> Jane Street is stupidly profitable — net trading revenues of $4.4bn in the first quarter, after a $10.5bn haul in 2023, and a profit margin north of 70 per cent — but it bears repeating. That is the fourth straight year of net trading revenues exceeding $10bn. Gross revenues came at a record $21.9bn in 2023, up 34 per cent from 2022.
Yes, I suppose this is all something to get all starry-eyed over, Jane Street encroaching on Citadel Securities, the two of whom control 30% of the US equity market volume.
I see it another way. I see people's hard earned money being siphoned by enormous financially-engineered vacuums, never to be seen again. And not just in the US, globally. This won't stop at 30% of the US equity market. It won't stop until the music stops and the last chair breaks. Which may or may not be soon. It will certainly be coming at some point.
Five times the London Stock Exchange’s entire trading volumes in 2023 in just your ETF arm? Sure ... this sounds like reasonable growth ...
> This is why some people argue that APs like Jane Street have become systemically important.
Oh, you don't say!
> About 80 per cent of the company’s capital comes from employee equity
That's adorable. They're like a little mom-and-pop shop ... except not anything like that.
> I see people's hard earned money being siphoned by enormous financially-engineered vacuums, never to be seen again.
can you expand on this? I have zero idea of what Jane street actually does and how they actually make money. (someone wrote that they have ~450 traders. trading what? equity? stocks? dark pools? PE? are they market makers? are they offering services to institution types?)
also what does "people's hard earned money" mean? you mean that Jane Street takes away their 401k or ... ?
They provide market liquidity. The chances that a seller and buyer come together at the exact same time across the 7.5 hours of open market operations is fairly low, so they buy from sellers and sell to buyers and hold in between to keep the markets liquid. This liquidity costs(often advertised as the bid/ask spread).
We could essentially close them down if we moved all trading to say 1 hour a day.
speculators can then sell/buy to/from them and if they are doing it well, they make a profit. (and help narrow the spread.) sure, great, they even inject some liquidity. but why do we want a narrow spread? it only helps people who don't know which side of the trade they would rather be on, no?
The bid/ask spread is never good, as it is a fixed transaction cost no matter what side you play. In fact, the equity under consideration has to move greater than the spread to even realize a profit -- with the spread, you are always "buying high, selling low". With very narrow spreads, the spread is only a few cents at most and this consideration evaporates.
The spread also compounds quickly. A wide spread indicates low volume and a sparse order book. This means if you need to offload even say 100 shares, you can single-handedly as a retail investor, widen the spread yourself and take an even larger loss.
Liquidity injects supply/demand and its always a good thing for retail investors. It goes past the stock market as well, spreads are why pawn shops, thrift stores, and even eBay can be profitable in certain goods and with other goods, not so much.
You can absolutely set limit orders, but depending on the limit, other people may or may not be willing to trade with you. Your order can sit all day and never be accepted.
If I want to sell AAPL, and set the limit oder to $1/share, buyers would take that trade instantly. But if I set the limit order to $10k/share, nobody would buy from me.
The exact same thing happens with the buy side.
It's like haggling with the vendor on the street corner or negotiating with your car dealer.
Think of it like a liquidity tax. Jane Street and other market makers(Citadel, etc) compete over that liquidity tax. The more often a fund, ETF or stock is traded, the lower the liquidity tax.
If XYZ Corp is very illiquid and only trades a few shares a month, then Jane Street will charge you a lot of tax to allow you to trade it instantly, because they have a harder time knowing what they can get for it a month from now when someone actually wants the trade.
Notice something like SPY(S&P 500 fund) is basically free to trade, but something like EEH costs you a very pretty penny to instantly trade. For EEH, you might be better off re-issuing limit orders and just hoping someone comes along that wants that fund. If you let Jane Street or other market makers handle the trade, they will charge you more than it's worth to trade.
They provide market liquidity. The chances that a seller and buyer come together at the exact same time across the 7.5 hours of open market operations is fairly low, so they buy from sellers and sell to buyers and hold in between to keep the markets liquid. This liquidity costs(often advertised as the bid/ask spread).
We could essentially close them down if we moved all trading to say 1 hour a day.
Though most retail traders are upset they can only trade 7.5hrs a day, they want to trade 24/7 instead. They seem to WANT the liquidity and are apparently willing to pay for it.
Me, I'm fine with trading for only an hour a day, but I get not everyone is as lackadaisical as me.
Unless you have a better mouse trap to solve the liquidity problem, this is the best we have for now.
I actually know a little about this space. You know what the easiest response is that is always the answer?
"We provide liquidity".
Sounds important, most people don't get it, it works.
But it's not like the market is going to grind to a halt if Jane Street disappears overnight. Of course, people will say that. Not people telling you the truth.
