Image Credit: Liu Bolin
“The problems are solved, not by giving new information, but by arranging what we have known since long.” – Ludwig Wittgenstein
Like discovering a secret doorway into a long-forgotten section of the Great Library of Alexandria, our recent focus on the data contained in the SEC’s Form 13F has been nothing short of captivating. Yes, one interpretation of these reports – the most common interpretation – is that these reports merely represent a fleeting and illusory fragment of an asset manager’s holdings.
However, if you were hunting for puzzle pieces (to reverse-engineer the inner workings of a complex system) in the equivalent of a sensory deprivation chamber, and then someone lit a match for a split second, the amount of information you could collect off the back of that spark would be profound.
In other words, the findings so far from this foray of ours into the 13F analysis has been quite valuable. As we will begin to demonstrate, even fragments of position- and portfolio-level attribution data can be quite illuminating about the nature of underlying strategies among the most secretive and mythological managers in the world. Even position count and the existence of any optionality can go a long way towards shortening the list of possible signal generation mechanisms and portfolio constructions (including the unobservable components).
But, most of all, this data represents a critical link between the market micro-structure research (on the nature of liquidity) developed with great effect by firms like Rosenblatt Securities and the market macro-structure research (on players and their strategies) being pioneered here at Alphacution…
So, here’s the setup for this post:
We started our tease with the recent musings, “Goldman Sachs’ Book: Hiding in Plain Sight,” where we mainly wanted to introduce this work by focusing on shapes. After all, the 13F reports only relate to US listed equity and equity-linked securities, only show the long side of these portfolios, don’t delta-adjust options positions (except in rare filings), and don’t provide any observable information whatsoever about underlying financial leverage. In short, the market value numbers really don’t mean all that much.
The shapes (and relative shapes), however, mean a lot – and that’s just for starters…
Recall the bomb that was dropped at the end of the recent piece, “Virtu, ITG: Much More Than Meets The Eye.” It was at the tail end of that post that we speculated about potential sources of headwinds for the soon-to-be-intertwined entities of Virtu and ITG:
“Though the hot era of the trading technology arms race has long since cooled – and perhaps forgotten by many – the right ear to the right ground would hear about renewed progress in speed. It is here that we return to the value of contextual data (sooner than I thought!): When we add up the possibilities of increased progress with speed, plus risks of information leakage, plus the fact that there are a scant few players in a position to make a dent, there is only one answer: Citadel.”
It is because of this, along with the naked fascination about the inner-workings of a firm like Citadel, that we return to that speculation. In the chart below, Alphacution presents the carved-out gross notional long market values for each of the 36 quarterly 13F reports beginning 12/31/2009 and ending 9/30/2018 for the broker-dealer business within the broader, global trading operation of Citadel, LLC.
In other words, the picture below is the shape of the long side of the US market making operation provided by 36 end-of-day snapshots over a 9-year period for a lineage of legal entities, now known as Citadel Securities GP, LLC.
Of course, if we were to attach numbers to this shape it might emphasize the level of success that seems to be occurring here. However, adding those numbers now also creates confusion and brings up lots of unnecessary questions at this juncture.
All we really need to do to emphasize the shape (and strategy and success) of Citadel Securities is to place something else next to it as a reference point…
Translation: A long, detailed and highly technical post is necessary to explain the difference between these two lines (which we will do another time), and why the owner of the blue line represents a much more formidable force among the other competitors within the “structural alpha zone” of Alphacution’s asset manager ecosystem map. We can say that the difference between these two lines is mainly related to options and it is the presence of that options book that allows the equity market making operation to be much more aggressive.
The list of remaining market makers in the lit equity market today is already short. The problem with being overly aggressive – or, becoming a victim of your own success – is when that oligopoly of market makers tilts further towards a monopoly. It’s not healthy…
I will leave this can of worms wide open for now. Back to you with more, soon…
As always, if you value this work: Like it, share it, comment on it – or discuss amongst your colleagues – and then send us firstname.lastname@example.org.
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.
Don’t be shy…