The Jane Street India Scandal Is a Wake-Up Call – No Matter the Outcome

It’s not every day that a regulator as methodical and reserved as India’s SEBI accuses one of the world’s largest trading firms of a “sinister scheme.” But that’s what happened last week when Jane Street—one of the “new titans of Wall Street”—was banned from India’s markets over allegations of manipulating prices in one of the fastest-growing derivatives markets on Earth.

According to SEBI’s 105-page interim order, Jane Street used its capital and speed to influence price action in India’s cash and futures markets, allegedly enabling it to profit from oversized positions in Bank Nifty index options, a market dominated by retail traders seeking quick returns. SEBI claims this generated billions in profits for Jane Street and heavy losses for small traders.

Jane Street has disputed the findings and is expected to mount a vigorous defense. In an internal email to staff, later reported by Bloomberg, the firm strongly rejected the “premise and the substance” of SEBI’s order, calling it “deeply upsetting” and “based on many erroneous or unsupported assertions.” Jane Street contends that its trades represent standard index arbitrage, not manipulation, and says it had been engaging with Indian exchanges and regulators for months before the ban, even halting trading voluntarily to address concerns.

Arbitrage or Exploitation?

The crux of SEBI’s allegation is that Jane Street manipulated the underlying market to benefit its options positions. Yet some commentators, such as Bloomberg columnist Matt Levine, have suggested that something less nefarious might be at play: that Jane Street may have spotted a pricing inefficiency between Indian bank stocks and related derivatives, and closed that gap. If correct, this would constitute textbook arbitrage: bringing prices in line, not distorting them.

However, that interpretation has been challenged, most notably by Alex Gerko, CEO of XTX Markets. In a now widely circulated follow-up LinkedIn post, Gerko dug deeper into the mechanics of the trade, arguing that Jane Street’s so-called arbitrage was built not on correcting mispricings, but on creating them through outsized trades in illiquid markets. He described how an HFT firm could use its capital to temporarily move prices in the less liquid “leg” of a trade—Leg1—to manufacture convergence with the more liquid Leg2, thereby creating the appearance of fair arbitrage while in fact profiting from its own market impact.

Gerko’s key challenge: if Leg1 loses money consistently and doesn’t effectively hedge risk, and Leg2 produces “astronomical” gains, is this really arbitrage, or simply a manipulation strategy disguised as one? His final test is telling: scale the strategy down by 100x. If it stops working, it wasn’t arbitrage; it was market impact.

In short, while Jane Street argues that its trades were legitimate and even market-improving, Gerko’s analysis casts doubt on whether such a strategy could be executed without harming less informed or less capitalized market participants, namely, retail traders.

A Defining Case for HFT and Market Integrity

This is why the case matters, regardless of the outcome.

If SEBI is right, and Jane Street actively manipulated prices to entrap retail traders, it exposes serious flaws in the structure and policing of modern markets. That demands reform: stricter oversight, better protections for retail investors, and incentives for responsible market participation.

If Jane Street prevails and is able to show that its trading activity amounted to fair arbitrage, it still reveals a troubling gap: the growing disconnect between retail behavior, market mechanics, and regulatory understanding. Why are option prices in India so consistently out of sync with their underlying assets? And how can we ensure that all participants, from hobbyist traders to high-frequency firms, understand the risks and incentives in play?

Either way, this is a watershed moment for the future of trading in emerging markets.

A Market Built for Inclusion, Now Under Pressure

India’s derivatives boom has been hailed as a triumph of financial inclusion. Bank Nifty options offered small traders the chance to participate in capital markets with minimal capital. The vision was simple: democratize access, and people will come.

And they did. But so did the machines.

According to SEBI, Jane Street didn’t invest in the ecosystem or mentor talent. It allegedly used its firepower to extract value, not provide liquidity. If that’s true, it reflects a broader trend within high-frequency trading: technology deployed not to improve markets, but to dominate them.

As Gerko highlighted, the outsized profits Jane Street made from its Indian trades suggest a strategy that was perhaps more extractive than stabilizing. The concern isn’t just that the trades were aggressive, but that they relied on distorting prices in low-liquidity instruments in a way that only firms with massive capital and speed could sustain.

But again, it’s worth emphasizing: this is alleged, not proven. Jane Street is preparing a formal response, has stated its willingness to cooperate with regulators, and has emphasized that its trading—by design—is “good for the health of financial markets.” The firm argues that without players like Jane Street, there would be no link between the Indian derivatives market and its real economy.

What Comes Next: A New Model for Proprietary Trading

Whatever the final ruling, the lesson is clear: we need to rebuild trust in trading. That means developing firms that prioritize ethics alongside edge and view emerging markets not as resource fields to be strip-mined but as communities to be strengthened.

At Real Trading, we’ve taken a different approach. We support thousands of human traders in over 90 countries, not to extract value, but to share it. These aren’t just business relationships; they’re training ecosystems, designed to elevate talent, deepen liquidity, and help build sustainable local markets.

The future of trading shouldn’t just be about who can build the fastest server. It should also be about building the fairest possible system in which market growth yields more jobs for real traders, not just outsized profits for those with the fastest computers.

Technology Without Ethics Is Not Innovation

SEBI’s intervention is a sign of a maturing regulatory regime unwilling to let opaque strategies go unchecked. However, the final verdict on Jane Street will likely take time and will define not just one firm’s fate but the credibility of modern market structure.

Whether arbitrage or manipulation, the episode highlights a critical truth: markets need more transparency, more accountability, and more human judgment.

While algorithms may be precise, human prop traders bring ethical judgment, diversity of opinion, and real market engagement. Let’s not waste this opportunity to reimagine what real trading means.