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 end of 2015 – life has never been better. The exhibit below illustrates consistent improvement in average daily trading revenue (to roughly US$2 million per day) during much of the post-GFC, Fed-interventionist, volatility-suppressed period 2011-2015 (with a respectable 4-year CAGR of 6.0%):
A different view of this stellar performance is encapsulated in the next exhibit where we expose net trading revenue per employee for the same 5-year period. On the backs of a remarkably consistent 150-person team, Virtu sets the outer extreme of technical leverage for all technology buyers within the global financial services ecosystem (that we have modeled so far), achieving a massive US$3.4 million per head in 2015. To put this performance in context, this is 11.9x the 2015 revenue per employee (RPE) of our composite banking model, and 3.7x for that of Goldman Sachs, the #technicalleverage leader for that IT buyer profile.
What happened here?! How do we explain this divergence from the prevailing narratives? Is Virtu the “tip of the spear” that we describe in that old video?
Stay tuned for more…