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 [...]
We've moved a major step towards a done deal here. Good news is that this remains far from a done story. Easy access to financial and operational data about the outer extremes of technical leverage in the global financial services sector provides great fodder for a story that will continue to inform and fascinate. Along those lines, and in addition to the updated deal news, both parties disclosed results from the most recent quarter today. With that, I thought it would be timely to update our ongoing analysis to see if the evidence confirms or alters the findings we have been showcasing to date. Here's where we started a little over a month ago on March 15 when Virtu made its unsolicited bid for KCG: "In the chart below, average daily adjusted net trading revenue for Q4-2016 returns to levels not seen since late 2013 / early 2014. Chances are quite high that persistent low volatility during Q1-2017 ... has caused these figures to fall back to pre-2013 levels." And then there is this additional comment: [...]
Here's an update from the initial post on March 15, 2017... The first wave of commentary is in, and the consensus seems to be that the unsolicited bid by Virtu for KCG is all "about the little guy." In other words, this deal is all about the position of a wholesaler relative to retail order flow. Maybe so. There is also some suggestion that these firms are not competitors; that, in fact, they may be complementary. Ok, I guess. But, widen your interpretation of the situation a bit and consider this: According to the 2016 Virtu 10-K, it is disclosed that, "We make markets by providing quotations to buyers and sellers in more than 12,000 securities and other financial instruments on more than 235 unique exchanges, markets and liquidity pools in 36 countries around the world." The notable liquidity venues are as follows, (and notice the part about "major private liquidity pools.") Since #HFT and narratives about highly-automated trading strategies are crowded topics among capital markets punditry, Alphacution has not followed the nuances close enough to know for sure whether the sponsor [...]
@VirtuFinancial bid for KCG Holdings (@KCGHQ) today. Here's why: In the chart below, average daily adjusted net trading revenue for Q4-2016 returns to levels not seen since late 2013 / early 2014. Chances are quite high that persistent low volatility during Q1-2017 - which has only a dozen trading days left in it - has caused these figure to fall back to pre-2013 levels. A situation like that needs a good distraction; something that can change the narrative and allow for lots of financial restructuring and restatements. Voila! Try to take out one of your nearest competitors... Problem is, it won't work - even if the deal gets done. The cultures of Virtu and GETCO - the parts that are likely to fit together the most logically - won't mesh. Knowing the founders and leadership, they are as different as New York and Chicago, as different as right and left. Stay tuned...
If you read Part 1 to this post (from December 15, 2016) then you know that at least as of the end of 2015, financial reports from HFT bellwether Virtu Financial illustrated strong and even increasing profitability. Our surprise from these impressive figures came from the countervailing hypothesis that HFT was already well past its prime (given the evidence of prop shop closings and consolidations over the past 5 years or so). Apparently, Virtu didn’t get that memo. However, upon closer inspection of the most recent quarterly reports – which as of now yields details over 11 quarters starting in calendar Q1 2014 (March) and ending in calendar Q3 2016 (September) – even this bellwether may have seen its best days. Exhibit 1 (below) is one perspective of what this recent turn of fortune looks like: Some translation: After spiking in Q4-2014 and peaking in Q1-2015 at an annualized (adjusted net trading) revenue per employee (RPE) of over $4.1 million, trading revenue as of the end of Q3-2016 has returned to somewhat less [...]
It's March 25, 2016 - and I crack open the newly minted 10-K from our friends at Virtu Financial. The equivalent of that new car smell wafts northward from its fresh digital pages. The anticipation is palpable. With years of intense focus and vigorous debate on the mechanics of #HFT - and the jealous wonderment surrounding its stratospheric profitability - it is both rare and puzzling that the public should get a real, data-driven look inside to support or debunk the mythology of this ultra-secretive corner of the global financial landscape. Searching within this fresh set of data, I update our model - and the output creates one of those WTF cognitive dissonance moments. After all, isn't the heyday of HFT over?! Haven't numerous high-speed shops consolidated or folded? As a refresher, the vid below is what we were saying back in July 2013 (while at Tabb Group): Hello from 2013! Struggling is not what's going on here. By the looks of things at Virtu - at least as of the [...]
We have been playing with some new equations; looking to see if anything interesting can be learned from benchmarking assets per employee across various firms. (It turns out that adding this analytic to our suite of other "per employee" metrics yields significant insights.) In the figure below, we took the top 10 hedge funds ranked by assets under management (AUM) and then re-ranked that list by AUM per employee. We also tossed in Virtu Financial and KCG (Getco) for giggles - and to test the extremes. Notice anything interesting? Based on what you might know about these trading companies, how would you label the X-axis? Here's some additional data to consider: The correlation between assets and headcount is not perfect by any stretch, but it is signal-worthy. Also, this trick works best on mature, ongoing firms whose operations and business are relatively consistent. Headcount level doesn't seem to matter. Albeit at the extremes of tradings firms, Virtu Financial generated nearly US$800 million in revenue (2015) with 148 employees - so [...]
In this FOURTH of a five-part video blog series Jim Jockle, CMO of Numerix sits down with Paul Rowady, Director of Research at Alphacution to discuss the recent FinTech Revolution. They discuss how firms are gearing themselves towards a digital culture, and how companies are working to distinguish themselves in this new age. The five videos cover the following: Part 1: Paralysis by Analysis: Preparation & Analyzation for Digital Disruption Part 2: IT Outsourcing and Transformation Part 3: Revolutionizing FinTech: Looking into the World of Data Automation Part 4: Technological Implications of Cultural Transformation Part 5: Digital Noise in the FinTech Space Jim Jockle (Host): So let me go to your research. You know you suggested a little bit, there’s the differentiators in terms of maximizing our opportunity and then there’s a congested middle-of-the-pack. Transitioning, so yes you had the Fords, who arguably have done very well in that or a transitionary period of time but you also saw the Hondas and Toyotas come out of nowhere and things of [...]