High-Frequency Trading Manipulation in India's Financial Markets

In the world of India's financial markets, an event has recently unfolded, sending ripples through exchanges, brokerages, and retail investors alike. The Securities and Exchange Board of India (SEBI), India's market regulator, has taken decisive action against this major U.S.-based quantitative trading firm, accusing it of manipulating key stock indices through sophisticated high-frequency trading (HFT) strategies. This unprecedented crackdown not only highlights the complexities of modern financial markets but also raises critical questions about regulatory oversight, market fairness, and the impact on retail investors. In this exclusive TheBrink feature, we delve into the intricate details of this case.

The Mechanics of Market Manipulation

The Strategy: Pump-and-Dump and Mirror Trading

At the heart of the controversy lies a dual-pronged trading strategy that allegedly distorted India's key indices, particularly the BANKNIFTY and NIFTY 50. The firm is accused of employing a "pump-and-dump" tactic, where it aggressively purchased large volumes of constituent stocks and futures in the morning to artificially inflate index prices. For instance, on a single day in January 2024, the firm bought BANKNIFTY futures worth ₹4,370 crore, creating upward pressure on the index. Later in the trading session, it reversed course, selling massive positions, ₹5,372 crore in futures, to drive the index lower, profiting from short options positions. This strategy reportedly yielded ₹735 crore in profits on that day alone.

Additionally, SEBI identified a high-frequency technique known as "mirror trading." This involved placing simultaneous buy and sell orders in NIFTY and BANKNIFTY futures and options at identical prices, reversed within seconds. These trades, executed across the firm's entities, were not aimed at hedging or liquidity provision but rather at stabilizing or shifting prices without genuine market exposure. SEBI's interim order notes that such trades were particularly prevalent during expiry days, when derivative contracts settle, amplifying their impact on market volatility.

The Scale of Operations

Between January 2023 and March 2025, the firm amassed profits of approximately ₹36,500 crore ($4.3 billion) in India's derivatives market, with ₹43,289 crore from index options alone. SEBI deemed ₹4,843.57 crore ($567 million) of these gains as "unlawful," alleging they stemmed from manipulative practices. The investigation focused on 21 specific expiry days, 18 involving BANKNIFTY and three involving NIFTY, where clear evidence of manipulation was found. However, SEBI sources indicate that the probe is far from over, with plans to scrutinize additional expiry days, other indices, and trades across multiple exchanges.

SEBI's Investigation: A 15-Month Trail

Trigger and Scrutiny

The investigation began in April 2024, sparked by media reports of a U.S. legal dispute involving the firm's proprietary trading strategies in India. SEBI's initial review flagged "abnormally high or low volatility" on weekly index options expiry days, with the firm holding disproportionately large positions in futures and options (F&O). By December 2024, a dedicated SEBI team was formed to conduct a comprehensive probe. Despite caution letters issued by the National Stock Exchange (NSE) in February 2025, urging the firm to curb its high-risk trading patterns, the firm continued its activities, prompting SEBI's interim order on July 3, 2025.

Key Findings

SEBI's 105-page interim order outlines a meticulous analysis of trading data, revealing two distinct manipulative strategies. The first involved exploiting the asymmetry between options and cash market participants. On expiry days, while over 16 lakh unique entities traded BANKNIFTY options, only 4,675 participated in the cash market for key constituent stocks, allowing the firm to influence index levels with minimal opposition. The second strategy, "extended marking the close," involved aggressive trades during closing hours to manipulate settlement prices, further tilting the scales in the firm's favor.

SEBI's investigation also uncovered that the firm's four entities, two India-based and two Singapore-based, worked in concert, executing coordinated trades across cash, futures, and options markets. This cross-segment approach maximized profits while minimizing risk, but it also misled retail traders who relied on index levels for their options trades.

Implications for India's Financial Markets

Market Impact

The immediate aftermath of SEBI's order saw significant declines in capital market stocks. BSE shares dropped 6.4%, Angel One fell 6%, and Nuvama Wealth Management plummeted 10.6%, reflecting concerns over reduced trading volumes. Proprietary trading firms, the one in question account for nearly 50% of options trading volumes in India, and their potential withdrawal could dampen retail activity, which constitutes 35% of the market.

Regulatory and Global Ramifications

The ban and asset freeze have sparked a broader debate about regulatory oversight in India's rapidly growing derivatives market, one of the world's busiest. The Alternative Investment Management Association (AIMA) emphasized the need for predictable regulation and due process to maintain India's attractiveness to global investors.

This legal battle could set a precedent for how foreign entities navigate India's regulatory landscape.

A lesser-known implication is the potential strain on India-U.S. financial relations. The firm's significant presence in India's markets since December 2020 highlights the growing integration of global capital. However, SEBI's action may prompt other foreign firms to reassess their strategies, fearing similar scrutiny. This could lead to a temporary reduction in foreign HFT activity, impacting liquidity but also providing an opportunity for domestic players to fill the gap.

Retail Investor Vulnerability

SEBI's findings underscore a critical vulnerability: retail traders' heavy reliance on index options, where they face steep odds against sophisticated HFT firms. The regulator's push for longer-term trading and hedging strategies aims to protect small investors, but it also highlights the need for greater financial literacy and risk awareness. The firm's alleged manipulation has magnified the losses for retail traders, who often lack the resources to compete with algorithmic trading giants.

The Role of Technology

Advanced algorithms in enabling such large-scale manipulation. The firm's use of proprietary HFT algorithms allowed it to execute thousands of trades per second, exploiting microsecond-level price discrepancies. While SEBI's order holds algorithm users accountable for their outputs, it raises questions about the adequacy of current surveillance systems to monitor such technologies in real-time.

Nuvama Wealth's Connection

The sharp selloff in Nuvama Wealth Management shares stems from its role as the firm's domestic trading partner. This relationship likely facilitated the firm's access to India's markets, raising questions about the due diligence of local intermediaries. Future investigations may scrutinize such partnerships, potentially reshaping how foreign entities collaborate with Indian firms.

Expiry Day Dynamics

SEBI's focus on 21 expiry days reveals a pattern of heightened manipulation during these high-stakes sessions.

How expiry day volatility disproportionately affects retail traders, who often hold options positions until the last moment. The firm's ability to influence closing prices through "extended marking the close" tactics underscores a structural flaw in expiry day mechanics, which SEBI may address through new regulations.

TheBrink about the Future

Prolonged Investigation

SEBI's ongoing probe is likely to expand, potentially covering additional indices and exchanges. Given the firm's reported profits of ₹43,289 crore from index options alone, the total scope of unlawful gains could be significantly higher. The investigation, expected to continue until at least the end of 2025, may uncover further instances of manipulation, leading to stricter penalties or broader market reforms.

Regulatory Reforms

SEBI is likely to introduce measures to curb HFT-driven manipulation, such as enhanced real-time surveillance, stricter position limits on expiry days, or mandatory disclosures for algorithmic trading strategies. These reforms could reduce market volatility but may also increase compliance costs for trading firms, potentially deterring smaller players.

Market Adaptation

The absence of a major player like the firm could create a temporary liquidity vacuum, but domestic HFT firms and institutional investors may step in to capitalize on the opportunity. Retail trading activity may decline in the short term due to reduced volatility, but SEBI's push for longer-term strategies could foster a more stable market environment over time.

Global Precedent

The case may set a global precedent for regulating HFT in emerging markets. Other regulators, particularly in Asia, may adopt similar measures to protect retail investors from algorithmic manipulation. This could prompt a reevaluation of HFT practices worldwide, balancing innovation with market integrity.

-Chetan Desai (chedesai@gmail.com)

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