RPE

Virtu: Q1-2018 Update on Extremes

With volatility spiking in Q1 of 2018 - and the successful porting of KCG's intellectual property (IP) prior to that in late 2017 - VIRT earned a welcomed reprieve from the conditions of recent quarters, as we predicted here (and elsewhere prior to that). In the exhibit below, Alphacution's as-if modeling of the combined entity - Virtu + KCG pre-Q3 2017 - yields a level of net trading income that would not have been seen since Q1-2016. Meanwhile, Alphacution's tracking of adjusted net trading income per employee - a proxy for our common look at revenue per employee (RPE) - starkly illustrates the path through the most recent maneuvers: Persistent declines in top line "productivity" since its most recent peak in early 2015 ultimately led to the acquisition of KCG, which closed in July 2017. Swift transfer of KCG's IP onto Virtu's infrastructure along with elimination of redundant technology and human capital allowed this productivity measure to bounce off its lows in Q3 2017 to finish the year as strongly [...]

By | 2018-06-21T20:28:30+00:00 May 15th, 2018|Alphacution Feed|

Nasdaq and the Case of the Missing Market Data

In late April 2017, we noticed a new string of dominoes falling at the fast, automated end of the trading spectrum: With Virtu about to gobble up KCG - not to mention additional consolidations of principal trading groups like RGM Advisors (to DRW), Timber Hill (to Two Sigma) and Chopper Trading (to DRW), among others - it seemed pretty clear that one of the next dominos to fall would be in the direct-feed market data space. The question was: To what degree? (See: "Nasdaq Under Virtu Market Data Axe," April 28, 2017) And yet, when we went back to look - via updating our Nasdaq model - this picture showed up: As Paul Harvey used to say: "...And now the rest of the story..." Obviously this trajectory is the opposite of what was expected. Better yet, in a dictionary somewhere is this chart - at least, of late - next to the words, "fairly smooth sailing" or "strong growth." Over the last few years, data products (and the growth in [...]

By | 2018-03-27T21:44:23+00:00 March 22nd, 2018|Alphacution Feed|

Technical Leverage in Context

Alphacution defines technical leverage as the difference between revenue per employee (RPE) and technology spending per employee. In the parlance of our T-Greeks benchmarking framework, this difference is also known as T-Spread. I stumbled over the chart below - 50 companies in the S&P 500 with the highest RPE rankings for 2016 - recently and thought it would be notable to add to the knowledgebase. Since our modeling and analysis currently focuses exclusively on companies related to the financial services sector, much of what we find in this exhibit provides illuminating context. Source: Craft Clearly, energy and healthcare companies dominate the RPE metric, with 3 companies producing astonishing RPE levels greater than $5 million. Only 3 companies from the Financials sector (2 insurance - Aflac, XL Group; and, 1 exchange - CME Group) make this list. From our own modeling, the highest RPE we have found to date is Virtu Financial - a high-frequency trading firm - with a 2016 RPE of $2.8 million. Among the world's major banking groups, Goldman Sachs [...]

By | 2018-02-28T16:31:53+00:00 June 20th, 2017|Alphacution Feed|