This is an audio transcript of the Unhedged podcast episode: ‘The secret giant of finance’
Katie Martin
Now if you keep half an eye on the nerdier bits of financial markets, then you will have heard about a spicy little scandal in Indian stocks. Earlier this month, the regulator there tore a strip out of a trading firm called Jane Street, accusing it of a, quote, sinister scheme to manipulate the market. It also impounded over $500mn of what it called illegal gains over the matter. Now, Jane Street, as you might imagine, has denied all this very firmly, saying it is beyond disappointed with what the regulator has said.
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It is all very much the talk of the town. And I mean, sure, this is a relatively small stock market, but today on the show, we’re gonna ask what, if anything, does this episode say about how shiny new-style trading firms operate and where could it all lead?
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, where it’s very much sun’s out, guns out. This is a hot country now and we need to get used to it.
Now joining me in the studio is a special guest all the way from Oslo — Robin Wigglesworth, editor of FT Alphaville and one of the authors of a recent FT Big Read on the Jane Street snafu. Robin, this sort of stuff is like your entire personality, right? You love this sort of nerdy stuff.
Robin Wigglesworth
Yeah, I mean, if we could have a title at the FT that was chief nerdy finance correspondent, then I think that would be my dream job.
Katie Martin
(Laughter) So this is just like Christmas come early for you from a random pocket of finance.
Robin Wigglesworth
I mean, this is my birthday. I mean, this is stuff that I look forward to. I go to work dreaming of situations exactly like this.
Katie Martin
Listen, in Norway, this is the sort of thing that passes for like high excitement. So tell the masses what is going on here. First of all, a lot of people won’t have heard of Jane Street. What is Jane Street?
Robin Wigglesworth
Well, it’s a street in New York is the succinct answer. It’s a trading firm that essentially acts as what we call a market maker, mostly. So whenever you buy and sell a stock in markets, there’s usually like somebody who kind of buys and sells it to you. If you wanna buy a stock then they’ll find it for you and deliver it and if you sell one, they’ll find a buyer for you.
Katie Martin
For a lot of people, the only reason they will ever have heard of Jane Street is because this is where Sam Bankman-Fried got his start in finance, right, before he ended up running the big crypto exchange, FTX, and then going to prison. So this is like a story that is high finance in quite a kind of quirky little pocket that a lot of people haven’t heard of — massive stakes, huge amounts of money. What’s going on here, if you can sum it up.
Robin Wigglesworth
Well, Jane Street has been accused of market manipulation by the Indian stock market regulator. And that has frankly opened up a whole can of worms about what stock market manipulation is, when it happens. It has thrust a light on these incredibly successful trading firms that most people don’t know but, you know, are making more money than the likes of Goldman Sachs and Morgan Stanley in markets. And it kind of raises questions about like how resilient markets might be to one of these major new powerhouses coming in trouble. And now we’re gonna find out the answers to all that.
Katie Martin
We certainly are. There’s a few of these like fancy-pants trading firms out there. So normally, if you think of trading, you think of a big trading floor either at an exchange or at a big investment bank. Lots of people are sort of shouting at each other and waving their arms around or like staring at massive banks of screens and pressing buttons. You know how like Airbnb is the world’s biggest hotel company that doesn’t have any hotels, and Uber is the world’s biggest taxi company that doesn’t actually have any taxis? These firms are like the world’s biggest trading firms that don’t have any human traders or have very few comparatively actual human traders doing this stuff.
Robin Wigglesworth
Well, I mean, Jane Street has fewer traders than, let’s say, a Goldman Sachs or a Morgan Stanley, these kind of banks we associate with the trading of yore. But what does differentiate Jane Street from a lot of these other sort of classic high-frequency trading firms that are like all technology and algos essentially, is that they do have traders, hundreds of traders, though they sit generally in shorts and T-shirts and they whisper very quietly whilst they do mental puzzles and math Olympiads in their spare time.
