Does Jianjie have "manipulation" of BTC? Breaking down the AP system to understand the pricing power game behind ETF subscription and redemption mechanisms

Author: Eddie Xin, Chief Analyst at OSL Group

“They’ve been f*cking us the whole time.”

This phrase, circulated on Reddit and Crypto Twitter (CT) after the lawsuit, accompanied by an epic short squeeze with over $240 billion in liquidations, directed market anger toward the same target: Jane Street Capital.

At 10 AM, a liquidity freeze in Asian markets over the past few months, finally began to thaw with the U.S. Department of Justice’s complaint. It all started with Jane Street Capital, a top Wall Street market maker founded in 2000, accused of using targeted ETF arbitrage to exploit the creation and redemption mechanism between spot and derivatives markets in a scheme lasting several months.

Until the lawsuit brought this controversy into the public eye, discussions around ETF arbitrage mechanisms and price discovery structures heated up rapidly. The market responded with a fierce rebound, resulting in an epic short squeeze with over $240 billion in liquidations.

But is Jane Street really the mastermind pressing the suppression button? That’s a question worth at least $1 billion.

1. Did Jane Street Really Suppress the Price of BTC?

This question deserves an accurate answer. The most important point to understand first is that this isn’t just about Jane Street.

It’s a question about the structural features of Bitcoin ETF architecture, which equally apply to every authorized participant (AP) in the ecosystem. For example, just considering BlackRock’s iShares Bitcoin Trust (IBIT), the list of APs includes Jane Street, JPMorgan, Macquarie, Virtu Americas, Goldman Sachs, Citadel Securities, Citigroup, UBS, and ABN AMRO.

These institutions are deeply misunderstood by the public—and even among seasoned industry veterans. Before drawing any conclusions, this misconception needs correction.

Regarding APs, it’s crucial to understand that they occupy a marginal exception within the Reg SHO (U.S. SEC’s naked short selling regulation) framework. For instance, Reg SHO requires short sellers to locate and borrow shares before shorting, but APs are exempt due to their contractual rights to participate in creation and redemption.

While this sounds procedural, the real consequence is significant: any AP can create shares at will—without borrowing costs, without traditional shorting capital requirements, and without a hard deadline for closing positions, aside from business-appropriate timeframes.

This is the gray area: a regulatory exemption designed for orderly ETF market-making, structurally indistinguishable from perpetual regulatory arbitrage. This exemption isn’t unique to any one firm; it’s a prerequisite for becoming a member of the AP club.

2. What Does This AP Exemption Mean?

Typically, if the trading price of IBIT falls below its net asset value (NAV), arbitrageurs would step in, redeem shares to buy Bitcoin at NAV, and close the gap. But any AP is essentially the arbitrageur controlling the pipeline—meaning their motivation to close the gap differs from third-party traders without redemption rights.

It sounds complex, but a simple analogy helps:

Layer One: What is normal “arbitrage” to close the gap?

Suppose there’s a blind box (the IBIT ETF), inside which is a voucher worth $100 in real Bitcoin (the NAV). Today, panic sells push the ETF’s price down to $95.

A rational arbitrageur would buy the ETF at $95, redeem it for the underlying Bitcoin, and sell at $100, pocketing a $5 profit.

Because everyone is rushing to buy the ETF for arbitrage, the price quickly rebounds to $100. That’s “closing the gap.”

Layer Two: The “monopoly channel” AP

In the real world of Bitcoin ETFs, ordinary traders and retail investors cannot directly “unwrap” the ETF (i.e., redeem for Bitcoin). Only a few Wall Street giants (APs) have the privilege to do so, monopolizing the only channel to convert ETF shares into real Bitcoin (they control the pipeline).

Layer Three: Why don’t APs just close the gap?

A regular trader, seeing a riskless $5 profit, would act immediately. But APs are different—they might calculate a smarter move: “Since I’m the only one who can unwrap the ETF, why rush? If I deliberately keep the price below NAV—say at $95—and use that as a low-price illusion, I can do other trades elsewhere (like Bitcoin futures) to short or go long, potentially earning $20 instead!”

In short: the market has an automatic correction mechanism (buying when prices fall too much), but because the “only switch” to trigger it is controlled by APs, and they find maintaining the gap more profitable elsewhere, they have no incentive to push prices back to normal.

Retail investors wait for arbitrage to save the day, unaware that the “arbitrage army” (APs) is on the sidelines profiting from the spread in other markets.

3. The Issue Isn’t Jane Street, But the AP Structure

IBIT’s short exposure can theoretically be hedged with long Bitcoin spot positions, but it’s not necessary—any closely correlated instrument, like Bitcoin futures, suffices.

The obvious alternative is Bitcoin futures, especially considering their capital efficiency. This means if the hedge is via futures rather than spot, the spot market is never actually bought. Since natural arbitrageurs choose not to buy spot, the price gap can’t be closed through natural arbitrage.

Note that the spot/futures basis itself is a core theme for basis traders, who aim to keep this relationship tight. But every divergence between the hedge instrument and the underlying introduces “dirty basis risk,” which accumulates throughout the structure—especially under stress, where basis risk is a key source of market dislocation.

The last piece involves the SEC’s recent approval of in-kind creation and redemption. Previously, under a cash-only system, APs were required to deliver cash to the fund, which the custodian then used to buy Bitcoin spot—acting as a structural regulator, mechanically forcing spot purchases upon creation.

In-kind redemptions eliminate this requirement: now, APs can directly deliver Bitcoin, sourcing it from OTC desks, negotiated prices, or minimal market impact, at their discretion.

This flexibility means APs can maintain derivative positions while earning funding rates or volatility profits during the window between shorting and physical delivery—while still operating within the legal bounds of AP activities.

This is the core issue: it appears as normal market-making behavior, but the process itself is hard to classify clearly. It’s not a single company’s fault. Every AP on the list, and by extension every Bitcoin ETF’s AP, operates within the same structural framework, enjoying the same exemptions and possessing the same theoretical capabilities. Whether some are subtly coordinating to exercise this power is a question for the SEC’s monitoring and sharing agreements required during ETF approval.

Whether these agreements can effectively oversee cross-market behaviors—spot, futures, ETFs, even offshore trading—is still an open question.

In short, Jane Street is just in the spotlight. The real problem lies in the underlying architecture of Bitcoin ETFs, designed by Wall Street veterans: no single AP is explicitly suppressing Bitcoin’s price. Instead, the AP structure can suppress the integrity of the price discovery mechanism itself, which could have far-reaching implications.

So the real question isn’t whether a particular company is the villain, but whether a regulatory framework built for 20th-century traditional finance is suitable for custody of a 21st-century asset whose “value” is rooted in being unregulated.

This might be the tuition fee for the crypto market’s entry into the “big institution” era. We crave Wall Street liquidity but don’t want to passively accept their regulatory loopholes and black-box strategies.

This isn’t just about Jane Street; it’s the ultimate question for the Bitcoin ETF era.