A new breed of trader on Wall Street

The Pak Banker - - OPINION - Lan­don Thomad Jr

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.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.