Katie Martin
Yes, as do we.
Robin Wigglesworth
Oh, obviously, obviously. That’s a Thursday night for me.
Katie Martin
Yes, but these are not the kind of human-intensive operations that you might think of and they’re not the general population. If you think of trading, you don’t think of a firm like Jane Street. But these guys are massive, right?
Robin Wigglesworth
They’re huge. I mean, they’ve been successful for a long time, but I’d say in the last half decade, they’ve gone gangbusters. I mean they went from around $2bn of trading revenue, let’s say, sort of in 2018-19, to now, last year, they raked in over $20bn net trading revenues in a year.
Katie Martin
That’s a fair amount of cash, right?
Robin Wigglesworth
That’s the equivalent of most major banks in the world. It’s not far short of a Morgan Stanley or Goldman Sachs. In the first quarter of this year, in fact, Jane Street made more money in markets than Morgan Stanley and within touching distance of Goldman, which has frankly been the powerhouse of financial markets for several generations now.
Katie Martin
Yes, so it just goes to show if you can inject yourself into just the right bit of the plumbing behind markets, there is money in them there hills.
Robin Wigglesworth
Yeah. I mean, they’ve been smart and kind of successful for a while. They started off trading something called American depositary receipts on something called the old American Stock Exchange — literally they don’t exist anymore. They branched out into this new product called, at the time, exchange traded funds, and obviously that became a huge, successful thing for them.
Katie Martin
Which is another thing you can nerd out on all day long. Listeners, we’re going to spare you. I can tell he’s about to go. Robin, reel it in. Come on, man.
Robin Wigglesworth
No index funds, I promise.
Katie Martin
But so Jane Street has been like riding this incredible wave for a few years, and then all of a sudden it’s really stumbled into something in India. One of the things that was really interesting to me from the piece that you were involved in that ran the other day — listeners, you really should check it out if you’re even remotely interested in this stuff — is that the regulator has been sending it warnings for a little while, right, saying, hey, knock it off. Like knock what off?
Robin Wigglesworth
I mean, it gets obviously quite legally sensitive and Jane Street, we should again stress, like denied that the regulator ever told them to knock it off and that they didn’t do it. They say they’ve been trying desperately to engage with the regulator, the Indian regulator, for quite some time and have just received radio silence.
But what the Indian regulator is basically alleging is that in India there’s a stock market. But there’s also this massive thing called the derivatives market, which is big elsewhere as well. But in India, it’s like the eighth wonder of the modern world. (Katie laughs) It is insane. It is an options market so big you could see it from space. It is the great wall of options trading. It is bigger than every other market in the world combined, times a factor of three, I think, almost.
Katie Martin
Is it bigger than like your ego and Rob Armstrong’s ego put together?
Robin Wigglesworth
Maybe one-and-a-half Robin and Robert, maybe. (Katie laughs) But it’s big. It’s big.
Katie Martin
But it’s really big.
Robin Wigglesworth
Let’s not get overboard. It is big.
Katie Martin
(Laughter) So the deal with derivatives, right? So just in the stock market, you can buy a stock, and then you’re effectively betting that the stock is gonna go up and you hope you’re gonna make some money out of it. With derivatives, you can sort of bet on what the stock is gonna do without necessarily owning the stock. And there are lots of good reasons why you might want to do that. If you’re like hedging yourself against risks it can just be like a conservative, normal thing to do. But you can use derivatives to make wild bets, right? And this has just been phenomenally popular in India.
Robin Wigglesworth
I mean, it’s been popular for a while, but frankly, since 2020, it just went . . . I mean it’s not even parabolic. It is incredible. If you have a chance to see a chart, it is gobsmacking. And we’ve talked about obviously like how people embraced trading, retail trading in the US and Europe since in the lockdowns, but India just took it and just went to town.
Katie Martin
To a whole new level.
