Jane Street Lost $300 Million Trading Trump's Election

Going Infinite by Michael Lewis

From Going Infinite by Michael Lewis. Quotes are from the book.

Jane Street noticed in late October of 2016 that the global stock markets tended to move noticeably with any news that affected Trumps odds of winning the election. The markets moved positively when Clinton's odds increased and moved negatively when Trump's odds increased. Emerging markets like Mexico moved negatively when there was goods news for Trump.

Sam Bankman-Fried took the lead for this project and Jane Street traders believed that they could find a way to somehow get the election data before anyone else on the planet and use it to trade the financial markets. Before the rest of the world got their election results through CNN and other major news corporations, Jane Street would already known the outcome and have made their bets in the financial markets.

" On the night of November 8, 2016, the machine Sam designed and supervised worked beautifully. The Jane Street traders were indeed able to get a jump on CNN, sometimes by seconds, usually by minutes, and occasionally by hours. “Trump up!” one Jane Street trader would shout, and some other Jane Street trader would sell stocks. Five minutes later John King would confirm the fact, and the market would move... By the time they’d finished, Jane Street had placed a bet of several billion dollars against the S&P 500 and another quarter of a billion or so against the stock markets of other countries, especially Mexico, whose economies were most likely to be damaged by a Trump presidency. Around one in the morning, after twenty-four thrilling hours without a break, Sam left the trading desk to get some sleep. The markets seemed to have fully digested the news of Trump’s victory. Jane Street was sitting on maybe the single most profitable trade it had ever done. “It was the most exhilarating day I ever had at Jane Street,” Sam said. Three hours later he returned to find that the markets had changed their minds about the likely effects of Donald Trump on the world’s stock markets. “It was supposed to be Armageddon,” said Sam. “And maybe it was. But it wasn’t Armageddon for US markets.” Markets in the United States actually had rallied, and most of the Jane Street bet was against the US stock market. “What had been a three-- hundred-million-dollar profit for Jane Street was now a three-- hundred-million-dollar loss,” said Sam. “It went from single most profitable to single worst trade in Jane Street history.”

What did Jane Street do next? Pretty much nothing. This is amazing.

"In retrospect, they had spent too much time getting their information and not enough time thinking about how to use it. They’d just assumed that a Trump victory was a global financial disaster. In retrospect, the trade they should have done was obvious (in retrospect it always was): bet on the damage to small foreign markets being greater than the damage to US markets. They should have bought the S&P 500 and sold bigger amounts of, say, the Mexican stock market. “There was an extremely good trade in it that we fucked up,” said Sam. “I thought the postmortem should be we almost nailed this. Everything we put a lot of thought into we did quite well.” Instead of trying to figure out how they might do such a trade better the next time, Jane Street’s bosses decided they’d made a mistake by trying to do such a trade at all. “It was, We have no intuition for this, and we’re not going to do it, and we’re going to all not talk about trading on elections for a while until this isn’t seared into our memory.”

This is a great reminder that as long as systems are correct, there should be no punishment. This incident reminds me a lot of VCs and SWFs response to investing in FTX without doing proper due diligence and checking their books thoroughly. The common man will ask for resignations and risk departments to get fired after investing in such an enterprise but the right way to move on is to figure out if any systems in place were wrong and fix it instead of being emotional. Also the last part is wonderful. "we’re going to all not talk about trading on elections for a while until this isn’t seared into our memory"

Albeit three orders of magnitudes smaller in size in terms of pnl and intellect, I resonated so much with this story.