Volatility, Accidental Alpha and the Ghost of GETCO…

“If we knew what it was we were doing, it wouldn’t be called research, would it?” – Albert Einstein

For this one we need to go all the way back to the first time we illustrated the fact that KCG’s market making operation – the artist fka GETCO (or, Octeg for the uber-insiders) – was more sensitive to volatility than Virtu’s market making operation, as illustrated below:

Now, I know we’ve spent an inordinate amount of time on these names and related topics, but I’m going to beg your indulgence on this one because the findings are uniquely cool – and I’ll keep it fairly short:

Specific sensitivities to volatility by different trading platforms notwithstanding, the condition that yields the greatest potential for outperformance of these market making strategies tends to occur when realized volatility exceeds implied volatility. It turns out that since these strategies are actually not set up to predict volatility very well they are therefore designed to remain in a defensive posture along with the prevailing vol levels and then shift reactively to changes in volatility. Therefore, the secret sauce tends to come into play with the trigger that causes a move from defensive to offensive posture with regard to vol. Based on the chart above, the data shows that the GETCO strategy had, shall we say, an itchier trigger finger when it came to shifts in volatility.

Ok, now with that in mind, the exhibit below illustrates those few (quarterly) periods when realized volatility exceeded implied volatility for the 21-quarter period beginning Q1 2014 and ending Q1 2019. It’s only 3 times:

Here you will notice clearly how the first of these – the Q3 2015 period (when realized vol > implied vol) – corresponds to the greatest surge in net trading income for KCG given the range of the first chart. Now, recall that KCG is acquired and absorbed by Virtu during Q3 2017 and the various GETCO and Knight Capital assets are integrated into the ongoing Virtu platform.

With this migration in mind, notice what happens next: Yes, Q1 2018 is the second in our sample where realized vol exceeds implied vol thereby representing a “tide that lifts all boats” quite dramatically. We will return to this momentarily. But, then look at Q4 2018, the third in our sample of realized > implied vol periods. Here, there is a much more significant reaction in Virtu’s net trading income to the shift in volatility conditions in relation to the Flow Traders comparison:

I believe this is the original GETCO strategy still operating within the Virtu platform. Kudos to them for successfully preserving this unique brand of special sauce.

Now, let’s return to the spike in net trading income that corresponds with the dramatic spike in volatility during Q1 2018. Based on additional data reported by Flow Traders relating to ETP values traded by region and by quarter, we are able to calculate the average revenue capture (as measured in basis points – or, bps) for each region over the entire 21-quarter period.

In the exhibit below, Alphacution presents these findings. Note here that the prevailing revenue capture per dollar traded in the US averaged 1.3 bps for the 2 years beginning Q1 2017 (if we were to remove the impact of Q1 2018 from the dataset). With the Q1 2018 shift in volatility, average revenue capture in the US expanded by a factor of nearly 13x to 16.6 bps thus producing the unprecedented surge in net trading income and vaulting 2018 trading revenue for both firms to all time highs. Note also the muted reaction in European revenue capture during the Q1 2018 US vol shifts.

In closing, I want to point out the labeling of persistent alpha and accidental alpha (in the chart above) because it is important to the nature of how various market participants feed on the assembly of available opportunities. Yes, maybe a more charitable term would be “temporary alpha,” but then again even persistent alpha is usually temporary along some timeframe. Anyway, the point is that since the accuracy of volatility prediction is still generally formative, a trading firm cannot scale its operations predictably if it is banking on consistently “winning the lottery” like what happened in Q1 2018. In other words, they cannot rely on growth via accidental alpha. Trading firms can only grow and scale operations reliably via persistent alpha

Of course, this begs the question for most traders and assets managers: Is your alpha persistent – and, if so, how temporary? – or simply accidental? You need to know. Alphacution is on a journey to quantify and more accurately answer these and many other questions that have historically eluded market participants.

Watch this space – inquire about subscription options for deeper learning…


Support the Feed!


Individual Subscription Options



Note: Business credit cards and bank accounts can be used via our PayPal payment portal.


Alphacution is in the intelligence business.

We are uniquely focused on harvesting, packaging and distributing intelligence about the impacts of technology in financial markets and on the businesses of trading, asset management and banking. Our growing model library is our intelligence asset. Today, this intelligence asset primarily supports written research content, which can be accessed via standardized subscriptions and customized engagements. Occasionally, this core asset also supports video, audio and live presentation content. In time, Alphacution’s intelligence asset will support a broader platform of products and services, like data feeds and software.

For the past year or so, Alphacution has been publishing most of its research content on its Feed for free, and promoting that content via periodic newsletter. The purpose of this strategy has been to assess the interest in and demand for a unique perspective and a new level of intelligence on the financial markets ecosystem.

And, based on the growth in network and activity around that research, it seems that we have struck a cord with many of you – a network of senior executives representing some of the most advanced players in the global financial markets arena and their stakeholders.

The recent trajectory of pageview metrics on our site is symbolic of this claim, as shown below:

Now it’s time to take that level of engagement and direct it towards a more viable long term economic support model that ultimately allows us to scale our team and enhance the quantity and quality of our intelligence.

So, here’s what we are going to do about that:

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 individual introductory 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.)

Examples of upcoming reports – that fall within our 2019 research strategy, outlined in the post Alphacution’s Book: Not Hiding, In Plain Sight – that will be available via the aforementioned subscription rebate mechanism include:

  1. Case Study: Citadel, LLC (~ Q1-2019)
  2. Case Study: All-Time Top 10 Hedge Fund Managers, Ranked by Profits (~ Q2-2019)
  3. Case Study: Top Proprietary Trading Firms (~ Q3-2019)
  4. Case Study: Goldman Sachs Group, Inc. (~ Q4-2019)

Enterprise subscription packages and custom content/service engagement options are available upon request at info@alphacution.com.


Individual Subscription Options



Note: Business credit cards and bank accounts can be used via our PayPal payment portal.

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 feedback@alphacution.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:

By | 2019-05-30T00:26:49+00:00 May 29th, 2019|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, the first digitally-oriented research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas with specific expertise in strategy research, risk management, and techno-operational development. Contact: feedback@alphacution.com; Follow: @alphacution.