Paul

"You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future." - Steve Jobs In a Feed post entitled, "Remembering Deutsche Bank: A Market Macro-Structure Canary?," Alphacution hinted that our modeling of Deutsche Bank Securities, Inc. (DBSI) was really a "first step towards quantifying the ongoing battle between and among bank and non-bank broker-dealers (BDs) and market makers..." Well, perhaps this post is the second step. So, let's briefly revisit why measuring and comparing various BDs at the center of the market ecosystem - otherwise known as the structural alpha zone - might be important: By now, many of you are familiar with Alphacution's asset management ecosystem map and our core hypothesis that since the capacity of alpha is finite, dominant players that operate in closest proximity to sources of liquidity ultimately impact the capacity of residual alpha that is available to be harvested in neighboring sectors of the map, namely the active [...]

"If you can't join them, beat them." - Mort Sahl In accordance with Rule 24b-2 of the Securities Exchange Act of 1934 (the "Act"), D. E. Shaw & Co., L.P., on behalf of D. E. Shaw & Co., Inc. and their affiliates (collectively, the "Firm"), hereby requests confidential treatment of the information contained in the enclosed Form 13F for the quarter ended September 30, 1998 (the "Form 13F"). Such request is made pursuant to Section 13(f)(3) of the Act, which allows the Securities and Exchange Commission (the "Commission") to prevent or delay public disclosure of information contained in the Schedule 13F. The Firm believes that the information contained in the enclosed Form 13F falls under Exemption 4 of the Freedom of Information Act ("FOIA"), which states that "trade secrets and commercial or financial information obtained from a person that is privileged or confidential" may be withheld from disclosure. In addition, in accordance with Rule 24b-2 of the Act and with Interpretive Release No. 65 under the Freedom of Information Act, [...]

"When we try to pick out anything by itself, we find it hitched to everything else in the Universe." - John Muir, Mountaineer It's one thing to build models and share insights about specific players in the trading and asset management universe. It's an entirely different thing to perform comparative analysis of that specific modeling to develop various rankings of a community of players. This latter point is precisely where the accumulation of Alphacution's modeling and research is now taking us, and that new level of insight is, frankly, a bit mindblowing. Our previous Feed post that illuminated an apparent anomaly with Jane Street's stock selection strategy was one of our first examples. For this one, we look at a ranking of average stock positions by shares for a selection of leading quant hedge fund managers, market makers and proprietary trading firms.  Now, what's truly fascinating here is if you consider these players in order of average stock position (by shares) you realize that what you are simultaneously looking at [...]

“Efficient market theory is correct in that there are no gross inefficiencies, but we look at anomalies that may be small in size and brief in time.” - Jim Simons, Founder, Renaissance Technologies Somewhere along the serendipitous journey, I had the good fortune to spend a flash of time with Jim Simons and a few key members of his team at Renaissance - see Jim Simons, Godfather of the Quants: Hiding in Plain Sight. He is certainly one of the great minds of the modern financial markets era - even if he might confess himself to be as or more lucky than smart - and among a short list of the most successful pioneers of the quantitative trading revolution. Now, one of the most amazing aspects about being in the presence of great minds is that they can shed significant pearls of wisdom so effortlessly, as if in passing. There's no drum roll or squadron of trumpets that precedes the statement of insight. It simply comes out - mixed with [...]

"The real voyage of discovery consists not in seeking new landscapes but in having new eyes." - Marcel Proust Here's a quickie that's likely to raise a few eyebrows, if you're looking through the right lens: One of the greatest dividends that's just now starting to come from Alphacution's expanding library of models is the one that results from comparing a bunch of legendary trading firms with one another. In this case, what we are able to do is use the aggregate value of product class exposures along with total product class positions through time to determine the weighted average implied price of that product class. The obvious product class to look at in this way first is cash equities. In the chart below, Alphacution presents the various time series' of average implied stock prices for each of a selection of some of the most legendary trading firms and hedge funds of all time, including our latest modeling on D. E. Shaw, Bridgewater, Susquehanna, Citadel, Millennium and Renaissance Technologies. Here, [...]

“Generations of human beings were transformed into machines in the relentless pursuit of material wealth: We lived to work.”  - Jeremy Rifkin, The Third Industrial Revolution Founded in 1988 by former Columbia University computer science professor, David Shaw, above a bookstore in New York's Union Square, The DE Shaw Group is now reported to manage over $50 billion in assets. LCH Investments ranks it as the fourth-highest grossing hedge fund group of all time; among the ranks of the likes of Soros, Bridgewater, and Citadel. It is for reasons like these - and many others - that we have been eager to add comprehensive modeling of the available regulatory data for the main reporting entity, D. E. Shaw & Co., Inc., to our expanding library, and moreover, to our evolving understanding of the global market ecosystem. And, like most - maybe all - of the legendary players, this one is worthy of a deeper case study. We will get there in time. For now, the following are a few highlights [...]

"I don't want to sell anything, buy anything, or process anything as a career. I don't want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed." - John Cusack as Lloyd Dobler, "Say Anything" Few others have captured our attention here at Alphacution like Deutsche Bank (DB). This phenomenon comes as a result of the collision of two facts: 1) a bulge bracket bank in an ongoing state of radical transformation which 2) has simultaneously provided a consistent level of financial and operational transparency to fuel one of Alphacution's most detailed and illuminating sell-side models. This model - along with our vision of the evolving landscape - has supported the production of a series of content along two inter-related themes: technical infrastructure outsourcing and the strategic communications around headcount shrinkage. Links to each of our DB articles can be found below, and now that some of our predictions are mostly in the rearview mirror, they may prove a more interesting read today than when they [...]

"My favorite things in life don't cost any money. It's really clear that the most precious resource we all have is time." - Steve Jobs If you happen to be reading this note while occupying a seat at a firm like Wolverine Trading or Peak6 or D. E. Shaw or AQR or any number of other mythological market creatures that we have yet to model, please don't fret. We will get to you soon enough... For now, we are going to leverage some recent modeling on Simplex Trading - a name not as well known (yet) as some of the others - to reinforce our plot (just in case some of you have lost sight of it in all of the numbers, vernacular, and other perceived complexities) and try to teach you something new about the market ecosystem we are all playing in or otherwise indirectly tethered to. The plot here is reminiscent of the DaVinci quote we use with extreme redundancy for effect: "Learn how to see. Realize that everything [...]