Leaked “Two-Phase” Index Manipulation
Algorithm
Main takeaway: Jane Street’s leaked algorithm for Indian index options trading exploited the
extreme imbalance between India’s massive derivatives market and its underlying market. By
artificially moving the spot index via concentrated stock and futures trades in the morning,
they drove down the price of large volumes of put options, then reversed their underlying
positions later in the day to crash the index and realize outsized profits on those puts.
1. Structure of the Algorithm
Phase I – Morning “Pump”
Aggressive Buying of Index Constituents
Using its India-based entity, JSI Investments, Jane Street would place large buy orders in
Bank Nifty (or Nifty 50) constituent stocks and futures during the opening minutes.
Objective:
Artificially elevate the cash index level, causing options premiums—especially for puts—to
fall.
Scale:
On January 17, 2024, they bought ₹4,370 crore of Bank Nifty stocks/futures, representing
up to 25% of volume in those names [1] .
Simultaneous Options Positioning
Mass Purchase of Puts
As the index rose, put options (which profit when the index falls) became cheaper. The firm
accumulated massive put exposures—often 15× their long stock position notional [2] .
Hedging Narrative:
Jane Street’s leaked memo framed this as “basic index arbitrage” to align option‐implied
and cash index prices [3] , but regulators saw no independent economic rationale for the
stock trades beyond manipulation.
2. Phase II – Afternoon “Dump”
Reversal of Cash Positions
In the late session—especially during the last 30 minutes and at expiry—the algorithm
liquidated its morning long stock/futures positions.
Immediate Effect:
The cash index plunged as they sold, triggering a spike in the value of the previously
accumulated puts.
Profit Realization:
Despite losses on the cash trades, the net gains on put options far outstripped those
losses. On the flagship trade day, Jane Street earned an estimated $85 million in a single
session [1] .
3. “Marking the Close” Variant
On weekly and monthly expiry days, they also engaged in “marking the close”—launching
concentrated orders in the final minutes to influence the weighted average closing price
used for options settlement [4] .
This follow-on strategy again capitalized on the derivatives’ dependency on the closing
index level.
4. Regulatory Exposure of the Leak
Jane Street’s own lawsuit against former employees inadvertently disclosed the strategy’s
mechanics, describing the two‐phase trades and profitability [5] [6] .
SEBI’s interim order labeled the approach Intra-day Index Manipulation and froze over
₹4,800 crore of alleged illicit gains [1] .
5. Why It Worked (and Why It’s Illegal)
Derivatives vs. Cash Depth: India’s daily options turnover (~$4 trillion) dwarfs its cash
market, allowing huge options positions with minimal impact on option prices but enabling
manipulation via cash trades.
Manipulative Intent: Each leg of the cash trades made net losses in isolation, serving solely
to distort the index for option profit—a clear breach of fair-market principles [7] .
Expiry-Day Leverage: Targeting settlement windows and closing auctions magnified the
effect on option payouts without genuine hedging intent.
Conclusion: The leaked algorithm was a two-stage pump-and-dump of index levels—
aggressive morning buys to cheapen puts, followed by afternoon sells to spike put payoffs—
disguised as “index arbitrage.” Regulators deem it manipulative because the cash trades lacked
independent economic rationale and were executed solely to profit from derivatives turmoil.
⁂
1. https://indianexpress.com/article/explained/explained-economics/jane-street-vs-sebi-recall-10128143/
2. https://www.capitalmind.in/insights/the-saga-of-the-jane-street-trading-scandal
3. https://www.moneycontrol.com/news/business/markets/why-jane-streets-basic-arbitrage-defence-doe
snt-wash-13272848.html
4. https://economictimes.com/markets/stocks/news/marking-the-close-explained-in-5-points-trick-inside-
jane-streets-alleged-manipulation-playbook/articleshow/122265283.cms
5. https://www.youtube.com/watch?v=VhqosmgfGR0
6. https://www.bloomberg.com/opinion/newsletters/2025-07-07/jane-street-s-indian-options-trade-was-t
oo-good
7. https://www.moneycontrol.com/news/business/markets/jane-street-leveraged-india-entity-to-breach-f
pi-rules-powering-trading-strategy-for-alleged-illicit-gains-13230218.html