Robin Wigglesworth
And for a market maker, a trading firm like Jane Street, I mean that’s not just catnip. That’s gold mine stuff. They went crazy. They thought this was incredible because also, dare I say it, like ordinary traders are not the most risk-sensitive, mathematically inclined, careful people in the world, certainly anywhere in the world, and that’s frankly especially true in India. Around the world, I think 80 per cent of people lose money trading options very quickly. In India, even the regulator says close to 90 per cent.
Katie Martin
Wow.
Robin Wigglesworth
But somebody has to sit on the other side, so who’s gonna make the money? Well, that was, to a large extent, Jane Street.
Katie Martin
Yeah, so like clever nerds doing math Olympiads, right? I can’t even say it, that’s how far I am from doing a math Olympiad. But when they see like charts where you have a share price going in one direction and derivatives that are based on that share price just massively exceeding moves in the underlying asset, that is a gap that you can insert yourself in and make money, right?
Robin Wigglesworth
Yeah. So a lot of what these guys do is something called arbitrage. They see two prices that should be linked that are less linked than they should be. So you buy one security and you sell the other one. And in theory, over time, you know, if they should be worth the same thing, you’ll make money on that. And what the regulator says that Jane Street did in India was essentially they went long, bought lots of Indian bank stocks, shorted Indian bank derivatives, especially options.
And then, once they had a massive position in options on Indian bank stocks, they then dumped all the Indian bank stocks. And because the Indian stock market is actually not very healthy — it’s not very liquid — that made the value of the far larger options position much more worth. So yeah, they lost money on buying and selling the Indian bank stocks, but they made way more money on those options on the other side.
Katie Martin
There’s lots of things in risk management at trading firms or at banks that if you really wanted to you could say, well, that looks and smells like market manipulation, but they would say, look, this is just either exploiting an opportunity that’s open to literally anybody, or actually us providing a public service in helping prices to converge and help markets to function more smoothly. I guess that’s the territory that we’re in here, right? So like Jane Street, as you were saying right at the top, are saying, wait, what? We haven’t been manipulating anything. This is like a really grey area.
Robin Wigglesworth
Well, all trading normally has an impact on the market. Are you manipulating that market? If I buy a stock of Apple, realistically, it’s gonna have a very small impact. If I’m a big hedge fund, I buy $1bn worth of Apple stock, probably would push the price of Apple up a little bit, but am I manipulating Apple’s share price? It’s kind of, it gets fuzzy actually quite quickly. I always call these duck rabbits, like the classic illusion, like is it a duck or is it a rabbit?
Jane Street is saying that actually, what they did was what they call index arbitrage. They took advantage of the fact that you have this massive, highly traded options market and this frankly slightly decrepit crappy actual stock market. And they made sure that those prices worth more closely linked, and they happened to make lots of money doing so.
Katie Martin
I don’t think they used the word crappy, but still, that’s the gist here, right?
Robin Wigglesworth
That’s my favourite technical word for it, at least.
Katie Martin
(Laughter) Now then, what are other people in the industry saying about this?
Robin Wigglesworth
They’re shocked. There’s a whole new generation of new trading firms like Citadel Securities, Hudson River Trading, Jump Trading, Virtu, XTX, IMC, I mean, these firms are very successful.
Katie Martin
Again, you love this stuff.
Robin Wigglesworth
I love this stuff. But they’re fascinating. They are kind of the ascendant force in markets today and not everybody appreciates that. And Jane Street was kind of the best of the best, in the same way that maybe Goldman Sachs was for so long kind of the apogee of Wall Street. Jane Street is where the smartest people aspire to work. It’s just, having a Jane Street internship on your CV is a cool, sexy thing to have these days. Whatever you want to do in the future. It’s considered like the ultimate imprimatur of being a very smart person. Like they pay their interns more than the US government pays the chair of the Federal Reserve. Like interns make the equivalent of $250,000 a year.
Katie Martin
Crikey O’Reilly.
Robin Wigglesworth
And that’s more than Keir Starmer, the prime minister of the UK as well, I found out.
