Weighing Jane Street vs SEBI and New Circuit Breaker Framework

What exactly happened in the Jane Street vs SEBI controversy and how SEBI’s proposed progressive circuit breaker and dynamic margins framework could have prevented it

By P SESH KUMAR

NEW DELHI, July 30, 2025 — Imagine we are watching a game show where contestants bet on the direction of a balloon’s movement — will it float up or sink down? Now, one clever contestant (let’s call them “Jane”) figures out that the balloon is in a closed studio and the airflow can be influenced.

So, Jane places a huge bet that the balloon will float up, then secretly switches on a hidden fan that pushes the balloon upward. When everyone sees the balloon rising, they rush to bet on “up” too — but just before the round ends, Jane switches the fan off, the balloon drops, and everyone else loses. Jane pockets a huge profit.

Now replace the balloon with the Bank Nifty index, the hidden fan with manipulative trading in futures and cash stocks, and the bet with options trades — and we have basically got the Jane Street matter.

What Actually Happened: The Timeline of Trickery

Jane Street, a global proprietary trading firm, was trading in Bank Nifty options — contracts that derive value from the Bank Nifty index. These options are incredibly sensitive to small movements in the index, especially on expiry days.

Here’s how the alleged manipulation may have played out:

1. Push the Price Up Artificially (The “Push”): Jane Street allegedly bought up Bank Nifty futures and underlying bank stocks aggressively, which caused the Bank Nifty index to jump. This looked like genuine buying to everyone else — but it wasn’t.
2. Place Secret Bets in Options: Simultaneously, they had already built large short positions in certain option contracts — bets that would profit if the index fell.
3. Pull the Plug (The “Pull”): At the last moment — minutes before expiry — they sold their futures and bank stocks just as aggressively, causing the index to fall. Because options are very sensitive to such sudden moves, the short positions gained massively. It was like pushing a seesaw up just to let it crash back down — after placing bets on the crash.
4. Result? Unfair Profits: Jane Street allegedly pocketed crores by simply nudging the index at the right moments — not through better market understanding or insight, but by gaming the structure of the market.

Retail traders, seeing the index spike and fall unnaturally within minutes, got crushed. Many couldn’t react in time — some saw profits turn to losses in seconds.

Why This Wasn’t Caught by Existing Rules

Current safeguards like circuit breakers were too broad and slow. They were designed to halt the market during extreme crashes or rallies — like pulling the fire alarm when the building is already on fire.

But Jane Street’s alleged moves were surgical — small, rapid, and precisely timed. They manipulated volatility and price in tiny windows of expiry-day trading. By the time anyone noticed, the game was over.

How SEBI’s New Circuit Breaker Framework Would Stop This

Now, post Jane Street fiasco, SEBI has come up with guidelines or whitepaper termed Progressive Circuit Breaker in Derivatives Trading.

Think of SEBI’s proposed system as installing motion sensors, tripwires, and invisible fences that get tighter and more sensitive as expiry nears — exactly when manipulation is most tempting and profitable.

Here’s how it should work — with easy to understand illustrations:

1. Rolling Price Bands Get Tighter Closer to Expiry: Like speed limits that go from 80 kmph to 20 kmph as you approach a school zone, SEBI’s rules would allow less and less room for price to swing wildly on expiry day. If Jane Street tried to push up the index by 2% in 10 seconds, it would trip a circuit breaker. Trading would pause. The balloon wouldn’t fly up unchecked.
2. Implied Volatility Circuit Breakers for Options: SEBI’s system would constantly monitor options volatility. Sudden unexplained spikes (caused by artificial index movement) would trigger volatility-based halts. We my think of this as a lie detector test for options pricing — if something smells fishy, the show pauses.
3. Liquidity-Based Safeguards: If a trader tries to pull out all the bids and offers to create a fake illusion of movement (a common trick), the system will notice the drop in market depth or widening bid-ask spreads and halt trading. Like a referee blowing the whistle when a player fakes a dive.
4. Higher Margins Near Expiry: We may think of this as making one pay a bigger security deposit if one wants to place a bet close to the deadline. If Jane Street wanted to build a massive position for expiry-day manipulation, they’d have to cough up significantly higher margin money — making the ploy far more expensive and risky.
5. Final Hour Supervision: In the last 30 minutes of expiry, the new system becomes ultra-sensitive — just a 0.5% move in a few seconds could trigger a halt or shift the contract into “close-only” mode. That’s like converting a free-for-all auction into a sealed-bid system — everyone calms down and gamesmanship reduces.

