The titans of Wall Street

0:06Pushkin. A whole bunch of massive trading companies have sprung up in the past few years, but rather than having huge rooms full of shouty old school traders on phones blaring at each other like in the good old days, they have computers and super smart coders. We've been writing all about these new titans of Wall Street in the FT recently, and you really must check out that excellent series. But today on the show, we're asking, do we welcome our new robot overlords? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, and I'm joined down the line from Oslo by yet another Norwegian titan, although you'd never know it from the name, Robin Wigglesworth.

0:55Robin, how are you doing? I'm doing pretty well, though. It's cold here in Norway now. Oh, really? How cold? Too cold and too dark. I don't want to talk about it. It's depressing. so these these titans these like super nerds who are kind of controlling the markets now this has been a passion project of yours for a while right yeah i think i first pitched a series like this 10 years ago now uh then you know you really saw it in the stock market they were really huge in fact they had completely obliterated the banks in that area but now they're kind of they're spreading their wings they're growing bigger they're more ambitious and they're making just obscene amounts of money?

1:33So, you know, back when I was a cub reporter, I spent some time being sort of toured around trading floors in the city and spent a little bit of time there. And the traders would write down on a little yellow piece of paper, the time, the price and the counterparty of the thing that had been traded, put the little yellow piece of paper to one side, and then someone would scoop up the piece of paper and reconcile all the trades at the end of the day. And pretty obviously, that was quite ripe for technological evolution, right? So you went from the point where you no longer have to call up five banks, you just get a machine to automatically ask five banks and then pick out the best price for you.

2:13And that's kind of how this all evolved, right? But the point is that 20 years ago, the banks were at the center of this. So how did they lose their grip? How did they let this go to a bunch of companies that normal people have never heard of? It's technology, right? I mean, we've seen it in many other areas that are fundamentally like people are the incumbents. They're big, they're strong. They think nobody's going to take their lunch money. And then somebody comes who's smarter, nimbler usually uses technology to do something better faster more efficiently and that's basically what it was the banks for a long time thought was like their personal playground like the bond market there was no way algorithms would ever work there and lo and behold we are actually seeing now that you know most u.s government bonds trade by algorithm today not by people on the phone and I think banks were just really slow to wake up to this.

3:11Yeah, I mean, banks were slow, but there was a couple of, you know, big pieces of regulation over the years as well, especially since the financial crisis of 08, 09, that sucked risk away from the banks. Like basically like politicians and just the public at large got sick and tired of banks being this nexus of risk that could just spread across financial systems. And it was time to spread that more evenly in a more heavily regulated way. So one of the things that's happened as a result of that is this flourishing of what we call the shadow banking system. Right. And you have, you know, lots of different parts of the financial system, like private equity companies and pension funds that are like not banks, but that are really important areas where risk can kind of coagulate.

3:59And on trading, it pushed a lot of trading, a lot of risk away, again, away from banks and into these other places. You know, why is that? It's around, you know, people talk about warehousing of risk. What does that mean? Well, essentially, the banks, one of the ways they were able to compete for quite a long time after trading became electronic was that they were just massive warehouses of stocks, bonds, currencies, whatever. Smaller trading firms couldn't do that. So if you're a Goldman Sachs or JP Morgan, you'd have essentially, imagine it's a big Costco or a Tesco or a big shop. Everything you want to buy, you can just get right there.

4:38You just walk into JP Morgan and say, I fancy a bit of IBM bonds or give me$20 million worth of Tesla shares. And they'd have it there or be able to get it really quickly. But eventually what we found out that those warehouses were risky. They stored all sorts of crap there before 2008, and it kind of blew up the shop. So we had to bail them out. After 2008, yes, all these regulations basically meant that banks were not able to warehouse as much as they used to. The financial securities, they used to carry on their own balance sheets for buying and selling, sometimes, frankly, for their own profit, not even for clients.

