“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.” – Steve Jobs
In a Feed post entitled, “Remembering Deutsche Bank: A Market Macro-Structure Canary?,” Alphacution hinted that our modeling of Deutsche Bank Securities, Inc. (DBSI) was really a “first step towards quantifying the ongoing battle between and among bank and non-bank broker-dealers (BDs) and market makers…” Well, perhaps this post is the second step.
So, let’s briefly revisit why measuring and comparing various BDs at the center of the market ecosystem – otherwise known as the structural alpha zone – might be important: By now, many of you are familiar with Alphacution’s asset management ecosystem map and our core hypothesis that since the capacity of alpha is finite, dominant players that operate in closest proximity to sources of liquidity ultimately impact the capacity of residual alpha that is available to be harvested in neighboring sectors of the map, namely the active and passive management zones. The chart below is our latest visualization of this map and its three zones. (For those of you who are new to the Feed – or simply want to refresh – curl yourself up with What Does Citadel* Spend on Technology? and work your way to the present.)
Now, with the exception of the recent piece on DBSI, Alphacution has mainly been focused on modeling non-bank broker-dealers – i.e. buyside market makers and proprietary trading firms – on the right side of the structural alpha zone carveout, below. However, with some of our latest modeling in place, Alphacution is starting to expand its analyses and rankings of the players on the left side of that chart (highlighted).
Referencing our focus on exchanges and bank-owned liquidity venues chart (below) – from our all-time most popular post to date, “Top 100 Players in US Listed Market Structure” – we arrive at a list of the dark (and lit) market operators from which we will gather the candidates for the next step in our analysis; namely, Goldman Sachs & Co. (GS) and Morgan Stanley & Co. (MS) along with DBSI, which are the broker-dealer entities within these banks.
In the next chart, below, Alphacution presents its latest bank broker-dealer comparison of total assets for GS, MS and DBSI over the 18-year period beginning 2001 and ending 2018. Here, it’s difficult to avoid noticing the similarity of trajectories – both pre-Global Financial Crisis (GFC) and post-GFC – for these three trading operations.
Now, recall that the catalyst for the initial DBSI post was the announcement that Deutsche Bank would exit its global equities business and so we thought to measure the US component of that business using data found in Form X-17A-5. Though all three trading operations – for GS, MS, and DBSI – reflect the common challenges to be found in the post-GFC risk, regulatory and fee-pressured landscape, DBSI has been in an increasingly clear decline since about 2013. Anyone who had had the foresight to assemble this data back in 2014 or 2015 would have found the odds of DB shuttering – or, at least, restructuring – it’s US equities operation increasing.
This picture becomes much more vivid when we focus in on the next two charts, Gross Cash Equities and Net Cash Equities. Here, we see that DBSI is approaching the US equities business is an entirely different manner than GS and MS.
Sure, DBSI is smaller than these two comparisons, but, more importantly, it has maintained much more neutral exposures while GS and MS appear to be introducing strong market biases into their BD portfolio positioning.
Granted, this is our first pass at this analysis. It will become much more illuminating once we can add the other major sell-side players as well as look into the specific 13F holdings reports and conduct various earnings analyses and volatility comparisons for each of them. However, for now, these early findings are noteworthy…
Support the Feed!
Note: Business credit cards and bank accounts can be used via our PayPal payment portal.
Alphacution is in the intelligence business.
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 unaffiliated individual 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.)
Enterprise subscription packages for individuals affiliated with trading firms and custom content/service engagement options are available upon request at email@example.com.
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 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…
Unsubscribe from prior subscriptions without further obligation, at any time, here: