Citadel vs. Jane Street
Doug Nolan
A week after Chair Powell encouraged the markets to keep running, run they did.
The KBW Bank Index jumped 2.7% this week, the DJIA 2.2%, the S&P400 Midcaps 2.2%, the Semiconductors 1.9%, and the S&P500 1.9%.
The Fed apparently has no issues with a conspicuous equities speculative Bubble.
No problem with a highly levered “basis trade”, bubbling “private Credit”, and leveraged speculation more generally.
The VIX (equities volatility) Index ended the week at 12.55, the lowest close since January 23rd.
The MOVE (bond volatility) Index traded Thursday (93.85) to the low since March.
Investment-grade spreads to Treasuries traded Monday at 85 bps, the low since November 2021.
Financial conditions work with a leg. And it appears that the loose conditions transmitted from the U.S. to the world are increasingly showing up in economic data.
“UK Recession Ends With Strongest Growth Since Lockdown’s End”; “Canada Added 90,000 Jobs in April, Most in 15 Months”; “Euro Zone Business Activity Grows at Fastest Pace in Almost a Year”; “Japan’s Service Activity Grows at Record Pace in April – PMI”.
Germany’s DAX equities index surged 4.3% this week (up 12.1% y-t-d), France’s CAC40 3.3% (9.0%), Italy’s MIB 3.1% (14.2%), Spain’s IBEX 2.3% (9.9%), and UK’s FTSE100 2.7% (9.1%).
The Hang Seng China Financials Index jumped 6.2% (18.2%).
Gold jumped $59, or 2.6%, this week to $2,361.
Silver surged 6.1%, while Platinum rose 4.4%.
Palladium gained 3.8%.
Copper rose 2.3%, closing Friday at a two-year high.
“US Sees Tighter World Grain Supplies, Sending Prices Higher.”
Wheat extended its blistering rally (up 6.6%), trading this week to a 2024 high (corn to early-January high).
Markets expect modest improvement in year-over-year inflation readings in next Wednesday’s April CPI report.
Preliminary May results from the University of Michigan Consumer Confidence survey were not encouraging.
Consumer Confidence dropped to a six-month low, as one-year inflation expectations rose two tenths to a six-month high of 3.5%.
Expectations were at 2.9% in March.
The bond market has been performing better than I would have expected, considering the fundamental backdrop (double threat of incessant inflation and unending supply).
Ten-year Treasury yields were little changed on the week.
The market closed Friday pricing a 4.92% Fed funds rate for the FOMC’s December 18th meeting.
This implies 41 bps of rate reduction by year end, up five bps for the week.
Perhaps the negative fundamental backdrop for bonds is today superseded by speculative dynamics.
May 10 – Reuters (Jamie McGeever):
“Leverage in the U.S. Treasury market is picking up again, counterintuitively feeding off a ‘higher-for-longer’ interest rate environment and building up potential trouble in the event of a price or rate shock.
After gradually but steadily scaling back exposure earlier this year, asset managers and leveraged funds are now rebuilding their respective long and short positions… at a rapid clip.
There is a lot of anxiety swirling around the U.S. bond market just now…, with inflation proving sticky, and the prospect of huge deficits for years to come…
But the longer interest rates are kept on hold, the more attractive it is for futures market participants - asset managers are drawn in by higher yields, and higher yields make the 'basis trade' more appealing...
Asset managers’ aggregate long position, spear-headed by mutual fund buying, has rocketed to a new record and leveraged funds’ short position is also expanding…
Data for the week to April 30 show that asset managers’ aggregate long position in two-, five- and 10-year Treasury futures rose to 8.15 million contracts, worth a record $1.045 trillion.
That’s up 12% on last year’s high.”
While on the subject of “basis trade” leverage…
Interviewed by Erik Schatzker at the Bloomberg Sell Side Forum, Citadel CEO Peng Zhao said the firm’s booming trading business was at a “record pace.”
“We had a very strong first quarter, and year-to-date we are running at a record pace.”
That’s saying something for a hedge fund operation that returned $7 billion of profits to its partners last year.
Operating as the “largest liquidity provider in the Treasury market,” Citadel has been a dominant player in the highly levered Treasury “basis trade.”
According to Zhao, the firm has recently expanded its powerful trading operations to investment-grade corporate debt.
As such, we should now include leverage in corporate bond-land to already massive Treasury, MBS and Agency levered holdings.
Leverage was likely integral in financing Q1’s record $530 billion of investment-grade bond issuance – while fueling a booming corporate debt marketplace and liquidity abundance more generally.
It’s worth noting that Citadel’s main hedge fund returned 5.75% during the first quarter.
Citadel has some competition.
While in business now for a couple decades, Jane Street really came into its own with the Fed’s massive Q1 2020 pandemic market liquidity bailout.
From the FT’s Eric Platt:
“Jane Street’s quarterly trading revenues have surged to their highest level since the start of the pandemic, as the secretive high-speed firm flourished alongside traditional Wall Street market makers.
The group expects its first quarter net trading revenue will be roughly $4.4bn, more than double the level it achieved a year prior and up 35% from the end of 2023...
