned Jane Street, a US-based investment giant, from trading in Indian markets. SEBI’s allegation against Jane Street is that it indulged in manipulative practices via derivative trading to make giant profits. These profits are likely to have come at the cost of retail investors. SEBI has also seized $567 million of Jane Street’s funds.
PREMIUM FILE PHOTO: People walk outside the National Stock Exchange (NSE) in Mumbai. (REUTERS)
“JS Group was undertaking an intentional, well planned, and sinister scheme and artifice to manipulate cash & futures markets and hence manipulate the BANKNIFTY [Indian bank stocks] index level, to entice small investors to trade at unfavourable and misleading prices, and to the advantage of the JS Group,” Financial Times said quoting SEBI’s interim order. “The regulator’s action is a blow for Jane Street, which started its India operations in December 2020 and, according to SEBI, made a profit of about $4.3 billion for the period between January 2023 and March 2025 on its India trades”, Reuters reported. A (relatively) simple explanation of how exactly Jane Street rigged the markets to make money has been given by algo trader Kirubakaran Rajendran here. Jane Street likely came under SEBI’s radar because of a case it filed against former employees whom it accused of stealing trade secrets.
Jane Street’s fortunes in Indian financial markets have triggered a gold rush of sorts among foreign firms. “The South Asian nation made up nearly 60% of global equity derivative trading volumes of 7.3 billion in April, the Futures Industry Association says, while its regulators say notional turnover of the contracts has grown 48 times since March 2018”, Reuters had reported in another story in June, adding that “Half a dozen global trading giants, from Citadel Securities and IMC Trading to Millennium and Optiver, are ratcheting up their presence in India’s booming derivatives markets, fuelling a hiring spree and pushing exchanges to improve technology”.
To be sure, just because one large foreign firm has been accused of illegality and manipulative practices does not mean that all of them are doing so in Indian stock markets. So, is there a larger point in making too much out of this development? There is, if one looks at it from a different perspective.
Retail participation in Indian stock markets has exploded in the past few years. While a lot of it has taken the route of mutual fund subscriptions through systematic investment plans, the growth in the number of people participating in uninformed and high-risk trade in things such as derivatives, forwards and even non-conventional assets such as crypto currencies is equally big. Financial products such as these can be extremely complicated to understand, let alone trade to make profits. The asymmetry in skill sets of people who create these products and those who can trade in them can take the literal form of a rocket scientist (the famous scene in the 2011 film Margin Call) and somebody who is a complete financial markets illiterate. This author’s newsroom was once visited by representatives from a crypto currency firm who told us that photocopy shop owners in towns like Jamshedpur were buying their products. Even if one were to put the legality or lack of such trades by giant companies aside, chances of such an asymmetric competition in the financial market short-term trading ending up benefitting the average guy on the street are next to nil. Large investment firms have significantly more intuitional knowledge, capital to survive losses and the ability to diversify to compensate for a loss against a gain. For the average Indian retail investor, short-term trading has become the equivalent of online gambling from a handheld device – it is no wonder that market trading has increased significantly with the growth of the mobile internet in India – where pretty much everything from income to physical gold assets of the family are being used as capital in the hope of hitting the elusive jackpot.
Should we, as an economy, allow this to happen? Are markets’ headline gains representative of those made by the average retail investor? Do we know about the capital lost in what can only be called uninformed punting by millions of small Indian investors? Remember, ultra-short-term gains in financial markets are almost always zero sum in nature. One side has to lose for the other to win. If Jane Street was winning, then someone else (or many others) are bound to have lost. What are the implications of this asymmetric financial market game for the financial health of Indian households?
One might be cancelled as a regulation dinosaur for arguing that we put curbs on retail participation in equity markets, but can the long-term financial health of retail investors (and consumers) be so seriously jeopardised for the sake of appearing to be a free-marketeer? Is it not the Indian state’s responsibility to nudge, if not outrightly stop, people from punting with their hard-earned money in things they do not understand at all? Maybe we could institute a basic financial literacy test before people are allowed to trade in financial markets. This author would like to think of it as akin to a driving licence test. The implications of a crash in financial markets, like a road crash, can be as devastating, after all. Another idea could be to put a relative cap on the amount of money a retail investor could put in high-risk short-term investment bets or tax it at an exorbitantly high rate to discourage such activity. All of this could puncture some of the euphoria around Indian stock markets in the short term but will protect household finances in the medium to long term.
Why do we not see a political debate on such things? Our politicians, unfortunately, are only excited when they talk about scams, whether real or imagined. Securing India’s future needs a theory, not conspiracy theories. Finding a rewarding but low-risk investment opportunity for the world’s most populous country is among the most difficult theoretical challenges we are facing as an economy. Time is running out to solve this problem.
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