Why Jane Street Pays 21-Year-Olds Half a Million Dollars

Why?

They’re not working 20 hour days and contemplating self-harm, so the answer is not - “the hourly pay is low, stupid”. Many of them don’t know very much about markets when they are hired, but from the people I know who work there, they don’t seem to be pulling uniformly from across the IQ distribution.

So it must be that these firms have figured out how to turn raw intelligence into profits. It makes intuitive sense that if there is a type of job that could do this, it’d be some form of trading.

Ask why and you might hear the word “leverage”. This is begging the question. Why do traders have so much (access to) leverage, literally and figuratively? After all, all business is about buying low and selling high. What’s so special about financial markets?

Financial Markets as a Special Case of Markets

In essence, trading is giving up something that matters to you less for something that matters to you more. A farmer handing two sacks of wheat to a blacksmith for a sharpened ploughshare fits the definition just as a trader buying stocks for cash.

Barter collapses the first time you try to trade outside your circle: you must locate someone who simultaneously wants your wheat and owns the ploughshare you need. Money breaks the "coincidence of wants" bottleneck.

Most properties of money (fungibility, divisibility etc) are downstream of its ability to project multi-dimensional, fuzzy sources of value (of goods, services etc) onto one quantifiable dimension. Once value lives on one axis, we can better order preferences and make them legible to others.

However, division of labor creates a scaling problem: as specialization increases, you must trade with more counterparties who are increasingly distant and unknown to you. Money solves the 'how to pay' problem but not the 'what exactly am I getting' problem. When you can't inspect goods personally or rely on shared reputation networks, you need the goods themselves to be standardized enough that their key attributes can be specified and verified remotely.

The standardization of goods—grading coffee as "Arabica Grade 2" with specified moisture content, defect tolerance, and bean size—is itself a step toward financialization. It makes the non-money side of the transaction more like money by removing the most important sources of variance, creating fungibility (one supplier's Grade 2 beans become interchangeable with another's), and legibility to strangers.

More importantly, standardization reveals that the goods and services we want are not identical to our preferences, but a means to satisfy our preferences. The company purchasing coffee beans doesn’t necessarily want any particular bag (or carton or whatever these things come in) of coffee beans but coffee beans that meet properties x, y and z, because coffee is just a means to an end of selling to their customers - which is just a means to making money.

Similarly, the company cares not only that it receives beans above some quality threshold, but also that it can buy those beans below a particular cost to maintain profitability. The company is actually in the market for coffee beans above quality X, below price Y, delivered within timeframe Z. Unless the seller has the exact inverse preference set (wanting to sell precisely that quality, at precisely that price, at precisely that timing), we're back to the ‘coincidence of wants problem’. It’s easier to find a seller who wants to sell you the beans than a seller who will take the other side of each one of these preferences.

The way financial markets solve this coincidence of wants problem is similar to how money solved the problem. Money represents an IOU, an asset that you can trade for pretty much anything else of equal value. Similarly, financial products also represent claims, but ones that are more specific and contingent, tailored to meet a commonly occurring preference.

These abstract preferences have an interesting relationship with scale. As you increase volume and market participants, you increase the likelihood that any specific preference finds someone who will trade the other side. Scale enables preference satisfaction. But new preferences also emerge from scale, by increasing the sensitivity of economic actors to contingencies.

This creates a reinforcing cycle: scale demands abstractions to handle complex preferences that physical goods can't accommodate, while abstractions enable even greater scale by eliminating transaction friction and enabling trustless trading between strangers. Financial markets represent the endpoint of this process—where abstractions eliminate almost all transaction costs, allowing markets to scale to whatever size the underlying preferences demand.

Crucially, these abstractions make risk quantifiable, which enables leverage. When uncertainty can be measured statistically rather than assessed case-by-case, lenders can price risk systematically and extend credit instantly. Apple stock represents a standardized claim with public information and price history that narrows uncertainty. Your corner bakery is a unique bundle of location, management, customer base, and operational risks that no algorithm can quickly assess.

When markets are maximally frictionless and abstract, value creation can only manifest itself in price. In other businesses, you create value through multiple channels (better products, customer service, operations, etc.) and then try to capture some of that value as profit. Your goal is to build something valuable, and profit is how you measure success. But financial markets strip away everything except price accuracy. Here, both the objective function and the means to getting there converge to profit maximization - there is no intermediate step where you optimize for customer satisfaction or product quality. Hence, the misplaced intuition accusing market participants of "just making money, not creating anything of value". Getting price right is value created.

Getting the price right is also a purely cognitive process. There's no separate implementation phase because the ‘market’ is designed to execute your insight instantly. When economic value can be created by and tracked back to better thinking, the compensation naturally reflects that unique relationship.