Why Is The Obvious Not So Obvious?

Discussion in 'Risk Management' started by nysestocks, Jan 25, 2009.

  1. themickey

    themickey

    The obvious is not obvious to many because the pysche is not in tune.
    There are numerous parts to ourselves which come into play, intelligence, ability, experience, psychology, desire, emotion, convenience, luck, determination, peers, sharing of ideas, being in the right place at the right time, ability to react..... the trading game is multifaceted.

    The markets are dynamic, twisting and turning, moving fast, slow, acceleration, deacceleration, unpredictable frequently.

    When the market moves in such a fashion that it's 'obvious' then often we're found wrong because from experience the obvious is not obvious.

    So for some people, trading is not hugely difficult because 'their stars line up' for a number of reasons, for others they haven't a chance as their psyche is out of tune to trading.
     
    #8681     Jun 21, 2025
  2. fairvalue

    fairvalue

    In my opinion a just recent play that was summarized how a really big player, Jane Street, did it just in India. Happy to keep the discussion going =)

    A bit lenghty, but still interesting:

    https://themorningcontext.com/yeste...ulation-is-so-simple-that-it-borders-on-crude

    In short:
    Summary
    The Securities and Exchange Board of India (SEBI) has issued an interim order barring four units of the American proprietary trading firm Jane Street from participating in Indian markets due to alleged market manipulation. SEBI seeks to impound Rs 4,843.58 crore in gains from 21 option expiry day trades that violated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Jane Street reportedly earned Rs 43,289.33 crore from index options between January 2023 and March 2025, with further investigations underway. The firm’s manipulation strategies are straightforward yet powerful, relying on large-scale leveraged positions in cash and options markets to manipulate index prices near expiry. Jane Street used a combination of intra-day index manipulation and marking the close strategies, leveraging its massive capital base and circumventing Indian regulatory restrictions via its Indian entity, JSI Investments. Although SEBI claims to prioritize investor protection, critics argue the regulator’s response is delayed and insufficient, highlighting the vulnerability of retail traders in India’s volatile futures and options markets.

    Highlights
    • SEBI bars Jane Street units from Indian markets over alleged manipulation.
    • Rs 4,843.58 crore gains from 21 suspicious trades targeted for impoundment.
    • Jane Street earned Rs 43,289.33 crore from index options over 27 months.
    • Manipulation involved simple but large-scale cash and options positions.
    • Jane Street leveraged over $140 billion in assets and used Indian entity to bypass rules.
    • ⚖️ SEBI’s action criticized as slow and inadequate by market participants.
    • Retail traders severely disadvantaged in India’s aggressive F&O market.
    Key Insights
    • Market Manipulation Through Scale and Leverage: Jane Street’s strategy capitalized on its enormous capital base, reportedly over $140 billion, allowing it to take positions large enough to influence market prices, especially on option expiry days. The ability to leverage capital up to 10x amplifies its market impact, enabling it to manipulate index levels and profit significantly from options trades. The scale of manipulation—making up to 25-35% of traded values on expiry days—demonstrates how sheer financial muscle can distort market fairness.

    • Dual Market Manipulation Strategy: The two-pronged approach—building opposing positions in cash and options markets and manipulating closing prices to benefit earlier option trades—is simple yet effective. This strategy exploits differences in how options and underlying securities settle, allowing Jane Street to lock in outsized profits while causing losses to smaller retail traders betting against them.

    • Circumvention of Regulatory Restrictions: Indian regulations prohibit foreign portfolio investors (FPIs) from netting off trades in cash markets intraday to prevent exactly this kind of manipulation. Jane Street circumvented these rules by channeling intra-day cash trades through its Indian subsidiary, JSI Investments, while its foreign entities took positions in options and futures. This structural workaround highlights regulatory loopholes exploited by sophisticated players.

    • Impact on Retail Traders: The manipulation disproportionately harms retail investors, who often seek quick profits from options but end up as “quick fodder” in a market dominated by powerful institutional players. This raises serious concerns about market fairness and investor protection, especially for less-experienced participants who lack the capital and information to compete.

    • Delayed Regulatory Action: SEBI’s interim order came long after widespread suspicion and even public reporting of Jane Street’s activities. Market insiders and retail traders have noted that evidence of manipulation was visible much earlier, but regulatory intervention was slow. This delay undermines trust in SEBI’s ability to protect investors and maintain market integrity.

    • Financial and Legal Context: Jane Street’s public legal disputes in the U.S., including a lawsuit against former employees for allegedly leaking proprietary strategies, coincided with increased scrutiny in India. The cross-border nature of these issues complicates enforcement and highlights the challenges regulators face in policing global trading firms operating in multiple jurisdictions.

