"Insider information" front-running and low-discount bottom-fishing, quantitative giant Jane Street accelerated the "crypto winter" of 2022

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 collapse of the Terra ecosystem by up to $40 billion and contributed to the "crypto winter" of 2022.

According to The Wall Street Journal and public documents from the Manhattan federal court, Todd Snyder, the bankruptcy plan administrator for 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 exploited private internal communication channels to gain access to undisclosed significant capital movements and executed large-scale sell-offs while the market was unaware.

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 hold them legally accountable on behalf of the harmed creditors. In response, a spokesperson for Jane Street firmly denied the allegations, calling the lawsuit "baseless opportunistic claims," and pointed out that the investors' losses were entirely due to the fraudulent actions of Terraform's management team amounting to billions of dollars.

This lawsuit reveals for the first time the institutional trading details behind the May 2022 de-pegging event of the algorithmic stablecoin TerraUSD, highlighting the critical role played by high-frequency traders during extreme market conditions.

(Jane Street's alleged cryptocurrency insider trading timeline)

Establishing "Backdoors" and Accessing Non-Public Information

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 sent Bryce Pratt, who had previously interned at Terraform, to establish communication channels with former colleagues. The lawsuit points out that Bryce Pratt created a group called "Bryce's Secret" with Terraform's core engineers and business development director.

This communication channel was initially intended to discuss Jane Street's potential investment in Terraform. However, the plaintiffs allege that Jane Street subsequently transformed this channel into a "backdoor" for obtaining significant non-public information from Terraform.

Through these internal contacts, Jane Street gained insight into Terraform's confidential financial status and used this non-public information to execute trades to maximize its own profits

The Critical Ten Minutes and the Selling Frenzy

Court documents detail the critical capital trajectory on the eve of the crash on May 7, 2022.

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 PM Eastern Time, Terraform quietly withdrew 150 million TerraUSD from Curve 3pool without making any public announcement to the market.

Less than 10 minutes later, at 5:53 PM, Jane Street executed its largest single transaction in the same liquidity pool, selling 85 million TerraUSD.

The lawsuit points out that this front-running trade was the largest redemption in Curve 3pool, directly triggering a severe sell-off of TerraUSD. It wasn't until the next day that Terraform founder Do Kwon publicly confirmed the prior capital withdrawal, but by then, the specific timeline and details of the withdrawal had not been disclosed to the market.

Seeking Bargain Buys After Front-Running

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

By May 9, 2022, TerraUSD had lost its peg to the US dollar, dropping below $0.80. While Terraform secretly sought help from Jump Trading to stabilize the market, Jane Street also expressed a willingness to participate in trading.

Documents show that Bryce Pratt directly contacted Do Kwon, expressing Jane Street's intention to purchase $200 million to $500 million worth of Bitcoin or Luna tokens at a significant discount. Do Kwon subsequently replied that Bill DiSomma, co-founder of Jump Trading, should have already contacted Jane Street to discuss financing matters.

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

The Aftermath of the Crash and the Billion-Dollar Lawsuit Settlement

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

On May 12, 2022, TerraUSD plummeted to $0.42; the next day, its price further dropped below $0.15, completely losing its peg. Accompanying the collapse of the stablecoin, its sister token Luna also nearly went to zero on May 13, falling to $0.001219.

This crash left hundreds of thousands of investors with significant losses 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, the bankruptcy liquidation work of Terraform Labs is underway, and its founder Do Kwon is serving a 15-year prison sentence. Two months before suing Jane Street, the plan administrator Todd Snyder filed a similar lawsuit against Jump Trading, accusing it of secretly reaching an agreement to support TerraUSD before the collapse and ultimately walking away with billions of dollars in profits from Terraform's downfall