What Is Jane Street? And Why Are Regulators Watching It?

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2:32They are the middleman in many ways. Catherine Doherty is a finance reporter for Bloomberg. Even though they are such a powerful player in finance, you wouldn't really know that you are interacting with them in the market. If you've ever bought stock on Robinhood or made an investment with your retirement fund, chances are Jane Street, or a firm like it, helped process that trade behind the scenes. Every day, they facilitate billions of transactions between buyers and sellers across markets. Jane Street is connected to all of the pipes, all of the plumbing of the market. And that means Jane Street makes a lot of money from trades.

3:13In 2024, its revenue was$20.5 billion, almost double what it brought in in 2023. But that growth has also come with new scrutiny. Earlier this month, India's main financial regulator accused the firm of market manipulation. India's market regulator is barring Jane Street from access to its local securities market. It may actually be the biggest fine if it materializes ever, you know, for such kind of market manipulation, alleged market manipulation. Jane Street has called the regulator's conclusions fundamentally mistaken and has said it will assess its legal options. But Catherine says the rest of the industry is watching to see whether this investigation sets off a reckoning that could change the way firms like Jane Street operate around the world.

4:00and just how fast they might grow.

4:05I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, we take a look at one of Wall Street's most secretive firms, how Jane Street's trading got it in hot water, and what that could mean for regulation in a corner of the industry that not many people pay attention to.

4:26Jane Street has a reputation as a firm with highly compensated, high-performing talent. The people at Jane Street are often described as mathematical. A lot of them play poker. They have puzzles in their offices. They're problem solvers in the most advanced way. And those puzzle-playing problem solvers spend their days helping institutions and other investors make trades. Essentially, they're matching a buyer and a seller. You think that when you place an order, it's as if you go to the grocery store and you're buying something. Well, in the markets, there needs to be someone that actually helps make that match happen.

5:10Jane Street is that firm. They're the middlemen for all sorts of transactions. If you buy stock in a company through a trading app or if you ask a broker to invest your money, Jane Street might be the firm behind the curtain, helping move that money around. Or you might be interacting with one of its competitors. And you don't know if it was Jane Street or if it was Citadel Securities or Susquehanna. There are so many of these market-making firms. And frankly, until the meme stock craze, retail traders didn't seem to care, or at least there wasn't as much discussion. Jane Street is a private company and not a bank.

5:50While it has to abide by market rules, it isn't subject to the same degree of regulation that big banks such as J.P. Morgan and Goldman Sachs have faced since the 2008 financial crisis. Those other financial institutions are under pressure to avoid risk-taking. And that gives Jane Street an edge. They can invest in their technology in the way that banks can't, because banks have to be a little bit more conservative with their own money. And the secret sauce is that they're able to code in the special language as well. And what that means is it is hard for other firms to copy exactly what Jane Street is doing.

6:35and they're able to take really big bets in the market. They're not in the game to necessarily invest in a company because they think that the company's earnings are going to increase over time or they're not looking to invest in even a sector because they believe in that sector. Their primary goal is to just be greasing the pipes of the market. They're not just using elbow grease. They're using powerful technology to guide their trades. If they can anticipate how markets are moving from one second to the next, they can offer the right prices and profit. So they've developed algorithms. They're using data and they're digesting that data to make inferences.

7:23They're guessing where the market's going to be moving. So if they, for example, see a share, maybe it's a share of Apple, and there's a buyer in the market that is looking to buy at a certain price, and there's a seller in the market, their algorithm is telling them to match at a certain time at a certain price, and it is in milliseconds. So this is very, very fast. And they're doing this with so many shares that the way that they make money is they're taking a tiny profit, the difference between where the share is sold and where the share is bought. And they're pocketing that. And it might be pennies.

8:04You might think, oh, this company that makes$20 billion in a year. How do they do that? It adds up over time. And because they're using their algorithms, their technology, their people, over time, they make billions of dollars. So it's a volume game and it's a speed game. Yes. A volume and speed game known as high-frequency trading. Still, there's a lot about the firm we don't know. And that sense of secrecy is deeply embedded in the company's culture. Its offices even hung a poster by the famous World War II slogan, Loose Lips Sink Ships. You don't see a lot of Jane Street executives in the public eye.