    • Implications for Market Regulation: The case underscores the urgent need for regulatory reforms in India’s futures and options markets, including better monitoring of large trades, enhanced transparency, and stricter enforcement of rules to prevent manipulation. It also calls attention to the importance of protecting retail investors from predatory practices by institutional giants.
    In-depth Content
    The Securities and Exchange Board of India (SEBI) recently took a significant step against Jane Street, a major American proprietary trading firm, by barring four of its units from Indian markets due to allegations of market manipulation. This follows SEBI’s interim order that seeks to impound Rs 4,843.58 crore in gains from 21 suspicious trades executed on option expiry days. These trades are alleged to have violated SEBI’s regulations against fraudulent and unfair trade practices, specifically the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

    Jane Street’s total profits from index options trading between January 2023 and March 2025 reportedly amount to an astonishing Rs 43,289.33 crore, as highlighted in the SEBI order. While the order only covers a subset of 21 trades, further investigations may reveal additional violations, emphasizing the depth of the issue.

    The core of Jane Street’s manipulation lies in two main strategies. The first is intra-day index manipulation, which involves taking offsetting large-scale positions in the cash market and the options market. For example, Jane Street could take a long position in BANKNIFTY stocks or futures (betting on price increases), while simultaneously taking a larger short position in BANKNIFTY options (betting on price decreases), or vice versa. This dual position allows the firm to manipulate underlying stock prices temporarily to benefit its options positions.

    The second strategy is “marking the close,” where Jane Street manipulated market prices near the close of trading to make previously taken options positions profitable. This manipulation ensured that options sold to other traders expired worthless, allowing Jane Street to pocket the premium, while simultaneously boosting the value of options it had bought.

    Crucially, these strategies rely heavily on Jane Street’s massive financial firepower. With an asset base exceeding $140 billion, the firm can leverage capital up to tenfold, meaning a relatively small amount of invested capital can translate into enormous market exposure. For instance, Rs 1 of capital in options can control Rs 1,000 of underlying asset exposure when leverage is applied, demonstrating the outsized influence Jane Street wields on the market, especially on critical days like option expiry.

    One key regulatory challenge is that foreign portfolio investors (FPIs) are restricted from netting off trades in the cash market intraday, aimed at preventing such manipulative tactics. However, Jane Street circumvented these restrictions by using its Indian entity, JSI Investments Private Limited, to execute intraday cash trades, while its foreign entities handled futures and options trades. This structural workaround allowed Jane Street to manipulate prices effectively without breaching the letter of the law, though clearly violating its spirit.

    The consequences for retail traders are severe. Retail participants, often seeking quick gains in the futures and options (F&O) market, become easy prey for such manipulative practices. The market environment, described as “shark-infested,” is unforgiving, with retail players routinely losing to institutional giants like Jane Street who have the capital and sophistication to dominate price movements.

    Despite the gravity of these findings, SEBI’s response has been criticized as inadequate and tardy. Market insiders note that SEBI had access to substantial data and had been aware of suspicious trading patterns for months, yet only acted after external reports and legal actions abroad brought renewed attention to the issue. Critics argue that SEBI’s delayed action undermines its mandate to protect investors and maintain fair markets.

    The case also intersects with legal disputes in the United States, where Jane Street sued former employees for allegedly sharing proprietary trading strategies with competitors. These cross-border legal battles highlight the complexity of regulating global trading firms and the challenges regulators face coordinating enforcement across jurisdictions.

    In conclusion, the Jane Street episode is a stark reminder of the vulnerabilities in India’s F&O market, especially concerning large institutional players with unmatched capital and leverage. It calls for urgent reforms in market surveillance, tighter regulatory frameworks, and stronger protections for retail investors to ensure a fair and transparent trading environment.
    =====

     
    #8682     Jul 9, 2025
    trismes and themickey like this.
  3. fairvalue

    fairvalue

    This is a good primer that describes the relationship between cash, future and option instruments. It is also mentioned/linked in the article but still gives good background information to dive deep generally

    Cant link to a google drive, but will post it this way. I really hope I wont violate any rules and apologize in advance if this should be the case.

    The reason is, this link is mentioned in the article above.

    drive.google.com/file/d/1oYM9vbUQo-So1KIpfjGASL-lSHk9Mkut/view

    You can find the full (free) article and link on your Bloomberg Terminal ;)
     
    Last edited: Jul 10, 2025
    #8683     Jul 10, 2025
  4. hey pelt how you been its john, send me a pm. i totally agree
     
    #8684     Jul 16, 2025