Concerns Over Market Manipulation in Indian Derivatives: SEBI Investigates

Allegations of Derivatives Market Manipulation: SEBI Faces Fresh Scrutiny Amid Unusual Trading Patterns

Concerns From the Ground Up

In recent months, murmurs of unusual trading activity in India’s equity derivatives market have grown louder—and more pointed. A number of prominent fund managers, both domestic and global, have flagged suspected manipulative behavior in the options segment. Their concern is not just about returns—it’s about the very structure and integrity of a market that has seen exponential growth, but which some now fear may be vulnerable to distortion.

The warnings, formally conveyed to the Securities and Exchange Board of India (SEBI), are grounded in observed trading patterns that, to seasoned professionals, simply do not add up. And while the regulator has launched a review, many in the industry believe the issue deserves far deeper investigation.

The SEBI Investigation: Work in Progress

SEBI, to its credit, has not ignored the complaints. Officials confirmed that the regulator is actively reviewing trading data and market behaviour, with a focus on identifying any structural or coordinated attempts to manipulate pricing in the derivatives segment. While no conclusive findings have yet been made public, the inquiry remains open—and closely watched.

Several fund managers have also held formal discussions with SEBI, sharing datasets and instances where option pricing appeared detached from established market logic.

A Case Study: Same Price, Different Contexts

Perhaps the most illustrative example of the anomalies comes from February 2025. On Budget Day (Feb 1), with just three days left to expiry and volatility running high, a 77,500 call option (Feb 4 expiry) traded at ₹300. Fast forward to Feb 4, with markets calm and hours away from expiry, a 78,300 ATM call was priced at ₹319.45.

By conventional models, this pricing makes little sense. Option premiums are, by nature, a function of time value and volatility—both of which were materially higher on Feb 1. Yet the prices barely budged across what should have been vastly different market environments.

When Options Lead, Not Follow

Another recurring red flag cited by institutional traders is the inverted causality in price action—options prices frequently moving ahead of underlying index moves, rather than responding to them.

Moreover, on several expiry days, implied volatility (IV) has spiked from 12% to 36% without a clear economic trigger—an anomaly that statistically should occur only once every 300 days, not with the regularity now being observed.

The concern? That some participants are accumulating large, leveraged options positions and then pushing the underlying index in a direction that inflates those positions’ value—an old but effective playbook for market manipulation.

Expiry Days: Calm or Chaos, But Never Neutral

Traders and fund managers have started categorising expiries into two distinct types:

• Violent Expiry Days: Characterised by erratic price swings, dramatic spikes in IV, and large intra-day movements in both options and underlying indices—often without external catalysts.

• Quiet Expiry Days: Marked by a sudden, eerie calm, especially in short-dated options. Even when broader markets show signs of volatility, these contracts remain unusually stable.

This stark dichotomy has led many to speculate about the presence of a dominant player—or “whale”—with disproportionate influence over intraday market structure. Some believe the effect is especially pronounced in weekly expiry contracts, which now dominate the market since their rollout in January 2022.

By mid-2023, pricing distortions that initially appeared in illiquid sectoral indices had spread to flagship contracts, such as Nifty and Bank Nifty.

Structural Vulnerabilities: Derivatives Swallowing the Market

At the heart of the issue lies a structural imbalance. India’s derivatives volumes have grown so large—eclipsing the cash market by a wide margin—that large positions in options can effectively move the underlying stock or index. In other words, the tail now wags the dog.

Efforts by SEBI to reduce speculation—such as the October 2024 circular limiting excessive derivative activity—were intended to restore balance. But some believe the outcome has been mixed. Reduced liquidity, they argue, may have actually increased the market’s susceptibility to manipulation, as fewer genuine counter-positions exist to absorb distortive trades.

Industry Voices: Performance Secondary, Integrity First

While some fund managers have managed to adapt—by anticipating and even trading alongside suspected manipulators—others have posted losses in periods that defy pricing logic.

But the overriding concern is not portfolio performance.

“It’s about confidence,” said one fund manager overseeing global EM allocations. “If the signals we rely on are unreliable—if volatility can be manufactured—then we have to rethink our exposure to Indian derivatives altogether.”

Several institutional desks have reportedly scaled back short-term options exposure and are shifting activity to more regulated, transparent structures like index futures or foreign markets.

Looking Ahead: A Market at an Inflection Point

SEBI’s next steps will be critical. Many in the industry are calling for deeper forensic analysis—not just of price movements, but of trading relationships, order placement patterns, and clearing member affiliations. The goal is to establish whether a small group of entities may be acting in concert, or whether market structure itself is enabling distortive strategies.

The integrity of India’s derivatives market—once praised globally for its efficiency and innovation—now faces a reputational test. Institutional confidence, especially from global investors, hinges on regulators’ ability to detect and deter manipulation while preserving liquidity and accessibility.