Options Secret Strategy: Is this group reaping heavy profits at expense of retail players in India?

The two investment management firms are fighting it out in a New York court over a highly profitable options trading strategy. Jane Street has sued two of its former employees of stealing the secret sauce for making heavy profits using an options trading strategy. These two employees took up jobs at Millennium.

Options Secret Strategy

Did Jane Street use some secret options trading strategy? Bloomberg news has reported that the company allegedly made $1 billion from one of the world's fastest-growing derivatives markets - India! The capital market firm earlier this month claimed that its 2 former employees stole a confidential and "immensely valuable" trading strategy.

The strategy's focus on Indian options only became clear after lawyers for Millennium inadvertently identified the country in a hearing on Friday.

It is worth mentioning here that details of the strategy aren't known yet, but the case offers a rare glimpse into the profits being made by secretive high-speed trading firms in the Indian market that has soared over the past decade to become the world's largest by number of options ­contracts traded, the Bloomberg report added.

What's Behind Jane Street's Options Gains?

"Options market-making is a 'winner takes all' game," Anant Jatia, Mumbai-based founder and chief investment officer at Greenland Investment Management, told Bloomberg. "Market making in India has become very competitive where the fight is not even over microseconds, it's nanoseconds."

Other experts have also raised concerns over the gains coming off of small retail traders. In India, retail investors make up about 35 per cent of option trades, with the market regulator estimating that 90 per cent of active retail traders lose money on derivatives.

"As retail participation in derivatives has gained traction in the post-Covid world, these players could be misled by complex market-maker positioning," said Tejas Shah, head of derivatives trading at Equirus Securities Pvt.

"The driving force is the liquidity that is now available in India. It has become one of the only markets besides the US that can offer the kind of opportunity," stated Vaibhav Sanghavi, a hedge fund manager at ASK Investment Managers in Mumbai.

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