This is an audio transcript of the Unhedged podcast episode: ‘The titans of Wall Street’
Katie Martin
A whole bunch of massive trading companies sprung up in the past few years. But rather than having huge rooms full of shouty old-school traders on phones blaring at each other like in the good old days, they have computers and super-smart coders.
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We’ve been writing all about these new titans of Wall Street in the FT recently, and you really must check out the excellent series. But today on the show we’re asking, do we welcome our new robot overlords?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets economist here at FT towers in London, and I’m joined down the line from Oslo by yet another Norwegian titan, although you’d never know it from the name, Robin Wigglesworth. Robin, how are you doing?
Robin Wigglesworth
I’m doing pretty well, though it’s cold here in Norway now.
Katie Martin
Oh really? How cold?
Robin Wigglesworth
Like too cold and too dark. I don’t even wanna talk about this. Depressing.
Katie Martin
So these titans, these like super nerds who are kind of controlling the markets now, this has been a passion project of yours for a while, right?
Robin Wigglesworth
Yeah. I think I first pitched a series like this 10 years ago now. Then, you know, you really saw it in the stock market. They were really huge. In fact, they had completely obliterated the banks in that area. But now they’re kind of, they’re spreading their wings, they’re growing bigger, they’re more ambitious and they’re making just obscene amounts of money.
Katie Martin
So, you know, back when I was a cub reporter, I spent some time being sort of toured around trading floors in the City and spending a little bit of time there. And the traders would write down on a little yellow piece of paper the time, the price and the counterparty of the thing that had been traded, put the little yellow piece of paper to one side and then someone would scoop up the piece of paper and reconcile all the trades at the end of the day.
And pretty obviously, that was quite ripe for technological revolution, right? So you went from the point where you no longer have to call up five banks. You just get a machine to automatically ask five banks and then pick out the best price for you. And that’s kind of how this all evolved, right?
But the point is that 20 years ago, the banks were at the centre of this. So how did they lose their grip? How did they let this go to a bunch of companies that like normal people have never heard of?
Robin Wigglesworth
It’s technology, right? I mean, we’ve seen it in many other areas that are fundamentally like people are the incumbents. They’re big, they’re strong. They think nobody’s gonna take their lunch money. And then somebody comes who’s smarter, nimbler, usually uses technology to do something better, faster, more efficiently. And that’s basically what it was. The banks for a long time thought was like their personal playground, like the bond market. There was no way algorithms would ever work there. And lo and behold, we are actually seeing now that, you know, most US government bonds trade by algorithm today, not by people on the phone. And I think banks were just really slow to wake up to this.
Katie Martin
Yeah. I mean, banks were slow, but there was a couple of, you know, big pieces of regulation over the years as well, especially since the financial crisis of ’08, ’09 that sucked risk away from the banks. Like basically like politicians and just the public at large got sick and tired of banks being this nexus of risk that could just spread across financial systems. And it was time to spread that more evenly and in a more heavily regulated way.
So one of the things that’s happened as a result of that is this flourishing of what we call the shadow banking system, right? And you have, you know, lots of different parts of the financial system like private equity companies and pension funds that are like not banks, but that are really important areas where risk can kind of coagulate. And on trading, it pushed a lot of trading, a lot of risk away, again, away from banks and into these other places. You know, why is that? It’s around, you know, people talk about warehousing of risk. What does that mean?
Robin Wigglesworth
Well, essentially the banks, one of the ways they were able to compete for quite a long time after trading became electronic was that they were just massive warehouses of stocks, bonds, currencies, whatever. Smaller trading firms couldn’t do that. So if you’re a Goldman Sachs or a JPMorgan, you’d have essentially like imagine it’s a big Costco or a Tesco’s or a big shop. Everything you want to buy you can just get right there. You’d walk into JPMorgan and say, I fancy a bit of IBM bonds or give me $20mn worth of Tesla shares. And they’d have it there or be able to get it really quickly.
But eventually what we found out that those warehouses were risky. They stored all sorts of crap there before 2008 and they kind of blew up the shop. So we had to bail them out.
After 2008, yes, all these regulations basically meant that banks were not able to warehouse as much as they used to. The financial securities they used to carry on their own balance sheets for buying and selling, sometimes, frankly, for their own profit, not even for clients. They were basically like big, sprawling hedge funds. That world basically ended.
