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#TBM – Yellen and Me: The Catalyst Behind the Rate Decision

In light of current events, we bring this one back from the Alphacution archives. Welcome to - uh - Throwback Monday? < This is a test. This station is conducting a test of the Emergency Broadcast System. This is only a test.> I had been in this room before. It was the early post-Dodd Frank days. Maybe February 2012. I had authored a study on the impacts of new regulations on collateral and initial margin requirements for OTC derivatives (OTCDs). The study had been commissioned and was being promoted by the World Federation of Exchanges (WFE). Largely as a result of my global initial margin estimate of US$ 2 trillion for OTCDs, it had made a big splash. On the back of this, the event invites and media came knocking. My friend, John McPartland – “McP” to those who knew him longer than 15 minutes – invited me to present at a monthly luncheon for Chicago financial muckety-mucks. Now, it was good to be back. For this night’s event - [...]

By |2020-11-24T20:24:44-05:00November 23rd, 2020|Open|

Alphacution Adopts Subscription Model

“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. You have to trust in something – your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well worn path; and that will make all the difference.”Steve Jobs It's been a long time coming... And now, after a few years of digging for data, modeling that data, creating pictures of that modeling, publishing snippets of insight around those pictures, growing our network to the point where several thousand of you are regular consumers of our output, and ultimately earning enterprise subscriptions and other engagements from many of the top trading firms in the world and other key ecosystem stakeholders, Alphacution is formally moving to a subscription model. In practice, this means that roughly 50 - 75% of the research content [...]

By |2020-10-18T16:03:56-04:00October 16th, 2020|Open|

SoftBank: Nasdaq Whale Files First 13F Report

“Entrepreneurship, you will only understand it if you experience it for yourself. It’s not something I can explain in words.” – Masayoshi Son On September 4, the Financial Times was first to report that “SoftBank is the ‘Nasdaq Whale’ that has bought billions of dollars’ worth of US equity derivatives in a series of trades that stoked the fevered rally in big tech stocks…” Since then, a consistent drumbeat of other articles and podcasts have been published; some of them tying SoftBank in with Robinhood and other retail brokers as leading factors that may explain the (concentrated) run-up in US equities from the March lows to the early September highs. For those of you who don’t speak options as a first or second language, the logic of SoftBank’s potential impact on cash equity markets based on equity derivatives positions goes like this: Derivative markets are zero sum. For every unit long there is a unit short. Customers, like SoftBank, typically buy options – outright or via spreads – to be long deltas of the underlying security. Market [...]

By |2020-10-05T21:37:00-04:00September 17th, 2020|Open|

Capitalism? Both Automation and Failure Elude Major Banks

"I don't know where I'm going from here, but I promise it won't be boring." - David Bowie   For someone who has spent a career scanning the landscape for cataysts - as if in perpetual "sentry mode" - it's damn near impossible to consume the latest news and not become introspective. Perhaps that is merely the occupational disposition of someone who regularly commits thoughts to pixels. It's difficult to conjure up this week's musings on the state of play without a corresponding level of seriousness and mood to risk opening Pandora's Box with a brief flurry of thoughts that are worth writing - and reading. Anyway, here we go: With the scent - and evidence - of economic upheaval in the air, I thought it would be a good time to revisit one of our older themes, the Investment Bank Headcount Index. The last time we touched on this topic was a year ago in, "How Many Heads Does It Take To Run A Bank?" It's never been a [...]

By |2020-10-05T21:35:47-04:00June 4th, 2020|Open|

Case Study: History of Jane Street

"I don't stop when I'm tired, I stop when I'm done." - James Bond Alphacution publishes its 125-page, 149-exhibit, 26,000-word case study, "History of Jane Street," with notable expansions into regional, US option strategy and revenue estimation details. The following is the Opening to that report with Table of Contents, including download of the full Executive Summary. Access to this report is available to Premium Subscribers. Subscription and individual report purchase inquiries can be directed to info@alphacution.com. NOTE: No representative of Alphacution has been in contact with any representative of Jane Street Group, LLC or affiliated entities for the preparation of this report. This report is solely based on the author’s interpretation of Alphacution’s ongoing assembly of raw, open-access data; library of contextualized modeling; and, internally-developed content. This report does not benefit from, nor include, any material non-public information (MNPI). Introduction Volatility... It’s like the highest-octane fuel in the engine of every proprietary trading and market making firm – and it is very difficult to capture, harvest or [...]

