“Empty your mind, be formless, shapeless — like water.” – Bruce Lee
In “Master Exploder, Part I,” we presented a first pass at Virtu’s Q1 2020 earnings release given the impacts of unprecedented volatility in March. If you’re tracking closely – or merely fascinated by – this neck of the woods, be sure to check in on that one, and the one on Flow Traders‘ Q1 earnings that preceded. Both releases presented outstanding, one-of-a-kind results.
As noted in the last Virtu post, we were waiting for some additional data to come out before wrapping our thoughts on the Q1 impacts, both specifically and more generally. After some of that additional data has come out, here we are – and the results are oddly surprising (as in, not what was expected).
In the chart, below, Alphacution presents the components of net trading income (NTI). This is a rolling, quarterly view of the composition of NTI that we have updated from time to time here on the Feed. You may recognize it. This latest view shows the four primary components of Virtu’s NTI for the 25 quarters beginning Q1 2014 thru the latest, Q1 2020.
This charts also tracks average quarterly SPX implied vs realized volatility. During the last four periods when average realized vol exceeded average implied vol, Virtu’s cash securities NTI (which includes equities and ETFs) tended to respond favorably, sometimes astronomically. Q1 2020 was an outlier in this regard, as realized vol exceeded implied by more than any previous point in the time series.
Now, as for the NTI internals, let’s just say they’re strange…
One might have expected a repeat performance in Q1 2020 of the “Volpocalypse” performance from Q1 2018. We didn’t get that. And, yes, their were some noted differences between the vol spikes in 2018 vs. 2020, but one might have expected that difference – a more protracted period of extreme volatility in March 2020 – to play in the favor of similar or even better NTI performance for Q1 2020.
Instead, the cash securities (equities and ETFs) NTI for Q1 2020 came in at only 53% of the figure in this category from Q1 2018 ($611 million vs. $1.164 billion). That’s oddly surprising…
Meanwhile, out of nowhere, the currency forward category contributed an unprecedented (and seemingly flukish) $202 million to the tally – thereby providing an unexpected assist to the topline NTI. And, the futures category – which may have been retooled since Q1 2018 – represented no hedge drag whatsoever on equities NTI (-$12 million for Q1 2020 vs. -$436 million for Q1 2018), unless it was overshadowed by offsetting performance in commodity or currency futures. (We have more digging to do there.) And, finally, the options NTI category, though small, and yet which Virtu had been touting for the very first time, ever during the prior two quarters – and a horn that we blew in congratulations on their behalf for Q4 2019 – delivered a bouncing baby goose egg for Q1 2020 ($1.3 million). That’s actually not so surprising.
The thing that Alphacution is monitoring most closely is the war that is being waged at the heart of listed liquidity by the titans of the prop world. And, no amount of MEMX investment or data-as-a-service launch or sales of tangential assets to CBOE or new hires or any other rearranging of deck chairs can disguise the fact that Virtu’s cash securities NTI category, as strong as it truly was, still should have performed better during Q1 in order to signal to its stakeholders that it is in a solid position to guard its flag…
Otherwise, benevolent randomness will eventually cut the other way, and no amount of distraction will be able to cover that up when it does.
BTW, @Dougielarge: As of right now, your 13F is late.
Until next time…
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