For Subscribers

Trading Strategy Secrets: Hiding in Plain Sight

"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom."Viktor Frankl Alphacution's exploration to tease insight from the available data - to make the data dance - continues to expand. Sometimes this is due to weaving a new and unfamiliar data source. And, sometimes it's due to seeing something entirely new in a familiar dataset. A challenge in the process is the growing sense that we can never quite tell all the fascinating nuggets of the stories we discover. Be that as it may, the fact that data can be electrified to dance about the most consequential and mythological players in the capital markets ecosystem after they have expended so much energy to remain secretive makes this journey that much more thrilling. What follows here is a concentrated example of our expanding capabilities... Today's story takes advantage of Virtu Financial's latest Q3 2020 earnings-related data dump. Virtu is a regular topic on the [...]

By |2020-11-17T18:09:30-05:00November 11th, 2020|For Subscribers|

Summary: 2020 Order Routing Revenue Expected to Exceed $2 Billion

"The opportunities that everyone cannot see are the real opportunities."Jack Ma When counting the top four retail brokerage platforms engaged in payments for order flow - including Robinhood, TD Ameritrade (along with TD Ameritrade Clearing - both of which currently in the process of being acquired by Charles Schwab), E*Trade (now a unit of Morgan Stanley), and Charles Schwab - Alphacution estimates YTD order routing revenue for 2020 thru the third quarter is nearly $1.8 billion. Of these main players, only Robinhood grew its order routing revenue for Q3 to $194.5 billion from $180.3 billion in Q2. Among the other major headlines are these: By wholesale broker, Citadel Securities leads; paying $711.9 million (or, 40.3% of total) for combined stock and option order flow thru Q3 2020;By retail broker, TD Ameritrade (including TD Ameritrade Clearing) leads; receiving $825.2 million (or, 46.7% of total) in combined stock and option order routing revenue thru Q3 2020;By product segment, payments for options order flow led at over $1.0 billion (or, 59,1% of total) [...]

By |2020-11-09T22:23:10-05:00November 9th, 2020|For Subscribers|

Robinhood: Q3 Order Routing Revenue Continues to Break Records

"Do not go where the path may lead, go instead where there is no path and leave a trail."Ralph Waldo Emerson The juggernaut that is the Robinhood commission-free trading app has accumulated some dents and bruises over the year, along with a number of truly breathtaking successes. One of the more overexposed stories in a year engorged with superlatives, system outages, a customer suicide and, most recently, the hacking of thousands of accounts has challenged Robinhood's meteoric rise along the way. Together, these headwinds have delayed Alphacution's prediction of the timing of an oncoming IPO. All that said, one aspect of the Robinhood juggernaut - certainly among the more important aspects to its key stakeholders - is persistent growth in order routing revenue; the largest component of total revenue. After two quarters of blockbuster, pandemic-fueled numbers showcasing the inner workings of Robinhood's order flow firehose, the Q3 2020 order routing figures have recently been made public. The headline is that after the second quarter's monstrous $180.3 million in payments for [...]

By |2020-11-02T22:38:42-05:00November 2nd, 2020|For Subscribers|

Citadel Securities Picks Fight With SEC Over Crystal Ball

"If you are not paying for the product, then you are the product."The Social Dilemma In a rare display of miscalculation, Citadel may have overplayed its hand... Here's the setup: According to Bloomberg, "Citadel Securities LLC has sued the U.S. Securities and Exchange Commission (SEC) over the regulator’s approval of an order type introduced by stock-exchange operator IEX Group Inc." Approved by the SEC in August and launched on October 1, IEX's discretionary limit order type - or, "D-Limit" - is essentially a mechanism designed to protect liquidity providers from potential adverse selection by latency arbitrage strategies - otherwise known in less polite company as getting "picked off" on the basis of stale quotes. In a comment letter, dated April 23, 2020, Citadel Securities expresses its objection to IEX's proposal, in part, because it "will broadly and indiscriminately affect myriad liquidity takers, including retail and institutional investors as well as market makers in equities and related asset classes, such as ETFs, options, and futures." (Hold that thought for a minute...) Now, [...]

By |2020-10-28T23:55:05-04:00October 28th, 2020|For Subscribers|

Options Powerhouse IMC Financial Markets: Stung by Pandemic Volatility?

“The best way to differentiate the good from the bad is to look at economic incentives. Companies that sell you a physical product or a subscription are far less likely to abuse your trust than a company with a free product that depends on monopolizing your attention.Robert McNamee, Zucked: Waking Up to the Facebook Catastrophe Amsterdam-based International Marketmakers Combination BV - more commonly known simply as IMC - is one of the most legendary proprietary option trading powerhouses in the world today; one of only three remaining independent prop firms - behind Optiver BV (1986) and Susquehanna International Group, LLP (1987) - founded in the 1980's during an era known for other pioneers like O'Connor & Associates, Hull Trading and Cooper Neff: IMC has a very successful Chicago-based unit representing roughly 40% of global headcount of ~800 known as IMC Chicago, LLC (d/b/a IMC Financial Markets) that was established on April 27, 2000 - originally under the name, Holland Trading House, LLC - to engage in proprietary trading in securities, [...]

