Speaker 1: Bloomberg, Audio Studios, podcasts, radio news. Jane Street is one
Speaker 1: of Wall Street's most profitable trading firms. You've maybe heard
Speaker 1: the name, but unless you're a Wall Street insider, you
Speaker 1: might not know who they are or what exactly they do.
Speaker 2: They are the middleman in many ways.
Speaker 1: Catherine Doherty is a finance reporter for Bloomberg.
Speaker 3: Even though they are such a powerful player in finance,
Speaker 3: you wouldn't really know that you are interacting with them
Speaker 3: in the market.
Speaker 1: If you've ever bought stock on robin Hood or made
Speaker 1: an investment with your retirement fund, chances are Jane Street
Speaker 1: or a firm like it helped process that trade behind
Speaker 1: the scenes. Every day, they facilitate billions of transactions between
Speaker 1: buyers and sellers across markets.
Speaker 3: Jane Street is connected to all of the pipes, all
Speaker 3: of the plumbing of the market.
Speaker 1: And that means Jane Street makes a lot of money
Speaker 1: from trades. In twenty twenty four, its revenue was twenty
Speaker 1: point five billion dollars, almost double what it brought in
Speaker 1: in twenty twenty three. But that growth has also come
Speaker 1: with new scrutiny. Earlier this month, India's main financial regulator
Speaker 1: accused the firm of market manipulation. India's market regulator is
Speaker 1: barring Jane Street from access to its local securities market.
Speaker 1: It may actually be the biggest fine if it matializes ever,
Speaker 1: you know, for such kind of market manipulation.
Speaker 2: Alleged market manipulation.
Speaker 1: Jane Street is called the regulator's conclusions fundamentally mistaken and
Speaker 1: has said it will assess its legal options. But Catherine
Speaker 1: says the rest of the industry is watching to see
Speaker 1: whether this investigation sets off a reckoning that could change
Speaker 1: the way firms like Jane Street operate around the world
Speaker 1: and just how fast they might grow. I'm Sarah Holder,
Speaker 1: and this is the big take from Bloomberg News Today.
Speaker 1: On the show, we take a look at one of
Speaker 1: Wall Street's most secretive firms, how Jane Street's trading got
Speaker 1: it in hot water, and what that could mean for
Speaker 1: regulation in a corner of the industry that not many
Speaker 1: people pay attention to. Jane Street has a reputation as
Speaker 1: a firm with highly compensated, high performing talent.
Speaker 2: The people at Jane.
Speaker 3: Street are often described as mathematical.
Speaker 2: A lot of them play.
Speaker 3: Poker, They have puzzles in their offices. They're problem solvers
Speaker 3: in the most advanced way.
Speaker 1: And those puzzle playing problem solvers spend their days helping
Speaker 1: institutions and other investors make trades.
Speaker 2: Essentially their matching a buyer and a seller. You think
Speaker 2: that when you place an.
Speaker 1: Order, it's as if you go to the grocery store.
Speaker 2: And you're buying something.
Speaker 3: Well, in the markets, there needs to be someone that
Speaker 3: actually helps make that match happen.
Speaker 2: Bayne Street is that firm.
Speaker 1: They're the middleman for all sorts of transactions. If you
Speaker 1: buy stock in a company through a trading app, or
Speaker 1: if you ask a broker to invest your money, Jane
Speaker 1: Street might be the firm behind the curtain helping move
Speaker 1: that money around. Or you might be interacting with one
Speaker 1: of its competitors.
Speaker 3: And you don't know if it was Jane Street or
Speaker 3: if it was Citadel Securities or Susquehanna. There's so many
Speaker 3: of these market making firms, and frankly, until the Meme
Speaker 3: stock craze, retail traders didn't seem to care, or at
Speaker 3: least there wasn't as much discussion.
Speaker 1: Jane Street is a private company and not a bank.
Speaker 1: While it has to abide by market rules, it isn't
Speaker 1: subject to the same degree of regulation that big banks
Speaker 1: such as JP Morgan and Goldman Sachs have faced since
Speaker 1: the two thousand and eight financial crisis. Those other financial
Speaker 1: institutions are under pressure to avoid risk taking, and that
Speaker 1: gives Jane Street an edge.
Speaker 3: They can invest in their technology in the way that
Speaker 3: banks can't because banks have to.
Speaker 2: Be a little bit more conservative with their own money.
Speaker 3: And the secret sauce is that they're able to code
Speaker 3: in the special language as well.
Speaker 2: And what that means is it.
Speaker 3: Is hard for other firms to copy exactly what Jane
Speaker 3: Street is doing, and they're able to take really big
Speaker 3: bets in the market. They're not in the game to
Speaker 3: necessarily invest in a company because they think that the
Speaker 3: company's earnings are going to increase over time, or they're
Speaker 3: not looking to invest in even a sector because they
Speaker 3: believe in that sector. Their primary goal is to just
Speaker 3: be greasing the pipes of the market.
Speaker 1: They're not just using elbow grease. They're using powerful technology
Speaker 1: to guide their traits. If they can anticipate how markets
Speaker 1: are moving from one second to the next, they can
Speaker 1: offer the right prices and profit.
Speaker 3: So they've developed algorithms. They're using data and they're digesting
Speaker 3: that data to make inferences. They're guessing where the market's.
Speaker 2: Going to be moving.
Speaker 3: So if they, for example, see a share, maybe.
Speaker 2: It's a share of Apple, and there's a buyer.
Speaker 3: In the market that is looking to buy at a
Speaker 3: certain price, and there's a seller in the market, their
Speaker 3: algorithm is telling them to match at a certain time
Speaker 3: at a certain price, and it is in milliseconds, So
Speaker 3: this is very very fast. And they're doing this with
Speaker 3: so many shares that the way that they make money
Speaker 3: is they're taking a tiny profit the difference between where
Speaker 3: the share is sold and where the share is bought,
Speaker 3: and they're pocketing that. And it might be pennies. You
Speaker 3: might think, oh, this company that makes twenty billion dollars
Speaker 3: in a year, how did they do that? It adds
Speaker 3: up over time, and because they're using their algorithms, their technology,
Speaker 3: their people, over time, they make billions of dollars.
Speaker 1: So it's a volume game and it's a speed game. Yes,
Speaker 1: a volume and speed game known as high frequency trading. Still,
Speaker 1: there's a lot about the firm we don't know, and
Speaker 1: that sense of secrecy is deeply embedded in the company's culture,
Speaker 1: its offices, even hung a poster, but the famous World
Speaker 1: War Two slogan loose lips sink ships.
Speaker 3: You don't see a lot of Jane Street executives in
Speaker 3: the public eye. They're not ever really on TV or
Speaker 3: even in really niche financial conferences if you go on LinkedIn.
Speaker 2: At one time.
Speaker 3: Profiles were discouraged, and now if you do see a profile,
Speaker 3: there's often not a title attached to a person's name,
Speaker 3: and that is reflective of how this firm operates in
Speaker 3: terms of its culture and the times that it has
Speaker 3: been brought into the public eye.
Speaker 2: It's probably something they would not want.
Speaker 1: One of those moments came with the collapse of FTX,
Speaker 1: the multi billion dollar crypto company that had been founded
Speaker 1: by a former Jane Street employee, Sam Bankman freed.
Speaker 3: When FTX collapsed, there was a lot of discussion about
Speaker 3: the risk taking that Sam's firm took and some comparisons
Speaker 3: to Jane Street.
Speaker 1: But Jane Street hasn't been the target of any major
Speaker 1: regulatory investigations itself until now. Earlier this month, India's regulator,
Speaker 1: the Securities in Exchange Board or SEBI, started investigating the
Speaker 1: firm for market manipulation. Why did regulators start circling. Do
Speaker 1: we know what made them want to investigate Jane Street
Speaker 1: in India.
Speaker 3: So it all stems back to a lawsuit the firm
Speaker 3: had with former employees that went to the hedge fund
Speaker 3: Millennium and they were suing these former employees for We
Speaker 3: didn't know it at the time, but it ended up
Speaker 3: being identified as an options trading strategy. They identified what
Speaker 3: they didn't want to lose as proprietary information. Through this case,
Speaker 3: the number the profit that they were making in options
Speaker 3: specifically and in India came out. It was such a
Speaker 3: large number that the regulators in India said, hold on
Speaker 3: a second.
Speaker 2: We have to look into this.
Speaker 1: We get into what those regulators found and what it
Speaker 1: could mean for the way firms like Jane Street operate
Speaker 1: around the world. After the break in the past few years,
Speaker 1: Street and other market making firms saw an opportunity to
Speaker 1: expand their presence in Indian markets. Over the past five years,
Speaker 1: India's options market has boomed along with the number of
Speaker 1: retail traders. That growth has also led to more volatility
Speaker 1: and a higher potential for profit, and for Jane Street,
Speaker 1: that paid off. The firm made more than four billion
Speaker 1: dollars in India in just over two years. Meanwhile, regulators
Speaker 1: in India said nine out of ten individual traders who
Speaker 1: bet on futures and options lost a significant amount of
Speaker 1: money doing so, and that's part of what got regulators
Speaker 1: looking at how these firms were operating. Bloomberg's Catherine Doherty
Speaker 1: walked me through what happened.
