Original Source and all credits: ET Money

₹4843 Crore - These are the profits Jane Street allegedly made by quietly rigging the Indian markets, as per SEBI.

Jane Street resorted to sophisticated methods of manipulation and rigging.

They made a profit of ₹36,502 crores in little over two years.

Here's what happened.

First, let's understand index options - call and put options.

Call Option:

It gives the buyer the right to buy an underlying asset at a specific price.

Buy Call Options: When bullish on an index or a stock.

Sell Call Options: When bearish on the index or a stock.

Put option:

This gives the buyer the right to sell an underlying asset at a specific price.

Buy Put Options: When bearish on the index or a stock.

Sell Put Options: When bullish on the index or a stock.

How Options premiums work:

Option premiums are calculated based on stock/index’s current price vis-a-vis the strike price. Strike price is the price at which you exercise the option.

So Premiums are high when they are at-the-money or in-the-money.

In-the-money (ITM) call option: Current price is higher than strike price

In-the-money put option - Current price is lower than strike price

At-the-money (ATM) call/put option: Current price is close to strike price

On expiry days, OTM (Out of the Money) options are cheap because they are likely to expire worthless. ATM options are most volatile because they near the strike price and anything can happen. But for ITM options, they are fully loaded and available at a premium.

For example,

You bet Rs.2 that Bank Nifty will cross 49,000 by 3:30 PM on Thursday.

If Bank Nifty ends at 49,001, you hit a jackpot. If it ends at 48,999, you lose the entire ₹2

Just one point can flip your fortune.

The "target" you bet on (49,000) is referred to as the strike price.

If the index ends above it, your bet is said to be "in the money", and rewards can be huge

If the index ends below, your bet is "out of the money" and it's worthless.

You either win big or lose it all.

Out-of-the-money options are cheap - ₹2,₹3 sometimes less.

That's because they're betting on a last-minute miracle.

But if it happens, your ₹2 bet can become ₹30, ₹40, or more.

Jane Street was placing thousands of these tiny bets.

Remember, all this is a game of chance. You need a lot of luck to win.

Even if you study patterns, deploy sophisticated computer programmes, and hire talented PhDs, you can't win repeatedly.

But here's the twist: Jane Street didn't just wait for the miracle.

They made it happen. How?

On the expiry day, you buy all the cheap Index OTM options on one hand and on the other hand, you either buy or sell the index underlying constituents to an extent where the options start to move in your favor. Sophisticated traders can do it by just buying or selling heavyweight stocks of the index.

Traders can buy all the cheap options before 3 pm and after that, they can accordingly make orders worth crores of rupees in the heavyweight stocks.

It can be done through algorithms which know the exact quantity, price and time, which makes computation of the expiry closing price easy, as the closing price is the weighted average of the last 30 minutes.

The algorithms know the closing price which in turn makes your position favourable.

On the day options expire, an associate of Jane Street would start buying large quantities of stocks in the morning that are part of the Bank Nifty.

If Jane Street and associates were heavily buying Bank Nifty stocks in the opening hours, it would mean they were bullish.

But here comes another twist in this tale.

Jane Street would sell Call options. This would mean they anticipated the Bank Nifty price to fall.

At the same time, they would purchase put options, which indicates they were bearish.

However, this contrasts with their actions in the cash market.

Towards the end of the trading day, in the last 30 minutes, Jane Street and its associates would start selling Bank Nifty heavily.

This would make the index fall.

Result? Their put options land them the jackpot.

Why exactly the last 30 minutes?

Because in India, the expiry price of the index isn't the last traded price. It's the average value of the index over the final 30 minutes of trading.

So if you can move the index up during that window, even temporarily, you can influence the official expiry level, and decide which options make money.

Here's what the whole strategy looked like:

Buy put options that only make money if the index falls
Crash the index in the last 30 minutes by selling index stocks
Let the 30-minute average settle below the strike
Watch the options become valuable
Exit everything and book profits

Even if they lost some money on the stocks they bought to push the index down, it didn't matter.

The gains on the options more than made up for it.

This is how Jane Street allegedly turned ₹2 options into ₹40 options again and again.

SEBI says this wasn't a one-off.

Jane Street consistently did this across multiple expiry days. On some days, they accounted for 25-30% of all Bank Nifty options trading.

They weren't participating in the market. They were subtly shaping it.

Why is this illegal?

Think of it this way. You are doing a coin toss. You can get either "heads" or "tails".

Jane Street used a coin that has heads on both sides & kept betting on the "heads".

Jane Street wasn't just playing the game. It was quietly shaping the result.

From SEBl's point of view, this isn't smart trading.

It's manipulation.

Because Jane Street's trades weren't driven by news, fundamentals or investor flows.

They were designed solely to artificially move the index, just enough to tip the expiry in their favour.

There's another issue.

Jane Street is a foreign institutional investor (FPI).

Under Indian rules, FPls are not allowed to do intraday trading in the cash market-that is, buy and sell the same stock on the same day.

But Jane Street allegedly found a way around it.

They used their India-based entity, JS!

Investments, to carry out those stock trades.

Since JSI was registered in India, it wasn't subject to FPI restrictions.

SEBI believes this was a deliberate attempt to bypass Indian market regulations.

Jane Street is estimated to have made ₹36,500 crore in profits from trading in India.

However, SEBI has focused on ₹4843 crore, the portion it believes originated from unlawful means.

That money has now been frozen. And Jane Street has been banned from further trading.

Why Jane Street got banned by SEBI in India?