Jane Street, a top 25 holder of US equities in 13Fs and one of the biggest global proprietary traders, has been banned for now from the Indian stock market by the regulatory equivalent there of the SEC.
Why should you care, investors and public companies?
Because Jane Street is a massive force in the US stock market. Holding put/call positions, it outranks thousands of stock-pickers owning the actual equities.
Here’s what’s happened. India had become the world’s dominant derivatives market, with notional options value eclipsing $3 trillion daily, far surpassing the US market.
For perspective, the largest securities market is FX (foreign currency exchange) near $5 trillion daily. India became #2 with its options market.
Volumes driven by retail trading in options attracted big US and European Fast Traders including Jane Street, which generated global returns of nearly $22 billion in 2024.
The linchpin permitting the boom was the decision by Indian stock exchanges to follow their American counterparts in offering co-location services. That’s where high-speed firms place servers in the same facility with exchange hardware.
Using superior trading technology and data, firms like Jane Street can move markets and capture gaps between stocks and associated derivatives.
Jane Street would say that it and other proprietary traders take the spreads out of securities. You might for instance see in your trading account that you bought INTC for $23.5879 per share.
Somebody like Jane Street slid between a bid to buy for $23.58 and an offer to sell for $23.59 and “crossed the spread” to fill both sides. Jane Street paid the seller $23.5849, let’s say, and kept the spread of $0.003 per share, or 30 cents per hundred.
The sudden carpet-calling for Jane Street imploded derivatives volumes in the Indian market. That suggests Jane Street was its engine. Jane Street is pushing back, claiming it engaged only in “basic arbitrage.”
That’s actually a big admission.
I’m not for or against Jane Street or any other Fast Trader per se. Jane Street calls itself a “quantitative trading firm and liquidity provider.” The Jane Streets of the world are the reason retail traders enjoy commission-free trading. They buy order flow.
But there is no such thing as free trading. What one gives up for free trades is information. Retail orders are information.
And when Jane Street admits to basic arbitrage, it’s saying it buys and sells the same things at different prices. The problem is that the term “arbitrage” emits a faintly rapacious odor. You have the sense you’ve been screwed by someone.
Jane Street would retort that filling your trade and getting a profit is what counts. But in the Indian market, retail traders lost billions, regulators say, while Jane Street profited.
Jane Street is accused of inflating volume in the options market for individual stocks while simultaneously moving the index options market the opposite direction with its immense capacity to place and cancel trades and reprice the markets for both.
I think it happens here. Routinely the futures market bears no resemblance to how stocks behave during market hours. And markets can move way up or down before closing flat.
That’s all a product of arbitrage – machines capturing gaps because they’re faster than everyone else and able to see in the data when the turn is coming.
We tell investors using EDGE that one can only outsmart Fast Traders by observing Demand/Supply imbalances and extending one’s timeframe beyond a day – the general range Fast Traders pursue. If you want to sit in on our latest thinking, join the live Discussion Jul 10 at 230p ET.
What would happen without Fast Trading? We know. We didn’t have it at all until the 1990s when computerized traders started exploiting the “Small Order Execution System,” getting branded SOES (pronounced “Soze”) bandits. Computers cut the line with 100-share orders to get ahead of other buyers and sellers.
But computerized trading didn’t explode until after Regulation National Market System permitted exchanges to incentivize firms to buy or sell. That’s the “maker-taker” market where exchanges give trading credits to those setting the bid and offer.
Why would they do that? To capture trades – that spread-crossing exercise by Jane Street. That’s valuable data to sell back to brokers and traders. It’s billions of dollars for exchanges. And that’s how the market works.
It’s improbable that US regulators will put a similar kybosh on Jane Street. Our market depends on arbitrage, because ETFs require it. No other purpose keeps an ETF aligned with its underpinning basket of stocks.
Also, the puts and calls trading on those stocks, and on the ETFs, and the futures trading on the indexes the stocks track, must generally align.
Enter not Sandman but Jane Street. Say your prayers.
Public companies, it’s more reason why you need a Passive strategy. Machines exploit asymmetries – what you provide to the market each quarter vs what’s already known by everyone, combined with derivatives bets.
And the volatility that this combination fosters boots you from ETFs and indexes because you’re causing tracking errors (deviations from the benchmark).
You need to control it. Become smarter. We can help you.
