What is the half-life of a heyday? In the land of crypto market making, it might be shorter than you think. Alphacution makes its case off the back of Coinbase data garnished with a couple recent news events...
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...
"As you think, so shall you become." - Bruce Lee Like a one-legged man in an ass kicking contest, sometimes the scenario is grim. And yet sometimes, the tailwinds converge in your favor - like a three-legged man in an ass kicking contest - and the scenario presents itself very much to the contrary... Historically, Alphacution has not been shy about pointing out the former. Who can forget "Virtu Financial: The Frying Pan and the Fire" from August 2019; a favorite of @Dougielarge, for sure? But, to give credit where credit is due, this story is quintessentially about the latter scenario: Today (May 7), Virtu Financial reported Q1 2020 earnings and, given an extra appetizer of preview from the company on March 20, it was - to borrow a riff from Tenacious D - "The. Best. Quarter. Ever. Period!" Now, it's no secret to anybody on the planet why a strong Q1 was to be expected from Virtu because nearly everyone on the planet is directly impacted by the [...]
"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 [...]
"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 [...]
“To develop a complete mind: Study the art of science; study the science of art. Learn how to see. Realize that everything connects to everything else” – Leonardo da Vinci If there was ever a moment in time when we realized just how much everything connects to everything else - a quote (and concept) I have been using to repeatedly bludgeon you lo these many past months - now would be that moment. However, so as not to jump on the singularly overcrowded bandwagon of doom that is the current events flow of content (for now), I'd like to walk through a storyboard of related significance. That sadly familiar aroma in the air is fear; a specific vintage of which has not washed over the market ecosystem since 2008. Many are coming to the conclusion that if the virus doesn't take us down, the arsenal of preventative measures just might - and therefore, one way or another, we are likely entering a period of financial stress (to put it as [...]
"You can have all the transfer orders that you want, but you have to ask me nicely." - Col. Nathan R. Jessup, "A Few Good Men" On December 11, 2019, Bloomberg News editor Tom Maloney publishes an unusually illuminating article on Citadel Securities, "Ken Griffin Has Another Money Machine to Rival Hedge Fund," citing specifically that the market maker earned $3.5 billion of revenue in 2018 and "handles more than 1 of 5 shares traded in the US each year." Of note, the article includes two charts, the first of which ranking net trading revenue in 2018 for a selection of bank and non-bank market makers; and the second of which showcasing the shifting market shares of US retail equity wholesalers. Given that Alphacution has followed this and other firms in this space as closely or moreso than any others - for example, we are not aware of any other research and advisory group publishing a comprehensive case study on Citadel Securities - I wanted to add a few thoughts [...]
"There are two kinds of people in the world: 1) Those who can extrapolate from incomplete data Oftentimes, when we are expanding an existing model - or, focusing in on a new modeling thread - it makes more sense to keep going until we have absorbed all the relevant data, even after we have already teased some of the findings on the Feed, than to stop and restart down the road. Better to stay in a patch of weeds once you are already stuck down in there. This is the case here. We have published some updated findings on Flow Traders last week - and its closest peer, Virtu Financial, the week before that - but there is still more of note to share: We are fascinated by the role that the exchange traded product (ETP) market is having on the broader markets, on strategy selection and development, on asset manager growth (and decline), and on the evolution of investor behavior. We have recently been detailing how the growth in [...]
"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 [...]
Image Credit: Liu Bolin “The problems are solved, not by giving new information, but by arranging what we have known since long.” – Ludwig Wittgenstein Launching ourselves right into a new year with a continuation of our curiosity with all the delicious clues lying around in plain sight, we give you a morsel of Flow Traders' book. Perhaps not the precise bromide for your hangover, but one that may end up tickling your intellect and soothing a need for a creative distraction at the same time... In the chart below, we present the shape of Flow's long portfolio value for the 28 quarterly snapshots beginning 12/31/2011. (For a little background on why we present this chart without the numbers, see our recent example on Citadel.) As of now, Alphacution interprets an upward sloping long portfolio value as a sign of success from either position count scaling and/or average position size scaling. Now, since I've already had the debate with a few of the high-speed, market-making types (on the potential illusions of 13F [...]