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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 quotes sinister scheme to manipulate the market.

It also impounded over half a billion dollars 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.

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 going to ask, what, if anything, does this episode say about how shiny 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 economist 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.

Yeah, I mean, if we could have a title at the FTL's Chief Nerdy Finance Correspondent, then I think that would be my dream job.

So this is just like Christmas come early for you from a random pocket of finance.

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.

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?

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 want to 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 for a lot of people the only reason they will ever have heard of jane street is because this is where sam bankman freed got his start in finance right before he ended up running the big crypto exchange fdx 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 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 kind of raises questions about how resilient markets might be to one of these major new powerhouses coming in trouble.

And now we're going to find out the answers to that.

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 all 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.

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 your.

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 in generally in shorts and t-shirts and they whisper very quietly whilst they do mental puzzles and math olympiads in their spare time.

Yes, as do we.

Oh, obviously, obviously, that's a Thursday night for me.

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?

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.

Yeah.

I mean, they went from around $2 billion of trading revenue, let's say, sort of

in 2018, 19 to now last year, they raked in over $20 billion net trading revenues in a year.

That's a fair amount, okay.

That's the equivalent of most major banks in the world.

It's not far short of a Morgan Stanley or a 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.

Yeah, 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.

Yeah, I mean they've been smart and kind of successful for a while.

They started off trading something called American Depository 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 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 no index funds I promise

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's been sending it warnings for a little while, right?

Saying, hey, knock it off, like, knock what off?

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 they've 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.

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.

Is it bigger than like your ego and Rob Armstrong's ego put together?

Maybe one and a half, Robin Robin and Rob, and maybe.

But it's big.

It's big.

But it's pretty big.

Let's not get overboard.

It's big.

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 going to go up and you hope you're going to make some money out of it.

With derivatives, you can sort of bet on what the stock is going to 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.

I mean, it's been popular for a while, but frankly, since 2020, it just went.

I mean, it is 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 embrace trading, retail trading in the US and Europe since in the lockdowns, but India just took it and just went to town.

To a whole new level.

And for a market maker, a trading firm like Jane Street, I mean, that's not just catnap, 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% of people lose money trading options very quickly.

In India, even the regulators say it's close to 90%.

Wow.

But somebody has to sit on the other side.

So who's going to make the money?

Well, that was, to a large extent, Chain Street.

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 make money right 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.

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.

Well, it's all trading normally has an impact on the market.

Are you manipulating that market?

If I buy a stock of Apple, like realistically, it's going to have a very small impact.

If I'm a big hedge fund and I buy a billion dollars worth of Apple stock, it's probably going to push the price of Apple up a little bit.

But I am 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 that 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 were more closely linked and they happen to make lots of money doing so.

I don't think they use the word crappy, but still, that's the gist here, right?

That's my favorite technical word for it, at least.

Now then, what are other people in the industry saying about this?

Well, 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.

You love this stuff.

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.

Yes.

They pay their interns more than the US government pays the chair of the Federal Reserve.

Like interns make the equivalent of $250,000 thousand dollars a year crikey over

kiir starmer the prime minister of the uk as well i found out i feel like i should have paid more attention in maths yeah no i i definitely should have done better in my math olympia

um but the thing is jane street also had a pretty good reputation yeah like i've been writing about them and and their rivals and nobody even their rivals ever had any bad words to say about them except we hate those guys they they're doing too well it's annoying us 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?

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 30s 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.

Well, I bet they're regretting trying to sue those guys, right?

Yes, I think this is quite possibly the most expensive, crazy barbarous Rise Land effect I've ever seen, essentially.

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?

Not arbitrage strategies overall.

Everybody says, you know, with a mix of disbelief and Schaden Freuder that, you know, we can't believe what James Freet did here.

We won't condemn them.

They're smart people, but this looks bad.

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.

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 defense eventually, I suspect.

But they all say, we don't do this, we're not worried about that.

But 20 years ago, like trading firms, especially high-frequency trading firms, it became this popular kind of bogeyman.

They were the Flash Boys, and they'd finally kind of gotten over like a basic 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.

No.

Do normal people need to worry about this?

What are the chances that this could lead to dislocations in markets, do you think?

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 shares that trades in the United States is traded by Jane Street.

There's only one firm making them, that's Citadel Securities.

They are huge in Europe.

They're huge in exchange traded funds.

They're even big in bonds these days.

They're big in almost every market.

So I don't want to be sound too dismissive of the risks, 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 James Street that would step in and pick up everything so actually this wouldn't be a downfall happened by a big sort of financial catastrophe.

No, no.

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 James Street, which obviously is still very unclear.

So in the meantime, it's just kind of like real housewives of

downtown Manhattan, right?

It's just kind of 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.

Yeah, but it's 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 owners.

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.

So for you, Robin, like you live and breathe this stuff, you love this stuff.

Is this going to be your favorite story of the year, hands down?

Well, we had the old tragic, comedy around Liberation Day, right?

Liquidation Day, as some people call it, the penguins, 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.

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.

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?

I have now.

Okay, let me go first.

I am short

bed bugs.

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's that over there?

Bed bugs.

No.

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?

Oh, I'm tempted.

I had once bed bugs in New York and I am still traumatized.

You said this now and I literally brought, I mean, it's cold shivers almost.

It was, maybe I've been, I had a very lucky sheltered sheltered life, but that was one of the most traumatic experiences.

Also, with a newborn baby, it was,

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 micro strategy.

I'm sure it's been short on the.

Heaven knows I've tried this before, Robin.

Did you not know the whole story?

Yeah, but eventually I'll get proven right, or some one of us will.

And maybe I'm the one that kind of finally manifests this into reality.

Listen, learn from me, like betting against this company that just buys Bitcoin and that's all that it does.

Like the doubters never win, man.

But now they're literally issuing the reason why for me, 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.

They have to pay on that.

So they have to borrow more money to pay the early investors.

And I'm not going to say what that is normally called but like I mean at some point this

the music has to stop here to tell you I got thoroughly humiliated trying to short this thing so I am I'm just out of microstrategy or strategy as it's called now but you do you and listeners if you've got thoughts about strategy and you'd like to tell Robin he's an idiot robin.wigglesworth at ft.com fill your boots Now, we're going to be back in your ears in just a couple of days, so listen up then.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from Topha 40s.

Cheryl Brumley is the FT's global head of audio.

Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

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Just go to ft.com/slash unhedged offer.

I'm Katie Martin.

Thanks for listening.

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