So technology had already caught up. The trading firms had already established themselves in places like the stock market. But after ‘08, all the regulation that came afterwards, essentially it changed a game in every market to a greater or lesser extent.
Katie Martin
Yeah. So who are these firms that are now kind of controlling how all these instruments change hands?
Robin Wigglesworth
The big ones, the really big ones are firms like Citadel Securities, Jane Street, Susquehanna and Jump Trading. Many of them were started by former traders that . . . Some of them actually worked in the trading desks back in the day and they were able to adapt. They saw the way technology was going to change things so they jumped on that trend before they got swamped by this, actually. And now these are the biggest trading firms in the world. I mean, a firm like Citadel Securities just, I mean, it trades a mind-boggling number of securities not just a day but per second at speeds that frankly would astound physicists just 10, 20 years ago.
Katie Martin
So I was refreshing my memory of the piece that we ran about, you know, these titans of Wall Street just earlier. Citadel Securities trades something like $455bn worth of stuff every day. It counts for something like a quarter of all US stock trading. How can it be that the person in the street has never heard of Citadel Securities and yet it is so powerful?
Robin Wigglesworth
Citadel securities has become a bit of like a bête noire for certain sort of online corners of the internet.
Katie Martin
Very online people. That is true.
Robin Wigglesworth
I think it’s because, you know, frankly, like most people before ’08 didn’t really know Goldman Sachs either. And finance doesn’t really interest people that much always. And quite often this is the stuff that happens in the background. Like people have heard about the New York Stock Exchange. But if you buy a stock on the New York Stock Exchange, chances are very good that it’s actually Citadel Securities that’s delivering it to you. You don’t really know that. It’s the same way that when you order something on Amazon, you don’t really know which courier is bringing it to you. You don’t really care. But that’s essentially what Citadel Securities and Susquehanna is. They are courier companies that deliver financial securities left, right and centre around the world and basically take a spread. Like they pocket the difference between the price it costs to buy it and to sell it. And they do this a bajillion times throughout the day and over time that adds up to like serious moolah.
Katie Martin
Now, one of the ways that Jane Street — former employer, as it so much enjoys being reminded, of one Sam Bankman-Fried — but one of the ways in which it really kind of got a leg up not so long ago was first of all, it really latched on to the ETFs thing, which I know is like another hobbyhorse of yours. And secondly, it really gets crypto. I mean, how has that all worked?
Robin Wigglesworth
They are kind of agnostic about what they trade. Some of these trading firms literally trade betting odds. Like they make markets in betting markets — really gambling, essentially. And some of them trade stocks, some of them trade bonds. And they all have different strengths and flavours and the cultures are sometimes very distinctive and in different ways.
And Jane Street, it kind of, it really, really loves puzzles. And it kind of thought that figuring out how to make markets in ETFs was a bit of a puzzle. And they just kind of cracked it first and did it better than everybody else. And over time, that kind of expertise, it compounds. And as ETFs have grown into this sort of $10tn industry, Jane Street is kind of dominant in making markets in ETFs. And that’s kind of its main piggy bank.
Katie Martin
Speaking of being a puzzle, right, they don’t have a CEO, right? They have this like weird sort of flat structure, right? Like these firms all in their own very special ways are all quite weird, no?
Robin Wigglesworth
Yeah. I mean, the way it is in the eyes of the beholder. But yes, they are definitely not . . . They don’t look like anything you’d normally expect from corporate America or (inaudible). I mean, Jane Street will probably make more money than Blackstone does this year, and it looks nothing like that. It’s, far as I know, it doesn’t have a CFO or anything like that. It just has basically 40 people that own the company together, the equity owners. And they kind of run it like a partnership. And there are certain people that whose voice maybe counts more, but it seems to be genuinely quite egalitarian.
And then you have someone like Citadel Securities, where in theory it’s run very separately from Citadel the hedge fund. I mean, they’re two different companies that just happen to be owned by Ken Griffin. And Ken Griffin doesn’t run Citadel Securities but like, he’s the man. He is Louis XIV. He is the Sun King of the Citadel empire, right? So there is one guy at the top and everybody knows who it is.