I actually considered "but, but, THE LIQUIDITY!" in my answer but I felt there was sufficient snark.
Yes they would. It would be a significant and catastrophic mistake to restrict trading based on feelings of envy. It would be technically negative in every measurement possible.
So many poor policies originate from Envy and poor reasoning not grounded in logic and understanding of free markets and economics. This would be yet another classic example of that.
As we have talked about in the other part of this thread, envy has absolutely nothing to do with it. Stop thinking it does. You are starting to sound like a broken record.
> It would be technically negative in every measurement possible.
Since you believe this so strongly, can you provide academic sources for this perspective?
Please do tell me then, what exactly motivates all the proposals for restricting trading periods or changing to auctions? All I have seen is that Jane Street and other make “too much money”. The reality is actually different they provide a service in 20 countries across all asset classes and do it for only $12B/year, that’s actually very cheap once the scope of their reach and operations are understood.
Please explain what is the motivation other than envy behind the numerous comments proposing some restrictions or claiming they aren’t worse or even better.
There are definitely academic sources that will backup my assertions however the irony is that my position somehow needs to be defended when it’s actually obvious to anyone who has spent a lifetime on the inside of the very system we are discussing and that somehow absurdist proposals about restricting market hours are accepted on face value without any rational or academic evidence whatsoever.
First, I never said it was a great idea, or that we should. It's not about envy or not. Liquidity provides a great service, if we need long market hours. If we don't need long market hours, it arguably provides little to no value.
Yes it would massively reduce liquidity, that's the point :) Yes volatility would go up during that hour(especially at the beginning), because everyone would have to figure out the new pricing, but it would remove the need for liquidity as well. It would bring all the sellers and buyers together at the same time, eliminating the need for market makers to provide liquidity.
I'm not suggesting we actually do this, in fact, the markets are trending the other way to 24/7 market trading. I'm sure Jane Street and the other liquidity providers are 100% on board with this plan of 24/7 trading.
Personally, I'm very happy with the status quo, 7.5hr trading days M-F. Though personally I'd prefer they shift a little later so it's easier for west coasters to trade at market open. I.e. shift from EST to CST. I know that won't happen, but that would be my only real complaint.
> Jane Street’s 2613 employees are replacing at least 10x that many needed to perform the same critical and necessary service to the markets from 30+ years ago.
Agreed, they are doing a bang up job providing liquidity to the markets. I'm happy for them. I use their service, it's great.
If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
> Liquidity provides a great service, if we need long market hours.
If Jane Street is so critical to the normal functioning of markets that their significance between "exists" and "don't exist" is a major change in liqudity, then they are a systemic risk.
They probably don't want to be viewed as a systemic risk to the financial system.
But when you are siphoning this much money out of the financial systems worldwide (to the point your employee equity looks to be going almost logarithmic), how much further can this go until "providing liquidity!" isn't good enough any more?
That's been the go-to answer since forever, anytime anyone questions what value is being added to the economy.
> If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
This is categorically false. Long electronic trading hours are simply a better solution, a more fair solution, a more competitive solution, a more efficient solution, and what the market is demanding. There is no trade off, especially as most liquidity is supplied by automated systems that can operated 24/7/365 if needed.
When you compress transactions into specific time frames it isn't about forcing buyers and sellers to meet, you actually will reduce the numbers of buyers and sellers overall, you will lower the value of the asset, because assets are given liquidity premiums. The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
When a primary issuer creates new securities this is very different situation and why an auction is needed, for example for new treasury bonds or any other initial offering. In that situation there is only 1 seller, the issuer, and the question is what is the starting fair price at which buyers appear.
In a secondary market there are many current owners of the asset and many potential sellers. They don't decide to sell or buy independently and then meet. That is simply not what occurs. Instead think that every current owner is a potential seller and every participant who follows that market is a potential buyer. Sellers attract buyers, buyers attract sellers, both when they push the prices around via the market makers. By extending the time period for this dynamic to occur to continuous central limit order books (CLOBs) it make the most efficient process, periodic auctions have been proven to be very poor ideas and results in choice paralysis of participants, CLOBs incentivize higher rates of decision making and healthier dynamics. All properly operated CLOBs will also have a circuit breaker to auctions should time be need to digest rapidly changing information and the continuous book can't be created within some limits.
By having extended market hours you widen the pool of buyers and sellers who can participate. You also allow markets to instantly digest new information as quickly as possible, this is most fair to all participants equally.
Extended trading hours are strictly better than restricted trading hours.
You seem to imply I think it's better without them. I'm not saying that at all. I'm saying we could do it without them, if we, collectively, wanted to. Is there a cost to that? Of course there is, there is a cost for any big change like this.
Private Equity seems to do just fine without any of these liquidity problems.
