For Subscribers

Robinhood and Payments for Order Flow

It was a recent father-son (and dog) road trip. Several hours in the car, on our way to support daughter / sister, Emma, at her final regatta of the season. Head of the Hooch in Chattanooga, Tennessee. And, an opportunity for some undistracted conversation. Among the many topics was our ongoing debate about how to trade Tesla (TSLA). Eddie has proven himself to be fairly decent scalper of this volatile name, so I usually ask how he is positioned and the levels he thinks are meaningful. Anyway, it turns out, he is trading on the Robinhood platform - no more than a few shares at a time - and paying zero commissions which, of course, improves his net profitability. This is the main attraction on top of the fact that he can toggle between trading stocks, playing video games, watching YouTube, Instagramming with his friends and listening to music all on the same device. (No wonder he is always wiped out!) So, this got me to thinking about some of [...]

By |2020-10-14T21:50:30-04:00November 14th, 2018|For Subscribers|
Read More

When #ETFs Ate The Beta

These days, making a point - and then creating enough initial magnetism to draw folks' attention further down into that point-making exercise - has become quite an art form. Would anyone even notice if a piece of writing had already been published under a different image and title? Perhaps someday we will perform that exercise. ;-) In any case, this post completes the natural progression of our tour of the three primary segments of Alphacution's asset management ecosystem "map" and our attempt to illustrate the overarching driver that is impacting each of them: automation. We started this tour back in July with the highly popular post, When Market Makers Ate Their Own, wherein we showcased how advancements in technical performance by a declining roster of players had led to the current self-destructive extremes of consolidation and concentration within the market-making zone of our map (since relabeled, structural alpha zone). Following on the heals of that came the post When Hedge Funds Ate Their Own wherein we introduced the hypothesis that [...]

By |2020-08-17T07:14:06-04:00November 11th, 2018|For Subscribers|
Read More

@VirtuFinancial: Yes, There Are More Acquisitions on the Way!

No problem can be solved from the same level of consciousness that created it. - Albert Einstein On October 4, news broke on all the major market news outlets that - after feasting on a meal formerly known as KCG Holdings, Inc. (KCG) in 2017, which itself was a combo platter made up of GETCO and Knight Capital - Virtu Financial, Inc. (Virtu) was returning to the all-you-can-eat buffet to consider the total consumption of multinational agency brokerage and financial markets technology firm, Investment Technology Group, Inc. (ITG). Of course, this news generated a chuckle around here because it seemed that it was not too long ago that someone was predicting that this kind of pairing would make sense for Virtu - if conditions were such that they needed to bolt something else onto their expanded frame. Oh, wait a sec, that was us... To wit, from Alphacution's post "Virtu Financial: More Acquisitions on the Way, If..." (March 27, 2018): "One other notable move for significant growth for a firm [...]

By |2020-08-17T07:14:06-04:00October 31st, 2018|For Subscribers|
Read More

Adventures in Speed: @VirtuFinancial, @FlowTraders

“Study the science of art. Study the art of science. Develop your senses — especially learn how to see. Realize that everything connects to everything else.” — Leonardo Da Vinci (~1500) It has been a little while - since here - that we updated our analysis on the market making and high-speed trading strategy end of the playing field. And, during that time it came to our attention that our friends at Flow Traders N.V. (FT) had begun to feel a little left out of the fun. After all, it seemed we had inadvertently given that impression by showcasing our thoughts on Virtu's progress and outlook as if it were the only remaining stand-alone public market making firm - now that the KCG acquisition had closed. (For those of you who are just joining us, you might refresh the thread on prior work around this topic, most notably, here...) Personally, I don't think Virtu will mind sharing a bit of the spotlight. With the Panthers near the basement of the NHL's Atlantic division, [...]

By |2020-08-17T07:14:06-04:00October 23rd, 2018|For Subscribers|
Read More

When #Hedgefunds Ate Their Own

If you have bought into our arguments that the capacity of alpha is finite and that the leading managers of automated trading methods can achieve "winner-take-all" performance characteristics in the sources of alpha that they target, then it stands to reason that the causes for where assets are concentrating and which funds are closing are related. Without even looking at track records, these two facts lead to the conclusion that systematic strategies are more consistent than, and therefore, winning a battle over allocations to traditional, fundamentally-oriented and "manual" strategies in modern markets. Something amazing - and, potentially terrifying - is happening at the crossroad of asset management and global markets. The drumbeat of clues in support of this theme is increasing and those observers with keen insights into market dynamics are beginning to notice. Alphacution has played a small role in giving voice and illustration to this theme by placing a bow around a unique interpretation of unprecedented market phenomena worth paying attention to, most relevantly to this part of [...]

By |2020-08-17T07:14:06-04:00October 10th, 2018|For Subscribers|
Read More

α < ∞ ?