And at some of these other firms, it’s kind of less clear and they kind of they wrote their origin stories a little bit kind of weird or in funky and quite often started by a bunch of friends. Like there were poker buddies that started Susquehanna, for example.
Katie Martin
Are they all men or am I imagining things?
Robin Wigglesworth
No. This is not an area of finance that is blessed with a lot of gender diversity. There are quite a lot of women working at them. But if you look at these senior management, and we don’t even know who the senior people all of them are at Jane Street, for example. Even if we go to like Citadel Securities, it’s not enormously balanced.
Katie Martin
Anyway, the people that do work there earn a metric tonne of money. So like at Jane Street, the average pay is about $900,000 a year for employees. That’s more than, like a lot more, like three times more almost than the average pay at Goldman Sachs. Like, you know, if you know how to do this, if you are a smart enough coder and if you can kind of survive in this kind of environment, then you are made.
Robin Wigglesworth
Yeah. Jane Street in particular is pretty crazy. I think it’s almost performative high pay on the lower side of things. Like their image is they want the smartest of the smart. They want the smartest finance people. They don’t give a crap about people coming out of Wharton. They want the top decile or percentile of computer science degrees, mathematicians, physicists from Cambridge, Oxford, Harvard, Yale, Stanford, and so on. They want the cream of the cream. And in that case, it almost pays to just pay interns City money. I mean, one thing that I discovered recently was that internships pay a greater annual salary at Jane Street than the chair of the Federal Reserve is making. Jay Powell makes around $203,000 a year, which is pretty good. But interns at Jane Street can expect $250,000 a year annualised.
Katie Martin
You know, a lot of this is US-based, but there is a kind of UK homegrown success story here, too. Like remember, like, you know, years ago there was this sort of, you know, thing on the periphery of currency trading that everyone was becoming aware of about 10, 15 years ago, maybe a little more, called XTX. And they had these like big ambitions. They were like, you know, we’re gonna start making prices in currencies and the banks are gonna know our name.
Now, hoo boy, XTX is making literally billions in profits. It’s run by this really kind of enigmatic guy called Alex Gerko. He’s only in his early 40s. He’s described as one of the mega geeks in this space. What can we learn from the XTX experience? And again, you know, you talk about like companies in this space that kind of fly below the radar, but XTX is kind of pretty performatively secretive in all this too.
Robin Wigglesworth
Yeah. I mean, it is definitely one of the more fascinating firms. America dominates the space but there’s always been a big trading culture in the UK and the Netherlands as well. There are actually quite a few big and medium-sized trading firms in the Netherlands are also very successful. But XTX is kind of the real story there. And it is fascinating.
I think it’s a good example of, again, the banks thought that in currencies, which to my understanding where XTX really sort of made its bread and butter for a long time, they thought, well, nobody’s really gonna compete with us there because we’re big banks. We have operations around the world. We handle buy and sell currencies all day long for corporate clients and central banks and so on. Nobody’s gonna be able to muscle us out there.
And lo and behold, XTX seems to have done an unbelievable job, and then used that as a kind of branched out into all sorts of other areas. And in the space where like a lot of very geeky alpha nerd vibes, you know, XTX is definitely up there in the top of the alpha nerds.
Katie Martin
One of the things that really kind of shines through from all the reporting that we’ve done on this — and again, like if you’re listening, do check out this series. It’s really good fun and really interesting. But one of the things that shines through is that a lot of the kind of really big hitters in this space are super media shy. They absolutely love to be in the shadows, under the radar. They’re not interested in public exposure, with the possible exception of Ken Griffin from the Citadel empire.
Personally, I find that a little bit weird and just makes me think if anything were to go wrong in this space, because they are now like a pretty important part of the financial system, how forthcoming would they be? What kind of relationship do they have with regulators? You know, do you think there’s a bit of this kind of secrecy that is possibly unhelpful here?
Robin Wigglesworth
Well, yes and no. I’m always a little bit torn on this because obviously, as a journalist, I want everybody to talk to me all the time whenever I want it and all the information they can give me when I need it. But like, frankly, look, if I was like a multi-billionaire trading mogul, I probably would talk to journalists all the time either. I mean, some people love the spotlight.
