To close observers of Wall Street, the fall of Sam Bankman-Fried carried a curious twist: The man whose unbridled recklessness may have led to one of the largest financial frauds in history started his trading career — and met many of his future lieutenants — at an under-the-radar firm known for keeping a tight grip on its financial risk.
The collapse of FTX, the cryptocurrency exchange that Mr. Bankman-Fried founded, has drawn attention to Jane Street Capital, a behemoth Wall Street firm that has few outside clients and mostly invests its own money. But when Mr. Bankman-Fried joined Jane Street fresh out of college in 2014, its reputation for risk management wasn’t what attracted him.
Instead, he went there because of his interest in a philanthropic movement called effective altruism, which holds that taking a high-paying job is worthwhile if the end goal is to give much of the income away.
Mr. Bankman-Fried had heard about Jane Street through the effective altruists he already knew — many of them young, with roots in the technology industry. Once he joined the firm, working out of its main office in downtown Manhattan, he built ties with more than half a dozen colleagues with similar views, who later became part of the FTX universe.
Among them was Caroline Ellison, a onetime romantic partner who later ran Alameda Research, a crypto trading firm that Mr. Bankman-Fried founded after leaving Jane Street.
“The sorts of people who are into effective altruism are not the sort of people who would flourish” in investment banking, William MacAskill, a British philosopher who is considered a leader of the movement, said in an April interview with The New York Times. “But Jane Street has this very nerdy, intellectual culture, so it’s a better fit.”
Mr. MacAskill was one of several people with connections to Mr. Bankman-Fried who spoke to The Times last year, before many distanced themselves in the wake of FTX’s collapse.
Jane Street, which had become informally associated with the effective altruism movement, seemed like an obvious place to start. The firm projected an anti-Wall Street bent, where casual clothing was the norm well before the pandemic and playing puzzles was part of a trader’s training. It recruited heavily from college campuses such as M.I.T., Carnegie Mellon and the University of California, Berkeley; paid junior employees handsomely; promoted a flat hierarchy; and saw little turnover.
A spokesman for Jane Street said that many people at the firm were involved in philanthropic giving, some donating to causes associated with effective altruism, but that Jane Street itself never had any connection to the movement. He declined to make anyone at the firm available for an interview.
The firm was founded in 2000 by Tim Reynolds, Rob Granieri and Michael Jenkins, all former traders at Susquehanna Investment Group, and Marc Gerstein, a former IBM developer. It was among the handful of trading firms that used its own, or “proprietary,” assets to trade, rather than manage money on behalf of pension funds and other big investors.
What to Know About the Collapse of FTX
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.
How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.
What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.
Jane Street was among the firms that led the evolution of financial markets at the turn of the century, combining mathematical models — or algorithmic programs — with advances in technology to trade in milliseconds. Today, it is one of the most dominant global trading firms, with more than 2,000 employees.
It built its business around arbitrage, a trading strategy that exploits tiny price differences between very similar investments. That paid off during the pandemic, when it pocketed $8.5 billion in profit in 2020 amid the market volatility, according to documents viewed by The Times. The firm’s profit in its founding year was $16 million.
Because Jane Street built its own technology, it often sought to hire recent graduates who could be trained to use its systems easily, like mathematicians or computer scientists. Job listings regularly stated that prior knowledge of finance or economics was not a prerequisite.
Given the speed and complexity of so-called quantitative trading, identifying and managing risk became a new challenge. The firm’s focus on controlling risk — which Mr. Jenkins once likened to a stint he spent working on a nuclear submarine — became a core part of its identity. Through a spokesman, Mr. Jenkins declined to comment.
It’s unlikely that Jane Street would have become one of the world’s biggest trading firms “without having embedded outstanding risk management discipline, policies and systems into everything,” said Paul Rowady, director of research at Alphacution Research Conservatory.
“Can’t happen,” he said.
Struggling to decide what he would do after graduating from the Massachusetts Institute of Technology, Mr. Bankman-Fried had lunch with Mr. MacAskill. He encouraged him to take a high-paying job and donate his income to charity.
In 2012, a Princeton graduate, Matt Wage, joined Jane Street and was later featured in a Times opinion column by Nicholas Kristof as an exemplar of the “earn to give” philosophy.
“He created a bit of the move for lots of people to work at Jane Street,” Mr. MacAskill said of Mr. Wage.