Katie Martin
I feel like I should have paid more attention in maths.
Robin Wigglesworth
Yeah, no, I definitely should have done better in my math Olympiads. (Katie laughs) But the thing is, Jane Street also had a pretty good reputation. Like I’ve been writing about them and their rivals and nobody, even their rivals, ever had any bad words to say about them, except we hate those guys. They’re doing too well. It’s annoying us.
Katie Martin
Also, like the origin of this scandal is kind of interesting to me, right? Because it comes from the fact that Jane Street, correct me when I get this wrong, but they were taking a couple of former employees to court, saying that they had given away secrets of Jane Street trading strategies when they went to another employer. That’s broadly right, yeah?
Robin Wigglesworth
Yeah. So one of the ultimate flexes and illustrations of how kind of badass Jane Street was at their peak or are now is that they didn’t have non-competes. Like most people in the finance industry tie people up in all sorts of very difficult contracts so you can’t just easily leave for a rival. But they were so cool and they paid so well and it was such a great place, they, just as a flex, didn’t really have this.
But as they’ve grown, they have occasionally had people retire. Jane Street partners were famous for retiring in their thirties because they had generational wealth. I know. But they actually had somebody leave them for a hedge fund, Millennium Management. And apparently, Jane Street alleged that they took with them the secrets to this very profitable Indian options trade. And they sued Millennium and then it emerged in the lawsuit that this was around Indian options, and that was what made the Indian regulator sit up and take notice.
Katie Martin
Well, I bet they’re regretting trying to sue those guys, right?
Robin Wigglesworth
Yes, I think this is quite possibly the most expensive, crazy Barbra Streisand effect I’ve ever seen, essentially.
Katie Martin
What does this all mean and where does it lead? Does it put other high-speed trading shops or sort of new-style trading shops off being active in India or in arbitrage strategies?
Robin Wigglesworth
Not arbitrage strategies overall. Everybody says like, you know, with a mix of disbelief and schadenfreude that, you know, we can’t believe what Jane Street did here. We won’t condemn them. They’re smart people, but this looks bad.
Katie Martin
Do you think they’re thinking, this could be us tomorrow? It’s possible that you run a rule over a whole bunch of stuff that we do that we think is benign or even helpful, and a regulator on a mission could try and describe it as manipulation?
Robin Wigglesworth
Yeah, well, the thing is, because it is a duck-rabbit situation, in many cases, I mean, this one, frankly, doesn’t look great. We’ll see Jane Street’s defence eventually, I suspect. But they all say, we don’t do this. We’re not worried about that. But maybe 20 years ago, like trading firms, especially high-frequency trading firms, became this popular bogeyman. They were the “Flash Boys”, and they’d finally kind of gotten over like a decade of being blamed for everything that went wrong in markets, so people are kind of maybe happy seeing a big rival like Jane Street getting humbled. But some of them are also wary that this might lead to a broader sort of regulatory scrutiny. They’re all very confident that they won’t find anything bad on their patch and what they’re doing. But obviously, regulators crawling up every crevice is not a fun thing.
Katie Martin
No. Do normal people need to worry about this? What are the chances that this could lead to dislocations in markets, do you think?
Robin Wigglesworth
Well, it’s a good question, just because Jane Street is so humongous. I mean, they trade trillions of dollars a day almost, but like, I mean they are one of the biggest market makers in the United States — like one in 10 of every share that trades in the United States are traded by Jane Street.
Katie Martin
Bonkers.
Robin Wigglesworth
There’s only one firm making them, that’s Citadel Securities. They are huge in Europe, they’re huge in exchange traded funds, they are even big in bonds these days, they’re big in almost every market. So I don’t want to sound too dismissive of the rest, but I think like given that this would be a very sort of idiosyncratic downfall if it ever came to that, there are enough rivals that would gladly see the back of Jane Street that would step in and pick up everything. So actually this wouldn’t be a downfall happen via a big sort of financial catastrophe. So I think this is something that, touch wood, probably won’t lead to any sort of major issues, if it leads to major issues at Jane Street, which obviously is still very unclear.
