Liquidity as Leverage: An Exploration of Jane Street's Options Arbitrage in India

Introduction

Jane Street Capital was founded on 31^st August 1999 and existed as a relatively small quantitative trading firm for most of its lifetime. However in recent years it has blown up to stand face to face with  the old Wall Street titans such as Morgan Stanely and Goldman Sachs, taking up over 10% of North American equity trading volume in 2024. 

The firm focuses their effort on exploiting strange trading patterns and arbitrage opportunities. Around the beginning of COVID they successfully managed to introduce and exploit a unique and substantial arbitrage opportunity in India which propelled them to the ‘high table’ of quantitative trading companies; this article aims to explore the growth from a respectable firm to the top of the financial food chain.

“‘Sinister scheme’: India ban threatens Jane Street’s money machine” – Krishn Kaushik, Robin Wigglesworth, Chris Kay, Financial Times, 2025

India's Unique Trading Market

The National Stock Exchange (NSE) of India is the world's 8^th largest exchange with a market cap of $3.5tn, though dwarfed in trading volume relative to the likes of the New York and NASDAQ exchanges with market caps of $25tn and $21.7tn respectively. What makes the NSE market truly unique is the boom it experienced in its options trading market in 2020 at the inception of the COVID pandemic. Although much smaller than other foreign markets, India has the biggest national options market in the world to the extent that it is larger than the rest of the globe combined. More than 80% of all worldwide options trading originates in India, largely from retail investors.

“‘Sinister scheme’: India ban threatens Jane Street’s money machine” – Krishn Kaushik, Robin Wigglesworth, Chris Kay, Financial Times, 2025

“‘Hedge funds make billions as India’s options market goes ballistic” – The Economist, 2024

What is Options Trading?

In contrast to traditional investing, options trading is a subset of derivative trading which takes the form of placing a ‘bet’ on the future value and direction (increase/decrease) of an asset within a particular time frame. This is done by placing a call or a put option, which gives the buyer the right, but not the obligation to, sell an asset at a specific price before a certain date. In simpler terms this means you place a bet that the stock value will increase or decrease, placing a call and put option respectively.

Options trading carries a far greater risk than traditional investing, however, as it offers exorbitantly high returns if the placed bet correctly predicts the value of the stock (referred to as the ‘strike’ price) within a set expiry (the time frame for the options trade). The risk is that all capital is lost if the direction, value or timing of the option is incorrect. 

An example follows to illustrate the incentive of options trading. If one was to buy a single share of a company for £200 and sell it after the value increased to £250 over a week the profit they make would be £50. However, if they instead put in a call option costing them £200, with a strike price of £220 over the same week and the value again increased to £250 their profit would be £6,000. If the value did not increase up to £220 within the week the initial £200 would be completely lost.

Herein lies the appeal of options trading. To many, it’s the equivalent of gambling using the financial markets and carries great risk to the initial invested capital. The regulators for the Indian NSE have found that 93% of all options traders lose money.

The Arbitrage

Jane Street opened their India office during 2020, and immediately saw a swift revenue increase in the billions.

The unique quirk of India's market that Jane Street exploited is the huge options market and consequent small actual trading market. As almost nobody is purchasing and selling actual stocks, the NSE is not a deep or liquid market. This afforded Jane Street the ability to use their purchasing power to move stock prices up and down. Furthermore, due to the inflated options, market underpriced futures are readily available. Hence, Jane Street’s traders realised the arbitrage opportunity.

“‘Khelo India | Mapping the boom in derivatives volumes and the rush towards F&O” – Moneycontrol News, 2023

By buying and selling Indian equities at a loss in high volume, Jane Street moved the stock price while simultaneously placing the opposite options trades. Knowing exactly the direction and timing of the market, Jane Street was able to successfully ‘predict’ options trades over and over by exploiting and profiting off the unique makeup of India's NSE and retail traders, making billions of dollars in the process and cementing itself as one of the top Wall Street firms.

This was an extraordinarily successful arbitrage strategy, which Jane Street naturally kept to themselves. It only came to light amidst the lawsuit between Jane Street and Millenium Capital Management, another quantitative trading company, over the confidential lucrative trading strategy. Being a smaller firm, MCM offered massive pay packages for Jane Street talent, poaching many of its high paid employees who, allegedly, brought the strategy with them.

The Fallout

The lawsuit between Jane Street and MCM has to be seemingly one of the dumbest, most ill advised, and expensive lawsuits in recent financial history. MCM began to implement the same trading strategy, resulting in Jane Street losing some market control and affecting its top line, resulting in a lawsuit for stealing trade secrets.

To prove this, the information about exactly how the strategy works had to be revealed publicly. As the lawsuit went on, the Indian government, market regulators, and the Securities and Exchange Board of India (SEBI) took a particular interest in how Jane Street managed to profit off the country's retail traders.

The regulatory bodies took issue with the strategy, claiming the exploitation and ‘farming’ of the county's traders. For reference, from its Indian office alone, Jane Street profited $4.3bn between January 2023 and March 2025. Shortly after the information was released in July of 2025, SEBI issued a trading ban and froze the assets of Jane Street, which was subsequently banned from operating in India.

As of November 2025 Jane Street has been allowed to resume trading and operate under close monitoring, subject to certain restrictions after depositing alleged unlawful gains to an escrow account (a temporary account held by a neutral third party). The proceedings over market manipulation are still ongoing, with Jane Street denying the allegations and supporting the stance that the strategy is a result of basic index arbitrage. The case presents an interesting grey area, as all aspects of the strategy are technically legal irrespective of how exploitative they are, and will set precedent for the future of trading in India.