GS Goldman Sachs Group Inc

High-tech trading firm Jane Street Capital is challenging traditional go-betweens

By Matt Wirz 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 6, 2019).

A high-tech trading firm known for its dominance of the exchange-traded fund market is pushing into territory long controlled by Wall Street banks: corporate bonds.

Investment banks and brokerages are the main go-betweens for money managers looking to buy and sell corporate bonds, about $25 billion of which trade daily in the U.S. Now, Jane Street Capital LLC, has begun offering the same service to investment firms on electronic trading platform MarketAxess and has recruited about 60 clients, people familiar with the matter said.

The move puts Jane Street in direct competition with traditional dealers like Goldman Sachs Group Inc. and JPMorgan Chase & Co. It also shows how bond markets are being transformed by electronic and algorithmic trading, innovations that swept stock and currency markets more than a decade ago.

Jane Street's headquarters are a five-minute walk from Wall Street, but in some ways the firm is more akin to a Silicon Valley startup than an investment bank. "They have a different approach -- there's not a lot of sales and a lot of technology," says Mike Nappi, a bond trader for mutual-fund manager Eaton Vance Corp. who has bought and sold bonds through Jane Street. "That's different from a traditional bank where they have a lot of sales and the technology is more like Microsoft Excel."

To be sure, bulge-bracket banks are also using technology to trade more bonds at a lower cost. JPMorgan, Goldman and others have adopted algorithms and automation to increase the number of smaller bond trades they do while freeing up human traders to focus on larger and more profitable transactions, people at the banks said.

Founded in 2000, Jane Street is a proprietary trading firm -- it doesn't manage money for outside investors -- that specializes in ETFs. The firm uses computer algorithms and human traders to buy and sell the funds and their component securities to take advantage of price differences. The company expanded into other areas as ETFs spread from stocks to different asset classes; it now makes markets in stocks, derivatives, currencies, commodities and bonds.

Jane Street has traded anonymously on MarketAxess for two years but in recent months it also became a so-called disclosed dealer on the platform, the first such transition by a MarketAxess client, according to people familiar with the matter. The new status allows bond investors to include Jane Street on trading requests they make to the dozens of dealers already active on the electronic venue.

By joining those ranks, Jane Street aims to get recognition from asset managers for the balance sheet it uses to buy and sell with them, ultimately boosting the amount they trade with the firm, said Matt Berger, the firm's head of fixed income and commodities trading. Jane Street trades about $550 million worth of corporate bonds in the U.S. every day, he said. This amounts to about 2% of the overall market, five times more than the firm traded two years ago.

That expansion would have been impossible without the recent spread of electronic bond trading.

Technology-driven trading firms like Jane Street and Virtu Financial LLC emerged after stock exchanges electronified in the 1990s, connecting buyers and sellers through computers and reducing trading times to fractions of a second. The firms' computer scientists built programs to cull market data and identify profitable trades that humans missed. Now, quantitative trading firms dominate the stock market.

Electronic trading has been slower to catch on in debt markets because bonds typically trade over-the-counter rather than on centralized exchanges. That has begun to change over the past five years as banks and money managers turn to electronic trading and data analysis to trim costs and to connect to more trading partners. Electronic trading platforms like MarketAxess have given Jane Street and other quantitative investors venues to apply the technology they used in other markets.

MarketAxess accounted for about 18% of all U.S. investment-grade bond trading last year, up from 12% in 2014, according to data from the company.

Jane Street, founded by four partners including Michael Jenkins and Robert Granieri, now has about 50 bond salespeople and traders. Recruiting materials tout chess facilities, office gyms, math puzzle contests.

The firm trades less debt overall than most banks, which still employ hundreds of human sales and trading staff. But when it comes to its inventory of corporate bonds, "we are on par with the banks," Mr. Berger said.

Jane Street hold bonds on its balance sheet for days or weeks to facilitate so-called portfolio trades of bundles of bonds often tied to ETFs. The portfolio deals normally range from $50 million to $750 million but can go as high as $2 billion, a person familiar with its trades said.

Traditional dealers like Goldman also provide portfolio trading. But banks in general have scaled back their bond inventories because regulations like the Dodd-Frank Act increased the capital banks must set aside against such holdings. Primary dealers held about $6 billion of investment-grade corporate bonds in March, down from about $14 billion in 2013, according to data from the Federal Reserve Bank of New York.

Jane Street held $2.2 billion of corporate bonds in December, up from $319 million a year earlier, according to Securities and Exchange Commission filings. The company also makes bets that other ETF and bond prices will decline to hedge its corporate bondholdings, the person familiar with its trades said.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

April 06, 2019 02:47 ET (06:47 GMT)

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