It has been almost exactly 2 years since “Jack” – the mastermind behind the Amsterdamtrader blog that chronicled a ton of insider’s knowledge about the high-frequency trading and market making world from about 2009 thru 2016 – posted his closing submission. Despite that, I still wanted to pause for a minute to give props where they are due. The contents of the Amsterdamtrader still sit out there in the blogosphere, open for any particular puzzle solver to stumble onto. It was here that I found several missing pieces to Alphacution’s modeling puzzle belonging to Optiver and IMC.
Here’s a first sample (or two) of what has come of that discovery:
Alphacution typically looks through a technology lens to see how various players operate around the global financial landscape – and what those findings may foreshadow for other players in neighboring regions of the ecosystem. Often labeled “technical leverage,” we are quantifying – wherever possible – the impacts of technology in and around the trading and investment management arena. In practice, this means focusing on the players and the operational engines they have “under the hood” to successfully deploy their strategies.
It just so happens that the most technically-savvy players display the best fireworks in terms of historical profitability and strategy mythology. Along with the apparent satisfaction of journaling the story, this fascination is the part that Jack and I have in common…
Using our common benchmarking analytic, revenue per employee (RPE), Alphacution is now able to present the net trading income per employee for the premier Amsterdam-based quant shops, Optiver, IMC and Flow Traders (see below)
Despite the volatility, there is more commonality here than meets the eye. Because when we expand the analysis to include the available data from GETCO (pre-Knight acquisition) and Virtu, the picture seems to tell a different story:
When we add GETCO and Virtu to the analysis, the Dutch triumvirate of Optiver-IMC-Flow appear to emit a more similar technical leverage than in the first chart – which brings us to a point that we will introduce here and then flesh out in more detail later: Operational efficiency – the primary driver of the technical leverage analytic because it uses headcount in the denominator – is a cultural attribute. And so, for some firms, maximizing efficiency by maximizing automation and minimizing human capital may not be in their long term best interests.
Culturally, some firms tend to maintain a layer of human capital “fat” – otherwise typically known as “research & development” – that would in turn tend to weigh on the level of the technical leverage analytic, RPE. With that, I am wondering if there is such a cultural difference between the Netherlands prop shops and these US prop shops that shows up in these analytics.
One more thing to consider for next time: Recall the chart we introduced about the growth of Citadel Securities‘ 13F positions and what that likely implied about their success and future growth. Now, consider the chart below which illustrates the trajectory of Optiver’s trading assets:
In his final post, Jack the Amsterdamtrader disclosed his true identity (after blogging for 8 years in anonymity) behind what amounted to the actor, Ewan McGregor, playing the lead role in the 1999 movie, Rogue Trader, about the Baring’s trader, Nick Leeson. If you followed that chain, then you might understand that it reminded me of the character that Robert Downey Jr. played in Tropic Thunder – Sgt. Lincoln Osiris: “I’m a dude playing a dude disguised as another dude!” LMAO.
Clearly, drawing upon the Howard Stern school of media, I blew my anonymity a long time ago…
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…