Bond Markets are completely private still, sure some market makers are now playing in that space, but it's still completely private transactions and you are on your own to find buyers and sellers. Seems to work well enough.
Certainly public markets and stock exchanges are great inventions, but we didn't have market makers in the early stock markets for a very long time. Well one might argue JP Morgan(the man, not the bank) was THE market maker for all of the NYSE early history. He certainly bailed out the markets once or twice before the Fed existed and decided to do the job for him.
So we can absolutely do it without market makers. So I stand by it being a trade-off. If one really wants to kill off market makers, we can, that doesn't mean we should.
> The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
This would imply that Cash should be more valuable than it is? USD cash has near infinite liquidity, but at best it's worth around 0%/yr real return.
> You seem to imply I think it's better without them.
Yet these are also all you:
> We could essentially close them down if we moved all trading to say 1 hour a day.
> If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
I responded that it is incorrect. You claimed that restricted hours and/or auctions are not necessarily worse, implied better for various envy based objectives that are commonly voiced in many of the comments under this article.
I am contenting that Continuous CLOBs with extending trading hours are technically better markets in every possible measurement. That is my position, it’s unambiguous and different than yours. I’d suggest you would prefer ambiguous positions that would elicit agreement and convey virtue than to take a hard stand for or against a topic.
> Private Equity seems to do just fine without any of these liquidity problems.
PE notoriously has liquidity issues. There are private platforms for qualified investors. PE also is focused on primary issued securities not secondary open free markets which we are discussing. So your observation is both irrelevant and incorrect.
> Bond Markets are completely private still, sure some market makers are now playing in that space, but it's still completely private transactions and you are on your own to find buyers and sellers. Seems to work well enough.
Bond markets are very very far from private. They are completely open but just not to small time investors other than indirectly via ETFs, which ironically the article explains is a massive source of income for Jane Street as they transfer institutional liquidity and prices into individual accessible ETFs. However the underlying cash and futures and options markets on both government, municipal, and corporate bonds are completely public and to any operator who can post the required collateral and meet the technical participation requirements. Trade sizes are often $1M notional minimal. In fact corporate and government bond markets are highly competitive and have extended trading sessions. So again you are technically incorrect.
> Certainly public markets and stock exchanges are great inventions, but we didn't have market makers in the early stock markets for a very long time.
Yes you did. Market making was a dedicated profession going back to the earliest exchanges and markets, including in Dutch empire, also in Roman empire times. Gold
market makers / dealing in bazars is 1000s of years old. I have no idea why you would believe such an incorrect opinion.
> Well one might argue JP Morgan(the man, not the bank) was THE market maker for all of the NYSE early history. He certainly bailed out the markets once or twice before the Fed existed and decided to do the job for him.
JP Morgan was a market manipulator and crony capitalist who using corruption bailed himself and his associates out of loses using the FED. Your example is extremely ironic if you actually understand what happened.
> So we can absolutely do it without market makers. So I stand by it being a trade-off. If one really wants to kill off market makers, we can, that doesn't mean we should.
> > The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
> This would imply that Cash should be more valuable than it is? USD cash has near infinite liquidity, but at best it's worth around 0%/yr real return.
This is a misunderstanding of the liquidity premium. Holding all other attributes constant of an asset, the intrinsic value, the income rate, all other relevant factors, then a more liquid asset vs less liquid asset with the same other attributes will have a higher market value. This is basic stuff.
You are missing the forest for the trees and misunderstanding what I'm trying to convey.
Even if we shifted to 1hr trading a day, we would still have market makers, but they would charge a lot more and a lot less people would use them. They would become more like pawnbrokers or middle-men, not be considered a must-have, like they are considered now. Much like your market makers of old.
For institutional investors, most all of their trading is already done either right at market open or right before market close, so it wouldn't be much of a shift for anyone except for retail investors.
I never said JP Morgan was a great guy. I basically agree with your characterization of JP Morgan. That said, he totally saved the NYSE and the larger American economy a few times anyway.
You are partially there in your understanding of the bond markets. There are public bond markets(NYSE, NASDAQ as examples) in the US, but they act very different from the stock markets, and they don't represent most of the actual bond market that is traded every day. The NYSE bond market still does public auctions of bonds for example.
There are MANY private bond markets. They don't regularly/always intersect. Bond markets as they exist today are still very new, and still not well understood. Pimco basically created the first ever regular bond market only a few decades ago. Before that pretty much all bonds just got stuck in some insurance companies filing cabinet never to see the light of day until it was time to collect a coupon. Even now a large portion of the bond market does effectively the same thing, except it's a digital file these days instead of a filing cabinet.
If I show up @ Brokerage A with 5M and want to trade bonds, they will for sure let me talk to their actual bond desk, but that doesn't mean they can facilitate my trade. I may have to shop around a few different bond desks to get my trade done. It obviously depends on how big that bond desk is and if they have any expertise in the particular bond I want to trade.