In Summary: The “Jane Street Problem” Meets Its Match

What Jane Street allegedly did was exploit unmonitored micro-movements in expiry-day pricing to rig the outcome in their favour. They were playing a high-frequency game of snatch and run, where milliseconds made millions.

SEBI’s new framework seeks to introduce a microscopic radar that looks not just at broad index moves, but at speed, depth, volatility, and timing — across futures and options. It adapts like a smart thermostat: the closer you are to expiry (i.e., the riskier the environment), the tighter the controls.

In short, SEBI isn’t banning options (critics would like to say, though). It’s banning rigged endings.

Now, a question could arise. Whether SEBI’s new progressive circuit breaker and dynamic margin framework is an overreaction, a bold innovation, or perhaps a hybrid evolution of what global regulators are already doing. It is interesting to see what the SEC (U.S. Securities and Exchange Commission) and the FCA (UK Financial Conduct Authority) are doing on this front, how SEBI’s approach stacks up, whether it’s derivative of global practices or distinctly Indian, and whether it risks compromising price discovery.

What Are the SEC and FCA Doing About Market Manipulations?

SEC (United States) – Smart Surveillance and Targeted Enforcement

The SEC, which oversees the world’s most sophisticated derivatives and equity markets, focuses heavily on surveillance, pattern detection, and punitive deterrence rather than real-time trading halts for specific instruments. Here’s how it probably works:

• CAT (Consolidated Audit Trail): This is the SEC’s god’s-eye-view surveillance tool that logs every order, modification, cancellation and trade down to the millisecond across all U.S. exchanges. It helps catch spoofing, layering, and cross-market manipulation.
• Rule 15c3-5 (Market Access Rule): Brokers must put in pre-trade risk filters — including checks on erroneous orders, fat-finger trades, and capital limits.
• Circuit Breakers: The U.S. has market-wide circuit breakers (e.g., S&P 500 index down 7%, 13%, 20%), and Limit Up–Limit Down (LULD) mechanisms that pause trading in individual stocks showing rapid price moves. But these don’t apply directly to derivatives or expiry-specific trades.
• Options Market Surveillance: The Options Regulatory Surveillance Authority (ORSA) coordinates cross-exchange options market monitoring, focusing on manipulation via quote stuffing, IV distortion, or tied strategies with underlying stocks.
• Enforcement: The SEC’s real muscle lies in enforcement. It routinely penalizes firms — from JPMorgan to individual high-frequency traders — for executing “spoofing” or price manipulation. But this is post-facto and depends heavily on data forensics.

We can think of the SEC as a super-cop with 24/7 CCTV access. They let the game play, but they review tapes — and if someone spiked the ball illegally, they face a $100 million penalty.

FCA (United Kingdom) – Principles-Based Oversight and Algorithm Monitoring

The FCA, Britain’s financial watchdog, appears to use a principles-based approach — it doesn’t prescribe as much as it penalizes those who break the spirit of fair market conduct. But it does this with some finesse:

• MAR (Market Abuse Regulation): The FCA enforces EU-origin rules that make insider dealing, manipulative orders, and distorted pricing behaviour explicitly illegal — including false signals via derivatives.
• Algorithmic Trading Supervision: FCA requires firms using high-frequency or algorithmic strategies to register their algos, test them before deployment, and keep kill-switches handy. This is akin to making every Formula One car carry a black box.
• Suspension Powers: FCA has the power to suspend trading in suspicious instruments — though rarely used in expiry-specific derivative games.
• Enforcement is key: Like the SEC, the FCA leans on ex-post penalties. The fines are big, but the manipulation is often only visible after expiry, not prevented in real-time.

