Better late than never…
(Zero Hedge)—Nearly two months after Leopold Aschenbrenner’s Situational Awareness went from a $45 billion AI juggernaut to a Citadel block trade after it dumped its entire public book on Ken Griffen’s doorstep at a 10% discount and six weeks after we learned that Jane Street lost $15 billion in July, its first down month in a decade, central bankers on both sides of the Atlantic have noticed that something may have happened.
According to the FT, the Bank of England’s Prudential Regulation Authority and the Federal Reserve have “stepped up scrutiny” of banks’ exposure to large trading firms and market makers. They are asking global lenders how much they have lent to Jane Street and Ken Griffin’s Citadel Securities, and presumably also to such HFT money makers as Susquehanna and Hudson River Trading.
Regulators want to know three things: the firms’ risk appetite, how banks’ exposure to them “evolved during the day,” and how risk controls held up. That’s a polite way of asking whether anyone at the prime brokers was actually watching intraday margin as the AI trade fell apart in July.
While the PRA, the Fed and Jane Street all declined to comment, Jane’s silence is the least surprising. Its last public word on the subject came from partner Turner Batty, who told investors, in the understatement of the year, that “July was a bad month.”
A brief history of a very bad month
For anyone who missed it (i.e., all the regulators), here’s the recap.
Situational Awareness is the fund Aschenbrenner, a former OpenAI researcher, launched in 2024 under the name of his viral essay. It had eight employees and ran long AI infrastructure / short software, with about 4x leverage through Goldman total return swaps. We described that leverage as “batshit insane”, but it was also extremely profitable, if only to Goldman. In a separate piece, the FT today reported that Goldman earned more than $200 million in fees this year from lending to Situational Awareness, the most of any client in its prime brokerage business financing hedge funds.
As long as the market was going, up it was a party: the extremely levered momentum-chasing fund was was up 439% net through June, reached $45 billion in AUM, and counted Jane Street among its investors.
Then July happened. AI stocks rolled over, software rallied, and both legs of the pair trade lost money at once. Nebius, Sandisk and SharonAI each fell roughly half, and SK Hynix dropped nearly 50%. As the margin calls came in, the fund went looking for fresh capital. It failed to find willing “widows and orphans” and so within days it had exited all of its public equity trades. Citadel bought the whole book in under 24 hours at about a 10% discount, beating Millennium and, fittingly, Jane Street. The fund ended the month down about 78%, with roughly $10 billion of private holdings left, including a large stake in Anthropic.
Griffin did well out of it. Citadel’s Wellington fund rose 5.94% in July, its best month since 2022, and about half of its year-to-date gains came from the Situational Awareness trade. Over the next three weeks, Citadel flipped more than 80% of Leopold’s portfolio to dumb money through roughly 100 block trades worth more than $4 billion. When Griffin later described the unwind, he thanked “the trading and prime brokerage teams at the banks serving both firms” for their “extraordinary cooperation.”
Regulators are now asking those same prime brokerage teams some questions of their own.
Jane Street was the collateral damage: on top of its direct stake in Situational Awareness, its own book, which tends to, cough, be just ahead of whale and retail orders, leaned into the same momentum names: Sandisk, Micron, CoreWeave, Broadcom, SMCI, Dell and Bloom Energy, all the names that defined the momentum trade trough July. And when the AI trade reversed, it lost $15 billion in a month. Most firms wouldn’t survive a hit like that. At Jane Street it barely dented the year: by early August the firm had generated $40 billion in net trading revenue, already more than its record $39.6 billion for all of 2025.
That is also what worries regulators. As the FT puts it, the size of the loss “indicated that Jane Street… appeared to take far more risk than a typical market maker.”
The “market maker” that isn’t one
This is the real story, and it has been building for 15 years. After 2008, Dodd-Frank and Volcker pushed banks out of proprietary trading. The risk didn’t disappear. It moved across the street to a new class of firms that started out collecting pennies as market makers and grew into some of the largest directional risk-takers in the world. Many readers will recall our early days which were defined as a crusade against HFT shops such as Jane Street, Citadel, Jump trading and others, whose business practices were best described as frontrunning providing liquidity. Of course, they had money and we didn’t, so that particular crusade ended up going nowhere.
Jane Street now holds equity stakes in companies, including Anthropic, and invests in hedge funds like Situational Awareness. Because these firms trade only their founders’ and employees’ money, they have no outside LPs to answer to. They can “take risks without answering to external investors,” which works fine until the leverage comes from banks that do answer to regulators.
So the banks that were told to stop running prop books now finance the firms that do. As a result, prime brokerage has become one of Wall Street’s biggest profit engines: banks finance equity trades, lend against bonds, and execute and clear derivatives for these clients. If a client defaults, the bank takes the loss… within limits of course – if the loss is too big, taxpayers end up eating it.
Put another way, the Volcker Rule didn’t take risk out of the system. It moved the risk one step further from its supervisors, and the banks collect a financing fee on it.
What regulators can actually do
If supervisors decide banks are too exposed to certain firms, their main tool is to make them hold more high-quality liquid assets against those exposures. That would cost the banks real money, which makes it about the only thing prime brokerage desks would take seriously.
To be fair, the PRA wasn’t entirely asleep. In its April business plan, three months before the blowup, it warned that while many firms had improved end-of-day monitoring, “rising intraday exposures – particularly for firms providing market access, clearing, and financing to electronic market-makers – continues to pose potential risks.”
It was the right warning, but it came roughly $50 billion in losses early and a few months short of any action.
The BoE is also looking at the rapid growth of London prime brokers financing Asian equities this year, after AI names like SK Hynix went vertical. That raises the obvious question: if one eight-person fund with 4x leverage could produce a $35 billion drawdown and a $15 billion hit at the world’s most profitable trading firm, how many other levered AI books are sitting on prime brokerage balance sheets, a question we have been asking repeatedly in recent months.
We know of at least one. While the Fed and BoE send out questionnaires, Situational Awareness is already putting on the same trades that blew it up the first time: AMD, Intel, SK Hynix and Sandisk. It dropped the Goldman total return swaps and now gets its leverage from out-of-the-money flex options through Clear Street. Nomura flagged a “mystery buyer” that spent $315 million in premium, equal to $1.1 billion of delta, on concentrated tech calls. Aschenbrenner told investors the fund had taken “the steps that were necessary to fight another day.” Evidently that day came quickly.
The bottom line
Nobody expects Jane Street to go under. A firm that makes $40 billion in seven months can absorb a bad July, and it just sold $14.6 billion in bonds to PIMCO, Capital Group and Fidelity. The problem isn’t Jane Street specifically. It’s that the firms running the most concentrated, levered bets on the market’s most crowded theme are now systemically important and lightly supervised, and they are financed by the banks regulators are supposed to protect.
Archegos was supposed to teach this lesson in 2021. Five years later, with AI in place of ViacomCBS, regulators are learning it again.
For more background, see our earlier pieces: “A Lack Of Situational Awareness”, “Situational Unawareness” and “Little To No Situational Awareness… With ZERO Risk Management”.
Starting the Day With a Scripture-Inspired Roast Helps Center Your Thoughts on Eternal Truths Amid Temporal Pressures
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