5:15They were basically like big, sprawling hedge funds. That was basically ended. So technology had already caught up. The trading firms had already established themselves in places like the stock market. But after 2008, all the regulation that came afterwards, essentially, it changed the game in every market to a greater or lesser extent. Yeah. So who are these firms that are now kind of controlling how all these instruments change hands? The big ones, the really big ones are firms like Citadel Securities, Jane Street, Susquehanna and Jump Trading. Many of them were started by former traders that some of them actually worked in the trading picks back in the day and they were able to adapt.

6:04They saw the way technology was going to change things. So they jumped on that trend before they got swamped by it, essentially. And now these are the biggest trading firms in the world. I mean, a firm like SysTel Securities just, I mean, it trades just a mind-boggling number of securities, not just a day, but per second. Yeah. At speeds that, frankly, would astound physicists just 10, 20 years ago. So I was refreshing my memory of the piece that we ran about these titans of Wall Street just earlier. Sysdale Securities trades something like$455 billion worth of stuff every day. It counts for something like a quarter of all US stock trading.

6:45How can it be that the person in the street has never heard of Sysdale Securities, yet it is so powerful? Sysdale Securities has become a bit of like a bet noire for certain sort of online corners or the internet. Very online people, that is true. I think it's because, you know, frankly, like most people before 08 didn't really know Goldman Sachs either. And finance doesn't really interest people that much always. And quite often, this is the stuff that happens in the background. Like, people heard about the New York Stock Exchange. But if you buy a stock on the New York Stock Exchange, chances are very good that it's actually Citadel Securities that's delivering it to you.

7:27You don't really know that. It's the same way that when you order something on Amazon, you don't really know which courier is bringing it to you. You don't really care. But that's essentially what Citadel Securities and Susquehanna is. They are courier companies that deliver financial securities left, right and center around the world and basically take a spread. Like they pocket the difference between the price it costs to buy it and to sell it. And they do this a bajillion times throughout the day. And over time, that adds up to like serious moolah. Now, one of the ways that Jane Street, former employer, as it so much enjoys being reminded of, one, Sam Bankman-Fried, but one of the ways in which it really kind of got a leg up not so long ago was, first of all, it really latched onto the ETFs thing, which I know is like another hobby horse of yours.

8:17And secondly, it really gets crypto. I mean, how has that all worked? They are kind of agnostic about what they trade. Some of these trading firms literally trade betting odds like they make markets in betting markets they're into gambling essentially and some of them trade stocks some trade bonds and they all have different strengths and flavors and the cultures are sometimes very distinctive and in different ways and james street kind of it really it really really loves puzzles and it kind of thought that figuring out how to make markets in etfs was a bit of a puzzle and they just kind of cracked it first and did it better than everybody else.

8:55And over time, that kind of expertise compounds. And as ETFs have grown into this sort of$10 trillion industry, Jane Street is kind of dominant in making markets in ETFs. And that's kind of its main piggy bank. Speaking of being a puzzle, they don't have a CEO, right? They have this weird sort of flat structure, right? Like these firms, all in their own very special ways, are all quite weird, no? Yeah, I mean, way it is in the eyes of the beholder. But yes, they are definitely not. They don't look like anything you'd normally expect from corporate America. I mean, Jane Street will probably make more money than Blackstone does this year.

9:38And it looks nothing like that. As far as I know, it doesn't have a CFO or anything like that. It just has basically 40 people that own the company together, the equity owners. And they kind of run it like a partnership. and there are certain people that whose voice maybe counts more but it seems to be genuinely quite egalitarian and then you have something like citadel securities where in theory it's run very separately from citadel the hedge fund i mean they're two different companies that just happen to be owned by ken griffin and ken griffin doesn't run citadel securities but like he's the man he is louis the 14th he's the sun king of the citadel empire right yeah so there is one guy at the top and everybody knows who it is yeah and some of these other films it's it's kind of less clear and they they kind of they they wrote their origin stories a little bit kind of weirder and funkier and quite often start by a bunch of friends uh like there were poker buddies that started sasquehanna for example are they all men or am i imagining things no this is not an area of finance that is blessed with a lot of gender diversity no there are quite a lot of women working at them but if you look at the senior management and we don't even know who the senior people all of them are at jane street for example but if you go to like sitel securities it's not enormously balanced.

11:04Anyway, the people that do work there earn a metric ton of money. So like at Jane Street, the average pay is about$900 ,000 a year for employees. That's more than, like a lot more, like three times more almost than the average pay at Goldman Sachs. Like, you know, if you know how to do this, if you are a smart enough coder, and if you can kind of survive in this kind of environment, then you are made. Yeah. Jane Street in particular is pretty crazy. I think it's almost performative high pay on the lower side of things. Their image is they want the smartest of the smartest. They want the smartest finance people.

11:46They don't give a crap about people coming out of Wharton. They want the top decile or percentile computer science degrees, mathematicians, physicists from Cambridge, Oxford, Harvard, Yale, Stanford, and so on. They want the cream of the cream. And in that case, it almost pays to just pay interns city money. And one thing I discovered recently was that internships pay a greater annual salary at Jane Street than the chair of the Federal Reserve is making. Jay Powell makes around$203 ,000 a year, which is pretty good. but interns at Jane Street can expect$250 ,000 a year annualized. You know, a lot of this is US-based, but there is a kind of UK homegrown success story here too.

12:36Like, I remember like, you know, years ago there was this sort of, you know, thing on the periphery of currency trading that everyone was becoming aware of about 10, 15 years ago, maybe a little more called XTX. And they had these big ambitions. They were like, you know, we're going to start making prices in currencies and the banks are going to know our name. Now, hoo boy, XTX is making literally billions in profits. It's run by this really kind of enigmatic guy called Alex Gurko. He's only in his early 40s. He's described as one of the mega geeks in this space, what can we learn from the XTX experience?

13:18And again, you know, you talk about like companies in this space that kind of fly below the radar, but XTX is kind of pretty performatively secretive in all this too. Yeah. I mean, it is definitely one of the more fascinating firms. Americans dominate this space, but there's always been a big trading culture in the UK and the Netherlands as well. There are actually quite a few big and medium sized trading firms in the Netherlands are also very successful. But XCX is kind of the real story there. And it is fascinating. I think it's a good example of, again, the banks thought that in currencies, which is my understanding, where XCX really sort of made its bread and butter for a long time, they thought, well, nobody's really going to compete with us there because we're big banks.

14:00We have operations around the world. We handle buy and sell currencies all day long for corporate clients and central banks and so on. Nobody's going to be able to muscle us out there. And lo and behold, xex seems to have done an unbelievable job and then use that as a kind of branch out into all sorts of other areas yeah and in the space where like a lot of very geeky alpha nerd vibes you know xex is definitely up there in the top of the of the alpha nerds one of the things that really kind of shines through from all the reporting that we've done on this and again like if you're listening do check out this series it's it's really good fun and really interesting but one One of the things that shines through is that a lot of the kind of really big hitters in this space are super media shy.

14:46They absolutely love to be in the shadows, under the radar, that they're not interested in public exposure, with the possible exception of Ken Griffin from the Citadel Empire. Personally, I find that a little bit weird and just makes me think, if anything were to go wrong in this space, because they are now like a pretty important part of the financial system, how forthcoming would they be? What kind of relationship do they have with regulators? You know, do you think there's a bit of this kind of secrecy that's possibly unhelpful here? Well, yes and no. I'm always a little bit torn on this because obviously as a journalist, I want everybody to talk to me all the time whenever I want it and all the information they can give me when I need it.

