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518 points bwfan123 | 45 comments | | HN request time: 0.736s | source | bottom
1. balderdash ◴[] No.44483756[source]
Having formerly worked for an NYSE Specialist firm the role of market making is incredibly important, but many large-scale HFTs today operate in ways that either stretch the legal boundaries or exploit regulatory gaps. Many practices arguably amount to market manipulation in spirit, even if technically legal. Candidly, the regulators are either too lazy, stupid, ill equipped or uninterested to do anything about it.
replies(8): >>44483821 #>>44483846 #>>44483885 #>>44484251 #>>44484632 #>>44484834 #>>44485682 #>>44492233 #
2. zeroCalories ◴[] No.44483821[source]
Does it really matter? I've done nothing but buy and hold at reasonable prices, and market manipulation has never affected my trades. This seems like finance bros fucking finance bros, which is solidly in the "who cares" category of my life.
replies(3): >>44483856 #>>44484423 #>>44485348 #
3. anonu ◴[] No.44483846[source]
That's sort of the very definition of arbitrage in today's modern markets - its not just the text book definition of "borrow money at a low interest rate and invest at a higher interest rate": there's latency arbs, regulatory arbs, microstructure arbs... They belong to the firms who can research and benefit from them before others figure it out.
replies(1): >>44484069 #
4. ycombinatrix ◴[] No.44483856[source]
Our 401k & pensions are managed by "finance bros"
replies(4): >>44484120 #>>44484825 #>>44484892 #>>44485718 #
5. state_less ◴[] No.44483885[source]
Who makes the markets in India? Is it the big Indian banks, or do these multinational trading firms act as market makers? If so, how do they distinguish between their trading and market making activities? It seems like it'd be relatively easy to rig a market (control the price) with enough capital and management over the trading.
6. RandomThoughts3 ◴[] No.44484069[source]
> its not just the text book definition of "borrow money at a low interest rate and invest at a higher interest rate"

That’s absolutely not the textbook definition of arbitrage.

Arbitrage is buy something somewhere at a price and resell it in a different market at a higher price. It’s just price arbitration hence the name.

There are no other kind of arbitrage implied when people talk about arbitrage. That’s what the word means.

replies(1): >>44488955 #
7. sokoloff ◴[] No.44484120{3}[source]
I hope mine is not managed by someone dumb enough to keep handing money over to Jane Street on such a simple scheme. If they are that dumb, I need to move my money way more than I need Jane Street punished.
replies(2): >>44484215 #>>44485731 #
8. ycombinatrix ◴[] No.44484215{4}[source]
Good luck moving "your" money out of a shared pension plan.
replies(1): >>44484400 #
9. sheepscreek ◴[] No.44484251[source]
SEBI’s bold move, at the expense of appearing unfriendly to foreign institutions, is commendable. I really hope that the SEC will wake up from its slumber and start investigating the tactics used by Citadel and its kind.
replies(2): >>44485008 #>>44486124 #
10. sokoloff ◴[] No.44484400{5}[source]
For a defined benefit plan, I don’t need to care. For defined contribution plan, I care (but can usually choose investments). I personally only have 401k, IRA, and after-tax investments, no pension.
replies(1): >>44492399 #
11. Fade_Dance ◴[] No.44484423[source]
Trades on this scale move the big indexes, and everybody in the market is exposed to the passive investing ETF complex.

Even if you are purely a stock picking buy and hold value investor, you will feel the reverberations. The modern market is deeply interconnected, and what Jane Street is doing here is literally moving the entire index volatility complex to pick up a modest billion a year. Let's say your small cap value stock issues some converts. A hair of that trading strategy will be embedded in the pricing model for the converts, and it will slightly change the cost of the debt for the company. Once you get out to 3rd 4th 5th order effects, it becomes a very faint influence, but when you consider that some of these market making/HFT trading practices at the core of the market are so deeply interlinked to just about everything that prints a price on a screen, it should be apparent that there is value in keeping the core areas of the market like the index volatility complex as clean as possible. Now weather Jane street's trading is just Irving price differences and improving the efficient market, or market manipulation, well that's another question, but the general rule of thumb is if you're using gigantic size to force bids and asks around, that's at high risk of being considered market manipulation that is toxic to market function.

replies(1): >>44485028 #
12. gruez ◴[] No.44484632[source]
>but many large-scale HFTs today operate in ways that either stretch the legal boundaries or exploit regulatory gaps. Many practices arguably amount to market manipulation in spirit, even if technically legal.

Can you expand on this?

13. zeroCalories ◴[] No.44484825{3}[source]
My 401k is a well diversified portfolio of stocks and bonds, not a HFT or options trading playground.
replies(1): >>44485297 #
14. thinkingtoilet ◴[] No.44484834[source]
>the regulators are either too lazy, stupid, ill equipped or uninterested to do anything about it.

Or it's their friends doing it and they're not uninterested, they're very interested in ensuring it continues.

15. ◴[] No.44484892{3}[source]
16. benced ◴[] No.44485008[source]
You can think “there should be a law” without endorsing the reckless and inconsistent ways that Indian regulatory agencies make up laws.
replies(1): >>44485178 #
17. zeroCalories ◴[] No.44485028{3}[source]
Can you actually show that this is bad for me? It just seems like free market stuff working as intended, and the people getting fucked are other snakes trying to fuck other people over.
replies(1): >>44486171 #
18. zaptheimpaler ◴[] No.44485178{3}[source]
No, India does not view things exactly the same way the west does re: the rule of law vs. institutional power. The regulator has broad authority to stop market manipulation and support from the public that we do not want HFT style manipulation skimming money from everyone else in our markets. SEBI does not need to wait for a precisely worded law for every single type of market manipulation that will take years to pass and then be sidestepped in months on some technicality. They stopped bad activity quickly only because they have some actual power to make judgements and enforce them.
replies(4): >>44485358 #>>44485693 #>>44485694 #>>44485871 #
19. triceratops ◴[] No.44485297{4}[source]
> portfolio of stocks and bonds

> not a HFT or options trading playground

Do HFTs not trade stocks and bonds? Or options on them?

replies(1): >>44492086 #
20. msgodel ◴[] No.44485358{4}[source]
That's why the Indian state looks the way it does.

Which is fine, that's how the Indians prefer it. Not every place needs to be the same.

replies(1): >>44501250 #
21. throwaway2037 ◴[] No.44485682[source]
I hear this defence of NYSE specialists now and again. Why do other markets, including the NASDAQ, not require them? It makes little sense to me in 2025 where the vast majority of trading is electronic.
22. jojobas ◴[] No.44485693{4}[source]
Nathan Anderson would have a word. It's just tribalism.
replies(1): >>44486787 #
23. throwaway2037 ◴[] No.44485694{4}[source]

    > HFT style manipulation skimming money from everyone else in our markets
This is a pretty bold statement. Do you have any evidence for market manipulation by major market makers? Else, it just reads like tin foil hat.
replies(2): >>44485867 #>>44495761 #
24. throwaway2037 ◴[] No.44485718{3}[source]
In 2025, most people have passive index tracking funds in their 401k. Not exactly rocket science.
replies(1): >>44485797 #
25. throwaway2037 ◴[] No.44485731{4}[source]
Real question: Does Jane Street accept outside money? I don't think so.

    > on such a simple scheme
If the scheme is so "simple", why aren't more firms doing it in India?
replies(1): >>44495218 #
26. esseph ◴[] No.44485797{4}[source]
Maybe, but most working adults don't have a 401k. It's almost 50% last I checked.
27. whattheheckheck ◴[] No.44485867{5}[source]
Do you have any evidence of it reading like a tin foil hat? Otherwise it reads like someone doing that practice or servicing someone doing that practice and skirting responsibility
28. pgwhalen ◴[] No.44485871{4}[source]
The SEC has similar autonomy in regulating that you describe. Congress does not legislate the rules that the SEC holds firms to.
replies(2): >>44489193 #>>44493181 #
29. jterrys ◴[] No.44486124[source]
SEBI wasn't bold at all. They saw them do this in January, told them in February to stop, and they persisted until they finally shut the operation off. They were tipped off as early as November 2024 that this was happening. If anything SEBI was incredibly slow at reacting lol
replies(1): >>44499093 #
30. Fade_Dance ◴[] No.44486171{4}[source]
I showed one direct cost in the example above, by showing that the trades theoretically drag up volatility, which decreases market stability, increases the cost/risk of leverage, and lowers collateral value of equities. That will quite literally show in the pricing model of newly issued convertible bonds, which will correspondingly raise the price of debt and lower the price of equity for those that issue converts.

Yes, these are very small effects. Despite profits of 1 billion per year, trades on major index level aren't directly going to impact regular people in a highly visible way. That's arguably the insidious part, because it adds up, and occasionally this sort of thing leads to major negative financial events/crashes. The passive investing/index complex anchors the entire tradable financial system. It's massive in scale and attributes like index level volatility are innately tied to many other variables all throughout the system.