By |2020-10-25T23:29:55-04:00October 25th, 2020|For Subscribers|

All About the Flow: Tower Research Capital Launches “SDP Latour”

"If you can't beat them, arrange to have them beaten."George Carlin A silver lining of living in a suspended state of lock down is that there is a lot of good content to fill the daily spaces that need to be filled. And, now that Bluetooth earbuds allow us to basically live with these digital appendages in our ears all the time, I have been devouring an expanding library of podcasts lately. (Participating in some, as well). Of the few market structure-oriented podcasts that are out there, IEX's Boxes and Lines is among my favorites. It's both thought-provoking and the banter of the hosts raises an audible chuckle from time to time... Now, the reason I wanted to take a longer-than-necessary stroll to my point is that today's Boxes and Lines episode just so happened to be entitled, "The State of Displayed Liquidity." It's a topic that's relevant to the story I wanted to tell here because the state of displayed liquidity - which is in decline - provides a [...]

By |2020-10-26T22:38:06-04:00October 23rd, 2020|For Subscribers|

Simplex Trading: Against the Odds

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”Henry Ford On occasion, we have framed the world's leading proprietary trading firms with the following graphic: And, as many of you know, this is the terrain upon which we have focused a notable component of our attention to date - and likely where we will place a disproportionate share of our attention going forward. This is partly due to the fact that this group bears out-sized responsibility for a quiet cascade of impacts throughout the global markets ecosystem, and partly because there are so few others that have managed to marry such scale with such creativity. This dynamic is made more notable by the idea that winner-take-all market dynamics that tend to reinforce an "incumbency of incumbents" make such an ascension less likely than the previous unlikeliness from all the yesterdays before... That said, based on our ongoing surveillance of the broader landscape, there are always exceptions. If you watch [...]

By |2020-10-16T23:50:57-04:00October 16th, 2020|For Subscribers|

Wholesale Market Makers: Adding Price Improvement to the PFOF Analysis

"The difficulty lies not so much in developing new ideas as in escaping from old ones." John Maynard Keynes Just because the rule requires “market centers that trade National Market System (NMS) securities to make available standardized, monthly reports containing statistical information about covered order executions that are free and readily accessible to the public" does not mean that that information is lounging around under a bank of Klieg lights in an easily consumable format. Like a lot of raw regulatory data, you need to know where to look while simultaneously in possession of a decoder ring... Meanwhile, there is a dramatic falling of US equity market dominoes that began a year ago with an industry-wide move to zero-commission retail brokerage models. This move became exacerbated in March by a convergence of pandemic-related forces that has resulted in a gusher of unprecedented profitability for a short list of leading proprietary trading firms that are otherwise known in the light of day as wholesale market makers. At the intersection where [...]

By |2020-10-27T20:10:25-04:00October 9th, 2020|For Subscribers|

The Fourth Exchange

“Nothing vast enters the life of mortals without a curse.” – Sophocles With a geyser of attention-snatching news as our normal daily backdrop, one could easily be forgiven for missing a signal from a collection of recent market structure clues. Individually, most of these have been on the radar of those that follow capital markets closely. And then there are others that are much deeper down in the weeds. Taken together, however, they paint of picture of increasing levels of market complexity coupled with increasing dependencies on fewer dominant players. Here’s the evidence: By now, most of you know that the launch of Long-Term Stock Exchange (LTSE), the launch of Members Exchange (MEMX), and the launch of MIAX Pearl equities exchange – all of which going live this month – bring the total number of US equities exchanges to 16. Now, considering that 33 alternative trading systems (ATSs) and at least another 12 internalizing broker-dealers (including wholesale market makers, single dealer platforms (SDPs) and central risk books) executed trades in NMS (national market system) stocks in 2019, US equity market fragmentation continues to [...]

By |2020-10-02T16:22:22-04:00September 29th, 2020|For Subscribers|

Runaway Concentration Risks in US Option Markets

“The future is a choice between utopia and oblivion. Whether it is to be utopia or oblivion will be a touch and go relay race right up to the final moment…” – Buckminster Fuller On September 23rd, the Financial Times reported, “Citigroup halts market making in retail options” in an apparent response to the challenges brought about by the era of zero-commission retail trading; an era that is swiftly nearing its one year anniversary. Among the more notable impacts of this Citi news, the fact that Morgan Stanley now remains as the sole major Wall Street bank still standing as an intermediary for retail option flows ranks high. Truth be told, it ranks second only to a backdrop of creeping concentration as bulge players like Citi and Barclays before them and Goldman before them and others before them – including those that have been winding down their cash equities businesses – have punted on their options businesses because it has become so mind-numbingly complicated and expensive to make money in [...]

By |2020-10-02T16:17:22-04:00September 23rd, 2020|For Subscribers|