Jane Street and Citadel are rising powerfully—Wall Street has already changed.
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A new force is reshaping the landscape of Wall Street's lucrative trading business.
As of the second quarter, high-frequency trading firm Hudson River Trading’s trading income more than doubled to $2.6 billion, while Ken Griffin’s Citadel posted a record $5.8 billion in revenue in the first half of the year. Previously, Wallstreetcn reported that Jane Street had a net trading revenue of $10.1 billion in the second quarter, surpassing all major Wall Street banks.
The three main market makers together earned nearly $30 billion in trading revenue in the first half of the year, mainly benefiting from market volatility following Trump’s tariff war. Although still short of the top three Wall Street trading divisions—JPMorgan, Goldman Sachs, and Morgan Stanley—with a combined income of $48 billion, the gap is narrowing.
These privately held companies face less regulatory scrutiny compared to banking competitors and can use their own capital for larger-scale investments. After the 2008 financial crisis, banks faced stricter risk restrictions, ceding market space to these technology-driven emerging players.
Paul Rowady of research firm Alphacution stated:
The global financial crisis spawned a new market leadership reshuffle, with new entrants leveraging technological and quantitative data expertise, making them opponents that major investment banks cannot compete with.
Technology-Driven Trading Revolution
The core competitiveness of these electronic market makers lies in their cutting-edge technology.
Firms such as Citadel use advanced technology to quote prices for large volumes of assets such as bonds, and execute trades with extremely high speed and razor-thin spreads.
Although this model lowers the profit margin per trade, the sheer volume of transactions more than compensates for it and ultimately creates scale effects.
At the same time, the business scope of these trading giants has long since extended beyond their original starting points.
As electronic trading becomes more widespread in fixed income markets, trading opportunities in areas such as interest rates and corporate bonds are emerging, and both Citadel and Jane Street have made large forays into this field.
Citadel once became famous for dominating the U.S. stock market, but in recent years has incorporated corporate bond trading into its fixed income business, and is also involved in trading government bonds in the U.S., U.K., and Europe.
Jane Street originally started with trading American Depositary Receipts (ADRs), later expanding to ETFs trading on U.S. exchanges, and today holds a dominant market share in this asset class.
Shrinking Bank Businesses Give Way to New Entrants
While non-bank market makers are making great inroads, traditional banks have somewhat retreated in trading business.
Post-financial-crisis regulations have increased the cost for banks to use their own balance sheets for proprietary trading.
Earlier this year, Morgan Stanley closed its U.S. equities options electronic market-making unit, and Citadel promptly acquired the business.
This options exchange business brought Citadel a massive portfolio of equity options positions, as well as professional access at exchanges such as CME, Nasdaq, and the New York Stock Exchange.
Bloomberg’s head of market structure research, Larry Tabb, commented:
There aren’t many companies that can make this much money in the capital markets. When banks lose their competitive edge in trading, clients will ultimately turn to institutions that can directly provide them with the best prices.
Nevertheless, according to Tabb, banks still hold an advantage due to their massive balance sheets. He says:
If you really need a lot of capital, you can't always get it from Jane Street, Citadel, or Hudson River Trading.
Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account any particular user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their individual circumstances. Invest accordingly and at your own risk. ```