A new breed of trader on Wall Street
THE mood in the markets may be getting grimmer, but in the booming world of exchange-traded funds, people just want to party. And so it was last month at the $2.8 trillion industry's annual jamboree in South Florida, where 2,200 investment advisers and fund salesmen came together for three days of hard drinking and product pitching. Against a backdrop of New Orleans jazz bands and poolside schmooze-fests - some call it spring break for the E.T.F. crowd - one event stood out, though. It was an invitation-only party (crabs, cocktails and a D.J. on a moonlit dock) thrown by Jane Street, a secretive E.T.F. trading firm that, after years of minting money in the shadows of Wall Street, is now pitching itself to some of the largest institutional investors in the world. And the message was clear: Jane Street, which barely existed 15 years ago and now trades more than $1 trillion a year, was ready to take on the big boys. Much of what Jane Street, which occupies two floors of an office building at the southern tip of Manhattan, does is not known. That is by design, as the firm deploys specialized trading strategies to capture arbitrage profits by buying and selling (using its own capital) large amounts of E.T.F. shares. As the popularity of E.T.F.s has soared - exchange-traded funds now account for a third of all publicly traded equities - the spreads, or margins, have narrowed substantially, making it harder to profit from the difference.
And in many cases, some of the most popular E.T.F.s track hard-to-trade securities like junk bonds, emerging-market stocks and a variety of derivative products, adding an extra layer of risk. These dangers were brought home last August, when markets were rattled by China's decision to devalue its currency; some of the largest E.T.F.s 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 wearing flip-flops, shorts and hoodies, swung into action with a wave of buy orders. By the end of the day, the E.T.F. shares had retraced their sharp falls. "It's remarkable what they can do," said Blair Hull, a founder of an electronic trading firm who relies on Jane Street to make a market for his recently started E.T.F. "If you look at who provides this kind of liquidity these days, it's fewer and fewer firms." It is not only Jane Street, of course. Cantor Fitzgerald, the Knight Capital Group and the Susquehanna International Group have all capitalized on the E.T.F. explosion.
And as these firms have grown, so has the demand for a new breed of Wall Street trader - one who can build financial models and write computer code but who also has the guts to spot a market anomaly and bet big with the firm's capital. In a word, these are not your suit-and-tie bond and stock traders of yore, riding the commuter train into Manhattan. They are, instead, the pick of the global brain crop. Here is a small sample of Jane Street's main traders: Tao Wang (doctorate in philosophy and finance from the National University of Singapore), Min Zhu (master's in chemistry, Columbia), Brett Harrison (master's in computer science with a focus in artificial intelligence, Harvard) and Srihari Seshadri (bachelor's in computer science, Carnegie Mellon). For large asset management firms like BlackRock, Vanguard and Invesco, the business of rolling out one E.T.F. after another has become a major profit center. But in many ways, the real money is being made by the trading firms that specialize in making a market in these securities. For example, Jane Street, which is privately held, has increased its shareholder's equity, or net worth, to more than $1 billion today from $228 million in 2007. That cash cushion handily surpasses what such established investment banks as Evercore, Moelis and Greenhill have (as of 2014) as well as that at money management firms like Eaton Vance.