Virtu Americas: Lessons in Risk Disposal (Updated)
Alphacution delivers a new comparison of Virtu Americas and Citadel Securities to explore the objectives of risk warehousing and risk disposal...
Got Hood-lash Yet? 2020 Order Routing Revenue – Part I
This is the fuel that ignites the chaos. Without it, the New Market Kamikazes run into the friction that keeps the rubber on the road...
Outlook 2021: The Drunk-on-Impunity Mania Arrives
"You cannot escape the responsibility of tomorrow by avoiding it today."Abraham Lincoln With protestors storming the U.S. Capital - some of which breaching the outer doors and freely strolling the U.S. Senate floor - as surreal and unprecedented backdrop, I sit down to organize a sketch of Alphacution's outlook for the year ahead, starting with a very wide lens: The U.S. economy - much like the rest of the other "developed world" economies - is naturally weaker than the meticulously curated employment and productivity numbers suggest. Technology adoption (from workflow automation to social media distraction), growing debt burdens, ossified resource allocation practices, cross-region labor arbitrage, deteriorating infrastructure, and other factors all converge to deteriorate "life, liberty and the pursuit of happiness" for a growing portion of the population. The COVID pandemic of 2020 - and however long it remains disruptive throughout 2021 as vaccines are being rolled out - acts as an accelerant of many of these factors. Ours is a deteriorating version of capitalism. Symptoms emblematic of the stage [...]
Alphacution’s Top Stories for 2020
"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. You have to trust in something - your gut, destiny, life, karma, whatever." Steve Jobs I was going to start out by saying that it's been a pivotal year for Alphacution. Problem is, I said the same things at this time last year. So, I supposed that means it's been a good coupla years. The pandemic, volatility, subsequent lockdown - and some luck in timing - drove a lot of attention towards Alphacution's content in 2020. Clearly, Robinhood and payments for order flow (PFOF) were top themes for the year. Our Feed post on Robinhood and trailing stop orders led the year in page views, and represented like no other before it what it looks like when a story goes viral. Not to be outdone, the timely post on the downfall of Ronin Capital also attracted a ton of attention. In fact, if [...]
Walleye Trading’s Book: Hiding in Plain Sight
“There is an old saying: If you want to hide the treasure, put it in plain sight. Then no one will see it.”Larry Dossey By now, avid readers of Alphacution know the joke: We have taken that which had previously been hiding in plain sight about the most secretive and mysterious players in the world of trading, and shed some light on them. Hence, today's title image metaphor is a well lit and colorful chameleon set against a black background. While much more in this zone of the ecosystem is no longer hiding from us, there are many fascinating discoveries yet to be made... Related to this idea, there's a super-cycle of research and development going on in the background at Alphacution, much of it currently about option markets. At the risk of redundancy, the options markets - in particular, those with skills for trading in option and other derivatives markets - hold a special key to the evolution of listed markets, and those who are most likely to remain [...]
Trading Strategy Secrets: Hiding in Plain Sight
"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom."Viktor Frankl Alphacution's exploration to tease insight from the available data - to make the data dance - continues to expand. Sometimes this is due to weaving a new and unfamiliar data source. And, sometimes it's due to seeing something entirely new in a familiar dataset. A challenge in the process is the growing sense that we can never quite tell all the fascinating nuggets of the stories we discover. Be that as it may, the fact that data can be electrified to dance about the most consequential and mythological players in the capital markets ecosystem after they have expended so much energy to remain secretive makes this journey that much more thrilling. What follows here is a concentrated example of our expanding capabilities... Today's story takes advantage of Virtu Financial's latest Q3 2020 earnings-related data dump. Virtu is a regular topic on the [...]
Citadel Securities Picks Fight With SEC Over Crystal Ball
"If you are not paying for the product, then you are the product."The Social Dilemma In a rare display of miscalculation, Citadel may have overplayed its hand... Here's the setup: According to Bloomberg, "Citadel Securities LLC has sued the U.S. Securities and Exchange Commission (SEC) over the regulator’s approval of an order type introduced by stock-exchange operator IEX Group Inc." Approved by the SEC in August and launched on October 1, IEX's discretionary limit order type - or, "D-Limit" - is essentially a mechanism designed to protect liquidity providers from potential adverse selection by latency arbitrage strategies - otherwise known in less polite company as getting "picked off" on the basis of stale quotes. In a comment letter, dated April 23, 2020, Citadel Securities expresses its objection to IEX's proposal, in part, because it "will broadly and indiscriminately affect myriad liquidity takers, including retail and institutional investors as well as market makers in equities and related asset classes, such as ETFs, options, and futures." (Hold that thought for a minute...) Now, [...]
Wholesale Market Makers: Adding Price Improvement to the PFOF Analysis
"The difficulty lies not so much in developing new ideas as in escaping from old ones." John Maynard Keynes Just because the rule requires “market centers that trade National Market System (NMS) securities to make available standardized, monthly reports containing statistical information about covered order executions that are free and readily accessible to the public" does not mean that that information is lounging around under a bank of Klieg lights in an easily consumable format. Like a lot of raw regulatory data, you need to know where to look while simultaneously in possession of a decoder ring... Meanwhile, there is a dramatic falling of US equity market dominoes that began a year ago with an industry-wide move to zero-commission retail brokerage models. This move became exacerbated in March by a convergence of pandemic-related forces that has resulted in a gusher of unprecedented profitability for a short list of leading proprietary trading firms that are otherwise known in the light of day as wholesale market makers. At the intersection where [...]
Stranded, As Virtu Bids Farewell to Madison Tyler
“We don’t receive wisdom; we must discover it for ourselves after a journey that no one can take for us.” – Marcel Proust With pandemic-era factors being historically and paradoxically hospitable for market volumes and volatility, those players that stand in closest proximity to the sources of listed liquidity have experienced an unexpected windfall so far in 2020. Today, with market making revenue for the past two consecutive quarters at all-time highs and seeming to bend a long-term downward trend in a new upward direction, VIRT stock found its own all-time high… For the remainder of this story, we need to refresh your perspective with a little context: Founded in 2008, Virtu is the youngest of a dozen leading proprietary trading and market making firms in the world: What is most unique about Virtu, however, in the context of this group is that it has grown primarily by acquiring other people’s trading strategies – typically by outright acquisition of other companies – from the beginning. By comparison, all the others on this roster have [...]
From Citadel Securities to Tastyworks: The New Economics of Liquidity, Part 1
"The real voyage of discovery consists, not in seeking new landscapes, but in having new eyes." - Marcel Proust The data contained in the revised SEC Rule 606 reporting has landed like a transparency bomb for those few of us who try to make sense of complex - and historically opaque - market structure issues; perhaps even more so for those fewer of us that are able to triangulate on the strategic movements of the various players by weaving additional insight from multiple datasets. Add the moves of the largest retail brokerage platforms, in particular, to a zero-commission paradigm off the back of the controversially-successful Robinhood platform, and we have a potent cocktail made of disruption and intrigue. For those of you that have been following along recently, Alphacution has toggled widely between intense fixation on these themes - with our latest Robinhood-related Feed posts, "Phenomenon: On This Score, Robinhood Now Exceeds E*Trade, Others" and "Trick Shot: Robinhood Underwrites MEMX" and our recent contributions to the July 8 New York Times [...]
