China scrutinses foreign ETF trades following Jane Street India investigation

China is scrutinising how Jane Street Group and other foreign firms participate in its $859 billion exchange-traded fund market, seeking information on such activities carried out by brokers, according to people with knowledge of the matter.Chinese regulators are keen to understand trading patterns in the fast-growing industry, especially after a crackdown on Jane Street in India, said the people, asking not to be identified, discussing a private matter. Indian regulators last year accused Jane Street of misleading retail investors through alleged index manipulation — claims the New York-based firm has denied.
Jane Street was the biggest foreign ETF market maker through the country’s qualified foreign investor program as of June 30, followed by the Amsterdam-based Optiver and US firms Susquehanna International Group and Hudson River Trading, according to Bloomberg Intelligence. Jane Street accounts for less than 2% of overall ETF trading in mainland China, according to a person briefed on the matter.
China’s queries led UBS Group AG to pause some trades from Jane Street via the QFI program late last year, the people said. UBS accounted for a relatively small portion of Jane Street’s China ETF transactions before the pause, according to one person. Barclays, another top broker for foreign ETF market makers, declined to comment when asked about its trading relationship with Jane Street in China.Read Also: HCLTech Share Price: Analysts raise targets after Q3, but valuations cap upside

Jane Street said in an emailed statement that the firm “is conducting business as usual with its counterparties globally, including UBS, across asset classes.” Representatives for Susquehanna, Hudson River and UBS declined to comment. Representatives for the China Securities Regulatory Commission and Optiver didn’t respond to requests for comment.UBS’s move was a precautionary measure that didn’t impact Jane Street’s other strategies for China, the people said. No firm is accused of any wrongdoing. There’s no indication that trading relationships among Jane Street’s peers have been impacted by Beijing’s queries.

The increased scrutiny of foreign market makers underscores China’s sensitivity to the performance of its stock market, which is dominated by retail investors and is prone to swings. Beijing has long used a mix of regulations, pressure behind closed doors and occasional buying by state-owned investment funds to dampen volatility.

Some of the world’s largest firms have flocked to China’s market in recent years as ETFs become popular with investors. Yet few official numbers exist to show how active they are in real time. The Bloomberg Intelligence calculations are based on financial reports filed by the ETFs, which are required to disclose their top 10 holders on a semi-annual basis. The rankings don’t capture all volumes of foreign market makers.

India Case

Jane Street is fighting market manipulation allegations in India, which led to a temporary trading suspension last year. In July, India’s securities regulator accused Jane Street of using its “immense” financial and technological prowess to influence price action in the futures and cash markets in favour of its index option positions. Jane Street has denied those allegations.

The trading firm is now awaiting the next step in its India case. The Securities and Exchange Board of India lifted the temporary trading ban on the company after it complied with an order to put $570 million in escrow. The firm filed an appeal, which will be heard on Jan. 19.