US courtroom drama surrounding Jane Street’s lawsuit is a testimony of how India’s retail investors are bleeding red in derivatives markets and the nation’s wealth is being drained of Curbs on options trading are a matter of utmost urgency
Evidence of how sophisticated foreign traders are bleeding India’s retail investors by capitalising on India’s stock market inefficiencies has been revealed in the proceedings of a US District Court in Manhattan. Jane Street, among the world’s largest hedge funds with more than $60 billion in its kitty, said it had earned $1 billion in just a year in 2023 by trading in the options segment on India’s stock exchanges.
The name of the country where it earned the colossal profits in just a year was revealed by the lawyers of Jane Street inadvertently. Not only this, Jane Street has said in the proceedings that it was taking advantage of the “inefficiency” in the country’s stock markets to earn its profits. This is akin to billionaire Geroge Soros pushing some Asian countries in the throes of economic despair by his currency trading in the 1990s.
Jane Street has filed a lawsuit against rival Millennium Management and its two former employees Douglas Schadewald and Daniel Spottiswood for allegedly stealing a ‘highly valuable, unique, and proprietary’ trading strategy that had earned the hedge fund $1 billion in the previous year. Jane Street has said that after the two traders left it and joined Millennium Management, its own profits plunged by 50 per cent in March 2024. Jane Street made $10.6 billion in net trading revenue last year, according to bond issuance documents reported on by Bloomberg, and $4.4 billion in the first quarter of 2024. The firm, which trades with its own capital instead of managing other investors’ money like a hedge fund, began researching the trade in 2018 and spent tens of millions developing it in the succeeding years, reaching full maturity in 2023 and 2024. It became its most successful strategy, producing $1 billion in profits in 2023, according to statements from the attorneys and Judge in court.
The juicy courtroom drama in the US is actually a wake-up call for India’s stock market regulators and the government. Over 90 per cent of retail investors lose money in India’s derivatives market, where the average daily trading volume has surged nearly two-folds to Rs 440 trillion in just a year. While India is now a major draw for most sophisticated traders, their butcher-like trading strategies scalp and slaughter India’s retail investors wealth, something which reflects poorly on Sebi and the government.
Jane Street and Millennium Management are not alone as high-frequency trading platforms like Graviton, Jump Trading, Alphagrep , Tower Capital and Citadel Securities have garnered repute for their algorithmic-based strategies in India. A recent study by Sebi had already highlighted that 90 per cent of active retail traders lose money trading options and other derivative contracts. In the year ended March 2022, investors lost $5.4 billion, Sebi study showed. A study in the financial year 2021-22 also that on an average a retail investor lost Rs 125,000. Furthermore, the average net loss of these 90 per cent individuals was over 15 times the earnings of the 10 per cent who made profit. In the view of DR Mehta, former chairman of Sebi, India’s derivatives market is among the largest casinos.
For the eleven months of financial year 2024, i.e. April 2023 to February 2024, the share of proprietary traders in index options gross premium turnover was highest at 48.9 per cent, followed by that of individual investors at 35.1 per cent. As per a recent report by Bloomberg News, Indian investors traded 8,500 crore options contracts in 2023, the highest in the world. Retail investors in India make up 35 per cent of options trades, while institutions, seeking to hedge their risk or profit for their companies’ accounts, handle the rest.
“It’s one of the largest if not the largest options trading markets in the world,” Dechert attorney Andrew Levander, who is representing Millennium, said. A March news report in The Wall Street Journal found options trading in India has exploded, with 78 per cent of all global equity options contracts tied to the country in 2023. More than 84 billion stock index options contracts were traded in India last year — the vast majority of short-term options — up 153 per cent from 2022.
The attorney also referenced a news report from February that found 35 per cent of the market’s options trading is conducted by retail, or amateur, investors, while the rest is handled by institutional investors — professionals like Jane Street and Millennium.
Jane Street is not alleging the traders stole computer code or data — it’s not a formula or software, Brown said, but rather trading signals and techniques that can be remembered in your head. Attorneys for Millennium and the traders say they breached no trade secrets, arguing that external factors explain the drop in profit. Baker said a decline in volatility — a key factor in options trading — compared to prior months was partially to blame. He also said that Millennium was trading at a fraction of the scale as Jane Street — 50-times less exposure — noting that Jane Street made $185 million during the relevant time period and Millennium made $4 million. The $185 million figure, if accurate, suggests that Jane Street’s Indian options strategy was on pace to generate multiple billions in 2024, even at the decreased monthly figure.
Whatever happens to Jane Street’s lawsuit, Sebi and the government should act to save the nation’s wealth.
