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518 points bwfan123 | 18 comments | | HN request time: 1.518s | source | bottom
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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.
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1. 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.
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2. ycombinatrix ◴[] No.44483856[source]
Our 401k & pensions are managed by "finance bros"
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3. sokoloff ◴[] No.44484120[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.
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4. ycombinatrix ◴[] No.44484215{3}[source]
Good luck moving "your" money out of a shared pension plan.
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5. sokoloff ◴[] No.44484400{4}[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.
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6. 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.

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7. zeroCalories ◴[] No.44484825[source]
My 401k is a well diversified portfolio of stocks and bonds, not a HFT or options trading playground.
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8. ◴[] No.44484892[source]
9. zeroCalories ◴[] No.44485028[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.
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10. triceratops ◴[] No.44485297{3}[source]
> portfolio of stocks and bonds

> not a HFT or options trading playground

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

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11. throwaway2037 ◴[] No.44485718[source]
In 2025, most people have passive index tracking funds in their 401k. Not exactly rocket science.
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12. throwaway2037 ◴[] No.44485731{3}[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?
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13. esseph ◴[] No.44485797{3}[source]
Maybe, but most working adults don't have a 401k. It's almost 50% last I checked.
14. Fade_Dance ◴[] No.44486171{3}[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.

15. zeroCalories ◴[] No.44492086{4}[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.
16. BobaFloutist ◴[] No.44492399{5}[source]
For defined benefit you need to care if it goes insolvent.
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17. sokoloff ◴[] No.44492692{6}[source]
That's where PBGC comes in: https://www.pbgc.gov/wr/benefits/guaranteed-benefits/your-gu...
18. fakedang ◴[] No.44495218{4}[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.