“Don’t get involved in partial problems, but always take flight to where there is a free view over the whole single great problem, even if this view is not a clear one.” – Ludwig Wittgenstein
As we build – and promote – our case to elevate Alphacution’s value proposition and research output to a more viable economic support model, we are beginning to focus on the development of deeper and more comprehensive premium content. This plan has been outlined in our recent Support the Feed! post, a portion of which will now be appended to the bottom of each new post going forward.
BTW, the sooner you respond to that plea in some way, the less likely it will be that I become increasingly obnoxious about the topic… 😉
Anyway, I had hoped to develop this case study on Spot Trading – a noted Chicago-based proprietary option-focused trading firm that closed at the end of 2017 – as an example of what we are able to highlight specifically in cases where there is opportunity for combined modeling of 13F and X17a5 reporting data. For now, this will need to be more of a teaser while we complete the development of the full Spot case study to be published in one of the upcoming newsletters, but here’s the central theme:
As a point of reference, the value of Spot’s portfolio peaked in Q2 2014 when their gross notional long market exposure reached $20.9 billion (spread out over about 4,500 positions), see below.
This level is shown in comparison to neighbor Jump Trading whose holdings have tended to remian in the sub-$5 billion range (with noted exception in Q3 2015) over a similar time period. Admittedly, Jump is not the optimal comparison in this case, since it is more of a high-frequency futures shop. Better comparisons will likely be found with Wolverine or Peak6, and we will present those comparisons once those additional models and analyses are developed.
In any case, when we look at the balance sheet (found in the X17a5 reports), we can see how the “long volatility” and “short volatility” sides of the book are matched up. Here, the securities owned side of the portfolio (including long call and put positions) and the securities sold side of the portfolio (including short call and put positions) both peak at around $3.5 billion in 2014, see below.
Note that these figures are delta-adjusted values as compared to gross notional long-side only values found in the 13F reports, which means that the gross notional and delta-adjusted perspectives on the book at running at a ratio of over 5:1.
Neither of these figures represent margin. Also note that while the 13F reporting does not begin until Q4 2010, X17a5 reports begin in 2001. Per the 13F filing rules, this suggests that Spot does not reach $100 million of “AUM” – in this case a more accurate proxy for margin – until Q4 2010.
Lastly, we are able to calculate the dollar neutrality of the portfolio for the period 2001 to 2016 from the x17a5 reports, see below:
For this chart, we are taking the ratio of net dollar exposure to the gross (long vol + short vol) value of the portfolio over the reporting period. And, it is here that we may have found some evidence – a smoking gun, of sorts – for why Spot ended up closing its doors: The consistent oscillation in the level of short vol positioning to long vol positioning follows a trendline that does not appear to correspond to changes in underlying volatility (as illustrated by CBOE’s Volatility Index – VIX).
While it’s too early in our analysis to tell for sure – and respecting the fact that we may never really know – chances are from what we can see here that Spot’s portfolio construction (as it became bigger) was not matched up well with the eventual shifts in volatility. They were likely long vol when it was muted, and flat vol when it spiked.
Again, just some conjecture at this point. I’d like to build this one out a little further to demonstrate how various portfolios are constructed, how they are balanced (or not), how these factors shift through time, how these fragments of insight might inform us about the underlying profitability of various strategies, and what all that new knowledge may suggest about the nature of the underlying markets.
So much to discover! So much to learn! So much to share!
Watch this space…
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Alphacution is in the intelligence business.
We are uniquely focused on harvesting, packaging and distributing intelligence about the impacts of technology in financial markets and on the businesses of trading, asset management and banking. Our growing model library is our intelligence asset. Today, this intelligence asset primarily supports written research content, which can be accessed via standardized subscriptions and customized engagements. Occasionally, this core asset also supports video, audio and live presentation content. In time, Alphacution’s intelligence asset will support a broader platform of products and services, like data feeds and software.
For the past year or so, Alphacution has been publishing most of its research content on its Feed for free, and promoting that content via periodic newsletter. The purpose of this strategy has been to assess the interest in and demand for a unique perspective and a new level of intelligence on the financial markets ecosystem.
And, based on the growth in network and activity around that research, it seems that we have struck a cord with many of you – a network of senior executives representing some of the most advanced players in the global financial markets arena and their stakeholders.
The recent trajectory of pageview metrics on our site is symbolic of this claim, as shown below:
Now it’s time to take that level of engagement and direct it towards a more viable long term economic support model that ultimately allows us to scale our team and enhance the quantity and quality of our intelligence.
So, here’s what we are going to do about that:
For those of you who are eager to derive greater value from this work and apply that intelligence to your own business interests, Alphacution is offering individual introductory subscription options priced at $275 per year or $25 per month, cancellable at any time. Both of these options include a rebate on purchases of deeper, more substantive reports and case studies.
In other words, the entire value of an individual subscription paid up to the point of purchasing a single report will be deducted from the purchase of that report. (Rebates not to exceed the maximum value of an annual subscription.)
Examples of upcoming reports – that fall within our 2019 research strategy, outlined in the post Alphacution’s Book: Not Hiding, In Plain Sight – that will be available via the aforementioned subscription rebate mechanism include:
- Case Study: Citadel, LLC (~ Q1-2019)
- Case Study: All-Time Top 10 Hedge Fund Managers, Ranked by Profits (~ Q2-2019)
- Case Study: Top Proprietary Trading Firms (~ Q3-2019)
- Case Study: Goldman Sachs Group, Inc. (~ Q4-2019)
Enterprise subscription packages and custom content/service engagement options are available upon request at firstname.lastname@example.org.
Note: Business credit cards and bank accounts can be used via our PayPal payment portal.
Now, for those of you who don’t expect to take advantage of the offers outlined above but want to continue to enjoy the insights, intelligence and occassional entertainment that remain openly available on the Feed, I want to make this specific plea:
Free doesn’t mean there are no costs. In fact, in this case, there have been extraordinary costs in the accumulation of experience and sight, meticulous curation and assembly of data, and creative visualization of and storytelling around our findings.
So, if you value quality content – here or anywhere else – then you need to find a way to support that content at some level simply because you want it to continue to exist. Our post, In Support of Digital Content – which was adapted from other notable digital era content developers – makes a more expansive case for this perspective.
Bottom line: Your efforts to support via one-time or recurring contributions will help guard against this content needing to move from the currently preferred audience-driven model (for its level of independence) to a sponsorship-driven model (which can be found on most other industry media outlets).
So, if none of the subscription options suit you, one-time and recurring support contributions can be made at any level here:
Of course, as always: If you value this work, please continue to “like it,” share it, comment on it – or discuss amongst your colleagues – and then send us email@example.com.
As our “feedback loop” becomes more vibrant – given input from clients and other members of our network, especially around new questions to be answered – the value of this work will accelerate.
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