The blockbuster figures underscore how Jane Street has quietly emerged as a trading powerhouse of global financial markets, out-earning a number of big rivals and banks.”
Jane Street is known to be a stealthy organization and must have abhorred all the attention when a couple former employees (Sam Bankman-Fried and Caroline Ellison) found themselves very publicly on the wrong side of a financial implosion – and the law.
A recent debt prospectus shed a little light.
A few highlights from Robin Wigglesworth’s April 29th FT Article, “Jane Street is Big. Like, Really, Really Big.”
“Jane Street estimates that, thanks to its strong growth in equities wholesaling, it accounted for 10.4% of all North American equity trading in 2023, up from 7.6% in 2022.
In other words, it is catching up on Citadel Securities, which reckons that it accounts for 23% of US equity market volume.”
“Globally, Jane Street thinks that it now accounts for over 2% of all trading in over 20 countries, and last year Jane Street also traded options with a notional value of $32tn, about 7.6% of all volume in Options Clearing Corporation contracts.”
“However, the firm’s prowess is particularly strong in ETF market-making.
Last year Jane Street’s monthly ETF trading volumes averaged $527bn, or about 14% of US ETF trading volumes and 20% of European ETF volumes.
Across the year that clocks in at $6.3tn.
For context, that’s about five times the London Stock Exchange’s entire trading volumes in 2023.”
“It is even more important as an ‘authorised participant’ — specialised market-makers that enable the creation and redemption of ETF shares — accounting for 24% of all primary market activity in US-listed ETFs, 28% in international equity ETFs and 12% in US equity ETFs.”
“Gross revenues came at a record $21.9bn in 2023, up 34% from 2022.
That’s equivalent to 1/7th of the combined equity, bond, currency and commodity trading revenues of all the major global investment banks last year.”
Occasionally, there’s an article that has me mumbling to myself: “Wow.”
I would love to take a deep dive into Jane Street’s balance sheet.
Total assets surged 34% last year to $140.2 billion.
I’ll assume most of its levered assets are financed through the repo market.
Would love to see Citadel’s balance sheet for that matter. It’s crazy to think that Citadel (23%) and Jane Street (10.4%) combine for a third of “U.S. equity volume.”
Perhaps the bigger – and more systemically important – story is unfolding in fixed income.
Citadel appears in a mad scramble to challenge Jane Street.
The most eye-opening sentences in the FT’s “Really Big” article:
“Jane Street is particularly dominant in fixed income ETFs, accounting for 41% of all primary market activity according to its bond prospectus.
The trading firm has used this as a bridgehead to break into corporate bond trading territory long dominated by banks.”
Not much concern of late for Treasury market liquidity, at least not so long as the “basis trade” Bubble continues to inflate.
And no fretting an ETF liquidity accident, especially with Citadel and Jane Street battling head-to-head for fixed income ETF market-making dominance.
I’ve for years warned of mounting liquidity risks, specifically in Treasuries and the ETF complex.
Both benefit momentously from the moneyness attribute of perceived liquidity and safety.
And especially after the Fed’s unprecedented March 2020 market liquidity bailout, faith in Treasury and ETF liquidity and market function has never been stronger.
Moral hazard is today a greater issue than ever.
The likes of Citadel and Jane Street have become too big to fail – and they operate as such.
And to see them (and their use of leverage) expand so aggressively corroborates the “Terminal Phase” excess and speculative “melt-up” theses.
For Fed officials to stick with “sufficiently restrictive” is bunk.
The Bank Index (BKX) has returned 11.9% y-t-d.
A look at first quarter asset growth doesn’t square with “restrictive.”
JPMorgan Total Assets ballooned $215 billion, or 22% annualized, during Q1 to $4.091 TN.
Bank of American Total Assets grew $93.7 TN, or 12% annualized, to $3.274 TN.
Goldman Sachs Total Assets expanded $56.8 billion, or 14% annualized, to $1.698 TN.
Perhaps the more notable growth is with the powerful non-banks, which seem to follow the trajectory of Citadel and Jane Street.
KKR Total Assets expanded $22.5 billion, or 28% annualized, during Q1 to $340 billion.
Apollo grew $20.6 billion, or 26% annualized, to $334 billion.
Intermediating “subprime” corporate debt into annuities with enticing yields is quite the booming (“private Credit”) business.
It was a fitting Friday FT (Brooke Masters, Harriet Agnew, Jennifer Hughes, Eric Platt, Antoine Gara and Stephen Morris) headline:
“‘There’s Money Everywhere’: Milken Conference-Goers Look for a Dealmaking Revival”: “The Hilton and other nearby hotels were heaving, with elevators packed to the gills and every table and chair claimed for rounds of speed dating with potential financial partners.
But the big business was done behind closed doors in hotel suites and in the homes of local tycoons.
‘It’s like going to Las Vegas,’ the co-founder of one alternative asset manager said.
‘There’s money everywhere.
Everyone is looking around, seeing who else can I talk to.’
The conference was the largest it has been since the return to in-person events after the pandemic.”
I’ve studied enough market history – including the fateful “Roaring Twenties” period – to be uncomfortable with much of what I observe these days.
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