8:48They're not ever really on TV or even in really niche financial conferences. If you go on LinkedIn, at one time profiles were discouraged. And now if you do see a profile, there's often not a title attached to a person's name. And that is reflective of how this firm operates in terms of its culture. In the times that it has been brought into the public eye, it's probably something they would not want. One of those moments came with the collapse of FTX, the multi-billion dollar crypto company that had been founded by a former Jane Street employee. Sam Begman-Fried. When FTX collapsed, there was a lot of discussion about the risk-taking that Sam's firm took and some comparisons to Jane Street.

9:43But Jane Street hasn't been the target of any major regulatory investigations itself. Until now. Earlier this month, India's regulator, the Securities and Exchange Board, or SEBI, started investigating the firm for market manipulation. Why did regulators start circling? Do we know what made them want to investigate Jane Street in India? So it all stems back to a lawsuit that the firm had with former employees that went to the hedge fund Millennium. And they were suing these former employees for, we didn't know it at the time, but it ended up being identified as an options trading strategy. They identified what they didn't want to lose as proprietary information.

10:31Through this case, the number, the profit that they were making in options specifically and in India came out. It was such a large number that the regulators in India said, hold on a second. We have to look into this. We get into what those regulators found and what it could mean for the way firms like Jane Street operate around the world after the break.

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13:19In the past few years, Jane Street and other market-making firms saw an opportunity to expand their presence in Indian markets. Over the past five years, India's options market has boomed, along with the number of retail traders. That growth has also led to more volatility and higher potential for profit. And for Jane Street, that paid off. The firm made more than$4 billion in India in just over two years. Meanwhile, regulators in India said 9 out of 10 individual traders who bet on futures and options lost a significant amount of money doing so. And that's part of what got regulators looking at how these firms were operating.

14:01Bloomberg's Catherine Doherty walked me through what happened. You have the options market and you have the equity market. They're directly correlated. The equities market is where you buy or sell stocks. The options market is where you buy the option to buy or sell stocks at a certain price at a future date. The key is betting on which direction the stock price might go, something that's influenced by activity in the equities market. The regulator in India, the Securities and Exchange Board, is accusing the firm of manipulating the market, using its money to place such large bets on one market that it moves the other market in a way that the firm knows they're going to profit from it.

14:48The firm has said that this is the term arbitrage. Arbitrage is just when you spot a dislocation or you can see that the market is inefficient in a way that you can profit from that. And you can essentially what the firm would argue is we were actually making the marketplace better. We were making it more efficient. So, yes, it might have moved, but it was moving in some ways closer to where it should. Basically, the regulator is accusing Jane Street of playing both sides of these markets and alleging that the firm was putting so much money on one market that it was impacting the other. The regulator ordered the seizure of about$570 million in profits from the firm, which it claims were unlawful gains.

15:33It also temporarily banned Jane Street from trading in the Indian securities market while it conducts its investigation. I mean, the Indian options market is pretty unique. What could this order mean for Jane Streets or other similar market-making firms, operations elsewhere around the world? First and foremost, there's nothing stopping a regulator from looking into a firm that they regulate. That's their job. So anytime a firm is in the news like Jane Street, there's increased scrutiny. Does it mean that other regulators from other countries where Jane Street operates might be wanting to turn over more stones?

16:13Yes. I talked to someone that said regulators don't want to be asleep at the wheel. So even if it's just precautionary, it's very likely that a regulator might take a second look at what they have access to. And if they don't have access or they have more questions, they might ask Jane Street to answer those questions just so they have some reassurance that there's nothing that they see as potentially nefarious or manipulative. And it goes the same for a peer of Jane's. I've talked to other market participants that would be competitors to Jane, other market makers. And one firm said that right after this order came out, they were digging through the order and they also had an internal meeting amongst themselves to say, hey, are we doing anything that might not be exactly the same as what Jane Street was doing?

17:07But let's look through our trading strategies to make sure there's nothing that comes across as questionable or that could be brought up by regulators as nefarious. And this person was quick to say, like, we didn't come to that conclusion. But you have to be proactive. Jane Street has set aside nearly$570 million in an escrow account to comply with SEBI's order while it investigates. A person familiar with the matter told Bloomberg that the firm doesn't plan to immediately return to India's options market. For now, market watchers will wait to see what the regulator's investigation turns up and whether Jane Street decides to file an appeal.

17:49What could this scrutiny of Jane Street mean for the entire high-frequency trading, market-making industry? It's a really important question, and it depends who you ask. People in the industry, even when I asked that question just about Jane Street's future, I had a quick answer from someone that said they're so large and they're so good at what they do that this won't impact the amount of trading that they're still able to facilitate and that they're just going to keep doing what they do because they have such an important role across global markets.

18:32This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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