India’s market watchdog Sebi has intensified scrutiny of foreign high-frequency trading (HFT) firms after taking action against US-based Jane Street. The move signals a broader regulatory shift in India’s financial ecosystem, targeting global players who dominate a large portion of derivatives trading.
According to sources, Sebi is now examining trading activities of multiple foreign HFT and quantitative trading firms operating in the Indian stock market.
The regulator has reportedly asked the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to analyse trade data to identify patterns resembling those used by Jane Street.
What triggered Sebi’s focus on HFT firms?
Earlier this year, Sebi took action against Jane Street for allegedly using manipulative and non-transparent algorithmic strategies in India’s capital markets. The case raised red flags about the potential misuse of technology by proprietary firms with deep pockets and high-speed trading capabilities.
A source close to the development said:
“Sebi is looking into the transactions of other large foreign high-frequency and quant firms to ascertain if they engaged in similar practices. The review is ongoing, and it is difficult to say when or what action will be taken.”
The source also indicated that some of these firms could be operating via offshore entities, making enforcement more complex.
Why Sebi is concerned
High-frequency traders operate by executing large volumes of trades in milliseconds. While their presence boosts market liquidity, Sebi fears that opaque algorithms and potential latency arbitrage could lead to unfair market advantages.
India’s derivatives market is one of the largest globally. A substantial portion of daily volumes comes from algorithmic and high-frequency trading. In such a scenario, any form of manipulative behaviour could lead to distortion of price discovery, increased volatility, and erosion of investor trust.
According to NSE data, algorithmic trades now account for over 50% of cash market volumes and over 80% in the derivatives segment.
Lack of transparency raises concerns
Emails sent to Sebi, NSE, and BSE seeking comments on the current investigation remained unanswered.
While Sebi’s action against Jane Street was seen as a warning shot, market experts believe the regulator is preparing for a long-term shift in how it oversees complex trading strategies. Several experts have urged the regulator to bring in real-time surveillance and strengthen audit trails of algorithmic trades.
Regulatory concerns are also focused on colocation, a setup where HFT firms place their servers close to the exchange servers to gain speed advantage. Though exchanges claim fair access, some observers argue that latency-based advantages persist.
Potential reforms on the horizon
The developments may result in a tighter framework for foreign trading firms. Sebi is said to be considering rules that will mandate greater disclosure of algorithmic models, improved surveillance systems, and possible restrictions on certain types of HFT strategies.
Analysts also believe that Sebi might push for mandatory audits of foreign trading algorithms and stricter Know Your Client (KYC) checks for entities operating through tax havens or shell structures.
Call to action for regulators and traders
This increased regulatory scrutiny comes at a time when global financial watchdogs, including the US SEC and UK FCA, are revisiting their policies on algorithmic and high-frequency trading. Sebi’s latest steps aim to align India’s capital markets with global standards of fairness and transparency.
For investors and brokers, this is a wake-up call to reassess risk frameworks and compliance systems.