“Great things are done by a series of small things brought together.” – Vincent Van Gogh
In late 2001, $1.1 million in member contributed capital is dropped into Northtown Trading, LLC. By 2005, this operation becomes Tradebot Systems, Inc. and the rest has become a notable component of high-frequency trading history – and mythology.
In comparison to much of our other modeling, we don’t know much about Tradebot. However, given the contextual evidence provided by that other modeling, we can leverage the data we do have on Tradebot much further than we’d otherwise be able to.
For the trained eye, the exhibit below – wherein Alphacution presents the total assets and a summation of cash and net receivables found in Form X17A5 for the years beginning 2001 and ending 2018 – shows that this trading operation is mostly holding cash and receivables from brokers. This means that they’re position exposure is limited, which further means that they are trading fast enough – and small enough – to be (mostly) flat at the end of each day.
Alphacution has often written that, in a perfect world, trading firms would much prefer to be flat by the end of each day (since risk-adjusted returns are highly correlated with holding period). However, it is the amount strategy scaling desired relative to available liquidity in the target security universe that ultimately forces position accumulation to form.
This position accumulation hasn’t happened here – certainly not to any degree that we have observed among a broad spectrum of peers and competitors – as we see that a vast majority of the assets here are cash or near-cash. Topping out around $100 million in total assets since 2009, there are a few possible reasons for this plateau:
First, there could be simple capacity constraints preventing the core strategy from growing further. Second, since $100 in assets under management (or, portfolio value) is the minimum trigger for filing a 13F report, perhaps Tradebot is purposely staying under that threshold. And, third – a reason we don’t often consider – perhaps the team at Tradebot is happy just staying around this level and enjoying the cash that it throws off. Now, based on the fact that Tradebot has launched other affiliates – like, Tradebot Ventures, Tradebot Properties and others – that is usually a strong sign that the core strategy is experiencing capacity constraints.
Anyway, since we only have the FOCUS reports to go off of, we don’t know the mix of trading in stocks and ETFs. (Chances are, there is no option trading in the book.) So, while we don’t know the product mix, nor the number of names Tradebot would be active in, we can home in on some of the position sizing limitations that would allow a trading firm like this to remain flying under the 13F radar.
In the chart below, Alphacution present the money-shot exhibit from the Feed post, “Ranking Strategy Speed by Top Quants, Market Makers,” wherein we propose that average position size is related to strategy turnover frequency (or, average position holding period).
As you can see, the smallest average position size in shares is represented by the market maker, Latour Trading, and its affiliated proprietary quant operation, Tower Research Capital (TRC). Until now, Alphacution viewed this tandem as the fastest / smallest in the observable universe of players. Yet, even with a small sample of evidence, Tradebot changes that.
In the next two charts, Alphacution isolates the average stock and ETF positions (in shares) for both Latour and TRC over the 31-quarter period beginning Q4 2011 and ending Q2 2019.
With these boundary conditions as reference, the point we are making here is simply this: Assuming that they are trading in similar names as Latour/TRC (which is a high probability), Alphacution estimates that Tradebot would need to keep intraday positions averaging less than 1,000-2,000 shares for stocks and less than 5,000 shares for ETFs in order to expect to be able to get flat by the end of each trading session.
As usual, its a fascinating puzzle, and we’re always gratified to add another player to the model library that appears to represent a new boundary condition, thereby bringing greater contextual clarity to everything else that is connected to it…
Support the Feed!
Note: Business credit cards and bank accounts can be used via our PayPal payment portal.
Alphacution is in the intelligence business.
For those of you who are eager to derive greater value from this work and apply that intelligence to your own business interests, Alphacution is offering unaffiliated individual subscription options priced at $275 per year or $25 per month, cancellable at any time. Both of these options include a rebate on purchases of deeper, more substantive reports and case studies.
In other words, the entire value of an individual subscription paid up to the point of purchasing a single report will be deducted from the purchase of that report. (Rebates not to exceed the maximum value of an annual subscription.)
Enterprise subscription packages for individuals affiliated with trading firms and custom content/service engagement options are available upon request at firstname.lastname@example.org.
Now, for those of you who don’t expect to take advantage of the offers outlined above but want to continue to enjoy the insights, intelligence and occassional entertainment that remain openly available on the Feed, I want to make this specific plea:
Free doesn’t mean there are no costs. In fact, in this case, there have been extraordinary costs in the accumulation of experience and sight, meticulous curation and assembly of data, and creative visualization of and storytelling around our findings.
So, if you value quality content – here or anywhere else – then you need to find a way to support that content at some level simply because you want it to continue to exist. Our post, In Support of Digital Content – which was adapted from other notable digital era content developers – makes a more expansive case for this perspective.
Bottom line: Your efforts to support via one-time or recurring contributions will help guard against this content needing to move from the currently preferred audience-driven model (for its level of independence) to a sponsorship-driven model (which can be found on most other industry media outlets).
So, if none of the subscription options suit you, one-time and recurring support contributions can be made at any level here:
Of course, as always: If you value this work, please continue to “like it,” share it, comment on it – or discuss amongst your colleagues – and then send us email@example.com.
As our “feedback loop” becomes more vibrant – given input from clients and other members of our network, especially around new questions to be answered – the value of this work will accelerate.
Don’t be shy…
Unsubscribe from prior subscriptions without further obligation, at any time, here: