The Indian equity market is currently experiencing turbulence following a ban imposed on U.S. high-frequency trading firm Jane Street by the Securities and Exchange Board of India (SEBI). The ban has triggered a significant downturn in the derivatives market, specifically impacting the National Stock Exchange (NSE) index options premium turnover.
The NSE, the world's largest derivatives exchange in terms of the number of contracts traded, has witnessed a substantial decline of nearly 36% in index options premium turnover over the past couple of weeks. On Thursday, July 17, the NSE's options premium turnover was ₹39,625.77 crore. This decline is a key indicator of reduced capital deployment and risk appetite in the market.
SEBI's action against Jane Street, initiated on July 4, alleges that the firm manipulated stock indexes through its derivatives positions. The regulator has also frozen assets worth ₹4,840 crore, representing what it claims are unlawful gains. Jane Street has denied these charges.
The ban's impact has been felt across the market, with both the NSE and the Bombay Stock Exchange (BSE) experiencing significant losses. Shareholders of both exchanges have collectively lost approximately ₹1.4 lakh crore in market capitalization in the last month, attributable to the Jane Street scandal, ongoing regulatory scrutiny of the Futures and Options (F&O) segment, and the overall decline in derivatives turnover.
BSE's stock has entered bear market territory, declining by 22% from its peak on June 10, while NSE's stock has fallen by over 20% from its June 21 high. Market analysts are downgrading exchange stocks, with concerns arising about near-term volume headwinds due to the uncertainty caused by the ban on Jane Street, potential scrutiny of other market participants, and the risk of more regulations amid increasing retail investor losses.
The absence of Jane Street, a major liquidity provider, has created a void in the options market. Osho Krishan, a senior analyst at Angel One, noted that the decline in options premium turnover is directly linked to the abrupt reduction in Jane Street's activity. Jefferies Financial Group Inc. reported a 25% week-on-week drop in index options premium turnover across both BSE and NSE after the ban. This reduction in volatility and the curbs on Jane Street could potentially reduce BSE's earnings per share by 4% in the current fiscal year.
The situation has raised concerns about the future of the Indian stock exchange landscape. With the NSE preparing for a public listing, the focus is shifting towards exchanges that can offer differentiated products and address the issue of individual investors losing out to high-frequency traders.
