No cutting corners on compliance rules

Sebi's recent restrictions on the US proprietary trading firm Jane Street for alleged manipulation will raise the compliance bar without affecting market depth. India is the world's largest derivatives market, particularly the segment where Jane Street is accused of entering into manipulative trades, with robust retail participation. This is typically the environment in which proprietary trading desks operate, and a low tolerance for deviant behaviour will not impact genuine interest. Sebi has been trying to curtail excessive retail speculation in the segment by increasing trading lot sizes and reducing the frequency of contract expiry. Regulatory sensitivity to abnormal trading activity will naturally be high in this scenario, and it extends to market participants operating abroad.

The curbs follow a prior notice to Jane Street about its trading activity and an assurance by the firm of compliance with concerns raised by NSE and Sebi. The abnormal activity was flagged some time ago, and due process has been followed. Jane Street has legal recourse against the findings, amid indications that Sebi could widen its investigation. The signal to other global trading firms expanding in India is that the market is well-governed and growing at an astonishing pace. Regulators are interested in making the market more efficient without excessive accumulation of speculative froth.

The size of the Indian securities market improves its resistance to manipulation, although the regulatory stance is broadly conservative. This is guided by the recent swing in household savings behaviour in favour of equities. The young age profile of new retail investors warrants some regulatory concerns over pockets of speculative buildup, and it also raises the oversight threshold for manipulative behaviour. Technology-assisted trading poses special risks that need focused oversight. Institutional capacity is being built to oversee securities trading in the age of AI. Indian equities offer foreign investors relative stability in a world that is tearing up the globalisation playbook. The regulatory environment contributes in no small measure to this stability.