The FCA would appear to be like a referee with a whistle, stopwatch, and post-match VAR. It expects teams to play fair and penalizes rogue behaviour later — but the game often continues unpaused in the moment.

What SEBI is now proposing – 

An Expiry-Sensitive, Real-Time Shock Absorber

SEBI’s proposal appears to be far more granular and perhaps even pre-emptive than either the SEC’s or FCA’s methods. Why?

1. SEBI introduces real-time circuit breakers specific to derivatives, not just index-wide halts.
2. These tighten dynamically as expiry approaches — a globally unique feature.
3. Price, volatility, and liquidity-based triggers are integrated. SEBI doesn’t just wait for post-trade surveillance.
4. Margin hikes progressively disincentivize expiry-day manipulation, especially from options writers and expiry “stranglers.”

In essence, SEBI isn’t just watching the game. It’s changing the game rules as the match nears full-time — because that’s when most fouls occur.

Is SEBI Drawing from Global Experience?

Yes and no.

• Yes, in spirit. SEBI has clearly studied SEC/FCA frameworks on surveillance, volatility triggers, and the problems of expiry-day manipulation.
• No, in mechanics. There’s no international precedent for expiry-sensitive, multi-trigger, contract-specific circuit breakers built into the derivatives market structure itself.

SEBI is doing something innovative and tailor-made for the Indian context — where:

• Retail participation in weekly options is massive and growing.
• Most volumes are concentrated in Bank Nifty and Nifty options on expiry days.
• Expiry days are high-risk, high-frequency battlegrounds for manipulation.

Which Approach Is Better?

That depends on one’s philosophy of market regulation.

• If one believes in free markets with post-trade accountability, the SEC/FCA model is better. But it needs massive surveillance muscle, deep forensic capabilities, and trust in enforcement.
• If one believes in real-time guardrails for retail-heavy, expiry-sensitive markets, SEBI’s model is arguably more proactive, context-aware, and retail-friendly.

In the U.S., a retail trader is one of millions in a deep, institutional market. In India, a ₹10,000 trader may be going up against global whales like Jane Street — on a Thursday afternoon — and lose everything in 15 seconds.

So, it can be said that SEBI’s approach is better suited to India’s market fragilities, even if it looks like “micro-managing” to global eyes.

But what about critics who would say ‘Does SEBI’s System not Kill Price Discovery’?

That’s the million-dollar fear. But it needs to be approached carefully.

No, if price discovery means fair, fundamental valuation over time.

SEBI’s framework doesn’t stop the market from finding fair prices — it stops it from finding fake ones through manipulative tactics. One can think of it as using a breathalyzer to keep the driver sober — not banning driving.

Yes, if one is an arbitrageur or HFT trader relying on ultra-fast expiry-day inefficiencies.

Their ability to exploit small IV gaps, order flow imbalances, and end-of-day liquidity cracks will now be under stricter surveillance and halt-prone environments.

But that’s a price worth paying to protect the 95% of traders who don’t have algorithmic armour.

A Bold Indian Bet on Regulation by Design

SEBI is doing what regulators rarely dare: embedding morality into market mechanics. While the SEC and FCA stand guard at the gate, SEBI is redesigning the entire traffic signal system — slowing cars near expiry junctions, installing invisible speed breakers for volatility, and hiking tolls for reckless driving.

It’s not a borrowed script. It’s a fresh Indian rewrite — one that doesn’t just punish manipulation, but prevents it with surgical precision.

So no, one can say that SEBI isn’t killing price discovery. It’s resuscitating it — with a defibrillator timed to expiry seconds. Regardless of what critics may say.

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(This is an opinion piece, and views expressed are those of the author only)

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