Does Jianjie "manipulate" BTC? Analyzing the AP system to understand the pricing power game behind the ETF creation and redemption mechanism

Written by: Eddie Xin, Chief Analyst at OSL Group

"They were fcking us the whole time."

This phrase, which circulated on Reddit and Crypto Twitter after the lawsuit, accompanied an epic short squeeze with a liquidation scale exceeding $240 billion, directing the market's anger towards a single target: Jane Street Capital.

At 10 AM, the liquidity freeze in the Asian market over the past few months was finally cracked open by the U.S. Department of Justice's lawsuit, revealing a glimpse of the iceberg. It all stemmed from Jane Street Capital, a top Wall Street market maker founded in 2000, which was accused of using a targeted arbitrage strategy between the spot and derivatives markets through ETF mechanisms, leveraging the creation and redemption process of spot ETFs to execute a months-long "sleight of hand."

Until the lawsuit brought this controversy into the public eye, discussions surrounding the ETF arbitrage mechanism and price discovery structure quickly heated up, leading to a dramatic market rebound and an epic short squeeze with a liquidation scale exceeding $240 billion.

But is Jane Street really the culprit pressing the suppression button? This is a question worth at least $1 billion.

1. Did Jane Street Really Suppress BTC Prices?

This question deserves an accurate answer. The most important point to understand is that this is not just a question about Jane Street.

It is a question about the structural characteristics of the Bitcoin ETF framework, which equally applies to every Authorized Participant (AP) in the ecosystem. Just considering BlackRock's IBIT, this list includes Jane Street Capital, JPMorgan, Macquarie, Virtu Americas, Goldman Sachs, Citadel Securities, Citigroup, UBS, and Dutch Bank.

The roles of these institutions are indeed deeply misunderstood by the outside world, even among seasoned industry veterans, and this misunderstanding deserves correction before drawing any conclusions.

Regarding APs, the first thing to understand is that they occupy a marginal exception within the regulatory framework of Reg SHO (the SEC's naked short selling regulation). For example, Reg SHO requires short sellers to borrow shares before shorting, but APs are exempt due to their contractual rights to participate in creations and redemptions.

While this may sound procedural, the actual consequences are significant. This means any AP can create shares at will—without borrowing costs, without the traditional capital tied to shorting, and without a hard deadline for closing positions, aside from a commercially reasonable timeframe.

This is the gray area: a regulatory exemption designed for orderly ETF market making, which, structurally, is indistinguishable from regulatory arbitrage with unparalleled duration. This exemption is not unique to any one company; it is a prerequisite for membership in the AP club.

2. What Does This AP Exemption Mean?

Typically, if IBIT's trading price is below its net asset value (NAV), you would expect arbitrage buyers to step in, redeeming shares for Bitcoin and closing the gap. But any AP is itself that arbitrage buyer; they control the pipeline, meaning their motivation to close the gap is different from that of third-party trading desks without redemption rights.

It sounds complicated, but it can be understood through a simple analogy:

First Layer: What is Normal "Gap Closing"?

Imagine there is a blind box (this is the IBIT ETF), and everyone knows it contains a real Bitcoin voucher worth $100 (this is the NAV). However, today the market is panicking, and the price of the blind box has dropped to $95.

Under normal logic, a savvy businessman (the arbitrage buyer) would rush to buy the blind box for $95, then go to the official source to open it and exchange it for the $100 Bitcoin, pocketing a $5 profit.

Because everyone is rushing to buy the blind box to arbitrage, the price will quickly be pushed back up to $100. This is called "closing the gap."

Second Layer: The AP's "Monopoly Channel"

But in the real world of Bitcoin ETFs, ordinary trading firms and retail investors are not qualified to go to the official source to "open the blind box" (i.e., they do not have redemption rights). Only a few privileged Wall Street investment banks (APs) in the entire market can do this, meaning APs monopolize the only channel to convert ETFs into real Bitcoin (they control the pipeline).

