Explorations into the Firm’s European Trading Operations, US Equity & Equity Option Strategies, Comparative Analysis with Select Competitors, Revenue Estimation
In this 91-page, 102-exhibit case study, “The Rise of Hudson River Trading”,the publisher adds another leading proprietary trading firm - and recent entrant to the $1 billion+ trading revenue club (2020e) - to its library focused on the most secretive and consequential players in the global markets ecosystem.
Notable highlights include:
- The history of Sun Trading and the impacts of its acquisition by Hudson River Trading (HRT) in Q1 2018, and explorations into the firm’s European trading operations;
- US equity and equity option strategies;
- Comparative analysis with select competitors, and;
- Revenue estimation, among many other details.
Executive Summary
As if on cue, and apropos of the times, a tweet by Joe Gawronski, President of Rosenblatt Securities states that December 24, 2020 marked the first time ever that off-exchange trading represented the majority of US equity volume (50.38%).
Rewinding from there to a Reuters article dated January 16, 2018 entitled “Hudson River Trading to buy rival HFT firm Sun Trading”, HRT’s co-founder and director, Jason Carroll, said in a statement, “This acquisition combines HRT’s expertise in on-exchange trading with Sun’s expertise in off-exchange trading creating a stronger, more diverse firm.”
What happens between these two points in time is no accident. More than describing a theme that contributes to the disruption of the entire trading and asset management ecosystem, they are two milestones in the story that launches Hudson River Trading, LLC (HRT) into what the analyst estimates is a rarefied league of proprietary trading firms that exceeded $1 billion in revenue for 2020.
Until now, the analyst has been intensely focused on shedding light on the broadest, most consequential trading firms in the global markets ecosystem. This led to the the analyst's first-ever case studies on some of the most attention-grabbing names in the business. Legendary firms like Citadel Securities, Susquehanna International Group (SIG), Two Sigma and Jane Street are among the analyst's published works; a research library that is without peer.
These works were developed in parallel with a steady cadence of much shorter research excerpts published on the analyst's feed, thereby exposing a much more diverse roster of notable players in total; each of which - short or long, deep or cursory - serving like pieces in the evolving solution to a much larger and more complex puzzle.
As if writing a script for a Netflix series whose ending remains perpetually uncertain, each act of puzzle-solving - published, yet-to-be-published, or merely serving as backdrop - has incrementally illuminated a much clearer picture of this ecosystem. We have come to call this market macrostructure research.
It turns out that the legendary players to which the analyst has dedicated their initial focus and deeper analysis have been valuable for more than their ability to fascinate. They are the cornerstones of the latest market structure phenomena, and therefore, have an extraordinary influence on the topology of the landscape, not only for the spaces they occupy but for the spaces they leave behind. This is all perhaps an overly poetic way of introducing the nuts and bolts of the matter: There is a war being waged between what happens in the light and what happens in the dark.
More than describing any number of religious texts or sci-fi movie plots, the inherent inefficiencies caused by liquidity fragmentation, structured product mechanics, and derivative product mechanics have galvanized strategy selection for those who wield industrialized technology; creating unprecedented fissures in the trading and asset management ecosystem. Given the level of interconnectedness, this war at the epicenter of listed markets - most notably in the US - impacts all the major stakeholder groups. And, given the winner-take-all dynamics caused by pervasive technology adoption, the roster of firms who fall on the fortunate side of the competitive line is far shorter than the list that falls on the unfortunate side.
With few exceptions, bulge-bracket broker-dealers have struggled to compete with the world’s leading proprietary trading firms (all of which are registered broker dealers and often market makers, and whose ongoing financial success perpetuates a positive feedback loop that allows them to stay at the forefront of technical innovation and human capital attraction). Many hedge fund managers have struggled to adapt - much less, realize - that material component of the so-called alpha they once enjoyed as outsized performance is now being captured by those who stand much closer to the sources of liquidity.
Traditional asset managers, particularly those without a vibrant exchange-traded fund (ETF) franchise, also suffer from a lack of automation, speed, creativity, and adaptability. Solution vendors are plagued by a declining spicket of new prospects in a world that favors an incumbency of incumbents. And, last but certainly not least, the retail segment, particularly the subset of day traders, risk junkies and other thrill seekers, is largely entertained in the new, frictionless, and increasingly gamified environment. In short, the configuration at the center of listed markets - which, thanks to an historically-accommodative yield curve, is one of the only games in town - continues to cause tectonic shifts and existential risks throughout the entire global markets landscape.
