Two Sigma Securities

Now You See Me: What The Bloomberg Opinion Guy Misses About Market Structure Mechanics

Leveraging numbers and narrative, Alphacution builds a higher-dimension analysis of market structure mechanics on top of Bloomberg Opinion's Matt Levine's recent manifesto on payment for order flow (PFOF). Disclaimer: No unsolicited elbows were thrown during the creation of this Feed post...

By |2021-03-04T19:37:16-05:00February 22nd, 2021|For Subscribers|

Outlook 2021: The Drunk-on-Impunity Mania Arrives

"You cannot escape the responsibility of tomorrow by avoiding it today."Abraham Lincoln With protestors storming the U.S. Capital - some of which breaching the outer doors and freely strolling the U.S. Senate floor - as surreal and unprecedented backdrop, I sit down to organize a sketch of Alphacution's outlook for the year ahead, starting with a very wide lens: The U.S. economy - much like the rest of the other "developed world" economies - is naturally weaker than the meticulously curated employment and productivity numbers suggest. Technology adoption (from workflow automation to social media distraction), growing debt burdens, ossified resource allocation practices, cross-region labor arbitrage, deteriorating infrastructure, and other factors all converge to deteriorate "life, liberty and the pursuit of happiness" for a growing portion of the population. The COVID pandemic of 2020 - and however long it remains disruptive throughout 2021 as vaccines are being rolled out - acts as an accelerant of many of these factors. Ours is a deteriorating version of capitalism. Symptoms emblematic of the stage [...]

By |2021-01-06T23:36:37-05:00January 6th, 2021|Open|

Pennies and Locomotives: Hypothesis for Virtu’s Next Acquisition

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking."John Maynard Keynes Back in the day, we called it picking up pennies in front of locomotives. Today, that locomotive is one nasty beast... Virtu is having a banner year in 2020, with 9-month net trading income (NTI) at an all-time high of nearly $2 billion. Virtu also appears to be well-positioned to benefit from periods of heightened volatility and volume in its core US cash equity strategy going forward. In other words, there is no specific need for Virtu to do anything dramatic. So, our hypothesis here is this: If there was a dramatic move to be made by Virtu that would cause a material uptick in growth potential, what could it be? Note: If you haven't already done so, our recent Feed post, "Trading Strategy Secrets: Hiding in Plain Sight" is worth reading as a detailed setup for this post... Right out of the gate it needs to be said that we [...]

By |2021-02-03T12:09:07-05:00November 13th, 2020|For Subscribers|

Robinhood: Q3 Order Routing Revenue Continues to Break Records

"Do not go where the path may lead, go instead where there is no path and leave a trail."Ralph Waldo Emerson The juggernaut that is the Robinhood commission-free trading app has accumulated some dents and bruises over the year, along with a number of truly breathtaking successes. One of the more overexposed stories in a year engorged with superlatives, system outages, a customer suicide and, most recently, the hacking of thousands of accounts has challenged Robinhood's meteoric rise along the way. Together, these headwinds have delayed Alphacution's prediction of the timing of an oncoming IPO. All that said, one aspect of the Robinhood juggernaut - certainly among the more important aspects to its key stakeholders - is persistent growth in order routing revenue; the largest component of total revenue. After two quarters of blockbuster, pandemic-fueled numbers showcasing the inner workings of Robinhood's order flow firehose, the Q3 2020 order routing figures have recently been made public. The headline is that after the second quarter's monstrous $180.3 million in payments for [...]

By |2020-11-02T22:38:42-05:00November 2nd, 2020|For Subscribers|

Citadel Securities Picks Fight With SEC Over Crystal Ball

"If you are not paying for the product, then you are the product."The Social Dilemma In a rare display of miscalculation, Citadel may have overplayed its hand... Here's the setup: According to Bloomberg, "Citadel Securities LLC has sued the U.S. Securities and Exchange Commission (SEC) over the regulator’s approval of an order type introduced by stock-exchange operator IEX Group Inc." Approved by the SEC in August and launched on October 1, IEX's discretionary limit order type - or, "D-Limit" - is essentially a mechanism designed to protect liquidity providers from potential adverse selection by latency arbitrage strategies - otherwise known in less polite company as getting "picked off" on the basis of stale quotes. In a comment letter, dated April 23, 2020, Citadel Securities expresses its objection to IEX's proposal, in part, because it "will broadly and indiscriminately affect myriad liquidity takers, including retail and institutional investors as well as market makers in equities and related asset classes, such as ETFs, options, and futures." (Hold that thought for a minute...) Now, [...]

By |2020-10-28T23:55:05-04:00October 28th, 2020|For Subscribers|

Wholesale Market Makers: Adding Price Improvement to the PFOF Analysis

"The difficulty lies not so much in developing new ideas as in escaping from old ones." John Maynard Keynes Just because the rule requires “market centers that trade National Market System (NMS) securities to make available standardized, monthly reports containing statistical information about covered order executions that are free and readily accessible to the public" does not mean that that information is lounging around under a bank of Klieg lights in an easily consumable format. Like a lot of raw regulatory data, you need to know where to look while simultaneously in possession of a decoder ring... Meanwhile, there is a dramatic falling of US equity market dominoes that began a year ago with an industry-wide move to zero-commission retail brokerage models. This move became exacerbated in March by a convergence of pandemic-related forces that has resulted in a gusher of unprecedented profitability for a short list of leading proprietary trading firms that are otherwise known in the light of day as wholesale market makers. At the intersection where [...]

By |2020-10-27T20:10:25-04:00October 9th, 2020|For Subscribers|

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 itself from a trampoline [...]

By |2020-10-02T15:23:24-04:00August 6th, 2020|For Subscribers|