🧵 A thread of thoughts on the current Jane Street situation. In the words of another JS alum: 1) What

2/ In the last few weeks, I've gotten a small flood of emails, DMs and messages asking my opinion about the recent news coming out about Jane Street. First the coup-funding story, and now the accusation from the Indian regulator SEBI.

3/ First some caveats: I don't work at JS and technically haven't worked there in over 11 years. I did do some consulting work for them until roughly 6 years ago, but not as a fulltime employee. So what I know from direct first-hand experience is extremely old knowledge.

4/ That said, I do try to keep in touch with people, especially people who left JS more recently than I did. I started in 2008, and in the first week I was told by at least two senior people some variant of:

5/ "There are lots of grey areas in trading. We avoid them. We avoid them because it's wrong, but also because it's bad business. If you're in this business for the long haul, your reputation as a good market participant is worth more than some shady little trade."

6/ I took that to heart, and during my whole time at Jane Street, I never saw ANYTHING that would make me question the truth in action behind those words.

7/ I remember lots of times where we learned of shady trades, possibly legal or possibly not, that we passed up on because they didn't meet the internal bar of "Are we making markets better by doing this?" The people who I talk to now from my vintage at JS remember it the same.

8/ I traded options at JS for 5 years. I was even involved in the very earliest efforts to start trading in India. I remember three things about Indian options trading: (a) it was enormous, (b) markets were weird, and (c) SEBI was a very *active* regulator in these markets.

9/ So it's utterly shocking to read the SEBI accusation. It's actually quite readable, and I encourage you to do so. I'm no securities lawyer, let alone an Indian securities judge, but the stated facts are very damning.

10/ In the simplest terms possible, whenever a derivative is more liquid than the underlying, there is an opportunity to manipulate the close to mark your derivative positions in your favor.

11/ For example, if you're long a bunch of futures, it might cost you less in market impact to just buy a bunch of underlying stocks, move them up, make money on your futures settlement, then sell out of the underlyings.

12/ As I said, I'm not an Indian securities judge so I don't know if what they did was illegal. But I do know two things:

13/ A) Whoever greenlit this trading had a very different conception of "acceptable market behavior" than what I was taught and practiced as a trader at JS.

14/ B) When SEBI sent them a caution letter, I am absolutely *shocked* they continued trading with (arguably) only minor modifications to the economic effect of the strategy.

15/ So what now? I certainly don't know, but I do know how regulators operate and so I can maybe predict a few things...

16/ A. It is now open season on JS. A Schelling point has been established for regulators around the world, and that Schelling point is Jane Street. Regulators have a tough job: so many companies doing so many different kinds of trades, and it's hard to figure out what they are.

17/ And even if you think there's something a bit sketchy going on, there's a big political calculation to be done in bringing any regulatory action or suit. Trading firms have deep pockets to fight things.

18/ But now regulators know there is strong political cover to investigate one firm in particular. So that's what they're going to do. They can share the political cost together, which means JS can expect more investigations and a lot more scrutiny than they've ever seen before.

19/ Especially around trades which involve futures/options settlement. After all, if JS thought it was fine to do this in India, logic dictates they should look for other places where this strategy would also be profitable. And do it there...

20/ B. Nature abhors a vacuum. PR perspective, JS has wanted it both ways for years: a quirky mathy puzzley public image for hiring, but no one even has a *picture of the founders or heard them speak. A co that makes $20b/year doing opaque trading and no one knows who they are?

21/ That's a recipe for a PR disaster if anything bad ever comes out, because THAT will become who you are in the eyes of the public. And so it has. They mostly managed to avoid getting hit with the SBF/FTX explosion...

22/ Maybe they could avoid too much scrutiny for the South Sudanese coup stuff because, well, it's all so weird! But this seems like a different kettle of fish entirely.

23/ C. How do great trading firms die? Sometimes it's because they lose edge, or lose a bunch of money. But the more boring and common way is that something happens that makes good people leave.

24/ Arguably that already happened post-COVID, when there was an exodus of semi-senior traders who realized their beta to firm performance wasn't as high as they thought. In fairness to JS's leadership, it's a tough problem.

25/ In 2020 you made 10x what you made in 2019. Do you really go through with paying someone $15m instead of the $1.5m they made the year before? What if they leave? Or just quiet quit?

26/ Door #2 (only increase their bonus by ~50%) isn't any better, since they'll realize they don't have the profit sensitivity they thought they did (and maybe were promised). They might leave for higher-beta pastures. Sure enough, many of them did.

27/ Post-2020 JS looks from the outside like a place with a hollowed-out middle. Senior partner-level people making huge amounts and very junior people making good-but-not-spectacular low-beta comp.

28/ Perhaps it's little wonder that value drift might have happened. When a trade is making you $4b a year, that's four billion reasons to believe it's actually a perfectly fine trade.