As Jane Street’s lawsuit against Millennium and two former employees shows, Wall Street’s most profitable trading machine isn’t keen on letting its secrets slip out.
However, it has begun in recent years to supplement its capital with some debt, and lenders expect at least some disclosure. Thanks to MainFT’s Eric Platt, Alphaville has now got its mitts on the prospectus for its latest bond sale.
It’s fascinating stuff and sheds some light on one of Wall Street’s hottest players. We won’t upload the whole thing though: we checked it for watermarks and scrubbed its metadata, but Jane Street is paranoid and publicity-shy enough that they might have inserted a few subtle changes in different docs to see if anyone leaks it.
But here are FTAV’s main observations from the prospectus.
Jane Street’s footprint is huge, and growing
Jane Street estimates that, thanks to its strong growth in equities wholesaling, it accounted for 10.4 per cent of all North American equity trading in 2023, up from 7.6 per cent in 2022. In other words, it is catching up on Citadel Securities, which reckons that it accounts for 23 per cent of US equity market volume.
Globally, Jane Street thinks that it now accounts for over 2 per cent of all trading in over 20 countries, and last year Jane Street also traded options with a notional value of $32tn, about 7.6 per cent of all volume in Options Clearing Corporation contracts.
However, the firm’s prowess is particularly strong in ETF market-making. Last year Jane Street’s monthly ETF trading volumes averaged $527bn, or about 14 per cent of US ETF trading volumes and 20 per cent of European ETF volumes. Across the year that clocks in at $6.3tn.
For context, that’s about five times the London Stock Exchange’s entire trading volumes in 2023.
It is even more important as an “authorised participant” — specialised market-makers that enable the creation and redemption of ETF shares — accounting for 24 per cent of all primary market activity in US-listed ETFs, 28 per cent in international equity ETFs and 12 per cent in US equity ETFs.
Jane Street is particularly dominant in fixed income ETFs , accounting for 41 per cent of all primary market activity according to its bond prospectus. The trading firm has used this as a bridgehead to break into corporate bond trading territory long dominated by banks. The prospectus says:
We are a leader in fixed income and corporate bond trading, and we saw considerable growth in this business over the last few years. Much of our bond expertise comes from our position as one of the largest fixed income ETF market makers: our primary market activity in fixed income ETFs has helped us expand our bond inventory, which in turn allows us to provide meaningful liquidity in the underlying market. In 2023, we executed approximately $179,000 million globally in portfolio trading volumes with typical basket sizes of $10 million to $1,000 million and 10 to 1,000 line items. We have leveraged our expertise through partnerships with electronic platforms like TradeWeb, Bloomberg, and MarketAxess to develop and refine their portfolio trading offerings. Industry tailwinds, including continued electronification of bonds trading, supports our business. The percentage of bonds traded electronically has grown to 42% and 31% in 2023 in U.S. investment grade and high-yield, respectively, up from 34% and 25% in 2021.
This is why some people argue that APs like Jane Street have become systemically important.
Jane Street is stupidly profitable
MainFT already reported the headline numbers — 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. That’s equivalent to 1/7th of the combined equity, bond, currency and commodity trading revenues of all the major global investment banks last year.
Goldman Sachs — historically Wall Street’s most formidable trading house — generated $15.8bn of net revenues from making markets in 2023, but on a vastly larger balance sheet and with a far bigger work force.
At the end of 2023. Jane Street employed 2,631 people, so that equates to almost $4mn of net revenue per head on average. In adjusted EBITDA, it comes to $2.83mn per employee (or nearly $22mn for each of the 482 traders actual traders at Jane Street.) FT Alphaville doesn’t have the number of employees in Goldman’s global markets division at hand, but for the bank as a whole the average earnings per head clocked in at $213,000 last year.
And the now-legendary Indian options trade that half of Wall Street is trying to unearth can’t account for much of this. Asia only accounted for 14 per cent of Jane Street’s net revenues last year, up from 12 per cent in 2022:
Revenues by asset class is less lopsided, with bonds, commodities and options accounting for 45 per cent of revenues last year, and equities and the rest making up 55 per cent. That compares to 57 per cent and 43 per cent respectively in 2022, presumably because of the growth of equity wholesaling.
Jane Street’s balance sheet has grown enormously
The bond prospectus indicates that Jane Street’s total assets rose 34 per cent to $140.2bn at the end of 2024, which is probably one of the best ways to show just how different it is from more “pure” high-frequency trading firms that try to avoid warehousing any risk for too long.
For example, that’s nearly 14 times larger than Virtu. Jane Street is a very quant-y firm, where speed and technology are important, but it’s more human-driven than many of the firms it is often compared to, such as Citadel Securities.
About 80 per cent of the company’s capital comes from employee equity, which has swelled to $21.3bn at the end of 2023 thanks to retained profits over the past four years.
