Alphacution Feed

"My favorite things in life don't cost any money. It's really clear that the most precious resource we all have is time." - Steve Jobs If you happen to be reading this note while occupying a seat at a firm like Wolverine Trading or Peak6 or D. E. Shaw or AQR or any number of other mythological market creatures that we have yet to model, please don't fret. We will get to you soon enough... For now, we are going to leverage some recent modeling on Simplex Trading - a name not as well known (yet) as some of the others - to reinforce our plot (just in case some of you have lost sight of it in all of the numbers, vernacular, and other perceived complexities) and try to teach you something new about the market ecosystem we are all playing in or otherwise indirectly tethered to. The plot here is reminiscent of the DaVinci quote we use with extreme redundancy for effect: "Learn how to see. Realize that everything [...]

“Any fact becomes important when it's connected to another.” - Umberto Eco, Foucault's Pendulum It is always fascinating to experience the fleeting juxtaposition of data and mythology. Before, there is only mythology, where almost anything is possible. And then, data enters the picture and for a brief moment they coexist until mythology dissipates and is forever changed. Students of this game are often aware of the lists of notable proprietary trading firms and other secretive trading entities, but there is rarely, if ever, any basis upon which to rank them other than the superlatives that tend to be associated with their founders and perhaps a guesstimate of headcount swagged from LinkedIn. Anyway, we just had such an experience with the development of a new model on Hudson River Trading (HRT), a noted highly-automated trading shop. In the absence of data - and pictures formed by data - we really only had mythology to go by. Now we have less mythology... So, let's add a few more pieces to solve our puzzle [...]

"Design is not just what it looks like and feels like. Design is how it works." - Steve Jobs In the lead up to the publication of our next case study on legendary derivatives trading powerhouse Susquehanna International Group (SIG), I wanted to provide context on how the proverbial sausage is actually made: Maybe it is true of most firms across most industries, but what we have found in the trading business is that companies tend to become more complex as they mature, particularly if they have enjoyed outsized success. Whether incubated internally or bolted on from the outside, the portfolio of legal entities tends to expand - although not always in linear fashion - as these firms grow and diversify their strategy mix (which in many cases is accompanied with a parallel expansion of legal entities). And, while we expect to discover new levels of complexity when we get to the point of modeling some of the sell-side entities most relevant to the global markets ecosystem - with Goldman [...]

"Learn how to see. Realize that everything connects to everything else." - Leonardo DaVinci Capital formation... Price discovery... These are the primary goals of market structure mechanisms. A place to gather - whether that place be a Buttonwood tree or a bank of caged servers - and a playing field framed with enough freedom for participants to discover and set asset prices based on publicly available information. Now, as most of you know, this opening salvo can go off the rails and into the complicated (and sometimes angry) weeds rather quickly. And, under most circumstances, I'd be happy to throw a few stones: There are strong arguments to be made that technology and regulation have (permanently) altered the nature of capital formation mechanisms in the digital era, which may be why private market solutions are thriving so much - and why the stock market is actually made up mainly of things other than stocks. Meanwhile, price discovery is no longer real price discovery as long as the price of money [...]

"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it." - Henry Ford Please forgive me for trying to squeeze just one more reference to HBO's hit series out of the tube, but it turns out that "GoT" is not the only G.O.T. In our current mission to focus on those notable players who thrive in closest proximity to the sources of market liquidity (in order to quantify their impact on the broader asset management ecosystem), we finally found time to explore and model the other G.O.T - Group One Trading, LP (GOT). Now, for those of you who are just joining the thread, you might consider starting with our piece on the Top 100 Players in US Listed Market Structure where we place GOT as a member - and for the exceedingly ambitious, you might rewind further to our study, The Context Machine: Estimating Asset Manager Technology Spending, which ultimately supports the hypothesis that defines our ecosystem mapping framework that has [...]

If you're not failing, then you're not pushing your limits, and if you're not pushing your limits then you're not maximizing you're potential." - Ray Dalio When we first exposed our initial thoughts on this legendary hedge fund manager in Bridgewater Associates: Modeling Ray Dalio's Modeling, the key finding was that their investment strategy was impersonating that of a macro manager (which historically relied largely on futures) by using ETFs to shoulder the primary market factors. In the chart below, Alphacution presents an illustration of the portion of 13F market value represented by a very short list of ETFs: Now, having expanded our modeling template (over several other trading firms) to include more analytics - and with the benefit of a couple more 13F reports to update our existing Bridgewater model, there are more key findings to share: First, the market value of 13F securities reached an all-time high for the 54-quarter period beginning Q4 2005 and ending Q1 2019. This should come as no surprise given widespread media accounts [...]

"If we knew what it was we were doing, it wouldn't be called research, would it?" - Albert Einstein For this one we need to go all the way back to the first time we illustrated the fact that KCG's market making operation - the artist fka GETCO (or, Octeg for the uber-insiders) - was more sensitive to volatility than Virtu's market making operation, as illustrated below: Now, I know we've spent an inordinate amount of time on these names and related topics, but I'm going to beg your indulgence on this one because the findings are uniquely cool - and I'll keep it fairly short: Specific sensitivities to volatility by different trading platforms notwithstanding, the condition that yields the greatest potential for outperformance of these market making strategies tends to occur when realized volatility exceeds implied volatility. It turns out that since these strategies are actually not set up to predict volatility very well they are therefore designed to remain in a defensive posture along with the prevailing vol [...]

"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 [...]

"I'm watching intelligence." - Jeff Daniels (May 20, 2019) Alphacution is in the process of "making a market" for intelligence about some corners of the financial ecosystem where there has historically been very very little. Most of what can be learned about the companies we focus on - market makers, prop trading firms, and quant hedge funds - is anecdotal. Hearsay. Rumor. And, of course, the occasional sensationalistic newspaper riff about gargantuan pay days and trophy purchases of real estate, art and toys that float... Sure, our friends at Hedge Fund Research and Hedge Fund Alert do a great job of keeping track of performance, key executive movements, and even develop strategy indices relating to many of the most fascinating players in this ecosystem - and yet, no one is tying the broader landscape together the way that Alphacution is doing it. Now, in most cases, these types of firms would greatly prefer to remain as quiet and invisible as possible mainly because information leakage can expedite the inevitable decay [...]