Jane Street – the top Wall Street firm ‘no one’s heard of’

Jane Street is a firm that few of us have heard about. However, this little known firm now plays a critical role in the US financial system due to its role as one of the world’s biggest market makers. This FT article says Jane Street traded more than $17 trillion of securities in 2020. (To put that into perspective the entire market cap of the Indian stockmarket is $3 trillion.)
So who are these people and what are they making markets in? The FT says: “Its forte is lubricating trading in exchange traded funds, which manage nearly $8tn of assets according to data provider ETFGI. Jane Street is especially dominant in the niche but rapidly growing world of bond ETFs. That prowess has allowed it to reach a beachhead in corporate bond trading, where it is now going toe-to-toe with some of Wall Street’s most pedigreed businesses.”
Whilst market making sounds easy (i.e. you just have to buy from the seller and then take that security and sell it to the buyer), if you really want to make money from it you have to be prepared to ‘make a market’ when people are most scared i.e. when liquidity dries up. In order to be able to do this (i.e. trade when no one else wants to trade), you have to have great risk management systems: “….Jane Street has also always been a little paranoid, with executives constantly fretting about the risks of improbable but catastrophic crashes. Even beyond every trading desk’s routine hedging of positions, Jane Street at a company level spends $50m-$75m a year on put options — derivatives that pay out if markets slump. In early February, the firm aggressively ramped this up to ensure it could still confidently keep trading even if turmoil hits the markets.
“Our basic service, standing ready to buy and sell ETFs, options and bonds, is even more critical in times of stress,” says Josh Kulkin, one of its top traders. “Because we bought all that extra protection we didn’t have to worry about the extreme moves, and were prepared to provide liquidity in an outsized way.”
That extra confidence paid off handsomely when markets were thrown into a tailspin last March, and bond ETFs emerged as a major faultline.”
As conventional equity trading gives way to ETFs, the rise of new giants like Jane Street is all but inevitable because the ETF market creates the need for firms like Jane Street: “These issues go to the heart of how ETFs function. Their shares trade like stocks on an exchange, but shares are also separately constantly created or redeemed to handle inflows and outflows and ensure that they track their index. When there is a demand imbalance, specialised market-makers that have the right to create or redeem ETF shares step in. These “authorised participants” — like Jane Street — are the under-appreciated cogs of the industry’s machinery.”
And all of this activity allows Jane Street to make colossal amounts of money. In the first half of 2020 Jane Street’s profits were $6.3 billion! In case you are already green with envy, here’s a factoid which will make you feel even more envious: Jane Street operates without any formal management structure. A group of 30-40 people spread across New York and HK run the firm without hierarchical job titles.