Ms. Ellison, who would go on to run Alameda, the trading arm that Mr. Bankman-Fried founded before starting FTX, got a job at Jane Street after she graduated from Stanford in 2016. In a March interview, she said that early in her tenure at Jane Street, Mr. Bankman-Fried had reached out over email because they had mutual friends in the effective altruism community.
“I was kind of scared of him,” Ms. Ellison said. “You could tell he was quite smart and sort of intimidating.”
Mr. Bankman-Fried also met Brett Harrison at Jane Street, and recruited him to run FTX’s U.S. operations in 2021. In an interview last week, Mr. Harrison said the two of them had bonded over their commitment to animal rights. Mr. Bankman-Fried, a vegan, would often eat French fries for lunch, Mr. Harrison recalled.
Mr. Bankman-Fried’s younger brother and political adviser, Gabriel Bankman-Fried, who also identified with effective altruism, briefly worked for Jane Street after his brother left. Two other traders, Xiaoyun Zhang, who goes by Lily, and Duncan Rheingans-Yoo, got their start at Jane Street before leaving early last year to found Modulo Capital, a hedge fund backed by FTX. And Mr. Rheingans-Yoo’s older brother, Ross, worked at Jane Street before taking a job last spring at FTX’s charitable foundation, which was built on the principles of effective altruism.
If Jane Street was a meeting ground for young adherents of effective altruism, it wasn’t the training ground for the risky and fraudulent activities that prosecutors say Mr. Bankman-Fried pursued at FTX.
The Aftermath of FTX’s Downfall
The spectacular collapse of the crypto exchange in November has left the industry stunned.
- Gaming Markets?: Since FTX imploded, Sam Bankman-Fried denied accusations that he manipulated markets for his companies’ benefit. Cryptocurrency investors disagree.
- Bail Terms: A federal judge overseeing Mr. Bankman-Fried’s case has signaled a willingness to jail the disgraced executive for his persistent testing of his confinement’s boundaries.
- Legal Counsel: A judge allowed the law firm Sullivan & Cromwell to continue advising FTX on bankruptcy, after critics complained of a potential conflict of interest between the firm and the exchange.
- Modulo Capital: Not long before FTX collapsed, Mr. Bankman-Fried sent $400 million to this obscure cryptocurrency trading firm, which is now emerging as a crucial part of the federal investigation into the exchange.
Federal prosecutors contend that he orchestrated a scheme to loot customer deposits and misdirected billions of dollars in customer money to fuel trading at Alameda, make tens of millions in campaign donations, buy expensive Bahamas real estate and invest more than $4 billion in over 300 crypto companies and other ventures.
Mr. Bankman-Fried, who worked at Jane Street for three years, absorbed the firm’s trading style, applying the same principles of arbitrage to crypto trading at Alameda that Jane Street used to profit on stocks and other assets.
But he doesn’t appear to have taken the risk management lessons to heart.
“If there was anything related to risk or compliance, that went above him,” said Mr. Harrison, the former head of FTX’s U.S. business, who has since disavowed Mr. Bankman Fried. “Perhaps he had tasted just enough success at Jane Street to make him think he could do it all on his own, without appreciating the magnitude of the operation that was being successfully administered at Jane Street.”
Mr. Harrison announced on Twitter in September that he planned to step down as head of FTX’s regulated U.S. business and become more of an adviser to the company.
In January, Mr. Harrison said on Twitter that he was unaware of the alleged illegal activities at FTX but had become increasingly disenchanted with how the company was being run. Mr. Harrison is now running a new company, Architect, which will develop crypto trading software, and where his chief technology officer is also a Jane Street alum.
Soon after leaving Jane Street in 2017, Mr. Bankman-Fried started work on Alameda. That fast pivot upset some people at Jane Street, according to a person familiar with the situation, because Mr. Bankman-Fried was starting a rival trading firm and recruiting old colleagues.
Much like FTX, the relationships Mr. Bankman-Fried developed in those early years at Jane Street have imploded.
In December, Ms. Ellison pleaded guilty to fraud and agreed to cooperate with prosecutors, as did another former top executive at FTX. Modulo has become a focus for federal prosecutors as well as FTX’s bankruptcy lawyers, who are seeking to recover the $400 million it received from Mr. Bankman-Fried.
Not long after the FTX collapse, Mr. Harrison, in a series of posts on Twitter, said that he had “fond memories” of Mr. Bankman-Fried at Jane Street but that when he went to work for him in the heat of FTX’s expansion, the Sam he knew had gone.
“I realized he wasn’t who I remembered,” Mr. Harrison wrote.