There's a good (relatively light and readable) paper called Liquidity Cascades which views the market through this lens of interconnected feedback loops which can sometimes have unintended consequences. That's another major reason you don't want HFTs and prop firms getting too crazy. It's not just about measurable impact in the real world timelines, it's also about pruning the tails in the far out distributions of the possibilities space - and the world has fat tails so it's prudent to mind the tails... The 2020 crash is a great example of a feedback loop that fed on itself until it destroyed the entire interconnected system within a few days and demanded central bank intervention (COVID was a catalyst, not a cause. The basis-trade was fragile, and a dynamic hedging feedback loop took broke the volatility complex and took out equity markets -40%, at which time the effects were most definitely felt in the real world as the Fed had to step in with 1 trillion, and they then entered a badly managed panic phase (which is on them, but still...) which very much contributed to the inflation wave and the housing price surge which locked out a generation from affordable housing).

Over the past 5 years the tail has really started to wag the dog in derivatives markets, and it's an extremely well orchestrated battlefield now. One of my acquaintances who sold a 4.5 sharpe ratio firm and clears 50k a day casually trading futures seems to spend a good amount of his day tongue-in-cheek complaining about this. As do we all. I'm a PM as well with an options book, and trade options in parallel in my personal accounts, and during the day we chat in a room and watch flow move around in index options, because the option positioning drives price. Watch the flow, reverse engineer the hedging activity, map out the implied liquidity, and join the bandwagon and pin/grind down price to these option levels. That's the game currently, and you either participate or you have negative edge. In single names as well, often the option landscape dictates price discovery.

Like you said, at first glance it's just snakes eating snakes, and arguably to a beneficial end as we all get a more efficient market at the end of the day, but is that necessarily the case?

All participants agree that there need to be some boundaries against activities like outright spoofing, submitting a fake takeover offer to major news outlets, etc. That's because it's immediately obvious that these activities detract from market function. They detract from the utility value of the market to society.

So let's take the general example of "options moving the market" on an industrial scale above, and give two more recent, bigger examples of how it can cause problems. Not criminal problems and still fairly arcane, but maybe something that shows we should be better designing our systems to manage transparently. These tidal forces of index option flows became so dominant in... I think it was Aug '24, that a large correlation bubble grew under the surface. The mechanics aren't important, but in short the mega-cap names were all perfectly anti-correlated as a result. One moved up, the other moved down, yet the indexes moved zero. Risk was building under the surface, like a roller coaster's chains clicking up a ramp. This was arguably spurred by index options overwhelming all other market forces (which ties back to the original article, except Jane would have been weaponizing these forces in an engineered way). Well this emergent mechanically driven bubble grew and grew, until voices started speaking up, and there was an almost self-fulfilling prophecy where it ballooned to absurd degrees (multi decade extremes) and then caused a small market panic event where volatility exploded and some giant mega-caps crashed for a bit.

Distill the above event, and what you're seeing is a "new" kind of boom/bust, cyclical price discovery anchored off of option flow, that I personally argue generalizes to the entire market now. And the questions to ask are questions like "is this contributing to the utility of markets? Should better guardrails be in place? Are we building systemic risk?" You know, questions regulators used to ask before they mostly went dark. In this new paradigm, most of the time options dominate price discovery, and any participant fighting these forces just gives up their money to those that are playing the game well, which reinforces the behavior. Every once in a while these hedging forces release their grip on the market, and we get some short burst of violent, pent up price discovery, before the option forces close back in and greek math like vanna and vomma dictate price discovery once again.

So the first conclusion I'd argue here is that transparent and organic price discovery is one of the major utilities offered by markets. If we're only getting organic price discovery in short violent burst every once in a blue moon, we're getting less information on what market prices infer about the real world. A parallel would be QE and painting the tape on the global bond markets, which drew an opaque veil for over a decade over a market which historically has been critically important as an input into many areas like financial risk management (and again, contributed to the horribly managed and prepared for real world inflation wave).

The second conclusion is that all of this is contributing to systemic fragility, which is an important enough real world metric to manage that it's baked into the core of the US central bank mandate, for example. A correlation bubble tanked Nvidia by 10% in a day, haha!... sure, but that isn't healthy, and roll the dice 10x, maybe 2 outcomes would be a more major crash, and sometimes these events go to very bad places, like the events that spurred the GFC (beyond the major trading institutions blowing up, there was a sort of quant collapse much like the correlation bubble above that actually was the initial spark of the GFC). It's just easier to manage problems if it's not a fiery explosion, so we should generally try and minimize nitroglycerine in financial markets...

