Making a whopping $1 billion in a year! Two American quantitative giants are fighting in court to harvest Indian investors

Two quant giants on Wall Street are in court, unexpectedly providing an opportunity for outsiders to "peek" at how top hedge funds on Wall Street use options to "silently harvest leeks" in the Indian market.

In April of this year, global top quant firms Jane Street Group and Millennium Management went to court.

According to court documents, Jane Street Group accused two former employees who jumped to Millennium Management of stealing highly confidential and "highly valuable" trading strategies in the Indian market. Jane Street Group claimed that after the two traders jumped ship, the company's profits from using this strategy in a single month dropped by 50%, a decrease that can only be explained by its main competitors also using the same strategy.

After several rounds of courtroom battles, there has been a significant development in the case recently. On October 9th local time, a New York court ordered Jane Street Group to provide detailed explanations of how they calculated the compensation for profit losses by October 29th.

It is believed that as one of the most mysterious companies on Wall Street, the latest court order may force Jane Street Group to disclose more financial information, revealing to the outside world how the company's options team is "making big profits" in the Indian market.

"Counterintuitive" Profit Strategy

According to the lawsuit filed in April of this year, the core focus of this lawsuit is on two former Jane Street Capital employees, Douglas Schadewald and Daniel Spottiswood.

In the lawsuit, Jane Street Group stated that the two employees stole a "very valuable, unique, and proprietary" options trading strategy in the Indian market. "By identifying certain signals, strategies, and methods of analyzing and interpreting these signals, the company can reliably predict future market activities."

Jane Street Group stated that the initial research results and the scale of potential opportunities for this strategy were "counterintuitive", facing serious doubts within the company. However, further research revealed that if the trading concept could be further developed and applied, there would be huge potential opportunities.

During the period from 2018 to 2022, the initial research, experimentation, and development of this strategy trading brought "negligible" profits to Jane Street Capital. However, by 2023-2024, the strategy was "fully matured". The profitability of the strategy experienced explosive growth in the second half of 2023, "multiplying several times" compared to the first half of the year, and the overall strategy maintained this profit level in January and February of 2024 Although Jianjie Capital blackened the relevant profit data in the court documents. According to the information disclosed in the trial, the company made a profit of about $1 billion through this strategy in 2023.

With two traders leaving in February 2024, Jianjie Capital immediately noticed a sharp drop in the strategy's profits, with profits in March decreasing by 50%. Combining feedback from brokerages, the company believes that this situation can only be attributed to "the emergence of another competitor in the market using the same strategy."

Jianjie Capital requested the court to order Millennium Asset Management and the two traders to immediately stop using the strategy and compensate for the "strategy theft."

"Real Gold Miners Who Know How to Use a Pickaxe"

On the other hand, Millennium Asset Management argued that the two traders established an Indian options business for Jianjie Capital, but the trades were based on experience and professional knowledge, not "algorithms or automatic signals." And Jianjie Capital's profit and loss statement (still under seal) shows that after the two left, the company's Indian options trading in April reached a new high, and this momentum continued over the next two months.

Millennium Asset Management likened these two traders to "real gold miners who know how to use a pickaxe," stating that they used basic options trading strategies discussed in textbooks and articles long ago. They "absolutely deny" using any data obtained from their former employer.

There is no secret, they can speculate and take risks based on their experience in discovering differences between stocks and options, and they are willing to bet.

It is worth noting that one of the traders, Doug Schadewald, was already famous before joining Jianjie Capital. He was selected for Forbes' 30 Under 30 list and was a star trader at Barclays managing S&P 500 and VIX derivative portfolios. During the February 2018 US stock market volatility crisis, Schadewald and his trading team reportedly brought Barclays huge profits, and he joined Jianjie Capital later that year.

Wall Street "Mining" in India

Due to allegations of trade secrets, many court documents in this case have been sealed or deleted. Both parties in the lawsuit also made every effort to avoid disclosing any detailed information during the trial, and the fact that the strategy involves Indian options trading was inadvertently disclosed at a court hearing shortly after the case was filed.

Although the specific details of this options strategy have not been disclosed. According to Bloomberg, in the Indian options market, many Wall Street trading firms adopt a relatively simple strategy: shorting volatility.

This trade or similar trades revolve around betting that the Indian stock index will fluctuate within a relatively small range, with high-frequency traders selling options, and long funds and retail investors buying contracts for speculation or protection against sudden market downturns This bet is clearly profitable: Bloomberg data shows that in the past 500 trading days (as of May this year), the benchmark index of the Indian stock market has only risen by 2% or more on 9 trading days.

However, the potential risks of the strategy cannot be ignored: once the market experiences sudden large fluctuations, companies will face huge losses.

In the United States, such trading led to the "Volatility Doomsday" in February 2018, when a large number of investors using low volatility strategies (shorting volatility) suddenly faced a sharp increase after many years of calm: the VIX index soared from a relatively low level in early February (around 13-17) to 37.32 on February 5th, an increase of nearly 115%, one of the largest single-day increases in VIX history. Many VIX shorts were wiped out overnight.

In addition to shorting volatility, Wall Street high-frequency trading companies also profit from a series of options trading by profiting from the bid-ask spread in the Indian options market.

Wall Street Hedge Funds Harvesting in the Indian Market

According to the Futures Industry Association (FIA), India accounted for 84% of the global stock options contract trading volume last year, compared to only 15% a decade ago. The contract trading volume in 2023 reached 85 billion, doubling every year since 2020.

The turnover of the derivatives market is also rapidly soaring: since 2019, the turnover of the Indian derivatives market has increased by more than 40 times, reaching a record $6 trillion in February this year, exceeding India's economic size.

Multiple factors have contributed to the "prosperity" of the Indian derivatives market: the introduction of short-term contracts by exchanges in 2019 (weekly expiry instead of traditional month-end expiry) stimulated trading volume; various trading apps are popular, with various influencers flaunting luxury cars and luxury homes online to promote trading courses; retail investors dream of "betting to become Ambani" (India's richest person).

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In the Indian market with low value and high trading volume, Wall Street hedge funds and high-frequency trading companies are thriving. In addition to Simplex Capital, well-known hedge funds such as Optiver and Citadel Securities have also started operations in India A study by the Indian market regulator showed that foreign funds and proprietary trading desks made profits of INR 588.4 billion (USD 7 billion) from trading in Indian stock derivatives last year.

However, most of the profits made by Wall Street hedge funds came at the expense of losses incurred by Indian retail individual traders: they collectively lost INR 610 billion in stock futures and options trading in the fiscal year ending in March.

Research by the Securities and Exchange Board of India (SEBI) indicates that 9 out of 10 retail derivative traders end up losing money, with an average loss of around INR 200,000 per trader. Only 1% of traders make profits exceeding INR 100,000. Out of India's 10 million individual traders, over 75% earn less than INR 500,000 annually (RMB 42,000)