New Delhi, July 28 -- Arbitrage or market manipulation? Jane Street believes it is an uber-efficient arbitrageur. It spotted pricing anomalies between index options and the index's stock constituents, and used sophisticated trading models to profit from the arbitrage.

The Securities and Exchange Board of India's (Sebi) order has some interesting findings. On 17 January 2024, the expiry day for Bank Nifty derivatives, the index opened 2% lower due to weak earnings of some of its constituents. However, options on the Bank Nifty traded at a level where the implied price was higher, resulting in an anomalous price spread.

JS did what textbooks tell us: buy stocks that make up the Bank Nifty while selling options on this index. The trade wor...