Alphacution Feed

When Market Makers Ate Their Own…

Right out of the gate, this story might emit a whiff of last year's news. Maybe. But, that sense would only last until you realize that this is also a template for improving predictions about future events. And, that kind of predictive power relies upon the bet that more markets and opportunities are becoming winner-take-all in the digital era... (Hint: As the functioning of markets - and other economic opportunities - become more "digital," a single leader can emerge in that market. This is how we end up with the "FANG's" - Facebook, Amazon, Netflix and Google. It's also how US equity markets end up with ~80% lit market-making flows being split between Virtu and Citadel. Here are some facts to fill in the background: In the three years beginning 2006, the Timber Hill market making unit of Interactive Brokers Group (IB) had an annual revenue run rate of around $1 billion, peaking at over $1.3 billion in 2008. By 2017, Timber Hill's revenue run rate had declined 94% to [...]

By | 2018-07-17T23:17:56+00:00 July 18th, 2018|Alphacution Feed|

Rise of the Platform

William Shakespeare wrote: "All the world's a stage, and all the men and women merely players." It turns out - more so now than ever before - that there is a business equivalent to this famous line from Act 2 Scene 7 of Shakespeare's play, "As You Like It." The difference, however, is that the "stage" in the current context is known as a platform. And, with each passing day, the strength, agility, intelligence and speed requirements of current financial platforms tend to increase. Putting our key points up front, what we are going to emphasize as we make the case for the validity (and urgency) of this opening salvo are the following: The ceaseless march of innovation, competitive forces and exogenous market factors dictate that players in the modern financial services industry evolve from their initial proprietary technology bias to an expanded supply chain strategy, with focus on certain foundational categories of technical functionality. In other words, for a majority of players, their are certain core technical components that [...]

By | 2018-07-17T00:33:26+00:00 July 17th, 2018|Alphacution Feed|

@DeutscheBank + @HPE: Case Study on Impacts

"Pay attention to what I say, not what I do..." Let's return to the bonus chart slipped in at the end of the recent post @DeutscheBank: Three-Card Monte and Other Confidence Games (For maximum context and extra credit, you can pick up the thread about Deutsche Bank from the beginning in March 2016 here). Bottom line: We are fascinated with the idea of detecting the impacts of the IT outsourcing deal that DB and HPE entered into in early 2015. The main questions that keep coming to mind are these: Is this deal a template for other large banks? Does it save money? Or, is its value to be found in other metrics, like enhanced performance or boosts in innovation? And, based on the level of transparency provided by DB (which is one of our best bank models), can we even detect the impacts of this arrangement? The answer to this last question is what brings us to this post... Right up front, we can say, yes - generically, speaking [...]

By | 2018-07-15T16:21:31+00:00 July 16th, 2018|Alphacution Feed|

@DeutscheBank: Three-Card Monte and Other Confidence Games

"Pay attention to what I say, not what I do..." More and more - over decades of practice - this opening statement has become the golden rule of marketing and communications, no matter if that "marcom" strategy is being applied in the context of finance, economics, politics - or, any other blood sport. Reason being: If you believe that perception is reality, then perception can have real economic consequences. However, with today's data ubiquity and resulting overload, we have the possibility of infinite perceptions and very little sense of reality... No one is truly to blame for this predicament. We have all conspired - most of us tacitly, some of us more directly - to participant in this confidence game. And so, when Alphacution picks out certain names, it is only to shed light on examples of how the game is played and not to pass judgement on the player(s) - since we are all more or less complicit... (As it turns out, Deutsche Bank is one of our best [...]

By | 2018-07-12T22:11:19+00:00 June 26th, 2018|Alphacution Feed|

@Crypto Blah Blah and the Birth of Markets

Disintermediation. And, desperation. That's what this is really all about. Together, these drivers produce an enormous amount of hype; a mixed wave of cryptocurrency insanity (and some blockchain legitimacy) washing over the global financial landscape... These days, it seems possible to transform any topic, no matter how dry or serious, into an all-out circus. And, it can be difficult - even for those most disciplined at rationing their limited attention - to look away as the spectacle unfolds. I mean, who can resist a tale that includes cornering the market on graphical processing units (GPUs), "chestahedrons," an Icelandic datacenter, the money flower, FUD and FOMO - among many other attention-grabbers? The Disintermediation Driver Now, typically, when the crowd rushes in one direction, I prefer not to follow - or, sometimes, head in another direction. Call it a bad case of intellectual claustrophobia. As a result, I haven't been eager to weigh in on any of this craziness. However, thankfully, the Swiss-based Bank for International Settlements (BIS) - sometimes otherwise known [...]

