NSE sends notices to certain Hong Kong based FPIs for ALGO Trading

NSE Investigates Hong Kong Hedge Funds for Derivatives Trades

Sources familiar with the matter revealed that the National Stock Exchange (NSE) has issued notices to three Hong Kong-based hedge funds regarding their activities in the Indian derivatives market. The funds under scrutiny include Sebes Befut Ltd, identified as a category II foreign portfolio investor (FPI), while the identities of the other two funds remain undisclosed.

Stock exchanges, acting as primary regulators in the Indian market, are mandated to oversee transactions involving brokers, mutual funds, and FPIs. Regarding Sebes Befut, the NSE detected rapid reversals of trading positions at prices significantly divergent from previous trade prices. In the case of the other two funds, suspicions arose over synchronized trades, where orders were allegedly pre-placed for execution at specific times.

Despite attempts to reach out for comment, the NSE and Sebes Befut have yet to respond to inquiries. However, sources indicate that all three funds have defended themselves by claiming that the trades were algorithm-driven, devoid of human intervention.

This development is noteworthy as foreign funds increasingly engage in substantial activities within the Indian derivatives market, often acting as counterparts to domestic retail traders. Notably, the legal dispute between UK-based Jane Street and Millennium Management sheds light on how FPIs leverage trading models to profit from the Indian derivatives market, with Jane Street allegedly making significant gains through its strategies.

Hong Kong serves as a jurisdiction offering greater flexibility to hedge funds compared to some other countries. However, global regulators have intensified scrutiny on Hong Kong-based funds, with legal proceedings initiated in the US, UK, and Singapore against some entities.