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Outlook 2021: The Drunk-on-Impunity Mania Arrives

"You cannot escape the responsibility of tomorrow by avoiding it today."Abraham Lincoln With protestors storming the U.S. Capital - some of which breaching the outer doors and freely strolling the U.S. Senate floor - as surreal and unprecedented backdrop, I sit down to organize a sketch of Alphacution's outlook for the year ahead, starting with a very wide lens: The U.S. economy - much like the rest of the other "developed world" economies - is naturally weaker than the meticulously curated employment and productivity numbers suggest. Technology adoption (from workflow automation to social media distraction), growing debt burdens, ossified resource allocation practices, cross-region labor arbitrage, deteriorating infrastructure, and other factors all converge to deteriorate "life, liberty and the pursuit of happiness" for a growing portion of the population. The COVID pandemic of 2020 - and however long it remains disruptive throughout 2021 as vaccines are being rolled out - acts as an accelerant of many of these factors. Ours is a deteriorating version of capitalism. Symptoms emblematic of the stage [...]

By |2021-01-06T23:36:37-05:00January 6th, 2021|Open|

Alphacution’s Top Stories for 2020

"You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever." Steve Jobs I was going to start out by saying that it's been a pivotal year for Alphacution. Problem is, I said the same things at this time last year. So, I supposed that means it's been a good coupla years. The pandemic, volatility, subsequent lockdown - and some luck in timing - drove a lot of attention towards Alphacution's content in 2020. Clearly, Robinhood and payments for order flow (PFOF) were top themes for the year. Our Feed post on Robinhood and trailing stop orders led the year in page views, and represented like no other before it what it looks like when a story goes viral. Not to be outdone, the timely post on the downfall of Ronin Capital also attracted a ton of attention. In fact, if [...]

By |2021-01-04T15:32:41-05:00December 31st, 2020|Open|

#TBM – Yellen and Me: The Catalyst Behind the Rate Decision

In light of current events, we bring this one back from the Alphacution archives. Welcome to - uh - Throwback Monday? < This is a test. This station is conducting a test of the Emergency Broadcast System. This is only a test.> I had been in this room before. It was the early post-Dodd Frank days. Maybe February 2012. I had authored a study on the impacts of new regulations on collateral and initial margin requirements for OTC derivatives (OTCDs). The study had been commissioned and was being promoted by the World Federation of Exchanges (WFE). Largely as a result of my global initial margin estimate of US$ 2 trillion for OTCDs, it had made a big splash. On the back of this, the event invites and media came knocking. My friend, John McPartland – “McP” to those who knew him longer than 15 minutes – invited me to present at a monthly luncheon for Chicago financial muckety-mucks. Now, it was good to be back. For this night’s event - [...]

By |2021-01-04T15:40:48-05:00November 23rd, 2020|Open|

Alphacution Adopts Subscription Model

“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well worn path; and that will make all the difference.”Steve Jobs It's been a long time coming... And now, after a few years of digging for data, modeling that data, creating pictures of that modeling, publishing snippets of insight around those pictures, growing our network to the point where several thousand of you are regular consumers of our output, and ultimately earning enterprise subscriptions and other engagements from many of the top trading firms in the world and other key ecosystem stakeholders, Alphacution is formally moving to a subscription model. In practice, this means that roughly 50 - 75% of the research content [...]

By |2020-10-18T16:03:56-04:00October 16th, 2020|Open|

SoftBank: Nasdaq Whale Files First 13F Report

“Entrepreneurship, you will only understand it if you experience it for yourself. It’s not something I can explain in words.” – Masayoshi Son On September 4, the Financial Times was first to report that “SoftBank is the ‘Nasdaq Whale’ that has bought billions of dollars’ worth of US equity derivatives in a series of trades that stoked the fevered rally in big tech stocks…” Since then, a consistent drumbeat of other articles and podcasts have been published; some of them tying SoftBank in with Robinhood and other retail brokers as leading factors that may explain the (concentrated) run-up in US equities from the March lows to the early September highs. For those of you who don’t speak options as a first or second language, the logic of SoftBank’s potential impact on cash equity markets based on equity derivatives positions goes like this: Derivative markets are zero sum. For every unit long there is a unit short. Customers, like SoftBank, typically buy options – outright or via spreads – to be long deltas of the underlying security. Market [...]

