Flow Traders: Bigger, Better Than Ever, With a Twist…

“The true sign of intelligence is not knowledge, but imagination.” – Albert Einstein

Ugh! So many great stories to tell, and so little time to tell them…

This one will need to be largely a storyboard for now, and then hopefully we can circle back and expand the narrative a bit (or, ideally, turn this into a full blown, deep-dive case study at some point). Anyway, given the similarities we demonstrated between Flow Traders NV (FTNV) and Virtu Financial way back here, you might have guessed that we had this one in the works once the latest Virtu update showed up last week.

For this update, we went the extra mile to fully update our financial modeling, our 13F position modeling, and some new modeling of the FOCUS report (X17A5) for Flow Traders US, LLC (FTUS) – the US broker-dealer affiliate of the Netherlands-based parent company. With all that to draw from, we start with the total gross portfolio value of FTUS – securities owned plus securities sold and not yet purchased – for the 10-year period 2009 to 2018. Here we show the US broker-dealer portfolio growing from $61.8 million in 2009 to $3.8 billion for 2018:

Next, we illustrate the primary source of those exposures (via 13F data), which are made up of (only) 307 long positions of which 263 are ETFs (as of Q1 2019), see below:

Of particular note in this analysis is the level of concentration within the subset of ETF positions. Over the 30 quarters beginning Q4 2011 and ending Q1 2019, the average concentration of the top 10 (long) positions was over 58% of the value of all long positions – with high concentrations exceeding 75% of the value of all long positions. Furthermore, the largest long position over the same period averaged 19.2% of the value of all long positions – with the most recent high in the largest position reaching 37.5%. Needless to say, this is a very concentrated portfolio…

When we leverage the FOCUS reports to determine dollar neutrality of the US equities book, we can get a better idea for how the short side of this book compares to the long side. In the chart below, Alphacution demonstrates that, on average (over the 10-year period 2009-2018) the dollar neutrality of the US equities book is 39%. Another way to think of this is that the short side averages 47.5% of the long side. From there, we can guess that there are just as many short positions as longs but of smaller average value or fewer short positions of similar average value as the longs. Our bet is on the latter…

From here, we return to an updated comparative analysis chart for quarterly net trading income (NTI) between FTNV and Virtu, except in this case we add the Americas NTI (adjusted from EUR to USD):

Certainly, there are a few key highlights in this exhibit, the most notable of which remains the outsized NTI from Q1 2018 for both players as a result of the much-needed surprise of realized volatility exceeding implied vol during that period. There is also a notable spike in the Virtu results from Q4-2018 that may be the result of some of the now-integrated KCG trading intelligence that we noted was more sensitive to changes in volatility here.

But, the highlight we want to bring to your attention above all is the consistent Americas NTI (Q1-18 spike notwithstanding) that results against the backdrop of the massive growth in the value of the US equity book that is illustrated in the first exhibit above. And so, our preliminary read of this phenomenon is one of declining profitability in their equity strategy (in part, as a result of increasing competition) that, in turn, is causing a broader shift in overall strategy mix.

Evidence of this claim can be found below in the recent movements of portfolio value into fixed income…

Given how large and important the ETF/ETP space has become – coupled with the ongoing intensity of competition among market makers and prop trading firms within equities, in general – we look forward to expanding this analysis into a deeper, more comprehensive case study.

So much to do…

Watch this space.

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By | 2019-05-29T13:58:02-04:00 May 23rd, 2019|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact: feedback@alphacution.com; Follow: @alphacution.