Chinese regulators are scrutinizing foreign firms' participation in the country's $859 billion exchange-traded fund market, with particular focus on Jane Street Group following the firm's regulatory challenges in India. The examination seeks to understand trading patterns in China's fast-growing ETF industry amid concerns about market manipulation practices.

Regulatory Scrutiny and Market Position

Jane Street was the biggest foreign ETF market maker through China's qualified foreign investor program as of June 30, despite accounting for less than 2% of overall ETF trading in mainland China. The regulatory queries have prompted precautionary measures from major brokers operating in the Chinese market.

Impact on Trading Operations

China's regulatory queries led UBS Group AG to pause some trades from Jane Street via the qualified foreign investor program late last year as a precautionary measure. UBS accounted for a relatively small portion of Jane Street's China ETF transactions before the pause, and the move did not impact Jane Street's other strategies for China.

Jane Street stated that the firm "is conducting business as usual with its counterparties globally, including UBS, across asset classes." There is no indication that trading relationships among Jane Street's peers have been impacted by Beijing's queries, and no firm is accused of any wrongdoing.

India Market Manipulation Case

The Chinese scrutiny follows Jane Street's ongoing legal battle in India, where the firm faces market manipulation allegations. In July, India's securities regulator accused Jane Street of using its financial and technological capabilities to influence price action in futures and cash markets to favor its index option positions.

Jane Street has denied the allegations and is awaiting the next step in its India case. The Securities and Exchange Board of India lifted the temporary trading ban after the company complied with an order to put $570 million in escrow.

Market Sensitivity and Foreign Participation

The increased scrutiny underscores China's sensitivity to stock market performance, particularly given the market's dominance by retail investors and susceptibility to volatility. Beijing has historically used various regulatory measures and state-owned investment fund interventions to manage market stability.

Some of the world's largest firms have entered China's ETF market in recent years as these investment vehicles gain popularity. However, official real-time activity data remains limited, with Bloomberg Intelligence calculations based on semi-annual financial reports that ETFs must file disclosing their top 10 holders.

Strategic Adjustments

Following its reduced exposure in India, Jane Street has increased trading activities in other markets, including US Treasuries, interest rates, and ETFs across Asia. The firm's revenue generation from China operations remains undisclosed, though its relatively small market share suggests limited direct impact from the current regulatory examination.

Jane Street Group has hired Washington lobbyists for the first time in 20 years while facing an expanding investigation from Indian regulators over alleged market manipulation practices. The privately-held trading firm has engaged in proactive meetings with lawmakers as India's Securities and Exchange Board (SEBI) prepares to conclude its multi-year investigation into the company's trading strategies.

Expanded Regulatory Investigation

SEBI is investigating additional trading strategies used by Jane Street, including alleged manipulation of India's biggest index to profit from options strategies known as "short straddles." The investigation focuses on whether Jane Street's significant market impact, at times comprising 40% of trading volume in underlying securities, allowed it to manipulate closing prices in its favor.

The additional strategy under scrutiny involves the simultaneous selling of index call and put options at the same strike price on settlement days. While short straddle strategies are commonly used by traders, regulators are examining whether Jane Street's outsized market influence enabled price manipulation. SEBI could order the firm to disgorge additional profits on top of the $570.00 million already placed in escrow.

Washington Lobbying Strategy

Jane Street paid law firm Hogan Lovells $160,000.00 from July to September to engage government agencies on matters "related to the regulation of financial investments." This marked the firm's first lobbying disclosure in two decades, excluding one tax-related filing earlier in the year.

The firm's representatives have met with the Treasury Department, Commerce Department, and Executive Office of the President to discuss Jane Street's operations in India. Co-founder Rob Granieri has separately engaged with lawmakers in what sources describe as introductory conversations aimed at explaining the firm's market-making operations and how it generates trading revenues exceeding many of the world's largest investment banks.

Record Financial Performance

Despite regulatory challenges in India, Jane Street has achieved unprecedented financial results. The company's trading revenue is projected to reach $30.00 billion by the end of 2025, representing a 50% increase over the previous record year. This projection excludes revenue from India, previously home to the firm's most profitable trading strategy.

After scaling back its India exposure, Jane Street has expanded trading in other markets, including US Treasuries, interest rates, and Asian ETFs. The firm generated nearly $7.00 billion in trading revenue during the third quarter, ranking third among US banks behind JPMorgan Chase and Goldman Sachs Group.

Legal Proceedings and Defense

Jane Street has consistently denied wrongdoing and filed an appeal against SEBI's interim order, scheduled for hearing on January 19. The company argues it has been denied access to crucial documents needed to contest the market manipulation accusations. Jane Street maintains that its trading activities constituted legitimate arbitrage trades that helped close price gaps between cash, futures, and options markets.

SEBI's July interim order detailed allegations that Jane Street used its "immense trading, financial and technological prowess" to influence price action. On one January day, the firm allegedly purchased $512.00 million worth of index components and futures while simultaneously taking bearish positions worth seven times its cash and futures position. The firm told staff that the Indian regulator made "many erroneous or unsupported assertions" about its trading activity, noting that SEBI's surveillance department had previously reviewed the same trades and found no manipulation evidence in most cases.