00:00Tell us a little bit more about what exactly Jane Street does in a single stock leveraged or inverse ETF.
00:05Yeah, sure. So we all know this year has an explosive growth of leveraged ETFs.
00:10But under the surface is this huge demand they all have for this derivative called total return swaps.
00:17Because think about where do they get the leverage, right?
00:20They turn to the swap dealers to get the two times and three times the returns they pass on to
00:27retail investors.
00:28And what we find is that Jane Street earlier this year has started to expand it into the swap business
00:34quietly.
00:35And by the second quarter now is that they provided a total notional amount of 1.2 billion swap to
00:4575 funds.
00:46And it's also interesting they focus on single stock products only so far.
00:51Yeah, well, you have a great chart here that shows that there's a lot of competition for the index leveraged.
00:56All the big banks do it. It seems more normal fare.
00:59But when it comes to single stock leverage, it's really sort of niche providers like a ClearStreet, who many people
01:06never heard of.
01:07So I think Jane Street probably thinks the margins are pretty good here, right?
01:10If you got only ClearStreet and they're very efficient, I'm sensing they see some profits to be made.
01:15Right, right, right. So ClearStreet has 21%, which is like a big outliner, right?
01:23And we also have Marix 10%, Nomura 10%.
01:26But, yeah, I would say this is an area that's kind of riskier, but more lucrative, as you imagine, right?
01:33The single stock leverage ETF underlying micro-strategy, some of the most volatile names.
01:39And as swap dealers, that means higher or more like a complex process as you do the hedging on the
01:46back end, right?
01:47And also what sources explain to us is they're a bit of a regulatory arbitrage because for big banks, there's
01:55more check and balance when they take on new business and how they manage, right, the counterparty risk.
02:01But for non-bank big dealers, more flexibility, they are more nimble.
02:05And for Jane Street, of course, right, that they have all the expertise in the ETF world already.
02:10Just about 30 seconds, Jane Street, could you see them getting into other swaps?
02:15Because we've been seeing filings for prediction markets.
02:18They might work on swaps.
02:19And also private companies might have swaps based on perps.
02:23Wow, that's a great question.
02:24I think it's possible because they actually registered earlier this year as a swap dealer for different asset class.
02:31So, yeah, that could be their next step.
02:34And I would say swap is you need lots of balance sheets, which is not a problem for Jane Street.
02:38And then it's all about hedgehog, again, they have the expertise.
Comments