The derivatives market could take a major hit in trading volumes after the Securities and Exchange Board of India (Sebi) cracked down on Jane Street Capital, halting its operations in Mumbai and impounding more than half a billion dollars of local assets.Analysts said the regulatory action would put pressure on revenue for intermediaries dependent on derivative market activity, with volumes shrinking in response to Sebi's stiff punitive measures against one of the biggest proprietary trading firms in the segment."Jane Street is one of the largest traders contributing to Indian markets," said Siddarth Bhamre, head of institutional research, Asit C Mehta.
"When big players are banned for wrongdoing, others become cautious and reduce activity, leading to lower volumes.
Traders may also face fewer counterparties, potentially causing a further drop in F&O volumes ahead."The capital market regulator has taken its toughest action ever against a foreign trading firm by targeting Jane Street, one of the world's largest quant trading firms that's also among the highest paymasters at India's top technology campuses.Highlighting the broader market implications, Zerodha Founder and CEO Nithin Kamath cautioned that action against proprietary trading firms like Jane Street, which contribute nearly half of the options trading volumes, could also dampen retail participation.Live Events"There's a flip side.
Prop trading firms like Jane Street account for almost 50% of options trading volumes.
If they pull back which looks likely it could also impact retail activity, which makes up about 35%.
This could spell bad news for both exchanges and brokers," Kamath wrote on X.He added that the coming days would be crucial in gauging the fallout.
"The next few days will be telling.
F&O volumes might show just how dependent we are on these prop giants.
I'll share more data as and when anything interesting comes up," Kamath wrote on the social media platform.In the wake of the Sebi order, shares of Nuvama Wealth Management, capital market service provider Central Depository Services and stock exchange BSE slumped following the regulator's action.Nuvama Wealth shares fell the most, dropping 10.6% as the firm is Jane Street's domestic trading partner, which got caught up in the regulatory crossfire, triggering investor anxiety despite no direct accusations against the firm.
Along with Nuvama Wealth, shares of BSE fell 6.4%, while CDSL plunged 2%.In a strongly worded 105-page interim order, Sebi accused Jane Street and its associated entities of using complex high-frequency trading strategies to manipulate the Nifty 50 and Bank Nifty Indices.
The regulator also said these tactics misled retail options traders and gave Jane Street an edge in India's booming derivatives market.The interim order alleged that Jane Street earned unlawful profits of 4,843 crore ($570 million).Jane Street runs its operations in India through four group entities-two based locally and two located in Hong Kong and Singapore, respectively.
The firm established its first Indian unit in December 2020, while the other two Asian entities participate in Indian markets as registered foreign investors.