Virtu Financial

Trick Shot: Robinhood Underwrites MEMX

“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 [...]

By |2020-10-14T21:47:06-04:00June 18th, 2020|For Subscribers|

Virtu Financial: Master Exploder, Part II

"Empty your mind, be formless, shapeless — like water." - Bruce Lee   In "Master Exploder, Part I," we presented a first pass at Virtu's Q1 2020 earnings release given the impacts of unprecedented volatility in March. If you're tracking closely - or merely fascinated by - this neck of the woods, be sure to check in on that one, and the one on Flow Traders' Q1 earnings that preceded. Both releases presented outstanding, one-of-a-kind results. As noted in the last Virtu post, we were waiting for some additional data to come out before wrapping our thoughts on the Q1 impacts, both specifically and more generally. After some of that additional data has come out, here we are - and the results are oddly surprising (as in, not what was expected). In the chart, below, Alphacution presents the components of net trading income (NTI). This is a rolling, quarterly view of the composition of NTI that we have updated from time to time here on the Feed. You may recognize [...]

By |2020-10-14T21:39:52-04:00May 21st, 2020|For Subscribers|

Virtu Financial: Master Exploder, Part I

"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 [...]

By |2020-10-14T21:40:04-04:00May 7th, 2020|For Subscribers|

Blast Off: First Look at Q1 First Responders

"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 [...]

By |2020-10-05T16:04:51-04:00April 23rd, 2020|For Subscribers|

Marketquake: The Volatility of Volatility

“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 [...]

By |2020-10-14T22:24:36-04:00March 19th, 2020|Open|

Virtu’s Optionality? Some Good News…

“That which does not kill us makes us stronger.” - Friedrich Nietzsche “We adore chaos because we love to produce order.” ― M.C. Escher   One intangible cost of being the sole US publicly-traded market making firm is the required level of financial and operational transparency - and the investor relations burden - that comes with that status. In this case, that cost may be unusually high because of the relative opacity of the competitors in this sector - what Alphacution typically refers to as the structural alpha zone of its asset management ecosystem map - coupled with the unparalleled use of technology and extraordinary magnitude of wealth generated by that small group of players. To compound this dynamic, recent dramatic shifts in the landscape for retail order flow sparked by the late 2019 moves - en masse - to $zero commissions by retail-oriented brokerage platforms, and the quick follow-on consolidations of TD Ameritrade (by Charles Schwab) and E*Trade (by Morgan Stanley), and given the pandemic-fueled volatility and volumes of [...]

By |2020-10-14T21:40:22-04:00March 12th, 2020|For Subscribers|

Virtu Financial: Musical Chairs

"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 [...]

By |2020-08-17T07:14:02-04:00February 13th, 2020|For Subscribers|

Implications: 2019 Payments For Order Flow Flat vs. 2018

"Historians study the past not in order to repeat it, but in order to be liberated from it." - Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow   With three quarters worth of financial reports for calendar 2019 long in the bag, it is not much of a courageous leap for us to deliver an estimate for order routing revenue - otherwise more notoriously known as payment for order flow (PFOF) - for the full year. And, with the quarterly earnings season coming in the month ahead, it won't be long before we are able to test the accuracy of this estimate. In the chart below, Alphacution extends our prior analysis not only to include 2011 and 2012 but also, more relevantly, to include the year just completed; thereby extending to nine years from six our focus on five of the primary players in retail order flow for US equity markets who also disclose order routing data: TD Ameritrade (soon to be acquired by Charles Schwab); E*Trade; the [...]

By |2020-10-14T21:47:35-04:00January 15th, 2020|For Subscribers|

What Bloomberg Misses About Citadel Securities

"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 [...]

By |2020-10-14T21:47:51-04:00December 18th, 2019|For Subscribers|