How the hell did Jane Street alumni end up creating FTX?

Fair play. Bloomberg’s Annie Massa, Hannah Miller and Muyao Shen have just published a piece exploring a subject that had been vexing us ever since FTX blew up: how on earth could a bunch of former Jane Street traders fuck up so spectacularly?

Jane Street is probably not as widely known as it should be (though probably still more than it wants). It’s one of the biggest, weirdest, most impressive trading shops in finance today. Having Jane Street on the CV was a crucial bit of Sam Bankman-Fried’s sales pitch. For traders it’s the equivalent of a junk bond banker having been at Drexel with Mike Milken.

I’ve been intrigued by Jane Street ever since a conversation with the trading head of a major US bank ended up being a long moan about how it was where the smartest people mostly wanted to work these days. That a quirky trading shop mostly specialising in ETF arbitrage was now suddenly considered a rival by a huge US investment bank was fascinating.

After a few years of digging and cajoling insiders to speak, I wrote a big piece about Jane Street in January 2021 . It was mostly focused on their role as a central cog in the ETF industry’s machinery, but one of my takeaways is that the firm is obsessed with risk, which makes its appearance in the SBF origin story somewhat incongruous. As Bloomberg says:

The more-than 2,000 employee powerhouse based in lower Manhattan is known among peers for its obsession with risk and preference for stealth. It digs into the health of trading partners, models potential catastrophes, autopsies losses and restricts staff from commenting publicly, because even that poses a danger.

The easiest way to describe the culture that Sam Bankman-Fried created at FTX: The opposite.

Alameda Research’s Caroline Ellison and Brett Harrison, the former head of FTX US, also have Jane Street on their CVs. (Alameda’s former head Sam Trabucco used to work at Susquehanna, another big trading outfit where Jane Street’s founders worked before splitting in 2000.)

Jane Street is a firm that compulsively models all sorts of potential mishaps and their possible effect (including a pandemic ). It spends up to $75mn a year constantly buying put options to ward against market downturns. FTX didn’t even have a finance department . Its chief regulatory officer appears to have been based remotely in Seattle and its approach to risk management relied on Slack emojis.

Jane Street's prowess can be seen in how quickly it has risen in prominence in wholesale US equity market-making, coming from nowhere in early 2019 to compete toe-to-toe with Citadel Securities, Virtu and Susquehanna, according to a recent report by Alphacution .

Alphacution’s Paul Rowady points out that Jane Street has seen similar ‘hockey stick’ growth in equity options market-making

This evidence continues to solidify Jane Street’s position among the likes of Citadel Securities and SIG in the top of tier of global proprietary trading firms. Right now, we can assume that Jane Street’s entry into wholesale market making was the catalyst for this latest set of hockey sticks.

As for the epiphany that led to the catalyst? I suspect someone from Jane Street found the Pick of Destiny on New Year’s Eve, December 31, 2018 because there’s no earthly explanation for what appears to be happening here — and it’s going to be fascinating to watch how the competitive landscape unfolds given the strength of a very short list of prop firms that include Jane Street.

Jane Street’s management structure is admittedly pretty messy and opaque. There is no board, chair, CEO or management committee. According to insiders, most corporate decisions are made by a group of 30-40 senior employees whose stature mostly seems to come through feels and longevity (Jane Streeters are famous for having the option of retiring wealthy in their 30s). They also play a lot of games, like FTX people (an internal favourite is “ Figgie ”, which Jane Street invented itself to simulate open-outcry commodity trading).

But the whole vibe is earnest seriousness, not lackadaisical hodling. They have a cultish dedication to a rarely-used programming language called OCaml , because of its transparency and safety.

Importantly, despite having trading capital closer to the level of a Wall Street bank, Jane Street’s culture is rooted in arbitrage rather than the unchecked risk-taking that seems to have been FTX/Alameda’s approach.

Of Jane Street’s three founders only Rob Granieri remains at the firm. He is probably the closest to a head that Jane Street has, and embodies the place’s nerdy paranoia. “I still walk in every day thinking that we’re still struggling to survive,” Granieri told me when I was researching the above piece.

If only SBF had approached things similarly, eh? Any venture capitalists that cooed at the sight of Jane Street on Bankman-Fried’s CV should have noted that the firm itself never invested in FTX.

All this said, I’m worried that Jane Street blows up next week and highlights from this piece are gleefully shared on Mastodon. It is active in crypto market-making as well, after all. But I’m not so worried about this as I would be about many other trading shops.