Lessons for Dalal Street and Parliament Street

As volatility pulsed through the Dalal Street, its tremors reached Parliament Street, home to Indian regulators and watchdogs. The question was no longer just about price movements—it was about market integrity. Could the highly choreographed market manipulation be disguised as the quant firm’s trading advantage on account of asymmetry of information, powered by speed and strategy?

What began as whispers about unusual expiry-day patterns soon turned into a full-blown regulatory storm. After months of deep surveillance, the Indian market regulator, the Securities and Exchange Board of India (Sebi), issued a powerful interim order against Jane Street and its affiliates for suspected market manipulation.

Jane Street’s alleged playbook

According to the order, Jane Street executed a clever but deceptive playbook. On key Nifty Bank expiry days, it would first buy large volumes of key banking stocks in the cash market during early trading hours. This buying lifted Nifty Bank sharply, creating the illusion of bullish momentum.

With the index climbing, they simultaneously bought put options—bearish bets—at dirt-cheap prices while the rest of the market remained euphoric. Then came the twist: after securing the options, they dumped the same banking stocks, causing a sharp market fall. As Nifty Bank dropped, the value of those put options skyrocketed, allowing Jane Street to book massive profits.

Sebi’s interim order alleges this strategy was used across 18 Nifty Bank and 3 Nifty expiry days, resulting in profits of over ₹43,289 crore, of which ₹36,500 crore was linked directly to expiry-day trades. Sebi found this too calculated to be coincidental and froze ₹4,844 crore, ordering it into an Indian escrow account. All Jane Street entities were also barred from trading in Indian markets until further notice.

Nightmare for retail traders

Jane Street’s sophisticated algorithms ran silent but deep, making split-second trades that moved markets and mined profits. But for lakhs of Indian retail traders who logged into their broker apps every Thursday expiry, hoping to make small gains from Nifty and Nifty Bank options, the experience was nothing short of a recurring nightmare.

In the high-stakes arena of derivatives this was a zero-sum game, but a rigged one. Every rupee earned by Jane Street in these options trades was a rupee lost—mostly by India’s small investors, pensioners, and first-time futures & options (F&O) enthusiasts seduced by the lure of weekly profits.

Sebi’s own report confirmed that for nearly 93% of the lakhs of retail traders in options, expiry Thursdays became synonymous with repeated losses as patterns failed, momentum reversed, and trust eroded – week after week.

Debt and taxes

But the tragedy didn’t end with financial losses. For Indian retail investors, the nightmare extended into another realm altogether: tax notices. Many investors unfamiliar with the complex rules of F&O tax reporting failed to correctly disclose these losses in their income tax returns. The result? Compliance notices, tax scrutiny, and audit threats—even for those who had no real income.

While Indian retailers suffered both financial loss and tax stress, Jane Street Singapore Pte Ltd—the main offshore beneficiary—walked away with thousands of crores in profits, reportedly without paying a single rupee in Indian taxes.

How? By using the India-Singapore Double Taxation Avoidance Agreement (DTAA). With no “permanent establishment” in India, and careful structuring, Jane Street was able to legally avoid tax on these derivative gains. This is a textbook case of treaty shopping and tax arbitrage, in which global giants use legal structures to bypass what domestic traders cannot.

Lessons to learn

Retail investors can’t play blind while global whales trade with radars. Sebi must enhance expiry-day surveillance, tighten position disclosures, and audit cash-derivatives linkages.

For tax authorities, the injustice is glaring—Indian traders face scrutiny even after losses, while foreign giants like Jane Street escape tax via DTAA loopholes. The government must invoke General Anti Avoidance Rule (GAAR), impose withholding tax on offshore gains, and simplify F&O loss reporting for domestic traders.

For Indian investors, the key lesson is awareness — know the rules, risks, and tax responsibilities. In a game that’s not always fair, abstinence remains the best form of protection.

Mayank Mohanka is founder, TaxAaram India, and a partner at S.M. Mohanka & Associates.