Context: SEBI action against JPMorgan unit and broker
The Securities and Exchange Board of India on August 19 banned two firms from the equity market for allegedly manipulating trades on a newly launched closing-price mechanism used to determine the final official price of a security at the end of each trading day. SEBI said the alleged violations by the firms, Copthall Mauritius Investment — an entity owned by JPMorgan Chase — and Mansi Share and Stock Broking, happened on August 13 when weekly derivatives contracts linked to the BSE Sensex index expired.
Breakingviews column on India’s derivatives crackdown
India's crackdown on its $6 trillion equity derivatives market — the world's biggest by volume — has claimed another Wall Street casualty. A year after targeting trading giant Jane Street, officials last week banned a unit of JPMorgan for allegedly manipulating prices. Higher entry barriers for retail traders may be next. All this suggests India's options frenzy will cool.
The Securities and Exchange Board of India last week moved swiftly against JPMorgan-owned Copthall Mauritius Investment and a Mumbai-based broker. While the combined fine for both, roughly $384,000, looks manageable, the order was issued just six days after the alleged violation. To compare, Jane Street's ban took over 17 months.
One reason may be new tools: a system for determining end-of-session stock prices through a 20-minute window, called the closing auction session, was introduced earlier this month to make pricing more transparent and reduce tracking errors for passive funds. Crucially, that has made it easier to monitor and identify market manipulation.
That will come in handy as regulators rein in risk in the market. Proprietary traders and foreign portfolio investors together made gross profits worth 584 billion rupees ($6.11 billion) from Indian equity derivatives during the 12 months to the end of March, with almost all of it accruing to algorithm-powered entities. The problem is, this has come at the expense of less sophisticated retail traders, who racked up 722 billion rupees in losses over the same period.
Regulators have already rolled out cooling measures, including increased lot sizes, transaction taxes and restrictions on lending to proprietary traders. Those, plus the recent bans and fines, appear to have had a small but noticeable effect: turnover in equity derivatives fell 9% during the March-end financial year. Yet that still implies those volumes are 394 times that of stock trading, up from just 15 times a decade ago.
More curbs look imminent. Mandating higher collateral from retail traders makes sense, as does eliminating more frequently traded weekly contracts to minimise speculation. Eventually stock exchanges and brokers may be asked to take on a bigger role, like in the U.S. where the latter closely screen customers for net worth and investment knowledge. That would be unpalatable for the likes of IPO-bound National Stock Exchange of India, which gets 60% of its revenue from options, and the $13 billion Billionbrains Garage Ventures, owner of stockbroker Groww, which draws over half of its top line from equity derivatives. India's options gold rush may slow sooner than expected.
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