And these firms, from the nature of like who founded them and who they are today, that kind of chest-thumping macho stuff that you sometimes see on Wall Street, that isn’t their culture. They don’t want to be seen to be beating Goldman Sachs and Morgan Stanley. They’re quite happy if they do it, but they don’t necessarily want everybody to kind of gawp at how much money they’re making. They just want to make it, essentially. There’s a bit of pride, obviously. They’re humans as well. But I actually understand that kind of what we sometimes see is really annoying secrecy, I think they see as a bit of helpful modesty.
There was one pretty notable exception, at least for a period in this whole kind of desperately seeking secrecy trend. And that was Alex Gerko from XTX. For a period he was what I would call a good old-fashioned shitposter on Twitter when it was still called Twitter. I mean, he was on there all the time. He was picking fights. He was, you know, bragging as well. But he was being really smart, engaging. I actually learnt a lot from it. And as much as I can see why he left, I thought, you know, it was actually quite valuable to have somebody high, quite a high profile in that industry being very public about stuff and frankly, you know, crapping a little on rivals. And we’re journalists. We love people crapping on their rivals.
Katie Martin
Yeah, we love that sort of thing.
Robin Wigglesworth
Half our job is to get people to do that. Yeah.
Katie Martin
Yeah. He does still unleash a little bit of shitposting on LinkedIn, which is like kind of professional shitposting, but yeah, not on the same scale as his Twitter days.
So yes, they are slightly reluctant to talk to you and me, for example. But the fact is that like behind the scenes, although people have never heard of them, they are fundamentally pulling down trading costs for everybody, like in the round. You know, they are effectively performing a socially useful purpose, in a way. Do you think they are making markets better?
Robin Wigglesworth
I do. Not as much as maybe they think they are. I mean, there are sometimes with these trading firms, they pretend that what they’re doing is kind of solving cancer, and they’re just providing liquidity and like that’s an important service.
But broadly speaking, I do think it is problematic from a societal perspective that the pay is so egregious in some of these sectors that they suck up some of the smartest people on the planet, work in kind of narrowing spreads in ETFs rather than, you know, solving world hunger or whatever, teleportation or whatever it’ll be — some sort of next-gen science fiction would be better.
But yeah, you know, people don’t always like to hear it or agree with me when I say this, but there’s never been a better time in the history of mankind to be an investor. It has never been cheaper to buy or sell a stock or a bond or to invest in an ETF or a fund. A lot of that are these firms. They’ve used technology to essentially reduce how much rent the finance industry extracted from our savings. Like every time we bought and sold the bonds 10, 20, 30, 50 years ago, banks used to stand in the middle and make an obscene amount of money. They extracted a rent from the system.
Katie Martin
Just cream money off, yeah.
Robin Wigglesworth
Yeah. Constantly. And you know, the trading firms do that now. They also extract rent but they extract a lot less from the system than the traditional finance industry did 20, 30 years ago. And that is, in a very kind of diffuse way, a genuine boon to the world.
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Katie Martin
Well, again, you know, not to labour the point, but listeners, do check out this series. They are a seriously curious bunch of characters. But we’re gonna be back in a sec with Long/Short.
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Now it’s time for Long/Short, that part of the show where we go long a thing we love and short a thing we hate. Robin, what you got?
Robin Wigglesworth
Well, obviously this is slightly gratuitous, but I’ll plug our pub quiz. Like Alphaville, the bit of the FT that I run, we run a pub quiz in New York and London, and we have one coming up in November in New York on November 12th. And I love it. It is genuinely a tonne of fun, though I have to admit I’m very glad I’m not competing because the questions are stupidly difficult.
Katie Martin
Fiendish.
Robin Wigglesworth
But I do love it. I get to pretend I’m so smart I can’t manage the question. Maybe that’s why I secretly love it.
Katie Martin
Yeah. Robin Wigglesworth and shameless self-promotion. Shock.
I’m long honesty. So you know how you get, like, notes from banks everyday, sort of general kind of this is what happens in the . . . This is what’s going on in the markets and these are the kind of things to watch out for today. And they always try and put like really complicated titles on these things and possibly make a pun and this and that.
There was a research note out from Rabobank today titled “Trying to explain yesterday”. And I think that is the perfect title for daily sellside research.
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It’s a massive yes for me. I think everyone should emulate it.
Robin, it’s been a pleasure. Listeners, we will be back in your ears on Thursday, so listen up then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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