Arbitrage as Manipulation
Jains don’t run this street.
Last Monday, Matt Levine wrote a masterful piece detailing the Securities and Exchange Board of India’s (SEBI) injunction against Jane Street Group for allegedly manipulating index prices through a set of trades that netted Jane Street billions of dollars.
Keen market watchers will recognize this as the aftermath of Jane Street’s lawsuit against Millennium over the theft of intellectual property and poaching, which the parties settled in December of 2024. Both firms are finance behemoths that do everything from proprietary trading to market-making. If you want specific details about the lawsuit or the actual trades that composed this strategy, read the articles above; I can’t do it justice.
This strategy has been known since December. In fact, many quants have been familiar with India’s unique financial markets for some years now. A large population of retail investors, inverted volume dynamics, and dilettante regulators have made the nation’s markets easy for large, mindful firms to make money in. At this point, there isn’t much for any firm to squeeze out of this particular strategy. What is consequential, however, is SEBI’s reaction. The fine line between genuine arbitrage trading and disruptive market manipulation is a dangerous one to tread.
Additionally, it raises a question about nationalized market interests: do countries have a specific responsibility to traders in their home country, especially at the expense of international players? Indeed, the public split seems to be along nationalistic lines. Reddit, X, and traditional media appear to follow this playbook. Indian sources call it market manipulation. International sources say it’s just arbitrage.
As much as I detest getting on my hands and feet, it’s very difficult to argue that prop shops have engaged in market manipulation without clear communicatory evidence. As Levine put it:
The difference between legitimate trading and manipulation is whether you send your colleagues an email saying “lol I sure manipulated that market.”
Still, it’s hard to consider the role of a government in managing its public markets. The SEC operates in America, and while fines are pennies towards the firms in suspect, it operates nonetheless. In contrast, Americans trying to trade Chinese stocks face immense regulatory hurdles. Chinese law generally prohibits international entities from owning parts of Chinese corporations, but Americans have clever workarounds like variable interest entities (VIEs) and American depository receipts (ADRs) that let them claim an interest in publicly traded Chinese companies. At least to China, there’s a significant warrant to have a heavy hand in public markets.
Free market fanatics will say that India and China are being obtuse with their regulations and interests. A government blocking investment is just as, if not more, tantamount to market manipulation. Of course, America has a similar thing, though smaller. The Committee on Foreign Investment in the United States has restricted Chinese money from flowing into critical sectors like technology, but more recently, agriculture under Trump. Investment of this form is not the same thing as high-frequency trading or alleged market manipulation, but it does point to a general principle of financial markets being subject to national scrutiny and interests.
India is simply realizing that principle in a more aggressive form now. If it views an international finance company as impugning the efficiency or veracity of its markets, it certainly seems like it has an obligation to act. My main concern is that this could easily spiral, both with India and other countries, to quickly block foreign finance vehicles of any kind. If “America First Investment Policy” devolves into banning international investors, markets across the world are in trouble.
SEBI, more likely than not, made the wrong move. What would make it worse is if American regulators counter harshly. So far, they’ve been quiet about the whole thing. Letting a private company deal with it for themselves is the right move, for now. Shutting down international investment is far from the interests of almost any governemnt. But, that’s its own fine line to tread on.