India’s recent action against high-frequency trading giant Jane Street has brought into sharp focus the gray area between arbitrage and market manipulation in financial markets. The distinction hinges on intent, with experts emphasizing that creating an arbitrage opportunity by influencing prices in a less liquid market is what crosses the line into illegality.
Arbitrage refers to buying and selling assets in different markets to exploit price differences, while market manipulation involves influencing prices or misleading appearances of supply and demand for unfair advantage. However, when does arbitrage edge into illegality?
According to finance professor Pradeep Yadav, the key is mens rea, or “guilty mind,” which refers to the intention behind wrongdoing in trades. If you’re creating an arbitrage opportunity by manipulating prices in a less liquid market, that’s manipulation.
India’s Securities and Exchange Board (SEBI) temporarily blocked Jane Street Group from participating in India’s securities markets, accusing the firm of large-scale market manipulation. The regulator argued that Jane Street’s tactics to manipulate India’s Nifty 50 index were part of a deliberate strategy to profit from options bets.
However, experts disagree on whether Jane Street’s actions were within the legal realm. V Raghunathan, a former SEBI primary market board member, believes that the firm’s strategies were legal and beneficial to market efficiency.
“The lines between manipulation and arbitration also depend on the regulator’s teeth,” said Paul Rowady, director of research at Alphacution Research. “In the U.S., similar allegations would hinge on whether a firm engaged in spoofing or deception.”
The Jane Street case highlights the vulnerabilities of India’s market structure, including liquidity imbalances between spot and options markets. Regulators may now seek to tighten these loopholes, which sophisticated players can legally exploit but also pose risks for investors.
As Howard Fischer, a former U.S. SEC litigator, noted, “Manipulation is giving him a July 4th present of firecrackers and propane tanks.” The distinction lies in intent: arbitrage exploits inefficiencies; manipulation tries to manufacture them.
Source: https://www.cnbc.com/2025/07/18/jane-street-sebi-arbitrage-become-market-manipulation-mens-re-derivative-india-markets.html