Third Layer: Why Don't APs Play by the Rules?

If it were an ordinary third-party trader, seeing that $5 risk-free gap, they would immediately act. But APs are different; they calculate a more sophisticated equation: "Since I'm the only one who can open the blind box, why should I rush? If I deliberately don't pull the price back to $100, but instead take advantage of the current low price of $95 to short or go long in another casino (like the Bitcoin futures market), I might make $20!"

In summary: the market originally had an automatic correction mechanism (when prices drop, someone will buy to arbitrage and raise the price), but because the "only switch" to execute this correction mechanism is in the hands of APs, and APs find that "not correcting and maintaining the gap" allows them to earn more elsewhere, they have no incentive to pull the price back to normal levels.

Retail investors are waiting for the arbitrage army to rescue the price, unaware that the only arbitrage army (APs) is right next to them, profiting from the gap in other markets.

3. The Problem Is Not Jane Street, But the AP Structure

The short risk exposure of IBIT can theoretically be hedged by going long on Bitcoin spot, but this is not necessary as long as the chosen tool maintains a close correlation.

An obvious alternative is BTC futures, especially considering their capital efficiency. This essentially means that if the hedging tool is futures rather than spot, then the spot has never been bought, and since natural arbitrage buyers choose not to buy the spot, this price gap cannot be closed through natural arbitrage mechanisms.

It is worth noting that the spot/futures basis itself is the theme of the entire basis trader community, which is dedicated to maintaining the tightness of this relationship. However, every separation between the hedging tool and the underlying asset introduces impure basis risk (dirty basis risk), which accumulates throughout the structure—while under pressure conditions, basis risk is precisely where market dislocation occurs.

The final piece of the puzzle involves the SEC's recent approval of in-kind creation and redemption. Under the previous cash-only regime, APs were required to deliver cash to the fund, and then custodians used this cash to purchase Bitcoin spot. This purchasing action was a structural regulator—it mechanically enforced the buying of spot as a consequence of creation.

In-kind redemption completely eliminates this point; now any AP can directly deliver Bitcoin, and the timing and counterparties for their acquisition can be chosen at will: OTC desks, negotiated pricing, minimizing market impact.

The broadest interpretation of this flexibility is that APs can maintain derivative positions, aiming to collect funding rates or volatility profits during the time window between establishing a short and completing the physical delivery—while ensuring that each individual step still conforms to the definition of legitimate AP activities.

And this is precisely the crux of the problem. The beginning looks like normal market-making behavior, and the end also looks like normal market-making behavior; it is the intermediate process that is difficult to classify clearly. This is not an indictment of any single company. Every AP on the IBIT list, and by extension every AP of every Bitcoin ETF, operates within the same structural framework, enjoys the same exemptions, and thus possesses the same theoretical capabilities. Whether any of them exercised this capability in a way that skirts the edge of collusion is a question that falls entirely within the scope of the "monitoring sharing agreements" required by the SEC when approving ETFs.

Whether these agreements are sufficient to capture behavior that spans the spot, futures, and ETF markets (including across offshore trading venues) remains a genuinely unresolved question.

In short, Jane Street has merely been thrust into the spotlight; the real problem lies buried deep within the underlying structure of Bitcoin ETFs designed by Wall Street veterans. No AP is explicitly suppressing Bitcoin prices; what the AP structure can suppress is the integrity of the price discovery mechanism itself, which may have far-reaching implications beyond the former.

Therefore, the real question worth asking is not whether a specific company is the villain, but whether a regulatory framework established for 20th-century traditional finance is suitable for custodianship of a 21st-century emerging asset whose value lies in being unregulated?

This may be the tuition that the crypto market must pay as it enters the "Era of Big Institutions." After all, while we crave the liquidity irrigation from Wall Street, we do not wish to passively accept the black-box games they construct using regulatory exemptions.

This is not just about the answer regarding Jane Street; it is the ultimate inquiry about the era of Bitcoin ETFs.