Right out of the gate, this story might emit a whiff of last year's news. Maybe. But, that sense would only last until you realize that this is also a template for improving predictions about future events. And, that kind of predictive power relies upon the bet that more markets and opportunities are becoming winner-take-all in the digital era... (Hint: As the functioning of markets - and other economic opportunities - become more "digital," a single leader can emerge in that market. This is how we end up with the "FANG's" - Facebook, Amazon, Netflix and Google. It's also how US equity markets end up with ~80% lit market-making flows being split between Virtu and Citadel. Here are some facts to fill in the background: In the three years beginning 2006, the Timber Hill market making unit of Interactive Brokers Group (IB) had an annual revenue run rate of around $1 billion, peaking at over $1.3 billion in 2008. By 2017, Timber Hill's revenue run rate had declined 94% to [...]
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 [...]
When we launched our first trading program at Quantlab in the late 90's, we didn't have direct market access yet. We generated an order list (overnight) that was worked throughout the subsequent market session at the discretion of an algo-equipped executing broker; some of whom now roam the halls at Jefferies / Leucadia. This was the era when 1- to 3-day portfolio turnover was considered fast - SOES bandits were still a thing - and Schwab would soon acquire electronic trading pioneer, CyBerCorp, from Philip Berber - a short drive down the road from our Houston headquarters in Austin, TX. Of course, everyone had nicknames then - as I suspect they still do now. Ed Bosarge, founder of what eventually became Quantlab (after at least 3 prior related incarnations that began for me around 1996), was known as Dr. Evil. Let's just say it's a hair-raising story about a swashbuckling pioneer of applied math involving a hideous toupee... I was known as Mr. Bigglesworth - or, "Bigsy" for short. No [...]
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 [...]
When the deal between Virtu Financial and KCG Holdings was announced in March 2017, we offered the following read of the motivations behind the announcement: Average daily adjusted net trading revenue for Q4-2016 has returned to levels not seen since late 2013 / early 2014. Chances are quite high that persistent low volatility during Q1-2017 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… Now, with the deal completed as of July 2017, and Virtu now reporting full year 2017 highlights, we took some time to update and combine our Virtu and KCG models. Here's what's notable about this latest update: The combined financials show some signs of improvement (or, at least, stabilization), however, the market landscape has continued to deteriorate: Over the 28-year life of CBOE's volatility index (VIX) - aka the "fear gauge" - 2017 [...]
Broker spending on technology is one of those topics that rises to the top of the headlines from time to time, particularly given how much the market landscape has shifted in the past several years - and how competitive, regulatory, and new market drivers threaten to change that landscape even more along the road ahead. So, during the course of developing research on a related topic, we had occasion to expand our modeling in the area of market makers, broker-dealers, and related specialist execution technologies - and stumbled upon a different lens through which to evaluate "broker" spending patterns. In the following chart, we share a common format for presenting these kinds of figures; a ranking of 5-year average total technology spending by 9 public broker and broker-like companies. Simple output. Mildly interesting. Ten's or hundred's of millions of dollars spent on technology is notable. But, not particularly illuminating. However, as we benchmarked technology spending using employee headcounts - a technique we use regularly - the picture packs an entirely [...]
Despite dramatic changes to the fortunes of quantitative trading strategies of late, they still represent the extremes of "technology leverage" in the global markets ecosystem. This means that due to a high level of workflow automation, these types of firms generate more output - as measured by revenue per employee (RPE) - than any others in the industry. Or, so we thought... In the context of its broader research mission, Alphacution has been focused - perhaps even a little obsessed - on modeling, measuring and benchmarking the interplay between the two primary engines of productivity within the global financial services ecosystem: technology capital and human capital. The value of this research - something we call "navigational intelligence" - is to help technology buyers understand where they fit amongst the constellation of peers and competitors, and for solution sellers to understand the needs and spending patterns of their clients. Until recently, high frequency trading and market-making operations - like those found at Virtu Financial and its newly acquired KCG Holdings - [...]
A quick math assignment: @Nasdaq earned $540 million in information services (aka - #marketdata) revenue in 2016, up 5.5% over 2015 (and, not to put to fine a point on it, but this growth is slowing as 2015 v. 2014 was +8.2%). @KCGHQ spent $148 million on communications and data processing in 2016. @VirtuFinancial is on its way to acquiring KCG - and is on record with a strategy to ultimately consolidate both operations onto a single, unified trading platform. No doubt, this is not lip service. What is the impact on Nasdaq - and other exchanges - whose revenue growth has become so dependent on market data sales? If you are ambitious, here's some additional intelligence that you could use in the analysis: (We have more in the can if you need it.) BTW, you have to guess that all #HFT leaders have really spiffy axes, no?