Katie Martin
So in the meantime, it’s just kind of like Real Housewives of downtown Manhattan, right? It’s just the most kind of glorious popcorn-filled kind of soap opera that you can possibly imagine in, just to restate, a very nerdy part of finance.
Robin Wigglesworth
Yeah, but it’s, yeah, very nerdy but insanely successful. I mean, these guys were making more money than God. I mean Jane Street made more money than Citadel. They are the highest earners and I think that’s why there’s so much interest, right? I mean, everybody likes really smart, successful people occasionally face plant, right? It’s just highly amusing, even if you have no bone in the fight. And it’s just for a nerd like me, it’s just really interesting because it does go to the heart of what these firms are, how they operate, what they do, what are the grey zones, how might regulators respond and what could the fallout from that be, more broadly? And we’re finally going to maybe see that now in real life.
Katie Martin
So for you, Robin, like you live and breathe this stuff, you love this stuff. Is this gonna be your favourite story of the year, hands down?
Robin Wigglesworth
Well, we had the old tragicomedy around “liberation day”, right — “liquidation day”, as some people call it, the poor penguins getting sanctioned. That was pretty amazing. But this one is up there, at least top three, and we’ll see how the year goes.
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Katie Martin
Good stuff. Listeners, I hope you have enjoyed this immersion in the world of Robin Wigglesworth. We are going to be back in one second with Long/Short.
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Okie dokie, it’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Robin, had you remembered that this is a part of the show?
Robin Wigglesworth
I have now.
Katie Martin
(Laughter) OK, let me go first. I am short bedbugs. So somebody who I know very well, I’m not going to say who it is, was staying in a hotel last night and they were like in bed and then they were like, oh, what’s that over there? Oh, what that over there? Bedbugs, nooo! I just, I think they should burn everything they own and not take it back to their home, but it’s been like a highly unpleasant drama. Let’s hope it’s a one-off. What have you got?
Robin Wigglesworth
Oh, I’m tempted. I had once bedbugs in New York and I am still traumatised. You said this now and I literally brought . . . I mean, it was cold shivers, almost. (Katie laughs) It was . . . Maybe I’ve been, had a very lucky sheltered life, but that was one of the most traumatic experiences, also with a newborn baby. It was horrific.
Katie Martin
Oh no, no!
Robin Wigglesworth
So . . . But I can’t go double-short that, of course. So yes, I guess I’m feeling in a short frame of mind. So I guess MicroStrategy. I’m sure it’s been short on the . . . (Laughter)
Katie Martin
Heaven knows I’ve tried this before, Robin. Did you not know the whole story?
Robin Wigglesworth
Yeah, but eventually I’ll get proven right or some or one of us will, and maybe I’m the one that kind of finally manifests this into reality.
Katie Martin
Listen, learn from me like betting against this company that just buys bitcoin and that’s all that it does. It ends like, the doubters never win, man.
Robin Wigglesworth
But now they’re literally issuing the reason why, for me and my latest sort of short thesis here. They’re literally borrowing money to pay like the money on some of the other money they’ve borrowed earlier. Like obviously because it’s like a bitcoin buying machine built on a crappy software company that doesn’t really generate any money. They’ve borrowed all this money and they have to pay on that so they have to borrow more money to pay the early investors. And I’m not gonna say what that is normally called, but like I mean, at some point, this. The music has to stop.
Katie Martin
Robin, I’m just here to tell you I got thoroughly humiliated trying to short this thing so I am just out of MicroStrategy, or Strategy as it’s called now. But you do you.
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And listeners, if you’ve got thoughts about Strategy and you’d like to tell Robin he’s an idiot, robin.wigglesworth@ft.com. Fill your boots. Now, we’re gonna be back in your ears in just a couple of days so listen up then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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