The financial services business model can easily be summed up thus: shovelling large amounts of money around the system, and keeping whatever sticks to the shovel. You only have to look at a contract note for shares, or the fee for looking after your money, to see how much sticks. It is true for your thousands, and true for transactions measured in billions.

Making a tiny percentage on the movement of a very large sum leads to fabulous wealth – if you get the transactions right. Readers of Michael Lewis’s Going Infinite, the story of the rise and fall of Sam Bankman-Fried, describe how his particular talent for understanding odds and assessing risk came to the attention of an obscure financial trading house called Jane Street.

The Streeters (as they probably don’t want to be called) run a business trading bonds, shares and today’s exotic derivatives based on a combination of speed of execution and assessment of risk. They are so good at what they do that some of the original partners are (probably) billionaires. Last year the 422 traders generated net income of $22m each. Split between all 2,631 on the payroll, net income was $4m per head.

You will not have heard of them, and they like it that way. However, they decided to issue some bonds, and bonds require a prospectus. It is not public, but the FT’s Eric Platt has got hold of a copy. FT Alphaville describes Jane Street as “stupidly profitable”, and considering the numbers above (from the prospectus) it’s hard to disagree.

The values circulating round the world’s financial system are measured in trillions, but trading currencies, bonds, shares and their derivatives is super-competitive, requiring fast risk-assessment and high-speed execution. Generally, people have a poor understanding of risk. Lots of us have a fear of flying. Very few are scared of travelling in a car. Yet the chances of dying while flying are a thousand times smaller than while motoring. Bankman-Fried had an understanding of risk and odds that attracted Jane Street to him. Its traders are always taking chances (which sometimes go wrong) but with what they hope is a clear understanding of the odds.

The bond prospectus highlights this obsession with risk. Buying out-of-the-money – a form of insurance against a sudden catastrophic fall in price – cost the firm hundreds of millions of dollars last year. One risk is that buying this insurance is itself a risk (to group profits).

Investors of all sizes are progressively buying exchange-traded funds rather than individual shares or government stocks. The speed at which the trader can sell to cover an ETF redemption, or the arrival of shares to convert to the ETF can spell the difference between a profit or loss on the transaction, or whether a competitor gets there faster than you do. 

One day, maybe, artificial intelligence will be able to figure the odds faster than the fabulously wealthy traders at Jane Street. AI could certainly do the math (as they say) faster than any human brain. But all these decisions must be made fast, and with inadequate information of all the inputs. Humans have an innate talent for this, honed over millennia. As long as the traders stay streetwise, fast and nervous, they will continue to make the “stupid” sums of money that stick to their shovels.

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