Like the financial markets equivalent of "dude", or "bro" or the many satisfying derivations of "F**K," the term "alpha" seems to pepper our market discourse in a way that has few peers. Rightly or wrongly, there isn't an investment or trading context into which it is not shoehorned. We hear it everywhere, at all times, and in numerous forms: Achieving alpha... Delivering alpha... Portable alpha... (A strategy that had its heyday around 2006 and has recently tried to make a comeback.) Tainted alpha... (Not gonna go there right now.) And, my personal favorite (for its level of misguidedness), generating alpha... There are conferences named after it, like the CNBC and Institutional Investor ANNUAL Delivering Alpha Conference, now apparently in its 8th year. And, of course, some of the most brilliant and creative companies of all time have been named after it! - and, I'm not necessarily talking about firms like Visible Alpha or AlphaSense or the defunct quant strategy development platform, Alphacet... To be fair, the list of common usages [...]

By |2020-08-17T07:14:07-04:00September 20th, 2018|For Subscribers|
Read More

Quant Invasion Continues As Data Infrastructure Overtakes Eyeballs

Clues... At it's core, this is much of what we are ever doing as a research and advisory operation: Looking for clues. Ideally, we are looking for the kinds of clues that recur as patterns. And then, tell the stories from those clues and patterns. (Better yet, if we can devise a mechanism to systematically discover more clues and more patterns with regularity, then we will have developed something quite valuable. But, I digress...) So, it was with great fascination that we discovered one of the next important clues; some evidence of the nature of transformation in the trading and investment world - and that which is indicative of so many other sympathetic movements in the broader financial industry. This is the falling of dominoes that we often refer to. Here's the gist: Quantitative methods are set to pervade much more of the traditional asset management community and a broader cross-section of the strategy spectrum. Likely more than expected. Reason being: Fee compression renders traditional investment processes too expensive and [...]

By |2020-08-17T07:14:07-04:00August 29th, 2018|For Subscribers|
Read More

Exposing Franklin Templeton’s Greatest Challenge: #ETFs

Exchange-traded funds (ETFs) may have their critics, but with nearly $3.5 trillion in total value represented by over 1,900 unique funds as of June 2018 (according to the Investment Company Institute - ICI), this segment of the market has grown faster and is now larger than total assets under management (AUM) of hedge funds (which BarclayHedge estimated at nearly $3.0 trillion for Q1 2018). Success is always the sweetest revenge... Sure, the naysayers point to numerous complexity factors - like variance in replication methods, tracking errors, liquidity issues, exotic-exposure risks, and others - to make their cautionary case and to send up warning flares to novice investors, but the blunt fact of the matter is that the well-designed, cost-efficient ETFs have had a profound impact on the financial landscape. That the downward trajectory of fees with competing financial products (like hedge funds and mutual funds) and the dramatic shift in asset allocations toward ETFs are among the most commonly cited attributes of the shifting landscape is obvious to most by [...]

By |2020-08-17T07:14:07-04:00August 14th, 2018|For Subscribers|
Read More

When Market Makers Ate Their Own…

Right out of the gate, this story might emit a whiff of last year's news. Maybe. But, that sense would only last until you realize that this is also a template for improving predictions about future events. And, that kind of predictive power relies upon the bet that more markets and opportunities are becoming winner-take-all in the digital era... (Hint: As the functioning of markets - and other economic opportunities - become more "digital," a single leader can emerge in that market. This is how we end up with the "FANG's" - Facebook, Amazon, Netflix and Google. It's also how US equity markets end up with ~80% lit market-making flows being split between Virtu and Citadel. Here are some facts to fill in the background: In the three years beginning 2006, the Timber Hill market making unit of Interactive Brokers Group (IB) had an annual revenue run rate of around $1 billion, peaking at over $1.3 billion in 2008. By 2017, Timber Hill's revenue run rate had declined 94% to [...]

By |2020-10-14T21:51:05-04:00July 18th, 2018|For Subscribers|
Read More

@DeutscheBank + @HPE: Case Study on Impacts

"Pay attention to what I say, not what I do..." Let's return to the bonus chart slipped in at the end of the recent post @DeutscheBank: Three-Card Monte and Other Confidence Games (For maximum context and extra credit, you can pick up the thread about Deutsche Bank from the beginning in March 2016 here). Bottom line: We are fascinated with the idea of detecting the impacts of the IT outsourcing deal that DB and HPE entered into in early 2015. The main questions that keep coming to mind are these: Is this deal a template for other large banks? Does it save money? Or, is its value to be found in other metrics, like enhanced performance or boosts in innovation? And, based on the level of transparency provided by DB (which is one of our best bank models), can we even detect the impacts of this arrangement? The answer to this last question is what brings us to this post... Right up front, we can say, yes - generically, speaking [...]

By |2020-08-17T07:14:07-04:00July 16th, 2018|For Subscribers|
Read More