On a more anecdotal level, these sort of extreme, late stage situations like "Jane Street weaponizes index options and pulls a billion a year out of Indian markets" are rarely good omens for healthy market function. What the market generally does is seek out weak points and incomplete models, and make it increasingly obvious via absurd situations until participants or regulators are forced to change behavior. If the system is not "working" and nobody cares, a sort of malicious nihilism creeps in to the financial space. Like the bankers laughing about MBS before the GFC after work at a bar in NYC, or prop traders saying "fuck it, let's double our size next year" while laughing about opponents getting crushed after their coordinated rush on liquidity tanks markets at the end of day like clockwork when it suits them. Most of the time financial markets reach equilibrium, but sometimes these things accelerate in odd directions, which is why we manage financial markets.

I'm not so sure some of the topics referenced above are terminating in a healthy equilibrium.

31. udev4096 ◴[] No.44486787{5}[source]
There is no fucking way he published those articles without being crooked himself. It's like they say, "no honor among wall street assholes"
replies(1): >>44496726 #
32. anonu ◴[] No.44488955{3}[source]
We can disagree on both points.

The example (ok - not exactly the definition - but close enough) is the Triangular Arbitrage in foreign exchange. This is cited in almost every textbook on explaining the topic.

The Wikipedia entry on arbitrage lists a dozen types of arbs. So while they may all be of the same "type" (buy low/sell high) there are nuances. It's like saying all cow meet is just beef: there are different cuts that taste different.

33. mlrtime ◴[] No.44489193{5}[source]
Not entirely true, Operation Chokepoint 2.0.
replies(1): >>44493986 #
34. zeroCalories ◴[] No.44492086{5}[source]
My portfolio isn't managed by a fiance bro, so I don't care if Jane Street is sending them to the food bank.
35. bjoli ◴[] No.44492233[source]
I wonder if things would be more tempered if you could, like in France, do a crime that is technically legal, but breaks the spirit of the law.

I can see how it would be awful in countries that have a common law system, but I am not sure I am completely against it in most of Europe.

36. BobaFloutist ◴[] No.44492399{6}[source]
For defined benefit you need to care if it goes insolvent.
replies(1): >>44492692 #
37. sokoloff ◴[] No.44492692{7}[source]
That's where PBGC comes in: https://www.pbgc.gov/wr/benefits/guaranteed-benefits/your-gu...
38. DrillShopper ◴[] No.44493181{5}[source]
They (presumably) do after Chevron deference was killed
replies(1): >>44493284 #
39. pgwhalen ◴[] No.44493284{6}[source]
I don't think this exactly the takeaway of Loper Bright Enterprises v. Raimondo. It just means judges have more power to weigh in with their own opinions when there is ambiguity involved, not that all the specifics of implementation _have_ to be specified to mean anything.
40. pgwhalen ◴[] No.44493986{6}[source]
I'm not sure how this is related. The so-called "Operation Choke Point 2.0" (which as far as I can tell is just a term used by the Trump administration to describe behavior of the Biden administration) is about bank regulation, which is not under the purview of the SEC.
41. fakedang ◴[] No.44495218{5}[source]
Scale and exposure. That's my hypothesis.

Nobody wants to commit as much to Indian markets because it's relatively primitive compared to more lucrative markets such as the US, China, etc. Jane Street was an outlier in that they took a bold bet on executing this manipulation strategy. Hence they readily dumped in billions, with an assured annual 1B profit. Because there are not many players to dig in and track their moves, they went largely unnoticed by other players.

42. zaptheimpaler ◴[] No.44495761{5}[source]
Literally the case in question here is a crystal clear example of manipulation? What possible value does this trade provide to any other market participant, and where do the profits come from if it doesn't provide value?

More importantly, there is a lot of debate around what value HFT provides to markets, all I'm saying is that in general the Indian public does not believe its a net positive and SEBI acts accordingly. Maybe you disagree, that's fine.

43. jojobas ◴[] No.44496726{6}[source]
We can survive traders of questionable morals, especially if there's proper government; having a wall-street-asshole-tier immoral regulator is a one way street.
44. ◴[] No.44499093{3}[source]
45. ToxicMegacolon ◴[] No.44501250{5}[source]
> Which is fine, ... Not every place needs to be the same.

Exactly. Which is why certain country is fine with their school kids being shot at with assault rifles as long as they have freedom™