Alphacution Feed

“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. You have to trust in something – your gut, destiny, life, karma, whatever." - Steve Jobs (2011) You've got to wonder if the founders of Jane Street Group, which began as a subsidiary of Henry Capital prior to 2001, had any inclination that the "dots" would connect as they have when they were first starting out. Certainly, looking backwards, what now amounts to 64 quarters of track record has produced a "shape" that we can confidently say is worthy of applause... Behind these scenes, Alphacution has nearly completed its initial modeling of Jane Street and the various legal entities that make up its track record, from a portfolio construction and positioning perspective. And, since we have done several of these modeling exercises so far among a roster of some of the more mythological managers and trading firms on record, it's natural that one begins to grow an intuition [...]

"Research is what I'm doing when I don't know what I'm doing." - Wernher von Braun In the hierarchy of preferred trade types, the riskless trade sits at the top. Capturing a perfectly hedged spread or pricing anamoly, or performing a round turn across the spread and back to flat in some temporal duration measured in micro- or even nanoseconds are examples of riskless trades. Like poker's rare royal flush hand, a mechanism to persistently discover and then capture ~riskless trades is the most coveted of the trading world. What comes next in this hierarchy is the directionless trade, where the trader essentially plays both sides of the trade and where success is achieved whether the target ultimately wins or loses. Like poker's next-in-line straight flush hand, the key caveat to the directionless trade is the requirement that the price of the target moves; that there is enough volatility during the life of the trade to cover the cost of entering and maintaining that trade. It is here that we [...]

“Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, the just saw something. It seemed obvious to them after a while” – Steve Jobs For Mitch (1957 - 2018) Let's start this one close to where we left off in The Privatization of Alpha: "He’s a dubious character – and, he maintains specific distinction as my all-time strangest interview; sitting there in his personal office’s gymnasium – like an antechamber – as I sat there at the leg press machine in my Armani suit and him, as Tom Wolfe wrote in A Man in Full, eventually breaking out in “saddlebags of sweat” on his spin bike as we chatted. That was 1994 – and I did not get the job." If it had not been for the perpetually warm and generous teddy bear known as Mitch Lester - who I met and quickly befriended to become "the Wadster" in 1990 while he and brother, [...]

"To create something exceptional, your mindset must be relentlessly focused on the smallest detail." - Giorgio Armani Taken out of context, one might legitimately jump to the conclusion that today's installment on the Feed is about 11-time kickboxing champion, Don "The Dragon" Wilson. Or, better yet, that the initials "DRW" represent the greatest hockey team of all time, the Detroit Red Wings... However, unfortunately for Mr. Dragon and my Wings - and given the context of the mythological trading landscape we have been exploring lately - this post can only be referring to Chicago's very own Don Wilson and his eponymous proprietary trading firm, DRW Holdings, LLC (DRW). Here's some personal perspective to get us started: In the history of legendary Chicago trading firms, one could draw a line with options trading prop shop O'Connor & Associates (and the O'Connor brothers, Billy and Eddie) and the CBOE on one side, and rival futures trading prop shop CRT (Chicago Research & Trading - and founder Joe Ritchie), and the CME on [...]

In the riverfront level of the 600 W. Chicago building (which is in Chicago) - the famed concrete fortress originally home to Montgomery Ward's mail order business - there used to be the trendy, over-priced hotspot known as Japonais. Japonais is gone now - after an eviction lawsuit from 2015, which apparently means they weren't high-priced enough - but, I was just thinking how much I could go for one of their blueberry saketini's about now, which is odd for a bourbon guy... Anyway, an elevator ride to the 8th floor of that very same building - past the old Thinkorswim, now TD Ameritrade, offices - brings you to the global headquarters of Jump Trading, LLC - the legendary and mythological prop shop known mainly for its prowess and longevity in high-speed futures trading, and little else (except among a small group of Chicago quant cognoscenti). With this as a brief backdrop, we found our tour of their 13F and X-17A-5 reports illuminating, both on absolute and relative bases. Here's [...]

