“Do what you can, with what you have, where you are.” - Theodore Roosevelt In last week's Feed post, "Marketquake: The Volatility of Volatility," we set up a comparison of volatility levels - and duration - from the GFC with that of the current pandemic period. In that, I implied that elevated volatility persisted for 218 trading days after the initial GFC shock. In other words, it took about 218 trading days for the VIX to traverse the round trip from normal vol levels (~mid-20's) through the associated shocks and back to normal. The chart below is a picture of that path along with where we are as of today, 23 trading days into the latest market shock... Now, 218 trading days into the pandemic shock puts us into early January 2021. The problem, however, is that with the latest vol shock being faster and higher than that of the GFC - and the likelihood that there will be subsequent shocks from the combined ongoing health and economic impacts [...]
“If it be now, tis not to come, if it be not to come, it will be now; if it be not now, yet it will come. The readiness is all." - Shakespeare: Hamlet Act 5, Scene 2 UPDATE HERE (3/26/2020) Last Friday, March 20, CNBC was first to report that "one of the CME’s direct clearing firms was unable to meet its capital requirements. The move forced the exchange to step in and invoke its emergency protocols to auction off the portfolios. Ronin Capital, based in Chicago, was confirmed to be the firm in question, according to sources. Additional sources said Ronin’s problems stemmed from positions in futures tied to the CBOE Volatility Index (VIX)." In concert with Alphacution's recent feed post, "Marketquake: The Volatility of Volatility," on unprecedented volatility levels that surpass that of the 2008-2009 Global Financial Crisis (GFC) period, I wanted to assemble whatever we could on Ronin. A story not well known outside of Chicago prop trading circles, John S. Stafford, Jr. - the founder of [...]
“To develop a complete mind: Study the art of science; study the science of art. Learn how to see. Realize that everything connects to everything else” – Leonardo da Vinci If there was ever a moment in time when we realized just how much everything connects to everything else - a quote (and concept) I have been using to repeatedly bludgeon you lo these many past months - now would be that moment. However, so as not to jump on the singularly overcrowded bandwagon of doom that is the current events flow of content (for now), I'd like to walk through a storyboard of related significance. That sadly familiar aroma in the air is fear; a specific vintage of which has not washed over the market ecosystem since 2008. Many are coming to the conclusion that if the virus doesn't take us down, the arsenal of preventative measures just might - and therefore, one way or another, we are likely entering a period of financial stress (to put it [...]
The latest from Lynne Marek, Crain's Chicago Business: "Why Citadel Securities may not be cheering all these retail brokerage mergers: The combos of Morgan Stanley and E-Trade, plus Schwab and TD Ameritrade, could squeeze an important revenue stream."
“That which does not kill us makes us stronger.” - Friedrich Nietzsche “We adore chaos because we love to produce order.” ― M.C. Escher One intangible cost of being the sole US publicly-traded market making firm is the required level of financial and operational transparency - and the investor relations burden - that comes with that status. In this case, that cost may be unusually high because of the relative opacity of the competitors in this sector - what Alphacution typically refers to as the structural alpha zone of its asset management ecosystem map - coupled with the unparalleled use of technology and extraordinary magnitude of wealth generated by that small group of players. To compound this dynamic, recent dramatic shifts in the landscape for retail order flow sparked by the late 2019 moves - en masse - to $zero commissions by retail-oriented brokerage platforms, and the quick follow-on consolidations of TD Ameritrade (by Charles Schwab) and E*Trade (by Morgan Stanley), and given the pandemic-fueled volatility and volumes of [...]
“Two roads diverged in a wood, and I—I took the one less traveled by, And that has made all the difference.” - Robert Frost Jane Street is one of the most exciting players among the roster of proprietary market making firms in the entire trading ecosystem. What began in 2000 as Henry Capital, with memberships on the American Stock Exchange and Midwest Stock Exchange, today sports a broad global footprint and continues to solidify its legendary status among those that trade for their own account. As such, Jane Street is the subject of our next comprehensive case study to be published in the coming weeks. This post is an appetizer for that... Until next time...
"There's a point, seven thousand RPM, where everything fades. The machine becomes weightless, just disappears. And all that's left is a body moving through space and time. Seven thousand RPM." - Carroll Shelby In the early days of Quantlab, we suspected that there were stock trading signals in option data. Our futures program had waaaay too much slippage in it, and we needed to make a shift into a strategy with far less position concentration if we were ever going to survive. It was 1996 - or maybe it was 1997 - and the biggest challenge we faced in making such a shift was finding clean historical option data. That's when we met Sandor Strauss, Renaissance Technologies' first data guru... My brother recently gave me a copy of Greg Zuckerman's book, "The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution," for Christmas. Not being someone who allocates much time to reading hard-bound books, it sat at the corner of my desk, beckoning for the right moment to [...]
"What you do speaks so loudly that I cannot hear what you say." - Ralph Waldo Emerson On Thursday, February 20, Morgan Stanley (MS) announced its acquisition of E*Trade (ETFC) for $13 billion in a billiard move that simultaneously 1) responds to the recent move to $zero commissions in retail brokerage; 2) responds to Charles Schwab's recent announcement to acquire primary ETFC competitor TD Ameritrade; 3) boosts MS's position in coveted wealth management channels; 4a) takes greater control of coveted retail order flows - and thus, (4b) away from competitive market making firms, like Citadel Securities and Virtu; 5) takes the last of the major independent discount retailed brokerage platforms off the proverbial table - sorry, Goldman; and 6) arguably completes a dramatic arc of industry evolution and consolidation that began with Schwab's acquisition of CyBerCorp in early 2000 and Citi's acquisition of Lava Trading in 2004... As trick shots go, this one is a doozy! Given that, I wanted to extend some thoughts around recent modeling that we [...]
"You don’t lead by pointing and telling people some place to go. You lead by going to that place and making a case." - Ken Kesey If you believe - as we do - that everything is connected to everything else, then it stands to reason that all events have potential to be seen as the proverbial canary in the coal mine. Therefore, what we really need to do is notice stuff and connect dots. Here's a few of our latest observations... On February 10, 2020, Bloomberg reported "high-frequency firm Allston cuts employees amid low volatility," and further noted that this move follows XR Trading's 10% headcount reduction in late 2019. This got us thinking about the tier of smaller to mid-sized proprietary trading firms and if any of the available data (which currently tends to be US equities-centric) provide clues as to the health of those firms - as well as that space in the market ecosystem (where prop firms and market makers reside) that we typically call [...]
"No good opera plot can be sensible, for people do not sing when they are feeling sensible." - Frank Zappa On Tuesday, February 11, Virtu reported Q4 and full-year 2019 financials. What follows are a few thoughts and charts on the latest data: Net trading income came in at $228.7 million for Q4 - not great, not terrible - based on a QoQ uptick in core equities; some weakness in global FICC, options and other (whatever that is) relative to Q3 2019; and, flat execution services revenue relative to Q3 and Q2 2019 (basically since the ITG acquisition closed last March). The chart below visualizes an historical quarterly decomposition of net trading revenue components relative to the ratio of SPX realized to implied volatility for the 24 quarters beginning Q1 2014 and ending Q4 2019 to emphasize the importance of unexpected volatility spikes in the grand scheme of profitability for market making and execution firms. When the other components of Q4 2019 NTI became available, we will circle back [...]