By | 2018-06-19T22:54:51+00:00 June 19th, 2018|Alphacution Feed|

Virtu: Q1-2018 Update on Extremes

With volatility spiking in Q1 of 2018 - and the successful porting of KCG's intellectual property (IP) prior to that in late 2017 - VIRT earned a welcomed reprieve from the conditions of recent quarters, as we predicted here (and elsewhere prior to that). In the exhibit below, Alphacution's as-if modeling of the combined entity - Virtu + KCG pre-Q3 2017 - yields a level of net trading income that would not have been seen since Q1-2016. Meanwhile, Alphacution's tracking of adjusted net trading income per employee - a proxy for our common look at revenue per employee (RPE) - starkly illustrates the path through the most recent maneuvers: Persistent declines in top line "productivity" since its most recent peak in early 2015 ultimately led to the acquisition of KCG, which closed in July 2017. Swift transfer of KCG's IP onto Virtu's infrastructure along with elimination of redundant technology and human capital allowed this productivity measure to bounce off its lows in Q3 2017 to finish the year as strongly [...]

By | 2018-06-21T20:28:30+00:00 May 15th, 2018|Alphacution Feed|

#FinTech Entrepreneurs*: This Clickbait is For You

Take a deep breath... Focus your attention... And then consider: How bad do you want it? As a fellow #fintech entrepreneur, the reason I pose the question is that mass disruption and disintermediation (of status quo business models and "analog" workflow processing methods) is already here, and accelerating. In fact, chances are, you are involved in developing a digitally-savvy venture - likely related to #AI or #blockchain or #bigdata or #IaaS or even #cryptocurrencies - right now. We are living in a truly amazing and unprecedented period in history. And, should that venture be successful, your efforts will add to that disruption, winning you and team an invitation to the "other side" of fear, uncertainty and doubt (FUD), but also further perpetuating the ongoing skills mix shift to a more globally-diversified STEM workforce (weighted towards lower-cost regions), and continue the displacement of non-STEM personnel, many of whom are middle-aged, mid-management market veterans (some of whom with a woefully under-appreciated cache of rare, indigenous knowledge). What's more, our current techno-economic paradigm [...]

By | 2018-04-30T02:04:20+00:00 April 30th, 2018|Alphacution Feed|

Riffs Ep5 – What is Your Return on Technology?

In this latest Alphacution Riffs episode 5 - What is Your Return on Technology? - we detail how to measure and benchmark "return on technology" - a concept Alphacution developed that quantifies the performance of technology investments relative to the cost of those investments for specific companies - and then aggregates those measurements into a benchmarking framework for a broader sample of companies. Leveraging our model library and analysis on 60 of the largest global banks since 2005, the resulting suite of analytics - based on our proprietary T-Spread - has been dubbed the T-Greeks Benchmarking Framework. Find out why... Additional modes to learn about this research - Download the slide presentation (tutorial): 2. Set aside to listen along to a webinar presented by Paul Rowady, director of research at Alphacution and Sang Lee, managing partner at Aite Group: As always, thanks for your attention. And, if you find value in this work, please share it - talk about it - and send us feedback to - wait for [...]

By | 2018-04-29T23:39:33+00:00 April 29th, 2018|Alphacution Feed, Video|

@GoldmanSachs, @RBC: First to Put the #GFC in the Rear-view Mirror

Before we dig into the latest numbers, let's level set the motivations here because, in the helter-skelter nature of most people's day, some of this analysis tends to get brushed aside as pedestrian. There is only so much one can do to make a headcount index sexy and provocative. But, this is something folks should be paying attention to. Banks are the biggest employers, the largest providers of services, and the most voracious consumers of technology in the global financial services ecosystem. As innovations strip away their dominance and incumbencies, people should want to know how the dominoes are going to fall because these players are currently interconnected with most everything that goes on in this space... Anyway, preamble (and gentle finger-wagging) aside, here's the setup: Why do we care so much about tracking bulge bank headcount? There are at least two reasons. The first is, well, a bit pedestrian, actually: Since we use headcount to normalize the variance in scale between banks (and other #fintech buyers) in order to [...]

By | 2018-04-27T12:31:24+00:00 April 26th, 2018|Alphacution Feed|

Aite Group Publishes Alphacution’s Asset Manager Tech Spend Study (Press Release)

< Originally published by Aite Group > According to Aite Group’s data and analytics partner, Alphacution, technical and human capital leverage benchmarks can be developed to represent a framework with numerous practical applications for all asset managers. Boston, April 25, 2018 — Understanding patterns in firms’ technology consumption offers unique insights into shifts in both business strategy and operational efficiencies. But the main challenge in discovering technology consumption for the asset management universe is that these firms are mostly private, if not highly secretive; therefore, accessing the right data presents some challenges. Alphacution’s latest report, Estimating Asset Manager Technology Spending: The Context Machine, examines what asset managers are spending on technology and the relation that those consumption patterns have with the scaling of headcount, assets under management (AUM), and strategy selection. “Alphacution believes that this research is a dramatic first step toward extending its techno-operational benchmarking framework to the global asset management universe,” explains Paul Rowady, director of research for Alphacution. “How strong the empirical context is from this initial data set—and the [...]

By | 2018-04-29T23:05:09+00:00 April 25th, 2018|Alphacution Feed, News, Press|