For Subscribers

AQR Capital Management: The Ominous Shapes of Strategy

"The cave you fear to enter holds the treasure you seek." - Joseph Campbell   For 12 straight years beginning Q4 2001, AQR Capital Management, LLC (AQR) - one of the great and legendary quant hedge funds of the current era - grew equity positions until peaking at 2,346 (long equity) positions by Q4 2013. Since that time, AQR's long US equity book has found an ominously consistent plateau averaging 2,140 positions. Here, in what would normally seem to be a benign factoid, lie the seeds of the story for why AQR has been suffering performance challenges of late; and, apparently, performance challenges for the foreseeable future according to co-founder and front-man, Cliff Asness. We start that story with the exhibit, below, where Alphacution presents the full 72-quarter record of total 13F (long) positions for the lineage of AQR Capital Management entities beginning Q4 2001 and ending Q3 2019. With these first shapes, we want to highlight that stocks are the dominant product class, thereby implying that there is little [...]

By |2020-08-17T07:14:02-04:00February 9th, 2020|For Subscribers|
Read More

Barclays Succumbs, Flips Options to GTS

"Sometimes it is the people no one imagines anything of who do the things that no one can imagine." - Alan Turing One by one, those willing to stand and make markets in options are - uh - taking a knee. Back in December (2019), Barclays became the latest in a long string of players - big and nots-so-big - to punt their options trading business to a willing buyer before any more value evaporated. So, we thought to take a closer look at what patterns or signals might exist, if any, to detect moves like this. Here's the setup: It turns out that in a Feed post entitled, "Goldman Sachs and the Long Arc of Hull Trading," we have some useful benchmarking to draw from to frame Barclays' ultimate decision. In the chart, below, Alphacution presents total 13F options position counts for parent entity, Goldman Sachs Group, Inc., over the 45-quarter period beginning Q2 2008. Note: The vast majority of these position reside in the broker-dealer entity, Goldman Sachs [...]

By |2020-08-17T07:14:02-04:00February 5th, 2020|For Subscribers|
Read More

Tom Brady, Louis Bacon and the Game Changers

“From the point of ignition to the final drive, the point of the journey is not to arrive.” - Neil Peart   New clues are emerging on the nature and pace of change... Here's the setup: Unlikely and unexpected virtuosity often serves as the catalyst for a dynastic run of success. Moreover, legend has it, that it's usually the will over and above the skill that fuels the initiation and duration of that run. While skills eventually decay, it's the will to keep finding a way to win - to distinguish oneself or team relative to the competition - that's the defining factor. Of course, whether it be a football field or a market landscape, like a moving sidewalk, everything happens as the ground is constantly shifting below our feet. What happens to Tom Brady next, I'm not here to predict. He is merely a reliable hook to drag your attention to this point in the story because the debate about whether his game has changed to favor running, mobile [...]

By |2020-08-17T07:14:02-04:00January 23rd, 2020|For Subscribers|
Read More

Implications: 2019 Payments For Order Flow Flat vs. 2018

"Historians study the past not in order to repeat it, but in order to be liberated from it." - Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow   With three quarters worth of financial reports for calendar 2019 long in the bag, it is not much of a courageous leap for us to deliver an estimate for order routing revenue - otherwise more notoriously known as payment for order flow (PFOF) - for the full year. And, with the quarterly earnings season coming in the month ahead, it won't be long before we are able to test the accuracy of this estimate. In the chart below, Alphacution extends our prior analysis not only to include 2011 and 2012 but also, more relevantly, to include the year just completed; thereby extending to nine years from six our focus on five of the primary players in retail order flow for US equity markets who also disclose order routing data: TD Ameritrade (soon to be acquired by Charles Schwab); E*Trade; the [...]

By |2020-10-14T21:47:35-04:00January 15th, 2020|For Subscribers|
Read More

What Bloomberg Misses About Citadel Securities

"You can have all the transfer orders that you want, but you have to ask me nicely." - Col. Nathan R. Jessup, "A Few Good Men" On December 11, 2019, Bloomberg News editor Tom Maloney publishes an unusually illuminating article on Citadel Securities, "Ken Griffin Has Another Money Machine to Rival Hedge Fund," citing specifically that the market maker earned $3.5 billion of revenue in 2018 and "handles more than 1 of 5 shares traded in the US each year." Of note, the article includes two charts, the first of which ranking net trading revenue in 2018 for a selection of bank and non-bank market makers; and the second of which showcasing the shifting market shares of US retail equity wholesalers. Given that Alphacution has followed this and other firms in this space as closely or moreso than any others - for example, we are not aware of any other research and advisory group publishing a comprehensive case study on Citadel Securities - I wanted to add a few thoughts [...]

