Better late than never…
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.”