Image Credit: Brad Trent / The Times "Treat your life like a game." - Ray Dalio Before we get to the overview of our recent modeling of famed hedge fund leader, Bridgewater Associates and its founder, Ray Dalio, we need to set the stage for why this particular profiling is so important. It starts with what we have been calling personal alpha... Personal Alpha Ray Dalio is a singular phenomenon in the modern financial world. For starters, he's performed the feat of building the world's largest hedge fund (with $160 billion AUM as of latest count) and delivering "stellar gains" in its flagship Pure Alpha fund of 14.6% for 2018 while most others struggled. In Alphacution's asset management ecosystem map, Bridgewater defines the boundary between active and passive management zones due its role as the largest hedge fund. But more than stretching AUM boundaries and strong performance, Ray Dalio is a singular phenomenon because he has built an amazing business culture, and has recently set out to share his wisdom [...]

Last week, in timely fashion, the SEC published the 13F securities list for Q4 2018. Here is our breakdown of the quarterly change in product categories. Refer to the original US Stock Market Made of These! (or below) for the full history:   In August 2018, I did what I rarely do anymore: Cut an article out of a newspaper. The title and topic caught my eye, and eventually became the catalyst for some of the analysis presented here. Amongst all the digital gear, I still needed a physical marker to remind me... "The Stock Market Is Shrinking. That's a Problem For Everyone." (Jeff Sommer, New York Times, 8/4/2018) It turns out that if you search on a title like this, the story comes up several times over the past couple years. Forbes actually did a similar story after the NYT did the one above. Barron's did one before that, in mid-2017. In any case, the articles from 2018 are both based on a report by Rene Stulz of the [...]

Image Credit: Liu Bolin, Museo Enzo Ferrari ~ There is infinitely more than just the devil in the details. ~ Ludwig Mies van der Rohe It is so often said, offhandedly and seemingly without much regard for the underlying meaning, that the devil is in the details. Ever wonder about the origin of this saying? I suppose this might be a silly question for those of you who commonly say things without thinking, but it's still one worth pondering... Famed architect, Mies van der Rohe, is credited with the origin of the quote, but this is not his original version. The original quote, which I have further paraphrased in our opening for purposes that you will soon understand, was: "God is in the details."  Now, as someone who has always thrived on the value of details - and sometimes criticized for getting stuck in the weeds - this last version of the quote, which I reinterpret for my own purposes as "opportunity is in the details," has always come naturally. [...]

It has been almost exactly 2 years since "Jack" - the mastermind behind the Amsterdamtrader blog that chronicled a ton of insider's knowledge about the high-frequency trading and market making world from about 2009 thru 2016 - posted his closing submission. Despite that, I still wanted to pause for a minute to give props where they are due. The contents of the Amsterdamtrader still sit out there in the blogosphere, open for any particular puzzle solver to stumble onto. It was here that I found several missing pieces to Alphacution's modeling puzzle belonging to Optiver and IMC. Here's a first sample (or two) of what has come of that discovery: Alphacution typically looks through a technology lens to see how various players operate around the global financial landscape - and what those findings may foreshadow for other players in neighboring regions of the ecosystem. Often labeled "technical leverage," we are quantifying - wherever possible - the impacts of technology in and around the trading and investment management arena. In practice, [...]

Image Credit: Liu Bolin “The problems are solved, not by giving new information, but by arranging what we have known since long.” – Ludwig Wittgenstein It is said that the best way to eat an elephant is one bite at a time. And, since the aggregated 13F filings of Citadel Securities represent such an elephant-sized trove of delicacies - not to mention the contextual value it brings relative to so many other players - we are only going to chew on a couple new bites for right now. First, we recently made a splash about the product composition of the US "stock" market, and the fact that it's mostly made up of derived products, in the post, US Stock Market is Made of These! More specifically, it should come as no surprise that the product class with the highest growth (since we started our indexing in Q1 2010) is ETFs - followed predictably by ETF options (see chart below). So, one factoid that may be worth further contemplation is the point at [...]