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

Written by: Eddie Xin, Chief Analyst at OSL Group

It’s not a matter of some “villain,” but rather that every Authorized Participant (AP) has the ability to influence BTC liquidity through the redemption mechanism.

“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 point of liquidity freeze in Asian markets over the past few months, the US Department of Justice’s lawsuit finally revealed a glimpse of the iceberg. It all started with Wall Street’s top market maker, Jane Street Capital, founded in 2000, which is accused of exploiting the ETF arbitrage between spot and derivatives markets through the creation and redemption mechanism over several months—a long-running “smoke and mirrors” scheme.

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 villain pressing the suppression button? That’s a question worth at least $1 billion.

1. Did Jane Street really suppress the BTC price?

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, in the case of BlackRock’s iShares Bitcoin Trust (IBIT), the list includes Jane Street Capital, 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 securities before shorting, but APs are exempted due to their contractual rights to participate in creation and redemption.

While this sounds procedural, the actual consequences are significant: any AP can create shares at will—without borrowing costs, without traditional short-selling capital constraints, and without a hard closing date for positions, aside from business-appropriate deadlines.

This is the gray area: a regulatory exemption designed for orderly ETF market-making, structurally indistinguishable from ongoing regulatory arbitrage with no expiration. This exemption isn’t unique to any one company; it’s a prerequisite for becoming a member of the AP club.

2. What does this AP exemption imply?

Generally, if the trading price of IBIT is below its net asset value (NAV), arbitrageurs would step in, redeem shares to buy Bitcoin, and arbitrage the difference. 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 complicated, but a simple analogy helps:

First layer: What is normal “price arbitrage”?

Suppose there’s a blind box (the IBIT ETF), inside which everyone knows there’s a voucher worth 100 yuan for real Bitcoin (the NAV). Today, the market panics, and the ETF’s price drops to 95 yuan.

According to normal logic, a smart trader (arbitrageur) would buy the blind box at 95 yuan, then redeem it with the issuer, exchange the voucher for 100 yuan worth of Bitcoin, and sell for a profit of 5 yuan.

Because everyone is rushing to buy the ETF for arbitrage, the price quickly rises back to 100 yuan. This process is called “price arbitrage” or “price correction.”

Second layer: The AP as a “monopoly channel”

In the real world of Bitcoin ETFs, ordinary traders and retail investors aren’t authorized to redeem directly with the issuer (no redemption rights). Only a few Wall Street giants (APs) have this privilege, effectively monopolizing the only channel to convert ETF shares into real Bitcoin (they control the pipeline).

Third layer: Why don’t APs follow the “rational” logic?

A regular third-party trader, seeing a riskless 5 yuan profit, would act immediately. But APs are different—they might calculate a smarter move: “Since I’m the only one who can redeem, why rush? If I deliberately don’t push the price back to 100 yuan, and instead exploit the 95 yuan low—say, by shorting or going long in the Bitcoin futures market—I could potentially earn 20 yuan!”

In summary: the market has an automatic correction mechanism (when prices fall too much, arbitrageurs buy in to push prices up). But because the “only switch” to trigger this correction is held by APs, and they realize that maintaining the price gap allows them to profit elsewhere, they have no incentive to correct the price.

Retail investors wait in vain for arbitrageurs to rescue the price, unaware that the “arbitrage army” (APs) is nearby, profiting from the spread in other markets.

3. The issue isn’t Jane Street, but the AP architecture

IBIT’s short exposure can theoretically be hedged with long Bitcoin spot positions, but it’s not mandatory—any hedging tool must maintain a close correlation.

The obvious alternative is Bitcoin futures, especially considering their capital efficiency. This means if the hedge is via futures rather than spot, the spot isn’t necessarily bought. Since natural arbitrageurs choose not to buy spot, the price gap can’t be closed through natural arbitrage mechanisms.

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

The final piece involves the SEC’s recent approval of in-kind creation and redemption. Under the previous cash-only system, APs were required to deliver cash to the fund, which the custodian then used to buy Bitcoin spot—this was a structural regulator that enforced spot buying as a mechanical consequence of creation.

In-kind redemptions eliminate this requirement: now, any AP can directly deliver Bitcoin, choosing the timing and counterparties—OTC desks, negotiated prices, minimizing market impact.

The broadest interpretation of this flexibility is that APs can maintain derivative positions to earn 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 precisely where the core problem lies. It appears as normal market-making behavior at first glance, and it ends that way too. But the intermediate process is hard to classify clearly. This isn’t a single company’s fault. Every AP on the IBIT list, and by extension every AP involved in Bitcoin ETFs, operates within the same structural framework, enjoying the same exemptions, and possessing the same theoretical capabilities. Whether anyone is exercising this ability in a way that skirts the edges of coordinated activity is a question that falls squarely within the SEC’s “monitoring and sharing” agreements required when approving ETFs.

Whether these agreements are sufficient to capture behaviors crossing spot, futures, and ETF markets (even including offshore trading venues) remains an open question.

In short, Jane Street has merely been thrust into the spotlight. The real issue lies deep within the underlying architecture of Bitcoin ETFs, designed by Wall Street veterans. No single AP is explicitly suppressing Bitcoin’s price; what they can suppress is the integrity of the price discovery mechanism itself—potentially a far more profound influence.

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

This may be the tuition fee for the crypto market’s entry into the “big institution era.” While we crave liquidity from Wall Street, we don’t want to passively accept their black-box games built on regulatory exemptions.

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