"We don't receive wisdom; we must discover it for ourselves after a journey that no one can take for us." - Marcel Proust With pandemic-era factors being historically and paradoxically hospitable for market volumes and volatility, those players that stand in closest proximity to the sources of listed liquidity have experienced an unexpected windfall so far in 2020. Today, with market making revenue for the past two consecutive quarters at all-time highs and seeming to bend a long-term downward trend in a new upward direction, VIRT stock found its own all-time high... For the remainder of this story, we need to refresh your perspective with a little context: Founded in 2008, Virtu is the youngest of a dozen leading proprietary trading and market making firms in the world: What is most unique about Virtu, however, in the context of this group is that it has grown primarily by acquiring other people's trading strategies - typically by outright acquisition of other companies - from the beginning. By comparison, all the others [...]
"Study the science of art. Study the art of science. Develop your senses - especially learn how to see. Realize that everything connects to everything else." - Leonardo da Vinci Market making in individual stocks has become so competitive that most hyperactive strategies - the ones that reside in Alphacution's structural alpha zone - have turned to increasingly rely on some form of ETF arbitrage. This competitive dynamic is exacerbated by factors such as liquidity fragmentation, liquidity internalization, payments for order flow (PFOF), and the winner-take-all impacts of process automation (aka - scaling via technology). For those proprietary trading firms with few, if any, options positions in their portfolio, cash ETF position concentrations (based on total 13F position counts) are represented as follows: When we isolate the leading order flow wholesalers and consider aggregate cash ETF positions as a percentage of 13F gross value, one of the clues that rises to the surface (in concert with the findings in the prior chart) is the prominence G1 Execution Services (G1X), a [...]
"Name of the game? Move the money from your client's pocket into your pocket. Number one rule of Wall Street: Nobody knows if the stock is going up, down, sideways or in ... circles. It's all a fugazi..." - Mr. Hanna, Wolf of Wall Street On Monday, August 10 at exactly 11am EDT (you know, after the opening bell was safely in the rearview mirror), Robinhood Markets, Inc. - the anti-incumbency insurgent trading app platform and self-proclaimed democratizer of all things financial - set out to dominate the week's financial news cycle by enticing media powerhouse, Bloomberg, to drop a news bomb into an ecosystem already negligently over-stimulated on the topic: "Robinhood Blows Past Rivals in Record Retail Trading Year." One piece of data was exclusively revealed to Bloomberg at the center of this story: 4.31 million daily average revenue trades - commonly known as DARTs (and generally defined as customer orders executed divided by trading days) - were recorded in June with the additional explanation that "the firm is [...]
Q2 PFOF Craziness: Robinhood Becomes Parody of E*Trade Commercial, Competes with TikTok for Attention…
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises, economist Someday, sufficiently far into the future, when we have somehow broken free of the illusion, we are going to look back on this chapter in world history and wonder how we had entered into such a collective state of insanity in parallel with such profound technological advancement... The Fed has all but said that it will prevent markets from declining (and plug whatever economic holes it needs to plug and lubricate whatever financial gears it needs to lubricate), no matter how much money it needs to print, debts and deficits be damned. This is not a characteristic of free markets, nor is it a feature of a capitalist system... And so, as if gleefully hurling [...]
Alphacution Director of Research, Paul Rowady, joins eXponential Finance Podcast host and Tokyo FinTech founder, Norbert Gehrke, for a spirited - if not, highly-caffeinated - and entertaining discussion covering a wide range of Alphacution's most illuminating research themes, from the genesis of its trading and asset management ecosystem map to the concept of alpha capacity to the implications of the current commission-free trading landscape and, of course, the riveting Robinhood phenomenon. Enjoy...
"Just when I thought I was out, they pull me back in." - Michael Corleone, The Godfather: Part III Chicken or egg? For today's story, we know which one came first. However, we may never know for sure which one was the more prominent cause of the recent sustained spike in US stock volumes: A frictionless environment brought on by a zero-commission framework or a high-volatility market brought on by a once-in-a-century global pandemic? Granted, there may be additional factors at play here. Like the gamification of market interfaces as substitution for a sports apocalypse. People need something to do. And, when confined for extended periods, they will naturally choose paths of least resistance, especially those that entertain, are addictive and tickle financial desires... This is what one of those paths looks like; notably since March 2020: Now, I made a point last week, in "Robinhood's Trailing Stop Orders: Extreme Profitability, By Design," to say that we would try to avoid seeming redundant in our topical choices, at least [...]
"They make it so easy." - Richard Dobatse, Robinhood user (via New York Times) "A fool and his money are soon parted." - Thomas Tusser, poet Imagine if you knew, ahead of time, exactly what bait to use? Not only which bait to attract and influence the behavior of specific customers, but how to package the output of those behaviors - into an additional form of bait - in such a way as to leverage US listed market structure and maximize the probability of financial windfall. If so, chances are, you would share some of the vision that the founders of retail trading app and rising zeitgeist symbol, Robinhood, did circa 2013... Now, the fact that Alphacution has been beating this drum for four weeks in a row (starting here, here and then here) is unintentional and unrehearsed. Certainly, we much prefer that our riffs come with a level of variety - and we will return to that variety shortly. However, as we have been grinding the numbers around order [...]
"You'd never believe how hard it is to find a wetsuit in Boston." - Dave "Davey Day Trader" Portnoy Alphacution quoted in Financial Times story on day trading, "Day trading: no complaints from Portnoy" (June 17, 2020).
“Principles for the Development of a Complete Mind: Study the science of art. Study the art of science. Develop your senses - especially learn how to see. Realize that everything connects to everything else.” - Leonardo da Vinci If there ever was a time to see how things are connected to other things, it is now. This is particularly true in places where something that is "free" is interpreted to be "without cost." After all, like "free" drinks at the casino, human nature tends to regress to its most lizard-like tendencies when presented with a frictionless environment... When will we ever learn that "free" is never the best price? Anyway, without becoming distracted by a rant about the true cost of Facebook, et al, let's take a brief look at the impact of "commission-free" trading on the macrostructure of the US market ecosystem over a very short window since October 2019: Thanks, in large part, to the popularity of retail broker, Robinhood Financial, LLC ("Robinhood) - the upstart financial [...]
"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 [...]