India’s capital markets may be vulnerable to sophisticated derivatives manipulation because, unlike China, they lack key deterrents that would dissuade high-frequency traders (HFTs) from attempting similar schemes, according to Nilesh Shah, managing director of Kotak Mahindra Mutual Fund.

In a sharply-worded opinion piece published in the Financial Express, Shah drew a stark contrast between Indian and Chinese markets, highlighting three structural deterrents that he believes make such manipulative conduct nearly impossible in China.

“First, Chinese markets are largely closed to foreign speculators for such activities, limiting access,” Shah wrote. “Second, Chinese regulators wield formidable power, employing tactics akin to sam, dam, dand, bhed (persuasion, fines, punishment, or division) to enforce deterrence and compliance. Third, the memory of a well-known hedge fund being squeezed by the China Investment Corporation in a short renminbi trade serves as a powerful deterrent.”

Regulatory muscle must match market complexity

Shah argued that while the Securities and Exchange Board of India’s (Sebi) recent action against Jane Street showcases its surveillance and forensic capabilities, more needs to be done to make India’s market enforcement truly effective.
He pointed to the persistence of unresolved cases from the 1992 securities scam and drew comparisons with the U.S. legal system, where mechanisms exist to recover investor losses, citing the Bernie Madoff case.

Shah likened the Indian F&O markets to a village derivatives bazaar where a powerful trader repeatedly exploits a rigged cycle, drawing a parallel to Jane Street’s alleged behaviour. He cautioned that India’s institutional investors, constrained by regulation and trading strategies such as volume-weighted average price (VWAP), lack the aggression and agility to act as a counterforce to such entities.“A new institutional mechanism equipped with advanced data analytics, high-speed connectivity, and access to leverage is needed,” Shah said, “as is the ability to act decisively to neutralise HFT dominance.”Sebi on July 3 barred U.S.-based Jane Street and four affiliated entities from accessing Indian markets, accusing them of manipulating index levels on 18 expiry days over a two-year period and profiting disproportionately from index options trades. The regulator has ordered the impounding of Rs 4,840 crore in alleged illegal gains.

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5 reforms to prevent another Jane Street:

Shah proposed five systemic reforms that he believes are essential to restore integrity, protect retail investorsand ensure India doesn’t become “a playground for manipulative merchants.”

1. Strengthen regulatory powers

Shah called for fortifying Sebi’s enforcement ability with a sharper legal toolkit. While praising the regulator’s data-driven action against Jane Street, he pointed out that India’s justice system lacks the speed and power required to address modern financial frauds.

“Commercial crimes, like market manipulation, often cause greater societal harm but face lenient treatment due to the absence of a ‘dead body’,” Shah said. “Empowering Sebi with robust legal tools and fostering a fear of swift punishment are critical to deterring future violations.”

2. Create counterbalancing mechanisms

Shah warned that India’s institutional investors, constrained by rules and low-risk strategies like volume-weighted average price (VWAP), cannot counterbalance aggressive HFTs like Jane Street.

“A new institutional mechanism equipped with advanced data analytics, high-speed connectivity, and access to leverage is needed,” he said, “as is the ability to act decisively to neutralise HFT dominance.”

3. Treat commercial crime seriously

Drawing parallels with past regulatory failures, Shah said Sebi must go beyond monetary recovery and impose deterrent penalties. He cited the Bhopal gas tragedy as a cautionary tale of limited consequences for catastrophic wrongdoing.

“Sebi’s order against Jane Street… must go beyond recovering manipulated profits,” Shah wrote. “An exemplary penalty is needed to deter future manipulations.”

4. Curb speculative mania

Addressing the surge in retail F&O trading, Shah likened the speculative frenzy to addiction fuelled by greed and social media hype.

“In our F&O markets, a massacre occurs every week, where millions of Indians get killed economically, not by bullets but by their greed,” he said. He compared quick-profit seekers to drug addicts and the mythological demon Raktabij: “Slay one, and a hundred more emerge.”

Shah advocated statutory warnings on derivatives trading, tighter restrictions on promotion, and possibly a levy on F&O trades to fund investor education and protection.

5. Prioritise financial education

Calling education the ultimate antidote to retail vulnerability, Shah urged regulators to scale up literacy efforts and implement tougher gatekeeping for risky products.

“The anti-dote to greed is financial education,” he said, recommending that traders be required to pass qualifying exams before being allowed to engage in leveraged trades.

Beyond detection: a warning for the future

While Sebi’s action has stirred much-needed conversation, Shah’s central message is that enforcement alone is not enough.

“Unchecked financial muscle and speculative frenzy can destabilise markets leaving retail investors vulnerable,” Shah said. “Only by addressing these issues head-on can India prevent its markets from becoming playgrounds for manipulative merchants.”

Also read | Jane Street clampdown raises big questions for Sebi: Can the regulator stop another derivatives fraud?

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