For stocks, if I show up with 5M and want to trade a stock, any brokerage anywhere well let me buy the stock.
TRACE, the system FINRA uses to monitor and manage the US OTC bond market doesn't even track all bond trades. Though they do track most of them now, however.
Certainly the bond markets are slowly becoming more public, but they are nowhere near public yet.
Corporate and government bonds have many venues and have for decades and in my opinion they are public in the sense that any qualifying participant can get access to them. Can an individual with a $10k in a 401k, no, but US treasury cash bonds have had published prints and quotes since 1970s. I personally remember corporates and converts prices and trades on my early Bloomberg terminal.
Now perhaps you call them private because they were and still mostly are for institutional traders however they are published prices and/or RFQ systems or there are continuously published two sided quotes. Yes big trades happened on phones and Jane Street is still involved in it.
When I think of a private market it means a market where prices and transactions are not published. So our terminology is different.
Fundamentally we disagree on the role of dealers and market makers. In my personal extensive market experience they are foundational and always have been. They carry inventory and manage risk. This has happened literally for 1000s of years and even in early NYSE and in the earlier stock markets in London and Amsterdam they were the key players in the price discovery process.
What you claim, that markets can even function with time restrictions and without two sided quoted dealers/makers in my world is absurd. I have nothing more to say. I don’t believe you have real world extensive market knowledge and if you do, you must he significantly younger than me. Goodnight.
I do agree with you. It's neither sustainable not really desirable, the amount of effort and resources and smart people dedicated to the financial sector.
Than in the past? That seems untrue at face, do you have a source? Firms like JS recruit a lot of people that wouldn't have ever considered a traditional finance institution in any event.
That sounds interesting. Are there easy sources for seeing what companies drive US equity market volume? My google-fu failed me but maybe I am missing something specific in the fintech industry that tracks that kind of thing . . .
> I see it another way. I see people's hard earned money being siphoned by enormous financially-engineered vacuums, never to be seen again. And not just in the US, globally. This won't stop at 30% of the US equity market. It won't stop until the music stops and the last chair breaks. Which may or may not be soon. It will certainly be coming at some point.
Envious bullshit! The reason they are so profitable is that believe it or not they are replacing earlier operators who were less efficient and taking more transactions costs out of the system before. To be anti-Jane Street is the same as being pro-Big Bank of the past, that was taking more money out of the economy doing a worse job!
Unless you know the history of global financial markets and lived it then you don’t understand. For example in the late 80s the CBOT treasury bond bit had over 1000 traders in that pit. They were all making money and quite a few a huge amount. And there was many more people supporting those traders of the floor. That was just a single futures bond contract! With Jane Street we have 2,631 employees doing the equivalent job globally and for less total cost of at least 80,000 employees in late 80s.
The profits per employee are higher obviously but that’s the effect of technology and productivity but the total price being charged to the economy as a whole is much lower. This trend will continue and I would not be surprised in 10 years that a company of 200 people will provide the entire function of those 2600 today, and probably the profits per employee will be $10M per person. But that’s what we want, is a good thing not bad, portraying otherwise is just Envy.
First of all I don't care one iota about Jane Street or how much money Jane Street employees make.
The problem is that this money has to come from somewhere. And while you say it's due to the entire system becoming more efficient, that's not the full story. That $1 billion Indian options play came at the expense of Indian retail investors.
So yes, there is a siphoning of money out of the hands of the retail investors and into the vast pool growing under Jane Street and its employees, much as it has done under others like Citadel.
Who is that good for, except Jane Street?
If you look the per capita income from where it's leaving to where it's going, that's where I see a growing problem.
There may be a sucker born every minute, but that doesn't mean that this is all just about making markets more efficient.
And, of course, none of this would have been possible without the additional "liquidity" provided ... the clearly essential contribution that makes it all justified. "We provide liquidity!". Ok ... ?
There's some efficiency improvements too, but ... eh.
Yes, I suppose this is all something to get all starry-eyed over, Jane Street encroaching on Citadel Securities, the two of whom control 30% of the US equity market volume.
I see it another way. I see people's hard earned money being siphoned by enormous financially-engineered vacuums, never to be seen again. And not just in the US, globally. This won't stop at 30% of the US equity market. It won't stop until the music stops and the last chair breaks. Which may or may not be soon. It will certainly be coming at some point.
Five times the London Stock Exchange’s entire trading volumes in 2023 in just your ETF arm? Sure ... this sounds like reasonable growth ...
> This is why some people argue that APs like Jane Street have become systemically important.
Oh, you don't say!
> About 80 per cent of the company’s capital comes from employee equity
That's adorable. They're like a little mom-and-pop shop ... except not anything like that.