In recent years, this has been supplemented with some longer-term loans (such as the recent bond sale where this data came from). Here’s a more granular breakdown of Jane Street’s capital:
Even this is now a little out of date. The bond prospectus indicates that the blowout first quarter of earnings means that there’s now over $24bn of member’s equity.
Jane Streeters make a lot of money. A LOT
Given Jane Street’s disclosed compensation and benefits of $2.4bn last year, this works out to over $900k for each employee on average. No wonder even its internships have become so wildly competitive.
Unsurprisingly, this has led to turnover of just 6 per cent over the past two years. Jane Street attributes this to a culture that is “highly collaborative, with an emphasis on intellectual curiosity, minimal hierarchy, and building for the long term” and “the success of our approach to recruiting and retaining talent”. But FTAV suspects it maaaay be linked to some of Wall Street’s most generous paychecks.
The real money is at the top. The bond prospectus reveals that Jane Street has 40 “equity unit holders on a full-time basis and in good standing”, with an average tenure of 16 years. Among those there will be at least a handful of billionaires, even if no Jane Streeter appears on any rich lists.
The only founder still at the firm is Rob Granieri, but insiders say it is functionally run by roughly 30-40 senior executives in what kinda resembles an incredibly profitable anarchist commune. Or as Jane Street itself puts it:
We operate as a functionally-organized structure consisting of various management and risk committees. Each committee is responsible for directing the overall strategy of the firm and for emphasizing the importance of risk management to our operations. Each of our trading desks and business units is run by equity unit holders who take an active role in managing our day-to-day operations of the firm and have a vested interest in prudent risk management to ensure our long-term success. Our management structure allows for effective cross-departmental communication reflecting our shared sense of responsibility and decision making across a wide array of individuals.
Jane Street is paranoid
Granieri once told MainFT: “I still walk in every day thinking that we’re still struggling to survive”. Sam Bankman-Fried may be the exception that proves the rule — that wariness still seems to permeate the firm.
In addition to a heavily-scrutinised centralised risk book monitored by 14 people, Jane Street is a big user of options “to hedge firmwide tail risk and to manage risk from idiosyncratic exposures” across its various trading desks and the company as a whole. The focus is very much on dodging calamities:
We focus on preparing for firmwide risks during catastrophic events. This involves, among other things, buying out-of-the-money puts as protection. Our goal is not just to protect positions during large dislocations, but to also ensure that we have the liquidity and risk capacity to trade larger than normal, enabling us to provide liquidity to our clients and the market at large.
A few years ago Jane Street indicated that it spends about $50mn-75mn a year on out-of-the-money puts to insure itself against severe market drops. The income statement in the bond prospectus doesn’t indicate where this might crop up, but Jane Street says that “other expenses” came to $359.3mn last year, which might be where this is lumped under.
The firm also maintains an extra “liquidity buffer” of about 15 per cent of its trading capital, held outside of the prime brokerages through which it does most of its business and secures its daily leverage.
This liquidity buffer is meant to ensure that it can hold on to positions even at times of extreme market stress and margin calls. It averaged $4.1bn in 2023, and was held in cash, money market funds, Treasury bills and reverse repo at a holding company level.
Unlike many trading firms, Jane Street also makes a point out of paying its people according to their contribution to the broader company, rather than tying it to personal P&L or the earnings of their desk. “As a result there is a significant emphasis on contributions to risk management and non-trading functions”, it argues. It also seems to lead to fewer slaps from the Financial Industry Regulatory Authority.
Jane Street even includes its risk management as a risk factor, arguing that its extra layers of safety — a series of preset risk controls on messages leaving its trading desks — can mean it might lose out on business.
In certain cases, this layer of risk management, which adds latency to our process, may limit our ability to profit from acute volatility in the markets. This would be the case, for example, where a particular strategy being utilized by one of our traders is temporarily halted for violating a preset risk limit. Even if we are able to quickly and correctly resume the trading strategy, we may limit our potential upside as a result of our risk management policies. As a result, our risk management systems could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
Jane Street wants to grow almost everywhere
The OCaml jockeys at Jane Street insist that the trading firm doesn’t do big long-term strategy plans, merely iterating and evolving year after year. And it certainly doesn’t like discussing any plans publicly.
But it did reveal some vague future initiatives in its bond prospectus, primarily speeding up across the board, growing the equity wholesaling business and moving into options wholesaling, and expanding even more in fixed income trading:
At this stage, few would probably bet against them doing well with all of this stuff. But, of course, Wall Street is littered with the carcasses of companies that once looked imperious and unassailable in their fief.
We gather the likes of Goldman Sachs are particularly keen to take Jane Street down a peg, so it will be interesting to see how things shake out over the next few years.