NEW YORK: The question pinged around Wall Street trading desks as they watched their rivals at Jane Street shatter record after record: Had they cracked the game, or were they playing a different one?
The trading firm’s massive July loss provided the answer.
Jane Street has long described itself primarily as a market-maker and liquidity provider.
But the US$15bil hit last month rivalled the most infamous drops in hedge fund lore, and is all but unfathomable on the trading desk of a modern bank.
The July blunder – its first monthly downturn in a decade – didn’t sink Jane Street or even knock it off its pace to set a new annual record this year.
But the slump did expose a level of directional risk that goes well beyond the traditional Wall Street middleman and showed how the lines between market-maker, proprietary trader and hedge fund have been blurring among the new power players in finance.
Even Jane Street is starting to acknowledge that.
In its latest debt offering, the firm described its strategy as evolving to also include longer-term bets, in line with a hedge fund, according to sources.
A spokesperson for Jane Street declined to comment.
The firm used to be more of a pure-play market-making firm.
It got its start in 2000, trading American depositary receipts, and later specialised in exchange-traded funds.
Since then, it has expanded across asset classes globally, often profiting from mismatches in prices.
Furthermore, as a market-maker, Jane Street steps in to take the other side of transactions.
The firm uses technology and algorithms to forecast where the market is likely headed and to offset risk it takes across positions.
Like bank trading desks, market-makers have benefitted from volatility and the rise of retail trading coming out of the pandemic.
But in recent years, firms such as Jane Street and Hudson River Trading have also added trading strategies with longer time horizons, crafting strategies that more resemble hedge fund bets that tie up some of the firm’s balance sheet. — Bloomberg