By |2020-10-05T21:37:00-04:00September 17th, 2020|Open|

Robinhood’s Trailing Stop Orders: Extreme Profitability, By Design

"They make it so easy." - Richard Dobatse, Robinhood user (via New York Times) "A fool and his money are soon parted." - Thomas Tusser, poet   Imagine if you knew, ahead of time, exactly what bait to use? Not only which bait to attract and influence the behavior of specific customers, but how to package the output of those behaviors - into an additional form of bait - in such a way as to leverage US listed market structure and maximize the probability of financial windfall. If so, chances are, you would share some of the vision that the founders of retail trading app and rising zeitgeist symbol, Robinhood, did circa 2013... Now, the fact that Alphacution has been beating this drum for four weeks in a row (starting here, here and then here) is unintentional and unrehearsed. Certainly, we much prefer that our riffs come with a level of variety - and we will return to that variety shortly. However, as we have been grinding the numbers around order [...]

By |2021-01-04T15:28:30-05:00July 15th, 2020|Open|

Capitalism? Both Automation and Failure Elude Major Banks

"I don't know where I'm going from here, but I promise it won't be boring." - David Bowie   For someone who has spent a career scanning the landscape for cataysts - as if in perpetual "sentry mode" - it's damn near impossible to consume the latest news and not become introspective. Perhaps that is merely the occupational disposition of someone who regularly commits thoughts to pixels. It's difficult to conjure up this week's musings on the state of play without a corresponding level of seriousness and mood to risk opening Pandora's Box with a brief flurry of thoughts that are worth writing - and reading. Anyway, here we go: With the scent - and evidence - of economic upheaval in the air, I thought it would be a good time to revisit one of our older themes, the Investment Bank Headcount Index. The last time we touched on this topic was a year ago in, "How Many Heads Does It Take To Run A Bank?" It's never been a [...]

By |2020-10-05T21:35:47-04:00June 4th, 2020|Open|

Case Study: History of Jane Street

"I don't stop when I'm tired, I stop when I'm done." - James Bond Alphacution publishes its 125-page, 149-exhibit, 26,000-word case study, "History of Jane Street," with notable expansions into regional, US option strategy and revenue estimation details. The following is the Opening to that report with Table of Contents, including download of the full Executive Summary. Access to this report is available to Premium Subscribers. Subscription and individual report purchase inquiries can be directed to info@alphacution.com. NOTE: No representative of Alphacution has been in contact with any representative of Jane Street Group, LLC or affiliated entities for the preparation of this report. This report is solely based on the author’s interpretation of Alphacution’s ongoing assembly of raw, open-access data; library of contextualized modeling; and, internally-developed content. This report does not benefit from, nor include, any material non-public information (MNPI). Introduction Volatility... It’s like the highest-octane fuel in the engine of every proprietary trading and market making firm – and it is very difficult to capture, harvest or [...]

By |2020-12-03T21:08:05-05:00May 28th, 2020|Open|

This Fed Put is Out of the Money

Don Dale, Chief Risk Strategist for Equity Risk Control Group, is a guest contributor to the Alphacution Feed.   I am not a funny guy. (Ask my wife...) And yet, occasionally - when I say the quiet part out loud - I manage to get a laugh. My latest bit is an idea about how to "fight the Fed." So, while you may enjoy a chuckle at the thought, here's why I think things might be different this time: The “Fed Put” is a common reference in capital market circles – particularly since the GFC – given their increasingly likely position to backstop some asset classes. Of late, the Fed’s actions were the driving force behind the stabilization of the bond market since the March gyrations; by extension, the equity markets. However, the primary driver for equity market performance within US indices has been the mega cap FAANGM names, given the thematic benefit of social distancing on factors like home delivery, video bingeing and all manner of online interactions. This [...]

By |2020-10-05T15:53:50-04:00May 16th, 2020|Open|

Cheap Volatility: A Lesson In Market Structure Mechanics

"The world breaks everyone, and afterward, some are strong at the broken places." - Ernest Hemingway   Alphacution has always been fascinated by the players. Unlike the world of sport, market players have unique potential to influence the field of play, and thus create a feedback loop that influences other players, and so on causing market ecosystem evolution. In this game, the rulemakers and overseers - the referees - are typically playing catch up... This is not to suggest that markets don't have naturally occurring limits in addition to those that are imposed by referees. They do. There are always capacity constraints, given performance requirements and performance expectations; and so, we are further fascinated by how players navigate - how they survive, thrive and scale (or not) - relative to the inevitability of market limitations, many of which are currently not well understood. Throughout these digital pages, Alphacution has plotted a journey to fill this unmet need for understanding -  presenting the output of our fascinations - the stories of [...]

By |2020-10-05T16:03:25-04:00May 1st, 2020|Open|