Man or Machine: Who Are The Real Trading Champions?

Despite dramatic changes to the fortunes of quantitative trading strategies of late, they still represent the extremes of “technology leverage” in the global markets ecosystem. This means that due to a high level of workflow automation, these types of firms generate more output – as measured by revenue per employee (RPE) – than any others in the industry. Or, so we thought…

In the context of its broader research mission, Alphacution has been focused – perhaps even a little obsessed – on modeling, measuring and benchmarking the interplay between the two primary engines of productivity within the global financial services ecosystem: technology capital and human capital. The value of this research – something we call “navigational intelligence” – is to help technology buyers understand where they fit amongst the constellation of peers and competitors, and for solution sellers to understand the needs and spending patterns of their clients.

Until recently, high frequency trading and market-making operations – like those found at Virtu Financial and its newly acquired KCG Holdings – have generated the highest RPE’s of any other company in the financial services arena that Alphacution has modeled; a library which now includes over 150 core models and more than 200 supplemental models. As we have expanded our modeling and analysis deeper into the buy side to include a more diverse collection of asset managers and hedge funds (including noted private equity firms), the dominance of quant shops – as it pertains to technology and human capital leverage – has been updated with an entirely new perspective.

Based on significant updates to the Alphacution model library, Virtu no longer holds the top RPE slot. Based on 5-year average RPE’s (from 2012 to 2016) for a selection of asset managers, hedge funds and private equity firms, the position of highest RPE in our database currently belongs to Apollo Global Management, LLC (see Exhibit below).

Now, the significance of these findings are that human-centric workflows within global markets can still generate productivity levels (as measured by RPE) that are similar to – if not, greater than – those of highly-automated, technology-centric workflows. In short, the battle for trading and investing supremacy continues…

That said, the one area where highly-automated, high turnover trading strategies retain their supremacy is consistency. Notice in the previous exhibit the level of volatility in RPE (as measured by standard deviation) of the machine-based example relative to the others. Though a select group of low-automation asset managers can generate extreme RPE’s, their performance over time is still quite volatile.

And, speaking of volatility, here’s one last thought for today: With historically low market volatility as the primary culprit, high-turnover trading strategies continue to struggle. Alphacution predicted this outcome as well as its role as the primary driver of continued consolidation in the HFT / market-maker space with this post back in March 2017.

The June 2017 update to average daily net trading revenue for Virtu is as strong an indicator of this continued weakness as any (see exhibit below).

Stay tuned for more data-driven updates – and don’t hesitate to reach out with questions and comments…

By | 2018-02-28T16:31:28-05:00 September 20th, 2017|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:; Follow: @alphacution.