"After all this news story all started when two young traders from Jane Street moved to Millennium with the threat that they could be taking the “magic sauce” of the Indian equity options strategy with them."
Deeply ironic that by prosecuting these traders, Jane Street ended up putting itself in much more trouble with Indian regulators.
Had Jane Street kept quiet, they could still be splitting profits with Millennium using this blatantly illegal market manipulation strategy.
Love reading about HFT trading strategies. Makes me wonder what works best against market abuse: regulation or competition? Because it's not that hard to imagine other traders getting wind of Jane Street strategy and taking advantage of it, arbitraging away the arbitrage.
“Notice, though, that the actual index “moved significantly from 46,573.93 to 47,176.97 during this patch.” It started at 46,573.93, but the options started at 47,335. The options implied a price for the Nifty Bank index that was 1.6% higher than the actual price of the index: Retail investors were paying more for stock exposure via options than institutions were paying to buy the actual underlying stocks. (Why? The best explanation I’ve heard is that the index dropped a lot overnight, opening 3.2% below its previous close, and retail investors love to buy the dip — and in India they do that with options. So there was a ton of retail demand for Nifty Bank index exposure via options, which pushed the options prices higher than the underlying index.)
By 9:22 a.m., the premium had come down. At that time, according to SEBI, options implied a price for the index of about 47,187,[6] versus 47,176.97 for the actual index, a premium of about 0.02%. And this was below the options-implied index price at 9:15 a.m. As Jane Street was buying the underlying stocks, “temporarily pushing up or lending considerable support to the BANKNIFTY index,” the prices of options on that index were going down.
This is a very different story from the one SEBI tells. This does not look like manipulation; it looks like arbitrage. This is: Jane Street came in one Friday morning and noticed that Indian retail traders were buying options on the Nifty Bank index at much higher prices than where the index was actually trading. So Jane Street got to work doing what it does: It sold options to retail traders who wanted them, and bought the underlying stocks to hedge, until the arbitrage closed. (More strictly, it net sold call options and net bought put options, giving retail traders long exposure to the index.[7] ) At the beginning of SEBI’s window, the options were trading at a pretty wide 1.6% premium to the underlying index; at the end, they were trading at basically the “correct” levels. “
I read that and the JS response, and it didn't change my view. Why?
If this is an "arb" trade, why was the short options side of the trade 7.5x the long side of the trade?
There can be some mismatch, but this was a strong directional trade, and they knew they were moving markets by trading 25% of the volume in the less liquid underlying stocks both at the open and the close.
JS was net short 7.5x and sold underlying shares aggressively in the last hour of trading ahead of the options expiration - they were 25% of the volumes in these stocks and would have known that kind of selling pressure in the close would move the stock prices down and make the options puts highly profitable.
There is a long trail of banks being fined for this behaviour. Check out Deutsche Bank and other case histories on equity indexes or in fixed income Libor rates trades.
If the "arb" trade doesn't work in a smaller or reasonable size, is it an "arb" trade?
Secondly, take the letter of the law out of this discussion and remember that JS has a $50bn capital base and generates $25bn of revenue a year, so it is not a corner shop prop firm. It is the size of Goldman Sachs. Would Goldman continue to do this vs retail investors on the other side in a highly political market like India, with a local regulator under pressure for being sleeping at the wheel?
So there is the definition of breaking the official rules, but the realpolitik of running a goliath business.
"After all this news story all started when two young traders from Jane Street moved to Millennium with the threat that they could be taking the “magic sauce” of the Indian equity options strategy with them."
Deeply ironic that by prosecuting these traders, Jane Street ended up putting itself in much more trouble with Indian regulators.
Had Jane Street kept quiet, they could still be splitting profits with Millennium using this blatantly illegal market manipulation strategy.
Oh no. Rent extractors getting in trouble for rent extraction. Disaster.
Chamath as Jordan Belfort….gold mate 💪
🙏🏼
Love reading about HFT trading strategies. Makes me wonder what works best against market abuse: regulation or competition? Because it's not that hard to imagine other traders getting wind of Jane Street strategy and taking advantage of it, arbitraging away the arbitrage.
Billion-dollar question! Bit of both? I can't imagine them getting away with this in US as the sharks would compete them out or tell the regulator
I think both forms likely lead to accurate pricing of assets, but regulation has the added bonus of increased retail investor trust in the markets.
Sorry but Matt Levine has it better:
“Notice, though, that the actual index “moved significantly from 46,573.93 to 47,176.97 during this patch.” It started at 46,573.93, but the options started at 47,335. The options implied a price for the Nifty Bank index that was 1.6% higher than the actual price of the index: Retail investors were paying more for stock exposure via options than institutions were paying to buy the actual underlying stocks. (Why? The best explanation I’ve heard is that the index dropped a lot overnight, opening 3.2% below its previous close, and retail investors love to buy the dip — and in India they do that with options. So there was a ton of retail demand for Nifty Bank index exposure via options, which pushed the options prices higher than the underlying index.)
By 9:22 a.m., the premium had come down. At that time, according to SEBI, options implied a price for the index of about 47,187,[6] versus 47,176.97 for the actual index, a premium of about 0.02%. And this was below the options-implied index price at 9:15 a.m. As Jane Street was buying the underlying stocks, “temporarily pushing up or lending considerable support to the BANKNIFTY index,” the prices of options on that index were going down.
This is a very different story from the one SEBI tells. This does not look like manipulation; it looks like arbitrage. This is: Jane Street came in one Friday morning and noticed that Indian retail traders were buying options on the Nifty Bank index at much higher prices than where the index was actually trading. So Jane Street got to work doing what it does: It sold options to retail traders who wanted them, and bought the underlying stocks to hedge, until the arbitrage closed. (More strictly, it net sold call options and net bought put options, giving retail traders long exposure to the index.[7] ) At the beginning of SEBI’s window, the options were trading at a pretty wide 1.6% premium to the underlying index; at the end, they were trading at basically the “correct” levels. “
I read that and the JS response, and it didn't change my view. Why?
If this is an "arb" trade, why was the short options side of the trade 7.5x the long side of the trade?
There can be some mismatch, but this was a strong directional trade, and they knew they were moving markets by trading 25% of the volume in the less liquid underlying stocks both at the open and the close.
JS was net short 7.5x and sold underlying shares aggressively in the last hour of trading ahead of the options expiration - they were 25% of the volumes in these stocks and would have known that kind of selling pressure in the close would move the stock prices down and make the options puts highly profitable.
There is a long trail of banks being fined for this behaviour. Check out Deutsche Bank and other case histories on equity indexes or in fixed income Libor rates trades.
If the "arb" trade doesn't work in a smaller or reasonable size, is it an "arb" trade?
Secondly, take the letter of the law out of this discussion and remember that JS has a $50bn capital base and generates $25bn of revenue a year, so it is not a corner shop prop firm. It is the size of Goldman Sachs. Would Goldman continue to do this vs retail investors on the other side in a highly political market like India, with a local regulator under pressure for being sleeping at the wheel?
So there is the definition of breaking the official rules, but the realpolitik of running a goliath business.