“Not I, not any one else can travel that road for you. You must travel it for yourself.” ―
“The teacher is of course an artist, but being an artist does not mean that he or she can make the profile, can shape the students. What an educator does in teaching is to make it possible for the students to become themselves.” ―
We return to this post, “Wolverine Trading’s Book: Hiding in Plain Sight,” so soon after it was originally published, to make a critical point. Moreover, the timing of this exercise is particularly relevant given the catalyst that Alphacution was recently – and, to be fair, ever so politely – judged as lacking the level of insightfulness necessary to win an engagement that should have already been in the bag. (It ain’t cash ’til it’s cash…)
Inherently configured as one who is typically long the challenges and short the easy road, and therefore game to make an appeal for what will eventually turn out to be a temporary verdict in this case, the gift that I see in this judgement merely sets the stage for all of us to overcome a common challenge together. There is far more going on here than initial meets the (distracted) eye if you are willing to pay attention. There is a specific pedagogy being deployed here that is designed to incrementally cause more of the responsibility of the phenomenon of insight to fall at the feet – or, minds – of our readers and subscribers.
I can assemble the data, make pretty pictures out of that data, and tell engaging and irreverent stories about those pictures given my perspective. However, given that my perspective is unique to me, maximizing the level of insight means that you have to contribute your own perspectives and interpretations to the mix. There is undoubtedly more intelligence embedded in these charts than Alphacution can ever see and write about. You are able to connect dots that we are unable to connect – at this time and maybe never…
So, in the initial version of this post – wherein we present the visuals without the words – the strategic purpose of such a seemingly sparse format is to force reader’s to incrementally develop the muscle and contextual experience to form their own interpretations with greater ease. More than enhancing the credibility of our research process and our output, we take the time and effort to assemble empirical evidence in a more visualized format precisely to foster a deeper connection between the content and its consumers.
Now, let’s revisit the latest Wolverine exhibits – and add some context and our own perspective:
The next two exhibits showcase 13F position count and 13F gross notional markets value by legal entity, respectively, for the 63 quarters beginning Q1 2003 and ending Q2 2019. The market making arm, Wolverine Trading, LLC, and the asset management arm, Wolverine Asset Management, LLC (WAM), are two of the primary entities within what we will call “Wolverine Group,” for now – all in, one of Chicago’s notable proprietary trading powerhouses with a strong tradition in option trading.
Consistent with Alphacution’s analysis of other leaders of the market making arena with structural ties to proprietary asset management or hedge fund-style affiliates – like Citadel, SIG and (soon to be demonstrated in our upcoming case study on) Two Sigma – the market makers tend to hold more positions and a larger gross notional book than their asset management affiliates.
This is primarily due to variance in strategy selection wherein market making operations typically respond to liquidity and volatility factors (with most other factors tightly neutralized with portfolio construction overlays) and asset management operations typically respond primarily to fundamental factors. Now, of course, this is us painting with a broad brush. In other words, market makers are looking to capture spreads wherever they can, and they don’t necessarily care about the ticker symbol or underlying fundamentals of the entity or security, however, with the caveat that they don’t want to accumulate positions to the point of violating pre-defined liquidity constraints. In short, they will tend to maximize their penetration within a universe of securities given these liquidity constraints.
And, because this breed of multi-strat affiliated market making operations are simultaneously engaged in a nested alpha architecture – a term and topic that we have dangled in posts on SIG and Tower Research Capital; initially fleshed out in the Citadel case study; and, one for which we will have much much more to say in upcoming research on Two Sigma and beyond – the asset management arms typically hold positions in a subset of the same securities as their market making affiliates, with few exceptions like convertible bonds.
The main problem with these first two charts is that their appears to be a lot of data missing for Wolverine Trading. If the length of the WAM 13F filing history is any guide, then 50 quarterly filings may be missing on the market making side. But, this scenario gets worse than these visuals show: In a 2001 FOCUS report (on Form X-17A-5), Wolverine Trading discloses gross securities value – meaning, securities owned plus securities sold, but not yet purchased – of nearly $4.5 billion (which translates to a net securities value of -$441 million) made up almost totally by equities and equity options. This is a sizable book that likely would have triggered a 13F filing way back in 2001. Moreover, there are zero FOCUS reports filed by Wolverine Trading, LLC (or its predecessor, Wolverine Trading, LP) – or errantly misposted or not posted by the SEC – since 2001…
Granted, this could be user error. But, we have gotten pretty good at tracking this data down, and so all I’m saying is the situation is odd beyond anything we’ve seen yet. And, given that most other firms who are required to make these disclosures tend to bend over backwards to make even the smallest, seemingly innocuous amendments to keep their filings accurate and up to date, a disparity of fairness seems to come into play here. Again, perhaps this is all based on some simple oversight. We’ve already seen Jump Trading make a simple fix. Chances are that it can happen here, too…
Now, we can add contextual power to this analysis by comparing scale and trajectories of Wolverine (missing data notwithstanding) with that of its peers and competitors, like we did in an exhibit related to SIG (exhibit 6) and the exhibit below. Here, Alphacution is beginning to isolate the leaders in option market making which is a notable subset of leading players within the structural alpha zone of our asset management ecosystem map. Also, it is here that Wolverine is shown to be trading in the fewest names among the leading option players Alphacution has modeled so far – at least as of Q2 2016, when their current cache of 13F reports appears to begin.
This perspective on the option market makers contains some potentially unintended illusion because it does not detail the variance in product class selection within the options universe (namely, expansions into ETF and ETF option market making) and expansions further down into the liquidity spectrum of equities and their options. Alphacution will be detailing more of these perspectives in an upcoming composite case study focused on leading market makers in options.
That said, this concept – of variance in product class selection and expanding deeper into the liquidity / illiquidity spectrum of those product classes – is further implied in the final exhibit below. Here, we are taking the total possible 13F options – a figure that Alphacution estimates to have averaged 4,100 calls and 4,100 puts (or, ~8,200 options total) over the 36-quarter period Q1 2010 through Q4 2018 – as a representation of option position capacity and comparing how much of that capacity is being traded by these notable option market makers over the 17-quarter period beginning Q4 2014 and ending Q4 2018.
This ranking is a relatively blunt proxy for the level of option position diversification among these players, (which is quite illuminating given that the ranking is not intuitive). Who would have guessed that Simplex – a relative newcomer – is trading more names in options than the behemoths, Citadel and SIG? Or, that Citadel is rarely trading more than half of the available universe? Certainly, we can detail and rank specific product class segmentations in subsequent research… Stay tuned.
Lastly, for extra credit, wander back to the original Wolverine post and see what you might find that we missed. Chances are that you might find new layers of insightfulness in the exercise…
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