The suite of charts included in this Feed post about the global ETP market showcase the increasing dominance of one region over the others...
Thanks to reporting from our friends at Flow Traders, Alphacution walks through a storyboard of ETP market attributes to arrive at an estimate for the structural (market making) revenue potential of the global and regional ETP markets...
"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 firstname.lastname@example.org. 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 [...]
"It is action, not rest, that constitutes our pleasure." - John Adams Amidst the doom and uncertainty of any unfolding saga, there are always bright spots, if you know where to look. After all, every problem can be an opportunity in disguise. And so, besides the uptick in all things online relative to most things not online during a pandemic lockdown, the expectation has been that there would be some bright spots for listed market first responders - the market makers and high-turnover arbitrageurs - given the unprecedented volatility that erupted in global markets in late February. This week, Alphacution has begun to confirm some of those expectations as critical data necessary to fill in the picture of what actually happened below the unprecedented volatility headlines began flowing... To create the proper gravity of perspective, let's start with average daily volume (ADV) in US cash equity markets for March arriving at more than 15.6 billion shares. This is an all-time high and a level not even remotely approximated since the [...]
"No good opera plot can be sensible, for people do not sing when they are feeling sensible." - Frank Zappa On Tuesday, February 11, Virtu reported Q4 and full-year 2019 financials. What follows are a few thoughts and charts on the latest data: Net trading income came in at $228.7 million for Q4 - not great, not terrible - based on a QoQ uptick in core equities; some weakness in global FICC, options and other (whatever that is) relative to Q3 2019; and, flat execution services revenue relative to Q3 and Q2 2019 (basically since the ITG acquisition closed last March). The chart below visualizes an historical quarterly decomposition of net trading revenue components relative to the ratio of SPX realized to implied volatility for the 24 quarters beginning Q1 2014 and ending Q4 2019 to emphasize the importance of unexpected volatility spikes in the grand scheme of profitability for market making and execution firms. When the other components of Q4 2019 NTI became available, we will circle back [...]
"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." - Steve Jobs It's truly amazing what we find deep down in the weeds... The solution to any puzzle starts with the pieces that are easiest to fit into place. Translation: Solutions can start most easily where the most granular data is readily available and easiest to interpret. In this case, and though not (yet) flowing smoothly from a firehose, that means regulatory disclosures based on long positions reported by various trading and asset management firms that correspond with the quarterly-updated 13F securities list managed by the Securities and Exchanges Commission (SEC). At Alphacution, the core mission is to solve, and keep re-solving, a very large puzzle made up of many other smaller puzzles which, themselves, may contain even smaller, more detailed puzzles... Think of this like the claim made by the Kirk Lazarus character in the movie, Tropic Thunder - [...]
"Great things are done by a series of small things brought together." - Vincent Van Gogh In late 2001, $1.1 million in member contributed capital is dropped into Northtown Trading, LLC. By 2005, this operation becomes Tradebot Systems, Inc. and the rest has become a notable component of high-frequency trading history - and mythology. In comparison to much of our other modeling, we don't know much about Tradebot. However, given the contextual evidence provided by that other modeling, we can leverage the data we do have on Tradebot much further than we'd otherwise be able to. For the trained eye, the exhibit below - wherein Alphacution presents the total assets and a summation of cash and net receivables found in Form X17A5 for the years beginning 2001 and ending 2018 - shows that this trading operation is mostly holding cash and receivables from brokers. This means that they're position exposure is limited, which further means that they are trading fast enough - and small enough - to be (mostly) flat [...]
"If you are not growing, you are dying." - Tony Robbins On August 8, Virtu reported Q2 earnings and the stock (VIRT) fell 18%. Non-GAAP EPS came in lower than Street estimates. In addition to the costs of integrating the ITG acquisition, disappointing results in the market making segment were blamed on lower volatility and trading volumes. Now, here's what you're never going to hear from the company: The Frying Pan: Both the market making and execution businesses are under significant spread and fee pressure. If there isn't an ongoing arms race for speed - which there still is - then there's intense competition around execution costs. Payments for order flow continue to rise as a result. And, some are exiting the equities brokerage business... 2. The Fire: They claim to be diversified. They try to become more diversified. And yet, they remain grossly over-weighted to equities and ETFs. The increased balance sheet that resulted from the KCG acquisition has not been lightened up, now 2 years later, despite [...]
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 [...]
Image Credit: Arpad Busson and actress Uma Thurman attend the premiere of Zulu during the 66th Cannes International Film Festival - Hubert Boesl/DPA/Alamy He pressed "record" on the cassette machine, leaned back and took a long, deep drag from a cigarette. "Let's begin," he said with a heavy accent. In a risky break from protocol, and much to the frustration of my partner - Quantlab co-founder and chief scientist, Ed Bosarge - I asked if I could bum one of his smokes. "But, of course," the Frenchman said with a smirk... Scene: Swanky leather-drenched, art-stuffed office, midtown Manhattan, 1998. Arpad "Arki" Busson, then already at 35 a legendary rainmaker for legendary hedge fund managers, like Tudor Investment's Paul Tudor Jones, had agreed to meet with two of the top geeks from a quant trading upstart to pitch their new strategy to his EIM Group, a prestigious fund of funds (FoFs) platform of the era. In a bizarre twist of unacknowledged credentials, it was difficult to pretend to ignore the fact [...]