"Insider information" front-running and low-discount bottom-fishing, quantitative giant JaneStreet accelerates the 2022 "Crypto Winter"

High-frequency quantitative trading giant Jane Street is facing a major lawsuit, accused of using insider information to front-run trades and seek low-discount bottom-fishing, which accelerated the Terra ecosystem’s collapse of up to $40 billion and contributed to the 2022 global cryptocurrency market “crypto winter.”

According to publicly available documents from The Wall Street Journal and the Manhattan Federal Court, Todd Snyder, the bankruptcy estate administrator of Terraform Labs, has officially sued Jane Street, its co-founder Robert Granieri, and employees Bryce Pratt and Michael Huang. The lawsuit alleges that the firm used private internal communication channels to obtain undisclosed significant funding movements and completed large-scale sell-offs without market awareness.

Todd Snyder stated that Jane Street abused market relationships to manipulate the market for personal gain during one of the most influential events in cryptocurrency history, and the bankruptcy trust will pursue legal responsibility on behalf of damaged creditors. Jane Street’s spokesperson firmly denied the allegations, calling the lawsuit “baseless opportunistic claims,” and pointed out that investor losses were entirely due to Terraform management’s fraudulent behavior involving billions of dollars.

This lawsuit is the first to reveal market details behind the May 2022 de-pegging of algorithmic stablecoin TerraUSD, exposing the critical role played by high-frequency traders during extreme market conditions.

(Jane Street Alleged Cryptocurrency Insider Trading Timeline)

Establishing a “Backdoor” for Non-Public Information Access

According to court documents, Jane Street’s direct trading relationship with Terraform dates back to 2018, but their deep entanglement in token trading began in February 2022.

At that time, Jane Street dispatched Bryce Pratt, who had interned at Terraform, to establish communication channels with former colleagues. The lawsuit states that Bryce Pratt created a group called “Bryce’s Secret” with Terraform’s core engineers and business development managers.

This communication channel was initially intended to explore Jane Street’s potential investment in Terraform. However, the plaintiffs allege that Jane Street later transformed this channel into a “backdoor” for obtaining major non-public information about Terraform.

Through these internal contacts, Jane Street gained access to Terraform’s confidential financial status and used this non-public information to execute trades for maximum profit.

The Critical Ten Minutes and the Sell-Off Frenzy

Court documents detail the key funding trajectory on the eve of the May 7, 2022, collapse.

At that time, Terraform planned to transfer its stablecoin TerraUSD from the existing liquidity pool Curve 3pool to a new liquidity pool. At 5:44 p.m. Eastern Time, Terraform quietly withdrew 150 million TerraUSD from Curve 3pool without any public announcement.

Less than 10 minutes later, at 5:53 p.m., Jane Street completed its largest single trade in the same liquidity pool, selling 85 million TerraUSD.

The lawsuit states that this front-running trade was the largest exchange in Curve 3pool and directly triggered a sharp sell-off of TerraUSD. It wasn’t until the next day that Terraform founder Do Kwon publicly confirmed the prior fund withdrawal, but the specific timing and details of the withdrawal had not yet been disclosed to the market.

After the front-run, seeking to buy low

Following the front-running sell-off, Jane Street is accused of further leveraging its informational advantage to profit from the crisis.

By May 9, 2022, TerraUSD had lost its peg to the dollar, falling below $0.80. While Terraform secretly sought help from Jump Trading to stabilize the market, Jane Street also expressed interest in participating in trades.

Documents show that Bryce Pratt directly contacted Do Kwon, expressing Jane Street’s desire to buy $200 million to $500 million worth of Bitcoin or Luna tokens at a steep discount. Do Kwon later responded that Bill DiSomma, co-founder of Jump Trading, should have already contacted Jane Street to discuss financing.

The plaintiffs allege that Jane Street not only failed to keep confidential the financial distress information it obtained but also continued to use intelligence, including information from Jump Trading, to conduct trades, ensuring it remained profitable during the de-pegging crisis.

The Aftermath of the Collapse and the Billion-Dollar Lawsuit Liquidation

Under the pressure of institutional-level selling, the Terra ecosystem rapidly disintegrated.

On May 12, 2022, TerraUSD plummeted to $0.42; the next day, its price further dropped below $0.15, completely losing its peg. Along with the stablecoin’s collapse, its sister token Luna’s price nearly hit zero on May 13, falling to $0.001219.

This crash wiped out hundreds of thousands of investors worldwide and triggered a chain reaction that ultimately led to the collapse of Sam Bankman-Fried’s FTX exchange. Notably, both Sam Bankman-Fried and Caroline Ellison had previously worked at Jane Street before founding Alameda Research and FTX.

Currently, Terraform Labs is undergoing bankruptcy liquidation, and its founder Do Kwon is serving a 15-year prison sentence. Two months before this lawsuit against Jane Street, the plan administrator Todd Snyder also filed a similar lawsuit against Jump Trading, accusing it of secretly reaching an agreement to support TerraUSD before the collapse and walking away with billions of dollars in profits from Terraform’s downfall.

Risk Warning and Disclaimer

Market risks are present; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.