By |2020-10-05T15:55:53-04:00May 28th, 2020|Open|

This Fed Put is Out of the Money

Don Dale, Chief Risk Strategist for Equity Risk Control Group, is a guest contributor to the Alphacution Feed.   I am not a funny guy. (Ask my wife...) And yet, occasionally - when I say the quiet part out loud - I manage to get a laugh. My latest bit is an idea about how to "fight the Fed." So, while you may enjoy a chuckle at the thought, here's why I think things might be different this time: The “Fed Put” is a common reference in capital market circles – particularly since the GFC – given their increasingly likely position to backstop some asset classes. Of late, the Fed’s actions were the driving force behind the stabilization of the bond market since the March gyrations; by extension, the equity markets. However, the primary driver for equity market performance within US indices has been the mega cap FAANGM names, given the thematic benefit of social distancing on factors like home delivery, video bingeing and all manner of online interactions. This [...]

By |2020-10-05T15:53:50-04:00May 16th, 2020|Open|

Cheap Volatility: A Lesson In Market Structure Mechanics

"The world breaks everyone, and afterward, some are strong at the broken places." - Ernest Hemingway   Alphacution has always been fascinated by the players. Unlike the world of sport, market players have unique potential to influence the field of play, and thus create a feedback loop that influences other players, and so on causing market ecosystem evolution. In this game, the rulemakers and overseers - the referees - are typically playing catch up... This is not to suggest that markets don't have naturally occurring limits in addition to those that are imposed by referees. They do. There are always capacity constraints, given performance requirements and performance expectations; and so, we are further fascinated by how players navigate - how they survive, thrive and scale (or not) - relative to the inevitability of market limitations, many of which are currently not well understood. Throughout these digital pages, Alphacution has plotted a journey to fill this unmet need for understanding -  presenting the output of our fascinations - the stories of [...]

By |2020-10-05T16:03:25-04:00May 1st, 2020|Open|

Going Hyperbolic: Fed Battles Volatility, Everything Else…

"The struggle itself towards the heights is enough to fill a man's heart. One must imagine Sisyphus happy." - Albert Camus "Captain Jack will get you high tonight And take you to your special island Captain Jack will get you by tonight Just a little push, and you'll be smilin'." - Billy Joel   This one has a long fuse, but you might enjoy the customary overallocation of pictures as we get into it: In a March 22nd note entitled "The Great Leverage Unwind" published by Guggenheim Investments, Global CIO Scott Minerd estimates the impact of the COVID-19 pandemic like this:  "...we would need to see about $4.5 trillion of quantitative easing (QE) before everything was resolved. This is in addition to emergency lending through the discount window, dealer repo operations, central bank liquidity swaps, and the Commercial Paper Funding Facility, Primary Dealer Credit Facility, and Money Market Mutual Fund Liquidity Facility. That would take the Fed’s balance sheet to at least $9 trillion, or about 40 percent of last [...]

By |2020-10-05T21:35:19-04:00April 16th, 2020|Open|

Hacking the Matrix: A New Era in Risk Perception

"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance." - Daniel Kahneman Chances are, "global pandemic" wasn't in your bag of quantamental factors; at least not by any name other than slippage.  But now that that cat is out of that bag - and, rightly or wrongly, the wheels of a response strategy have largely been set in motion - the least we should do against a backdrop of historically significant uncertainty (aka - risk) is widen our lens as to the new spectrum of future market contagions that have suddenly become more probable... Of particular note, keep your eye on a little thing that isn't widely discussed in polite society: the Fed's balance sheet. As of April 1, the chart below illustrates over a century of total assets for the US Federal Reserve system - ironically, since around the time of the last global pandemic (in 1918). What you are seeing there at the recent end of [...]

By |2020-10-14T22:20:45-04:00April 8th, 2020|Open|

Marketquake 2020 – Volatility Update

“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 [...]

By |2020-10-14T22:22:00-04:00March 25th, 2020|Open|