Citadel hedge fund rival Jane Street is now at a $15 billion loss after a margin call forced one of its biggest bets to sell most of its public equities, per a new Bloomberg report.
The massive $15 billion loss for Jane Street in July is the hedge fund’s first monthly downturn in 10 years.
While the Citadel rival has still made record this year, experts say the loss did expose some risks.
“The slump did expose a level of directional risk that goes well beyond the traditional Wall Street middleman and showed how the lines between market-maker, proprietary trader and hedge fund have been blurring among the new power players in finance,” says Bloomberg.
It’s often times a one-sided game when it comes to the leverage and incredible amount of information these market makers have.
Jane Street Conflicts of Interest as a Market Maker
Robinhood Jane Street payment for order flow (PFOF).
The conflict arises when a firm has multiple roles, information advantages, or incentives that can work against the retail customer/order flow it is handling.
Jane Street is one of the off-exchange market makers that can receive retail orders from brokers.
For example, SEC filings from Robinhood show Jane Street as a venue receiving Robinhood equity order flow.
Robinhood’s disclosures state that payments from third-party market centers can be tied to a percentage of the bid-ask spread.
Jane Street gets the opportunity to execute the trade and potentially earn money from the economics of that flow.
That’s not inherently improper.
But here’s the structural conflict:
The broker wants to obtain the best execution for its customer.
The market maker wants to acquire order flow profitably.
Venue
Robinhood S&P 500 order flow
Virtu
46.32%
G1 Execution Services
14.62%
Jane Street
13.47%
Citadel Securities
10.30%
HRT
9.28%
Two Sigma
6.01%
Hedge Fund & Market Maker Robinhood Overflow.
The SEC has reported that more than 90% of retail marketable orders were being routed to a small group of off-exchange wholesalers, and that the wholesaling business was highly concentrated.
That creates a very different market structure.
Essentially, payment for order flow (PFOF) creates conflicts of interest and can lead to worse (or less optimal) trade execution for retail investors, turning “commission-free” trading into a system with hidden costs that benefit brokers and wholesale market makers.
Why Did Jane Street Lose $15 Billion?
Jane Street $15 billion loss.
Jane Street’s investment in Situational Awareness, the AI hedge fund started by Leopold Aschenbrenner, was one of those longer-term bets. The hedge fund took a plunge last month as AI shares fell, forcing the young founder to offload most of its public equities book to meet margin calls.
Situational Awareness is still standing; the hedge fund has not sunk yet.
However, it is not without major losses for its investors including Citadel rival Jane Street, which said its downturn left its stake flat on the year.
Bloomberg reports that Jane Street’s bets in Asian equity markets were also challenging.
“We’ve closed a significant portion of our risk in the specific areas we lost on in July, and have also reduced risk-taking in other strategies,” Turner Batty, a Jane Street partner, said in an internal note.
“Our positions currently seem appropriate for our present risk tolerance.”
The reason why Jane Street’s loss is significant is because of its sheer size when compared to other Wall Street giants.
For example, in 2007, Morgan Stanley posted more than $7 billion of losses tied to subprime mortgages.
And in 2012, the London Whale incident at JPMorgan fueled a $6.2 billion loss.
If you’re a long-time reader of FrankNez you remember our coverage of Bill Hwang’s $20 billion loss as Archegos Capital Management imploded back in 2021.
But despite Jane Street’s $15 billion loss, the company has generated more than $40 billion in net trading revenue this year — a level that’s “significantly stronger than what we expected at the beginning of the year,” Batty said in the note.
Frank Nez is an American entrepreneur, journalist, writer, and investor. Frank's work has been cited by SEC and Congressional reports. Franknez.com is a personal finance and market news publication, dedicated to publishing content on money, investing, entrepreneurship, and retail investor news.
