The latest from Lynne Marek, Crain's Chicago Business: "Why Citadel Securities may not be cheering all these retail brokerage mergers: The combos of Morgan Stanley and E-Trade, plus Schwab and TD Ameritrade, could squeeze an important revenue stream."
“That which does not kill us makes us stronger.” - Friedrich Nietzsche “We adore chaos because we love to produce order.” ― M.C. Escher One intangible cost of being the sole US publicly-traded market making firm is the required level of financial and operational transparency - and the investor relations burden - that comes with that status. In this case, that cost may be unusually high because of the relative opacity of the competitors in this sector - what Alphacution typically refers to as the structural alpha zone of its asset management ecosystem map - coupled with the unparalleled use of technology and extraordinary magnitude of wealth generated by that small group of players. To compound this dynamic, recent dramatic shifts in the landscape for retail order flow sparked by the late 2019 moves - en masse - to $zero commissions by retail-oriented brokerage platforms, and the quick follow-on consolidations of TD Ameritrade (by Charles Schwab) and E*Trade (by Morgan Stanley), and given the pandemic-fueled volatility and volumes of [...]
"What you do speaks so loudly that I cannot hear what you say." - Ralph Waldo Emerson On Thursday, February 20, Morgan Stanley (MS) announced its acquisition of E*Trade (ETFC) for $13 billion in a billiard move that simultaneously 1) responds to the recent move to $zero commissions in retail brokerage; 2) responds to Charles Schwab's recent announcement to acquire primary ETFC competitor TD Ameritrade; 3) boosts MS's position in coveted wealth management channels; 4a) takes greater control of coveted retail order flows - and thus, (4b) away from competitive market making firms, like Citadel Securities and Virtu; 5) takes the last of the major independent discount retailed brokerage platforms off the proverbial table - sorry, Goldman; and 6) arguably completes a dramatic arc of industry evolution and consolidation that began with Schwab's acquisition of CyBerCorp in early 2000 and Citi's acquisition of Lava Trading in 2004... As trick shots go, this one is a doozy! Given that, I wanted to extend some thoughts around recent modeling that we [...]
“From the point of ignition to the final drive, the point of the journey is not to arrive.” - Neil Peart New clues are emerging on the nature and pace of change... Here's the setup: Unlikely and unexpected virtuosity often serves as the catalyst for a dynastic run of success. Moreover, legend has it, that it's usually the will over and above the skill that fuels the initiation and duration of that run. While skills eventually decay, it's the will to keep finding a way to win - to distinguish oneself or team relative to the competition - that's the defining factor. Of course, whether it be a football field or a market landscape, like a moving sidewalk, everything happens as the ground is constantly shifting below our feet. What happens to Tom Brady next, I'm not here to predict. He is merely a reliable hook to drag your attention to this point in the story because the debate about whether his game has changed to favor running, mobile [...]
"Historians study the past not in order to repeat it, but in order to be liberated from it." - Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow With three quarters worth of financial reports for calendar 2019 long in the bag, it is not much of a courageous leap for us to deliver an estimate for order routing revenue - otherwise more notoriously known as payment for order flow (PFOF) - for the full year. And, with the quarterly earnings season coming in the month ahead, it won't be long before we are able to test the accuracy of this estimate. In the chart below, Alphacution extends our prior analysis not only to include 2011 and 2012 but also, more relevantly, to include the year just completed; thereby extending to nine years from six our focus on five of the primary players in retail order flow for US equity markets who also disclose order routing data: TD Ameritrade (soon to be acquired by Charles Schwab); E*Trade; the [...]
"You can have all the transfer orders that you want, but you have to ask me nicely." - Col. Nathan R. Jessup, "A Few Good Men" On December 11, 2019, Bloomberg News editor Tom Maloney publishes an unusually illuminating article on Citadel Securities, "Ken Griffin Has Another Money Machine to Rival Hedge Fund," citing specifically that the market maker earned $3.5 billion of revenue in 2018 and "handles more than 1 of 5 shares traded in the US each year." Of note, the article includes two charts, the first of which ranking net trading revenue in 2018 for a selection of bank and non-bank market makers; and the second of which showcasing the shifting market shares of US retail equity wholesalers. Given that Alphacution has followed this and other firms in this space as closely or moreso than any others - for example, we are not aware of any other research and advisory group publishing a comprehensive case study on Citadel Securities - I wanted to add a few thoughts [...]
"The book of nature is written in the language of mathematics." - Galileo Galilei As we prepare to turn the page on a new year, and consider what we may want to accomplish during that year, derivatives are on the priority list. Why? Options are important for many reasons from risk management to computational rigor and signal generation. And, if you had been paying close enough attention over the course of this year, you might have noticed that each of our case studies have touched, in one way or another, on options. Now, given that Alphacution is committed to its research providing new pictures to ponder, I wanted to drop the following chart on you with little additional commentary for this go 'round - except to say that the plan right now is to dedicate a full case study to the key players in options trading during 2020. Stay tuned... Until next time...
Success in any endeavor requires single-minded attention to detail and total concentration." - Willie Sutton, bank robber Alphacution has been writing untold stories about the most secretive, mythological and successful trading firms, hedge funds and asset managers in the history of the global markets ecosystem for the past couple years. What originated as our "Hiding in Plain Sight" series has come to life based on an accidental cocktail of messy data and an experiential overlay made up of a maniacal curiosity for puzzle solving, the joy of storytelling, and a potent dash of personal circumstance. Dozens of these companies have found themselves in our sights, many of them the subject of these Feed posts - some more than once - and, many of them modeled but yet to be written about. And, since there is so much secrecy around proprietary trading strategies - and rightly so - most folks have responded without responding, except for their ongoing readership, and the network effect. Yes, a small minority of our subjects have [...]
"What is to give light must endure burning." - Viktor Frankl “The backbone of surprise is fusing speed with secrecy.” – Carl von Clausewitz UPDATE 11/21/2019 (bottom of post) Why is it coming out now, apparently months after the talks took place, that Blackstone inquired about buying a stake in Citadel? There are a few reasons we can think of for monetizing coveted equity - or, at least showing enough leg to solicit an updated "mark" on the assets - but, the most likely one has been the same for years: Ken wants to become an investment bank. Ok, so what does Citadel need to become an investment bank that it doesn't already have? Well, given leadership - and, occasional dominance - in listed equity-linked markets by Citadel, the next beachhead for investment banks-in-training is fixed income. And, Citadel-like prowess in fixed income may require lots of technology and smart folk, but the one thing it definitely needs is balance sheet. The next question, then, is: Do you build [...]