15:30But like, frankly, look, if I was like a multi-billionaire trading mogul, I probably wouldn't talk to journalists all the time either. I mean, some people love the spotlight. And these firms, from the nature of who founded them and who they are today, that kind of chest-thumping, macho stuff that you sometimes see on Wall Street, that isn't their culture. They don't want to be seen to be beating Goldman Sachs and Morgan Stanley. They're quite happy if they do it, but they don't necessarily want everybody to kind of gawp at how much money they're making. They just want to make it, essentially. There's a bit of pride, obviously.

16:06They're humans as well. But I actually understand that kind of what we sometimes see as really annoying secrecy. I think they see as a bit of helpful modesty. There was one pretty notable exception, at least for a period, in this whole kind of desperately seeking secrecy trend. And that was Alex Gurko from XDX. For a period, he was what I would call a good old-fashioned shitposter on Twitter when he was still called Twitter. I mean he was on there all the time he was picking fights he was you know bragging as well but he was being really smart engaging I actually learned a lot from it and as much as I can see why he left I thought you know it was actually quite valuable to have somebody high quite a high profile in that industry being very public about stuff and frankly you know crapping a little bit on rivals and we're journalists we love people crapping on their rivals yeah we love that sort of thing our job is to get people to do that.

17:02Yeah. Yeah. He does still unleash a little bit of shit posting on LinkedIn, which is like kind of professional shit posting. But yeah, not on the same scale as his Twitter days. So yes, they are slightly reluctant to talk to you and me, for example. But the fact is that like behind the scenes, although people have never heard of them, they are fundamentally pulling down trading costs for everybody in the round. They are effectively performing a socially useful purpose in a way. Do you think they are making markets better? I do. Not as much as maybe they think they are. I mean, there are sometimes with these trading firms, they pretend that what they're doing is kind of solving cancer.

17:43And they're just providing liquidity. And that's an important service. But broadly speaking, I do think it is problematic from a societal perspective that the pay is so egregious in some of these sectors that they suck up some of the smartest people on the planet working kind of narrowing spreads in ETFs rather than, you know, solving world hunger or whatever. Teleportation or whatever it'll be. Some sort of next gen science fiction will be better. yeah but yeah you know people don't always like to hear it or agree with me when i say this but there's never been a better time in the history of mankind to be an investor it has never been cheaper to buy or sell a stock or a bond or invest in etf or fund a lot of that are these firms they've used technology to essentially reduce how much rent the finance industry extracted from our savings.

18:40Like every time we bought and sold a bond 10, 20, 30, 50 years ago, banks used to stand in the middle and make an obscene amount of money. They extracted a rent from the system. Yeah, constantly. And the trading firms do that now. They also extract rent, but they extract a lot less from the system than the traditional finance industry did 20, 30 years ago and that is in a very kind of diffuse way a genuine boon to the world well again you know not to labor the point but listeners do check out this series they are a seriously curious bunch of characters but we're going to be back in a sec with long short

19:28now it's time for long short that part of the show where we go long a thing we love and short a thing we hate. Robin, what you got? Well, obviously this is slightly gratuitous, but I'll plug our pub quiz. Like Alphaville, the bit of the FT that I run, we run a pub quiz in New York and London and we have one coming up in November in New York on November 12th and I love it. It is genuinely a ton of fun, though I have to admit, I'm very glad I'm not competing because the questions are stupidly difficult. Fiendish. But I do love it. I get to pretend I'm so smart I can manage the question. Maybe that's why I secretly love it.

20:06Yeah, yeah. Robin Wigglesworth in shameless self-promotion shock. I'm long honesty. So you know how you get like notes from banks every day, sort of general kind of this is what happens in the market, this is what's going on in the markets, and these are the kind of things to watch out for today. And they always try and put like really complicated titles on these things and possibly make a pun and this and that. there was a research note out from Rabobank today titled, Trying to Explain Yesterday. And I think that's the perfect title for daily sell-side research. It's a massive yes from me. I think everyone should emulate it.

20:44Robin, it's been a pleasure. Listeners, we will be back in your ears on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

21:32We'll be right back.