00:00Jane Street suffered roughly $15 billion in losses last month, its first losing month in a decade.
00:06The hit came from its investment in AI-focused hedge funds, situational awareness, and wrong-way bets in Asian equities.
00:12Despite the setback, Jane Street still has generated over $40 billion in trading revenue this year.
00:17For more on that story, Bloomberg Finance reporter who covered this, Catherine Doherty, joins us now.
00:22Catherine, great to see you. So what exactly was behind the setback for them?
00:26So situational awareness is the primary headline driver for these losses.
00:32This is a company that is not just purely market-making, moving in and out of positions.
00:37They have started to take investments over the long-term, hedge fund-like.
00:43Situational awareness, the hedge fund, they had a stake in that.
00:48They are backing the founder.
00:50This is also a company that is backing many AI startups across the board.
00:55So putting their money not just in the market as a trading firm providing liquidity, but as a venture capital
01:02firm, in a way, backing some of these new companies.
01:06They have been really big in artificial intelligence infrastructure, helping chip makers, helping the data center builders, building their own
01:15data centers.
01:16And so what you've seen today in the month of July, the reported losses that the firm has had to
01:23deal with and they have absorbed those losses, that is because of not the market-making losses that they did
01:31experience in Asian equity markets.
01:33So there have been other losses outside of AI bets that they made, but the primary driver is in both
01:40situational awareness, the hedge fund, the stake that they had in that firm, and their own AI bets as well.
01:47It's interesting that it's been a decade since they've had a down month.
01:52And I wonder if for Jane Street, this does represent an era of more volatility.
01:55If they are making these VC-like bets at a time when we don't really know how AI is going
02:00to play out, and public markets are incredibly volatile, and you get situations like situational awareness.
02:05If this is a norm for Jane Street, but not necessarily a bad thing, if you can have these mean
02:10reversions like we have over the past couple weeks.
02:12I do think that the record revenue that the firm has been setting is in large part due to the
02:19risk that they have been taking.
02:20They've been able to extend the time frame that they've been placing bets and basically moving in with the market,
02:30trying to think about what is the not just day-to-day movement across equities, options, ETFs.
02:37That is the primary foundation of this firm.
02:40They had started as an ETF market maker and have expanded now to other asset classes, and they've also expanded
02:49their time horizon of the risk that they're able to absorb.
02:53So I think that what we have seen with their revenue now catching up and exceeding the biggest banks on
03:01Wall Street, that comes with losses as well.
03:04So it's going to be a big deciding factor.
03:10The firm has now said that they've taken and reduced their risk-taking overall, so they've learned from this mistake
03:18in July specifically.
03:20So now it's just a matter of what does risk mean for them in the future, and will they put
03:26on some of that risk that they took off after this huge reported loss in July.
03:31How much of this is isolated to Jane Street in terms of moving into different asset classes versus this universe
03:36as a whole looking at getting in on the ground floor of AI and also acting more like a VC?
03:41So there are other market-making firms, Hudson River Trading, Jump Trading in Chicago.
03:47These firms that are technology-first, they have started backing some of these startups in the AI infrastructure space specifically.
03:57And what we're going to see in the future is these firms are users of some of these startups.
04:03They also back firms like CoreWeave, Anthropic.
04:07So they're across the board within AI and AI infrastructure.
04:11They're not just users but investors.
04:15So it's really going to be the next chapter of this story is how much of that is the compute
04:22power that they have both invested in, again, building their own data centers, and then being partners with some of
04:29these firms.
04:30How does that translate into revenue?
04:31How does that translate into their businesses growing not just as market-making firms but as these venture capital and
04:39firms that are really betting on the future of AI and how that translates into their own business?
Comments