• Jane Street is suing two former traders and Millennium over a highly lucrative trading strategy.
  • Jane Street aimed to keep details of the trade top secret, heavily redacting its complaint.
  • Details about the trade, including the country it involves, were revealed in court Friday.

Proprietary trading firms obsess over and are accustomed to an extraordinary level of secrecy — something that doesn't hold up well in open court.

Jane Street learned that the hard way at a federal court hearing on Friday over a temporary restraining order it requested against hedge fund Millennium Management. The restraining order, which Manhattan federal Judge Paul Engelmayer denied, was aimed at stopping Millennium from using a top-secret trading strategy Jane Street says two ex-employees pilfered to make money for Millennium.

It was the first hearing over a lawsuit representing a clash of two of Wall Street's most formidable and lucrative trading firms. In a heavily redacted complaint filed April 12, Jane Street accused former senior index options trader Doug Schadewald and his direct report Daniel Spottiswood of taking highly valuable trading IP with them when they left to join Millennium in February. Most details about the trade were redacted. Even the country the strategy focused on is highly confidential, according to Jane Street.

At Friday's hearing, Jane Street attorney Deborah Brown, a partner at Quinn Emanuel, argued that revealing the country would enable competitors to start digging into the signals and hedging strategies and figure out the trade.

Over the course of Friday's nearly two-hour hearing, however, it emerged that the strategy revolved around short-term options trading in India. Lawyers also revealed that the trade earned Jane Street $1 billion last year and was on pace to earn even more for the firm this year.

Name of secret country inadvertently revealed

Jane Street claims the trade, its most profitable, is highly confidential intellectual property. The firm even sought to have the hearing closed to the public, a motion Judge Engelmayer quickly dismissed.

Engelmayer said he wasn't comfortable with the level of secrecy, calling the presumption of confidentiality "way too broad." He specifically called out the redaction of the country where the trade takes place, allowing it to remain unnamed but suggesting the plaintiffs take a "more realistic view" of the standard of public disclosure in US federal court.

Brown argued that if more details emerge, the strategy, which Jane Street spent tens of millions of dollars building, "could evaporate" as new competitors pile in. But she also indicated that the strategy is related to short-term options, telling the judge the market in questions "is not something people invest in long-term, more like a day."

On multiple occasions attorneys for the defendants appeared to slip up and mention the trade is tied to "India," apologizing afterward.

Attorneys for Millennium as well as Schadewald and Spottiswood said the trade is not so secret, arguing that the media has written about it extensively in the past year and that the government of the country overseeing the market has issued reports detailing the market's opportunities and inefficiencies.

"It's one of the largest if not the largest options trading markets in the world," Dechert attorney Andrew Levander, who is representing Millennium, said.

A March news report in The Wall Street Journal found options trading in India has exploded, with 78% of all global equity options contracts tied to the country in 2023. More than 84 billion stock index options contracts were traded in India last year — the vast majority short-term options — up 153% from 2022.

"In India, er, in this country — I apologize —" Levander started to in response to a question about why Jane Street's broker temporarily stopped processing its trade after Millennium entered the market. The defendants' attorneys argued that brokers in India have tighter margin restrictions than other markets.

Related stories

"It's not unusual for brokers in India to hit margin limits," said Rollo Baker, a partner at Elsberg Baker & Maruri, who is representing Schadewald and Spottiswood. He referenced a news report from February that found 35% of the market's options trading is conducted by retail, or amateur, investors, while the rest is handled by institutional investors — professionals like Jane Street and Millennium.

A trade worth more than $1 billion

Jane Street is understandably antsy to keep its trade under wraps and out of the grasp of competitors. The firm made $10.6 billion in net trading revenue last year, according to bond issuance documents reported on by Bloomberg, and $4.4 billion in the first quarter of 2024.

The firm, which trades with its own capital instead of managing other investors' money like a hedge fund, began researching the trade in 2018 and spent tens of millions developing it in the succeeding years, reaching full maturity in 2023 and 2024. It became its most successful strategy, producing $1 billion in profits in 2023, according to statements from the attorneys and Judge Engelmayer in court Friday.

Other statements Friday suggest the trade was on pace for multiples of that amount in 2024.

Jane Street worried about extinguishing the trade's viability, Brown said, intentionally leaving short-term profits on the table to maintain its long-term viability. It endeavored to size its trades such that it avoided sending signals to the rest of the market.

But the company's profits from the strategy plummeted in the month after the traders joined Millennium, Jane Street says, falling 50% in March. The firm alleges the decline is attributable to the emergence of a new competitor — Millennium — whereas previously they were aware of no other firm executing a similar strategy.

Schadewald and Spottiswood were Jane Street's most profitable traders last year, Baker said.

Jane Street is one of the rare Wall Street trading firms that doesn't impose noncompetes on departing employees — which would require them to sit out months or years before joining a rival — instead relying on its confidentiality and trade secret agreements. The firm claims to have never previously sued a departing employee in its 24-year history.

Jane Street is not alleging the traders stole computer code or data — it's not a formula or software, Brown said, but rather trading signals and techniques that can be remembered in your head.

Attorneys for Millennium and the traders say they breached no trade secrets, arguing that external factors explain the drop in profit. Baker said a decline in volatility — a key factor in options trading — compared to prior months was to partially to blame. He also said that Millennium was trading at a fraction of the scale as Jane Street — 50-times less exposure — noting that Jane Street made $185 million during the relevant time period and Millennium made $4 million.

The $185 million figure, if accurate, suggests that Jane Street's Indian options strategy was on pace to generate multiple billions in 2024, even at the decreased monthly figure.

Who is ultimately right likely won't be decided until summer, when the parties indicated they'd be ready to go to trial.

Millennium is free to continue trading in the meantime. Engelmayer denied the temporary restraining order, saying Jane Street did not establish irreparable harm. Jane Street's claims are "undeniably serious," Engelmayer said, adding that the company has "identified smoke but hasn't established a fire."

Jane Street may believe irreversible harm has already taken place, given its desire to keep details of the trade secret, including the country it operates in.

But more disclosure about the trade seems inevitable as the firms head toward discovery.

Judge Engelmayer asked for updated filings from the parties by mid-next week with far fewer redactions.