A man walks past the Securities and Exchange Board of India (SEBI) headquarters in Mumbai. For representational purposes.
Credit: PTI File Photo
By Andy Mukherjee
Jane Street Group has told its employees that the Indian regulator, which has accused it of market manipulation, is “fundamentally mistaken” about its trades. A math nerd in London thinks there may be a way to find out.
The Securities and Exchange Board of India sent ripples through trading rooms around the world last Friday when it temporarily banned Jane Street from the local market and froze Rs 4,840 crore ($565 million) in what it alleges to be unlawful gains.
According to the New York quant firm’s email to employees, the whole premise of the 105-page interim order is wrong. It is preparing a formal response. The SEBI, meanwhile, is bracing itself for a grueling legal battle. The regulator says that the high-frequency trading giant has made $4.3 billion from India in a little over two years, and so far its officers have only investigated trades in one index. The stakes are high, especially if other countries launch their own probes.
That’s a cue for bruised competitors to wade in. Around two years ago, rival XTX Markets Ltd.’s Sharpe ratio — a measure of profitability per unit of risk — went from 10 to zero overnight in India index options. A ratio of zero means there is no compensation for the risk. The trade “never recovered and was completely shut down earlier in 2025, the first time in our 17 years history when we abandoned a market where we used to make money previously,” Alexander Gerko, the billionaire geek behind the UK-based algorithmic trading firm, wrote on LinkedIn.
Gerko suspects that his New York competitor got the better of XTX. But did Jane Street, one of the world’s largest market makers, win fair and square? In a subsequent post, Gerko proposed a thought experiment to the self-described puzzle solvers at Jane Street. Here’s how they could prove their smarts: “Imagine reducing all sizes in your strategy by a factor of a 100. If it works better than before (per unit of risk/in terms of margins) then it looks legit. If it stops working altogether after scaling down then question your life choices.”
This is a testable hypothesis. The regulator’s contention is that the Jane Street bets were intentionally super-sized. When they hit relatively illiquid equity and futures markets on a day options on the Bank Nifty — a popular gauge of 12 financial stocks — were expiring, they ended up moving the index so that the trader profited spectacularly from its much larger options positions, while consistently losing money in stocks.
But what if the regulator is wrong? What if Jane Street has a legitimate and “immensely valuable” proprietary trading strategy for India, as it claimed last year when it sued two of its former traders who had left to work for Millennium Management? (The suit was later settled.) In that case, the firm should be able to demonstrate even higher profitability for smaller position sizes. As Gerko says, “Any ‘normal’ strategy works worse as it scales up, due to market impact, unless your strategy is market impact.”
This is a perfect setting for a contest. The SEBI should invite the two rivals for a demonstration. The firm under the scanner would simply have to show that it can still make money with bets 1/100th the size of what the regulator has characterized as “an intentional, well-planned and sinister scheme” of market manipulation. XTX, on the other hand, would be requested to do two things — reprise its own now-abandoned trades, and implement what the SEBI thinks Jane Street’s strategy was. For the latter, XTX would have temporary indemnity, as long as any supernormal profits are credited to India’s investor protection fund.
Jane Street has disputed the SEBI interim order and said that it is “committed to operating in compliance with all regulations” in markets around the world. A demonstration of its skills may help shore up perceptions of its global business. But should Gerko’s hypothesis be proved right, Jane Street should be prepared to lose quant talent to its rival. The math PhD from Russia, who already has papers like A Trading Approach to Testing for Predictability under his belt, would have fresh material to add to his academic oeuvre.
Most importantly, though, such an experiment would either collapse the regulator’s argument, or put it on a stronger footing when legal proceedings begin. It will be helpful for the judges to approach this complicated case with familiar courtroom tools like reenactment and expert testimony. Otherwise the lordships might get lost in arcane option-market jargon.
Let both Jane Street and XTX show what they would cook up for the world’s biggest equity derivatives market by volume, without revealing their secret sauce. The technical ingredients are far less important than the philosophical question that has come up on social media: What is the true role of large market makers in society, and are high-frequency traders fulfilling it?