A Lawsuit, a Secret Strategy, and a $1B Payday

In April 2024, Wall Street stopped as Jane Street sued Millennium Management over an alleged stolen trading strategy

One so lucrative it reportedly earned $1 billion in a single year. The battleground? India’s booming derivatives market.

Let’s unpack the hidden mechanics, and the lessons for traders, regulators, and investors worldwide.

Janestreet

India’s Options Boom

2016–2019: Retail traders discover “theta decay,” flooding index options with naked short bets.

2020: COVID lockdowns ignite a retail trading frenzy. Platforms like Zerodha see user growth explode by 300%.

2021–2023: Jane Street, Citadel, and Optiver quietly build out Mumbai desks. Profits surge as retail traders pile into BANKNIFTY and FINNIFTY options.

2024: SEBI (Indian SEC) cracks down, slashing lot sizes and killing volatility, but the whales had already feasted.

The Gamma Trap

Here’s the playbook:

Target Expiry Days: Retail traders sold out-of-the-money (OTM) options for pennies, assuming they’d expire worthless.

Trigger the Squeeze: At 1:20 PM, 30 minutes before close, Jane Street bought underlying stocks, spiking indexes just enough to smash retail stops.

Profit from Panic: A 50-point index move turned ₹2 options into ₹20 payouts. “They’d trap thousands of sellers in minutes,” a Mumbai quant told me.

Why it worked:

No Hedging: Retail traders relied on “theta gang” dogma, not dynamic delta hedging.

Slow Reaction Time: Mom-and-pop traders couldn’t adjust positions fast enough.

Concentrated Indices: BANKNIFTY had just 12 stocks—easy to manipulate with modest capital.

5 Reasons India Became a Quant’s Paradise

Retail Naivety
“Selling options is free money!” became a national mantra. Result? Plenty of mispriced gamma for pros.

Stone-Age Infrastructure
While U.S. firms battle over microsecond latency, India’s brokers still use Excel sheets for risk management.

Regulatory Gaps
SEBI’s rulebook was thinner than a Mumbai street vendor’s ledger. Example: Until 2023, there was no real-time surveillance of options block trades.

Herd Mentality on Steroids
When BANKNIFTY twitched, 500,000 retail traders panic-closed positions in unison. Predicting this was like “taking candy from a baby,” laughed one hedge fund manager.

Volatility Arbitrage
Indian markets swing 2x harder than the S&P 500. Combine that with unsophisticated players, and it’s “arbitrage Christmas every day.”

The Coming Crackdown (And Where the Alpha Went)

SEBI isn’t clueless, just slow. Recent moves:

Lot Size Cuts: Nifty options now require 5x more capital, crushing small sellers.
Index Suspensions: FINNIFTY options were halted, removing low-hanging fruit.
Expiry Time Shifts: Mimicking the NYSE’s 1980s MOC reforms, India moved closing auctions to 3:30 PM, reducing pre-close volatility spikes, too late for gamma games.

The result: Volatility dropped 40% in Q1 2024. Jane Street’s India profits? Halved.

Lessons from the Gold Rush

Alpha Dies Fast: Strategies that print $20M/day get arbitraged away, or regulated into oblivion.

Retail Always Loses: Theta isn’t a strategy; it’s a trap set by smarter players.

Watch the Expiry Calendar: As one quant put it: “Expiration days aren’t events, they’re hunting seasons.”

India’s market is maturing, but the next frontier is already emerging: Indonesia’s options volume just hit record highs.