Why Derivative Trading Is Risky in India – SEBI vs Jane Street

Why Derivative Trading Is Risky – How Indian Markets Are Manipulated from Outside India

By Option Matrix India

Derivative trading in India has become one of the most popular ways for traders and investors to try their luck at making quick profits. Weekly and monthly index options on NIFTY and BANKNIFTY attract millions of participants every expiry day. However, beneath this rapid growth lies a hard truth—derivative trading is extremely risky, and markets can be influenced or even manipulated by large global players.

The recent case involving Jane Street, a global proprietary trading firm, and its former American traders has exposed how strategies built outside India can manipulate Indian markets. This controversy has shaken the confidence of retail traders and raised serious questions about the fairness of our derivatives market.

 Two American Traders and Their Billion-Dollar Scheme

In 2024, U.S. court filings revealed that two American traders, Douglas Schadewald and Daniel Spottiswood, had played a central role in building a highly profitable Indian options strategy for Jane Street. Reports from court hearings showed that this strategy generated over $1 billion in profits in 2023 alone.

Later, when the traders moved to rival firm Millennium, Jane Street filed a trade-secrets lawsuit in New York. During hearings, it was revealed that the closely guarded trading approach was linked directly to Indian index options. Although the case was settled in December 2024, it unintentionally exposed how India’s derivatives markets were being used as a profit machine by foreign players.

₹5000 Crore Stock Market Scam: The Jane Street Case

Jane Street, a global giant in high-frequency trading backed by cutting-edge algorithms and elite talent (mostly recruited from top institutes like IIT), targeted India’s ultra-popular Bank Nifty options market. While millions of Indian retail traders were drawn in by the promises of quick money from financial influencers, Jane Street quietly employed complex intraday and closing strategies to influence bank stock prices, ultimately raking in thousands of crores in profit.

What Happened?

Jane Street, a global giant in high-frequency trading backed by cutting-edge algorithms and elite talent (mostly recruited from top institutes like IIT), targeted India’s ultra-popular Bank Nifty options market. While millions of Indian retail traders were drawn in by the promises of quick money from financial influencers, Jane Street quietly employed complex intraday and closing strategies to influence bank stock prices, ultimately raking in thousands of crores in profit.

Jane Street’s Manipulation Strategy

• Intraday Index Manipulation: In the morning, Jane Street’s Indian entity aggressively bought key banking stocks, like HDFC Bank, SBI, and Kotak Mahindra, driving the Bank Nifty index upward. Simultaneously, their global desks placed bearish bets in the derivatives market.
• Marking the Close: After building up the index and attracting retail call options buyers, Jane Street sold off their positions, causing the index to fall—making their derivative positions hugely profitable.
• Scale of Operation: This coordinated “pump and dump” was executed at least 15 times in just over two years, with profits peaking at ₹734 crore on a single day (January 17, 2024).

Their method took advantage of the fact that Bank Nifty is composed of just 12 stocks (with the top five contributing 80% of its value) and is especially popular among Indian retail traders—over 1 crore traders in 2024, up from just 7 lakh in 2019.

The Fallout

• Retail Pain: Most Indian options traders are young, often misled by the ease promised in influencer videos and social media posts. 91% lose money, with risk often misunderstood. Many suffer devastating financial losses, a far cry from the wins shown online.
• Legal Drama: After proprietary algorithms leaked to rival Millennium Management via ex-employees, Jane Street’s secret India strategy entered the spotlight. Lawsuits and settlements ensued, eventually triggering a deep-dive SEBI investigation.
• Regulatory Action: SEBI banned Jane Street from trading, later lifting the restriction after they deposited ₹5000 crore as a penalty. The episode spurred SEBI to ramp up surveillance and investor education.

 SEBI’s Action Against Jane Street

In July 2025, the Securities and Exchange Board of India (SEBI) issued an interim order against Jane Street, accusing the firm of running a “sinister scheme” to manipulate BANKNIFTY-linked markets.

SEBI’s Key Allegations:

1. Jane Street coordinated trades in bank stocks, index futures, and options.
2. The alleged purpose was to influence expiry-day prices to benefit from pre-positioned option bets.
3. These activities resulted in unlawful gains worth $567 million (₹4,700 crore approx.).

As a result:

• SEBI banned Jane Street from Indian securities trading.
• Ordered the firm to deposit $567 million in an escrow account.
• Later, restrictions were partially relaxed after the deposit, but investigations continue.

Jane Street, however, denies all allegations, stating that it was merely carrying out legitimate arbitrage trading and not manipulation.

How the Manipulation Worked – Step by Step

The alleged strategy followed a pattern that highlights how expiry-day trading is risky for small investors:

1. Build a large options position – typically in weekly BANKNIFTY contracts, where small price changes have a huge impact.
2. Push the underlying index – using heavy trades in basket bank stocks and BANKNIFTY futures to nudge the market in the desired direction.
3. Trigger retail traders – sudden sharp moves appear as “breakouts,” encouraging retail traders to chase the same direction.
4. Book profits – with the index pinned near target strikes, the firm books massive profits in options while late retail entrants suffer losses.
5. Exit positions quickly – just before market close, leaving retail traders holding worthless options.

This is exactly why expiry-day trading in derivatives is a dangerous trap for most retail participants.

Retail Traders: The Biggest Losers

According to multiple reports, Indian retail investors have lost tens of billions of dollars in index options trading over the past few years. Most of these losses happen on expiry days, when volatility spikes and large players have the ability to move markets with coordinated flows.

The problem is made worse because:

• Weekly options are cheap but high risk.
• Traders chase lottery-like gains without understanding time decay (Theta) and volatility crush.
• Foreign players with billions in capital can control liquidity and direction in the final trading hours.

Why Derivative Trading Is Risky

1. High Leverage – Small capital controls large positions, increasing both profit and loss potential.
2. Expiry Pressure – Every passing minute erodes option value, often wiping out retail traders who hold too long.
3. Market Influence by Big Players – Foreign institutions can use basket trades and futures to influence underlying index moves.
4. Lack of Information – Retail traders react to price action without realizing that moves may be engineered, not natural.
5. Regulatory Gaps – While SEBI actively monitors, sophisticated manipulation is hard to prove and often identified only after damage is done.

SEBI and Tax Department Scrutiny

Beyond SEBI’s interim order, India’s Income Tax Department has also started investigating Jane Street’s trading and profits. Reports suggest that authorities are checking whether the firm routed profits through Singapore entities and whether there was full cooperation with Indian regulators.

This indicates a wider crackdown on how global trading firms operate in Indian derivatives markets.

Lessons for Indian Traders

The case of Jane Street is a wake-up call for retail participants in India’s derivatives market.

• Avoid chasing expiry-day lottery bets.
• Understand that sudden spikes or crashes can be artificial.
• Always size trades with the assumption of slippage and time decay.
• Remember: for every winner in derivatives, there is an equal and opposite loser—and retail traders are often on the losing side.

Conclusion

The Jane Street controversy shows how global players can exploit Indian markets using advanced trading strategies developed outside India. While regulators like SEBI are taking strong action, retail traders must realize the true risks of derivative trading.

At Option Matrix India, we believe education is the only defense. Traders must learn how options really work, understand market manipulation tactics, and avoid risky expiry-day bets that are designed to favor big players.

Derivative trading is not a shortcut to wealth—it is a battlefield where information, capital, and execution speed decide who wins. And in that game, foreign giants have a natural edge.