Traders across Wall Street were asking themselves a question as they observed Jane Street breaking one record after another: Had the firm figured out a winning formula, or was it operating in a completely different league? The answer came with the firm's huge July loss.
For years, Jane Street has positioned itself mainly as a market-maker and liquidity provider. However, the $15 billion loss last month was comparable to the worst hedge fund collapses in history, and it would be almost inconceivable for a traditional bank's trading operation. Yet the decline revealed that Jane Street takes on directional bets far exceeding what a typical middleman would, and it highlighted how the distinctions among market-making, proprietary trading, and hedge fund strategies are fading for today's financial heavyweights.
Jane Street itself is beginning to admit this. In a recent bond sale, the company said its approach now also incorporates longer-horizon investments, similar to a hedge fund, according to sources who requested anonymity because the details are private. A Jane Street representative declined to comment.
Jane Street was once a straightforward market-making operation. Founded in 2000, it initially traded American depositary receipts before focusing on exchange-traded funds. Over time, it has grown into multiple asset classes worldwide, frequently earning from price discrepancies.
In its market-making role, Jane Street acts as the counterparty for trades. It relies on technology and algorithms to predict market movements and to hedge the risks from its various positions. Similar to bank trading operations, market-makers have gained from volatility and the surge in retail investing that followed the pandemic.
That market-making model usually produces small gains from large volumes, but it also leaves the firm holding positions that can move sharply against it. The July decline was a vivid example: a firm known for tight, automated trading lost money at a pace that would be extreme even for a hedge fund. The loss did not erase the firm's long run of profitable months, but it showed how much directional risk can build up inside a business that is often thought of as a middleman.
Recently, however, Jane Street and Hudson River Trading have introduced strategies with extended timeframes, resembling hedge fund wagers that commit a portion of their capital. That shift helped lift Jane Street's annual trading revenue to a record $39.6 billion last year, more than the $35.8 billion JPMorgan Chase & Co. made at its bond and stock trading desks during the same period.
Yet as Jane Street's lead over its Wall Street competitors grew in early 2024, experienced bankers noted that the firm was making large investments in private firms such as Anthropic PBC - a practice that has been off-limits for banks since post-crisis regulations banned proprietary trading.
The July loss is a reminder that Jane Street's combination of market-making and hedge-fund-style positioning cuts both ways. The same firm that produced record revenue by taking advantage of volatility can give some of those gains back when markets turn. For investors, the episode underscores how the biggest traders now blur the line between providing liquidity and making big bets.