Recent unusual activity in the Indian stock market has drawn attention to potential manipulation within the options trading of a key Indian stock index. These mysterious option trades involve unusual patterns, particularly concerning the Nifty 50 and Sensex indices, leading to scrutiny from market observers and regulators alike.
One notable characteristic is the selling of options at unusually low prices, especially on expiry days. This behavior deviates from typical market dynamics, where option prices should reflect the underlying asset's price and market volatility. Seasoned traders have observed these anomalies, noting that implied volatility (IV) often moves unpredictably before actual price changes occur. Typically, significant market movements should cause a rise in IV due to increased uncertainty, but the opposite has been observed.
Market experts suggest that a "humongous" player, possibly a foreign hedge fund with substantial financial resources, may be orchestrating these manipulations. To significantly influence the Nifty index, an exposure of approximately ₹5,000 crores is needed. The alleged manipulator might achieve this by purchasing large volumes of call options and then maneuvering the market to ensure these options expire "in the money". This involves either directly buying stocks or using Nifty futures to create artificial market movements.
The Securities and Exchange Board of India (SEBI) is actively investigating these concerns. Recently, SEBI took action against Jane Street and its affiliates, alleging market manipulation in India's index derivatives market. The regulator impounded ₹4,843.5 crore and froze related bank accounts. SEBI Chair Tuhin Kanta Pandey has warned that market manipulation will not be tolerated and that the regulator is closely monitoring other entities.
These manipulative practices have far-reaching implications. Increased volatility and compromised market integrity can deter global investors seeking stable returns. If the situation is not addressed, it could lead to a decline in foreign investment, negatively impacting the Indian economy. For retail traders, adapting to market manipulation is crucial. Understanding the mechanics of these manipulations and adjusting trading strategies accordingly is essential for navigating the complexities of the options market.
The alleged activity appears to have begun around late August to early September 2023. During this period, some firms experienced a drastic decline in their India index options trading. One firm reported that their trading went from Sharpe 10 to 0 overnight and completely shut down in early 2025, marking the first time in 17 years that they abandoned a previously profitable market.
While option trading offers opportunities for hedging risks, speculation, and income generation, these recent events highlight the importance of regulatory oversight and market integrity. As the market evolves, staying informed and vigilant is key to navigating the complexities and ensuring a fair trading environment for all participants.
