When does arbitrage become market manipulation? India crackdown brings issue into focus

It's worth noting that It's worth noting that The line between arbitrage and market manipulation has long been one of the grayest areas in financial

India's recent action against Jane Street has brought this murky boundary into sharp focus

In contrast, Brendan McDermid | ReutersThe line between arbitrage and market manipulation has long been one of the grayest areas in financial — and India's recent action against high-frequency trading giant Jane Street has brought this murky boundary into sharp focus

Jane Street disputed the findings from India's regulator, claiming that its actions were "basic index arbitrage trading (which is quite significant). " Arbitrage, at its core, is spotting a mismatch and trying to make a fit out of it — and it is perfectly legal, in today's market environment

What the re reveals is refers to the simultaneous buying and selling of an asset in different to exploit price differences

In contrast, Market manipulation, by contrast, is an illegal act designed to deceive or distort the free and fair operation of — typically by influencing prices or misleading appearances of supply and demand for unfair advantage

However, But when does arbitrage edge into illegality

Moreover, According to experts whom CNBC spoke to, the distinction hinges on intent and market impact

On the other hand, If you're the one pushing prices out of alignment — especially in less liquid — to fit on the other side, then that's manipulation

Pradeep Yadavfinance fessor at the University of OklahomaOn July 3, India's Securities and Exchange Board (SEBI) temporarily blocked Jane Street Group from participating in the country's securities, accusing the U

Furthermore, High-frequency trading firm of large-scale market manipulation

This includes tactics to manipulate India's Nifty 50 index in order to fit from sizable positions in index options

Moreover, It then placed significant wagers anticipating a decline in the index later in the session (which is quite significant)

SEBI added that Jane Street subsequently sold off those earlier purchases, pushing the index lower and increasing the fitability of its options positions

The regulator argued that this was part of a "deliberate strategy to manipulate indices" for the benefit of its larger and more lucrative options bets

SEBI said that the intensity and sheer scale of the intervention, coupled with the rapid unwinding of positions "without any plausible economic rationale," was deemed manipulative

What the data shows is key: mens reaAs the legal back-and-forth commences, industry veterans said the difference between legal arbitrage and illegal manipulation isn't always -cut

The intention behind wrongdoing in trades — known as mens rea, which means "guilty mind" in Latin — is key to determining manipulation, said Pradeep Yadav, finance fessor at the University of Oklahoma

He also pointed out that creating an arbitrage opportunity by influencing prices in a less liquid market is what crosses the line into illegality

Additionally, "Arbitrage turns into market manipulation when you are creating the arbitrage by manipulating the less liquid side of the market," he said, explaining that the options market in India is very liquid thanks to the large volume of buyers and sellers

However, the country's spot and futures are less so, which renders it easier to push prices by placing large enough trades

This kind of arbitrage, while aggressive, is legal and often beneficial to market efficiency

V RaghunathanFormer SEBI board memberSEBI's case hinges on two claims

In contrast, First, Jane Street intentionally distorted the less liquid cash market to fit on the more liquid options market

Moreover, Indeed, SEBI, in its interim order against Jane Street, cited an earlier judgement from a case, "Nobody intentionally trades for loss

An intentional trading for loss per se, is not a genuine dealing in securities. "Second, that its fits came entirely from options, with consistent losses in stocks and futures, suggesting the trades were designed to move prices rather than reflect genuine market views (noteworthy indeed), in today's financial world

Furthermore, "Mens rea is the demonstration of ill intent to manipulate the market… if prices are already misaligned, arbitraging them is fine

But if you're the one pushing prices out of alignment — especially in less liquid — to fit on the other side, then that's manipulation," said the fessor, who added that in a normal arbitrage situation, the size of one's stock trade and their options trade would be portional, considering recent developments

The imbalance, in his view, suggested it was not a case of classic arbitrage

On the other hand, A statue of Justitia holds a weighing bowl in front of a district court

Picture Alliance | Picture Alliance | Getty ImagesOther experts also emphasized that the fine line between market manipulation and arbitrage lies in intent

However, V Raghunathan, a former SEBI primary market board member, believes that Jane Street's actions were within the legal realm

Jane Street thrives in exploiting minute inefficiencies — for example, in ETF pricing versus underlying securities, or between exchanges, he said (remarkable data)

Furthermore, "This kind of arbitrage, while aggressive, is legal and often beneficial to market efficiency," he told CNBC

He cited the example of latency arbitrage — where firms fit from tiny time delays in market data across venues — as being criticized as parasitic or predatory, but hardly illegal, in this volatile climate

That said, Raghunathan noted that the broader concern is whether Jane Street's strategies came close to manipulation — in either intent or the letter of the law

Additionally, Get a weekly roundup of news from India in your inbox every Thursday, in today's financial world

Now other experts whom CNBC spoke to, Raghunathan established market manipulation as deliberately misleading or influencing prices and trading volumes to create artificial trends or unfair advantages, such as pump-and-dump schemes and wash trading, in today's market environment

Nevertheless, In contrast, "In short, unless Jane Street is found to be placing deceptive orders, spoofing, abusing confidential information, or manipulating prices to create artificial moves — none of which it has been accused of — it would not be considered to have engaged in market manipulation," he said, amid market uncertainty

Paul Rowady, director of re at Alphacution Re, said that the lines between manipulation and arbitration also depend on the regulator's teeth. , similar allegations would hinge on whether a firm engaged in spoofing or deception (this bears monitoring). "Trading aggressively is not a crime," he said

SEC litigator, Howard Fischer puts it, arbitrage is akin to "looking at one's neighbor's house, seeing he keeps stacks of newspapers and lit candles everywhere, and taking out fire insurance on his. ""Manipulation is giving him a July 4th present of firecrackers and pane tanks," Fischer, who is now a partner at law firm Moses & Singer, said, amid market uncertainty

The data indicates that distinction lies in intent: arbitrage exploits inefficiencies; manipulation tries to manufacture them, amid market uncertainty.