Wild Nifty Swings on Expiry Day Ignite Fears of HFT Cartel Manipulation

Two sudden intraday trend reversals in the Nifty 50 index within a month have raised concerns about potential collusion among high-frequency trading firms. Allegations have emerged that these firms are leveraging advanced technologies to manipulate the index for financial gain. According to derivatives traders interviewed by Moneycontrol, the alleged manipulation involves exploiting positions in options contracts linked to Nifty index movements. The firms are suspected of using sophisticated technology to influence the index and reap substantial profits from their options positions.

Notably, both instances of significant price fluctuations occurred on a Thursday, which coincides with the expiration date for weekly Nifty options.

On April 18th, with two hours remaining in the session, the Nifty was steady around 22,300 when it abruptly plummeted 200 points within 30 seconds. During the second incident on May 16th, the Nifty had been trading below or at parity with the previous close for most of the session. However, in the final 45 minutes, the index surged over 200 points. In the first episode, buyers of Nifty 22300 put options profited significantly, while in the second, buyers of Nifty 22300 call options reaped financial rewards.

Derivatives traders harbor two conspiracy theories. One theory posits that High-Frequency Trading (HFT) firms, also known as quant firms, use sophisticated algorithms to detect other traders' stop-loss orders. They then trigger these orders with massive buy or sell orders, initiating a self-perpetuating cycle of short covering that leads to a brief surge in options prices.

F&O traders humorously label these sharp price fluctuations 'injections' due to their resemblance to a syringe on price charts. A growing conspiracy theory alleges that certain high-frequency trading firms have colluded to manipulate key index components, causing temporary fluctuations in benchmark indices. Visit Fno360 page now! and check Predefined Strategies on 5paisa's FnO360: Step-by-Step Guide

Santosh Pasi, founder of Pasi Technologies, is a vocal critic of alleged HFT cartels. He cites the rapid spike in 22300 put option volume on April 8th as evidence. In a mere three seconds, the volume surged, and the price skyrocketed from ₹45 to ₹392 within two minutes.

“When the price of the option jumped from ₹46.30 to ₹68.90 and then to ₹117.80, all the bids came in at the same price, which is a bit suspicious, considering that the surge in volumes was massive” Pasi told Moneycontrol. “Hard to believe that all the buyers decided to bid at exactly the same price,” he said.

The other suspicious thing Pasi says he noted is that the prices of the 22300 put options, in the hours before the surge. “They were not decaying (losing value) at the rate it should have, considering there were just a few hours to expiry. It indicated there was demand for the option even when the market was sideways,” he said.

Claims of large traders manipulating spot prices to benefit their derivatives holdings are also voiced worldwide. A report from risk.net cites a study by Robeco, the Chinese University of Hong Kong, and Copenhagen Business School that examined derivatives data from February 2003 to December 2021. The study found a price spike in equity index futures in the hours leading up to the opening of the market on the third Friday of the month, known as 'witching day,' when numerous options expire.

The researchers evaluated various hypotheses for the emergence of the spike and determined that market manipulation was the sole plausible explanation, according to the report. This discrepancy suggests a wealth transfer of approximately $3.8 billion annually, potentially from parties holding long put and short call positions to those holding short put and long call positions.