Speaker 3: You have the options market and you have the equity market.
Speaker 3: They're directly correlated.
Speaker 1: The equities market is where you buy or sell stocks.
Speaker 1: The options market is where you buy the option to
Speaker 1: buy or sell stocks at a certain price at a
Speaker 1: future date. The key is betting on which direction the
Speaker 1: stock price might go, something that's influenced by activity in
Speaker 1: the equities market.
Speaker 3: The regulator in India, the Security Is and Exchange Board,
Speaker 3: is accusing the firm of manipulating the market, using its
Speaker 3: money to place such large bets on one market that
Speaker 3: it moves the other market in a way that the
Speaker 3: firm knows they're going to profit from it. The firm
Speaker 3: has said that this is the term arbitrage. Arbitrage is
Speaker 3: just when you spot a dislocation or you can see
Speaker 3: that the market is inefficient in a way that you
Speaker 3: can profit from that and you can. Essentially, what the
Speaker 3: firm would argue is we were actually making the marketplace better,
Speaker 3: we were making it more efficient. So yes, it might
Speaker 3: have moved, but it was moving in some ways closer
Speaker 3: to where it should.
Speaker 1: Basically, the regulator is accusing Jane Street of playing both
Speaker 1: sides of these markets and alleging that the firm was
Speaker 1: putting so much much money on one market that i
Speaker 1: was impacting the other. The regulator ordered the seizure of
Speaker 1: about five hundred and seventy million dollars in profits from
Speaker 1: the firm, which it claims were unlawful gains. It also
Speaker 1: temporarily banmed Jane Street from trading in the Indian securities
Speaker 1: market while it conducts its investigation. I mean, the Indian
Speaker 1: options market is pretty unique. What could this order mean
Speaker 1: for Jane Streets or other similar market making firms operations
Speaker 1: elsewhere around the world.
Speaker 3: First and foremost, there's nothing stopping a regulator from looking
Speaker 3: into a firm that they regulate.
Speaker 2: That's their job. So anytime a firm.
Speaker 3: Is in the news like Jane Street, there's increased scrutiny.
Speaker 1: Doesn't mean that other regulators from other countries where Jane
Speaker 1: Street operates might be wanting to turn over more stones.
Speaker 2: Yes.
Speaker 3: I talked to someone that said, regulators don't want to
Speaker 3: be asleep at the wheel. So even if it's just precautionary,
Speaker 3: it's very likely that a regulator might take a second
Speaker 3: look at what they have access to, and if they
Speaker 3: don't have access or they have more questions, they might
Speaker 3: ask Jane Street to answer those questions just so they
Speaker 3: have some reassurance that there's nothing that they see as
Speaker 3: potentially nefarious or manipulative. And it goes the same for
Speaker 3: a peer of James. I've talked to other market participants
Speaker 3: that would be competitors to Jane, other market makers, and
Speaker 3: one firm said that right after this order came out,
Speaker 3: they were digging through the order and they also had
Speaker 3: an internal meeting amongst themselves to say, hey, are we
Speaker 3: doing anything that might not be exactly the same as
Speaker 3: what Jane Street was doing, but let's look through our
Speaker 3: trading strategies to make sure there's nothing that comes across
Speaker 3: as questionable or that could be brought up by regulators
Speaker 3: as nefarious. And this person was quick to say, like,
Speaker 3: we didn't come to that conclusion, but you have to
Speaker 3: be proactive.
Speaker 1: Jane Street has set aside nearly five hundred and seventy
Speaker 1: million dollars in an escrow account to comply with SEBI's
Speaker 1: order while it investigates. A person familiar with the matter
Speaker 1: told Bloomberg that the firm doesn't plan to immediately return
Speaker 1: to India's options market for now. Market watchers will wait
Speaker 1: to see what the regulator's investigation turns up and whether
Speaker 1: Jane Street decides to file an appeal. What could this
Speaker 1: scrutiny of Jane Street mean for the entire high frequency
Speaker 1: trading market making industry.
Speaker 3: It's a really important question, and it depends who you
Speaker 3: ask people in the industry. Even when I asked that
Speaker 3: question just about Jane Street's future, I had a quick
Speaker 3: answer from someone that said, they're so.
Speaker 2: Large and they're so.
Speaker 3: Good at what they do that this won't impact the
Speaker 3: amount of trading that they're still able to facilitate, and
Speaker 3: that they're just going to keep doing what they do
Speaker 3: because they have such an important role across global markets.
Speaker 1: This is the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 1: To get more from the Big Take and unlimited access
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Speaker 1: Thanks for listening. We'll be back tomorrow