I recently read the reports of Jane Street being temporarily banned and fined by the Indian securities board. They made $4.3B in a little over two years and are being fined $570M, per Bloomberg.
Short: Jane Street has much more money than Indian firms and retail traders so they can push prices in low volume markets and win big based on their typical HFT methods. Their play was exposed while suing another American firm, Millennium Management, that hired their guys who brought the approach there too.
Competition can be healthy. Situations like this will make Indian investors smarter and more formidable in the long-term as their economy opens to more actors. The part that I have beef with is that someone else is on the opposite end of the trades and the equity is concentrating with some guys at Jane Street’s desks. Retail investors lost an equivalent of $21 billion from trading futures and options in the three years to March 2024, according to SEBI (Securities & Exchange Board of India). In the short-term, there is capital loss that will need to be recouped, rough regulation introduced, and compounding incentives to play zero-sum games by domestic and foreign traders. There’s an opportunity to sway the direction away from this extractive model to a more collaborative model that has financial upside.
Host countries that open up their economy will want investment activity but inherently expose themselves to being overwhelmed by mature trading exploits. Aligning foreign traders with the host country’s intents is more structurally sound than ad hoc laws/bans. Indian leadership will continue a patchwork of regulation if they stick to reactive regulation.
What does host-country-driven market collaboration look like?
India has strict requirements for firms to start trading but this creates an imbalance. Big foreign players like Jane Street can afford the legal and technical hurdles to get going in the Indian markets but the requirements are cost prohibitive for smaller foreign firms. The unequal playing field is exposing India’s retail investor-led markets to the dominance of global leaders in trading. In more mature markets, competition from local firms would provide a gradient of competitive cover between the two. India’s local firms aren’t quite ready to take on that role by themselves. The opportunity to right this ship could lie in businesses that tokenize assets, handle legal and tech setup on behalf of foreign small and medium-sized firms, and drive onboarding of retail investors from abroad.
The model of retail investors getting into the play could be similar to what we saw from the coordination of capital for Gamestop that was led by group chats, feeds, and easy trading apps. That kind of grassroots capital movement based somewhat on hype and long-term holdings is bound to grow beyond just memes. This is especially true now that mature asset classes like commodities, currencies, and futures contracts are being tokenized for 24/7 global trading that can’t be blocked. That’d be good for India in the short term since it’d inflate their low-volume markets’ values without simply extracting capital from investors there. Long-term, they’d have to find ways to validate the valuation like Gamestop is doing (that’s been chaotic lol) but seems like an easier task for a country with growing productivity and economic activity.
Tokenization and including more actors ultimately will stabilize and mature some emerging markets. This kind of work helps push forward countries and the individual lives within them.
from Montez ★