By |2020-10-14T21:47:51-04:00December 18th, 2019|For Subscribers|
Read More

Ranking of Select US Option Market Makers

"The book of nature is written in the language of mathematics." - Galileo Galilei As we prepare to turn the page on a new year, and consider what we may want to accomplish during that year, derivatives are on the priority list. Why? Options are important for many reasons from risk management to computational rigor and signal generation. And, if you had been paying close enough attention over the course of this year, you might have noticed that each of our case studies have touched, in one way or another, on options. Now, given that Alphacution is committed to its research providing new pictures to ponder, I wanted to drop the following chart on you with little additional commentary for this go 'round - except to say that the plan right now is to dedicate a full case study to the key players in options trading during 2020. Stay tuned... Until next time...

By |2020-08-17T07:14:02-04:00December 5th, 2019|For Subscribers|
Read More

Balyasny’s Book: Hiding in Plain Sight

“Even though the transformation of energy, in all of its various forms, is the very basis of all economic activity, only a tiny fraction of economists have even studied thermodynamics. And only a handful of individuals inside the profession have attempted to redefine economic theory and practice based on the energy laws.” - Jeremy Rifkin, The Third Industrial Revolution With this Feed post, Alphacution adds Balyasny Asset Management, LLC (BAM) to its growing roster of modelled trading firms. BAM is a multi-strategy multi-manager investment firm who is often compared to the likes of Millennium, Point72, and Citadel. We might go a bit further to add Two Sigma and AQR Capital Management to a broader description of other large hedge fund managers that operate in the active management zone of our ecosystem map. To more specifically define BAM's core strategy genre as statistical arbitrage is likely to go a bit too far on the active and automated strategy spectrum, as its material reliance on fundamental analysis would more accurately put it [...]

By |2020-08-17T07:14:02-04:00December 1st, 2019|For Subscribers|
Read More

Citadel Punks Blackstone – Part 2

"What is to give light must endure burning." - Viktor Frankl “The backbone of surprise is fusing speed with secrecy.” – Carl von Clausewitz   UPDATE 11/21/2019 (bottom of post) Why is it coming out now, apparently months after the talks took place, that Blackstone inquired about buying a stake in Citadel? There are a few reasons we can think of for monetizing coveted equity - or, at least showing enough leg to solicit an updated "mark" on the assets - but, the most likely one has been the same for years: Ken wants to become an investment bank. Ok, so what does Citadel need to become an investment bank that it doesn't already have? Well, given leadership - and, occasional dominance - in listed equity-linked markets by Citadel, the next beachhead for investment banks-in-training is fixed income. And, Citadel-like prowess in fixed income may require lots of technology and smart folk, but the one thing it definitely needs is balance sheet. The next question, then, is: Do you build [...]

By |2020-10-05T16:23:58-04:00November 21st, 2019|For Subscribers|
Read More

Saved By Zero? Virtu’s 30 Quarters of Payments For Order Flow

"The idea of the song is how great it is to get back to zero." - Cy Curnin, The Fixx frontman, in reference to the Buddhist mantra, Śūnyatā Today, Amazon announced that it would be launching cashierless grocery stores in 2020. Immediately, a thought-bubble arose above my head and played a scene from the Illinois Tollway when my E-ZPass battery went dead, and I spent a half hour - the lane I was in all backed up with frustrated travelers - pushing buttons in the vain attempt to cause a person to show up. Just send me a bill for the busted tollgate next time... No, thank you. I don't want to scan and bag my own groceries... I don't want to go fill my own plate at restaurants... And, I don't want to trade in a market that has been sanitized of all intermediaries with a pulse...  Because that's where we're headed; the exact wrong and utterly Simpletonian outline of a "free market," where all levers conspire to deliver [...]

By |2020-08-17T07:14:02-04:00November 20th, 2019|For Subscribers|
Read More