Jane Street Capital (usually called Jane Street) is a global proprietary trading firm and market maker founded in the early 2000s in New York. It trades its own capital rather than client money and earns mainly from market making and arbitrage, especially in ETFs, where it buys and sells to keep ETF prices in line with the value of their underlying holdings. It is also known for building its trading systems in the OCaml programming language. This article, written in 2021, covers how the firm operates and how to compare ETF components in Excel with a MarketXLS template.
How Jane Street grew
Jane Street spent years out of public view while growing its ETF trading business. In July 2020, S&P Global Ratings confirmed Jane Street moving in the direction of capital growth. They also stated that it is a “highly profitable trading business,” that “the company has generated very strong earnings so far in 2020 and that its trading has benefited from the market volatility related to the COVID-19 pandemic.”
Jane Street's technology: OCaml and FPGAs
Jane Street is one of the rare companies on Wall Street that uses the OCaml programming language. It went ahead with OCaml as its main programming language early on because the language’s functional programming style and clear expressiveness made it possible for code reviews to be performed by traders who were not programmers. Jane Street has stated that “OCaml helps us to quickly adapt to changing market conditions, and go from prototypes to production systems with less effort”. Furthermore, OCaml’s “rigor is like catnip to some people,… giving Jane Street an unusual advantage in the tight hiring market for programmers” that allows Jane Street to “lure a steady supply of high-quality candidates”. Jane Street plays to win the advantage of programmable hardware like FPGAs to solidify some of the logic and functions. It registered some open-source code on GitHub too including their versions of standard OCaml libraries.
Comparing ETF components with a MarketXLS template
Jane Street Capital is one of the world’s largest market makers, trading more than $17 trillion worth of securities in 2020, and it was credited with helping keep bond ETFs liquid during the market turmoil that year. For individual investors studying ETFs, MarketXLS templates can help you compare ETFs and their components across sectors. One such template is the Intra Sector View by Market Cap (open the Intra Sector View workbook).
Usage: In the Intra Sector View template, you select an ETF and compare the companies that make up its index. You can also edit the list of components. The comparison covers current market price, market capitalization, P/E, Revenue, and Profit Growth, ROE, and ROC indicators.
Why Jane Street focuses on ETFs
Since ETFs began to climb the ladder of popularity, they have accounted for one-third of the total market of all publicly traded equity instruments. This has caused a substantial decline in the trading of margins, spreads, etc. The uprising of ETFs created unfavorable conditions for the traders to profit from margin differences. The risky nature of the elements involved that ETFs track, such as junk bonds, emerging market stocks, derivative products, add extra spice to the mix. These dangers were highlighted in August 2015, when markets were shaken by China’s decision to devalue its currency; some of the largest ETFs sank by 50 percent or more. While traders at large investment banks watched their screens in horror, at Jane Street, a bunch of Harvard Ph.D.s swooped in action with a wave of buy orders. By the end of the day, the ETF shares had retraced their sharp falls.
“It’s remarkable what they can do,” said Blair Hull, a founder of an electronic trading firm who uses the services of Jane Street Capital to work through in the market of ETFs. Cantor Fitzgerald, the Knight Capital Group, and the Susquehanna International Group have all capitalized on the ETF explosion.
How Jane Street makes money
Jane Street uses quantitative methods to find arbitrage opportunities: it trades when two related instruments, such as an ETF and its underlying basket, move out of line with each other, and profits as the prices converge. “As a trader, if you do well, you will retire before you turn 30,” said one employee on an industry message board.
Jane Street quotes, “On an average day, we trade over $13 billion in equities worldwide. We are also very active in the markets for options, futures, currencies, commodities, and fixed income. We are active participants in more than 200 electronic exchanges and other trading venues in about 40 countries worldwide. We traded over $4.8 trillion across all products in 2016.”
Conclusion
Firms like Jane Street hire traders who combine quantitative skills and programming with a feel for when markets are pricing related instruments inconsistently.
For large asset management firms like BlackRock, Vanguard, and Invesco, the business of rolling out one ETF after another has become a significant profit center. In totality, most of the market is driven by prominent trading firms who know how to build a new one out of these securities. Jane Street has increased its shareholder’s equity, or net worth, to more than $1 billion today from $228 million in 2007.
Disclaimer
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