At the base of all this, current market structure promotes a finite list of mainly speed-related arbitrage strategies, all of which reside within the analyst's structural alpha zone; the home of all hyperactive trading strategies. With the Robinhood-triggered move - en masse - in November 2019 by the entire retail brokerage industry to a zero-commission framework (and fueled, in part, by new, more transparent SEC Rule 606 disclosures), 2020 is the year when the value of captive order flow elevated the war between dark trading and lit trading to an unprecedented level of obviousness that is now observable by the naked eye.
Based on additional regulatory data beginning in late 2014, accumulated evidence shows that captive order flow is among the most recent in a set of keys used to unlock trading profits by those who dare to stand exceedingly close to capitalism’s furnace. More than matching order flow from a nested architecture of cooperatively affiliated strategies, captive order flow has proven to provide a peak at the future. No matter that much of the value of that signal decays quickly, sometimes in mere microseconds. Harnessing more captive order flow improves that predictive powers of that signal.
Except for Jane Street (who has yet to fully embrace the wholesaling game), the analyst's case study subjects so far are leaders among a short list of wholesale market makers who are highly active in the realm of captive order flow, especially, captive retail order flow. This includes the combined practices of payments for order flow (PFOF), dark pools (including single dealer platforms - SDPs), and the most sophisticated high-performance technical infrastructure to leverage inherent inefficiencies caused, in large part, by liquidity fragmentation and derivative product mechanics (including both options and ETFs).
When you consider that:
- the available universe of securities is largely derivative of a subset of that inventory (whereby as much as two-thirds of tradeable securities in that universe are options and ETFs),
- that the thirst for yield in the longstanding - if not, further deteriorating - interest rate environment supports persistent flows into equities, and
- the increasing pervasiveness of quantitative methods, among other factors, have all conspired to foster increasing concentration of liquidity within that securities universe.
Literally a game of temporal fragments, it’s no wonder that the signal derived from captive order flows has become such an important variable in this equation. Moreover, the flywheel effect continues to speed up and cause further intensifying liquidity concentrations. Like the properties of fractals (where similar patterns recur at different scales), the analyst sees the patterns of increasing concentrations happening everywhere.
Even in the rarified air of the leading prop firms, there are notable fault lines. Citadel Securities and SIG are the only two of these to have found success - if not, dominance - across the broadest spectrum of hyperactive strategies that include all listed product classes, many asset classes, and most regions. The analyst believes that the primary source of this dominance is a market making platform that successfully spans both cash equity and equity option markets, among others.
Jane Street Group is currently the only other player with the maturity, knowledgebase, and scale to be in position to mount a credible competitive threat against these top two (or in front of many other contenders), and therefore, the analyst ranks it as the #3 global player in the structural alpha game.
Of course, given windfalls earned by many prop trading firms in 2020 off the back of historic volumes and volatility, competitive dynamics in the areas of market making and other hyperactive strategies could shift starting as early as this year. If that happens, the players are likely to come from the following roster of leading proprietary trading firms and their trading affiliates.
Nevertheless, we need to draw a line between those few with the broadest strategy spectrum and greatest scale and everyone else, for the time being. After this line comes the next tier of players who tend to have a more focused spectrum of strategies which are more highly tethered to a single product class, such as cash, options, or futures. This is where the subject of this case study on Hudson River Trading, LLC comes into the picture.
Furthermore, given the market dynamics and competitive impediments outlined above, it is becoming increasingly more challenging to scale a trading business. HRT is unique amongst its competitors for navigating the terrain to a dramatically new level of scale over the past three years. Overcoming these challenges was made possible by the acquisition of Sun Trading, LLC in Q1 2018. That event is a centerpiece for the story that follows.
Data Sample
The Storyboard and select findings contained in this report represent the analyst’s interpretation of a total of at least 73 regulatory reports representing Hudson River Trading, LLC (HRT), its predecessors and certain affiliated entities, including (most notably) HRT Financial, LP (HRTF), HRT Execution Services, LLC (HRTX, formerly known as Sun Trading, LLC), Hudson River Trading Europe Limited (HRTE), and Sun Trading International Limited (STI), among others.
The supporting data sample is comprised specifically of the following:
- 24 quarterly 13F2 holdings reports (including 13F-HR/A amendment reports, wherever applicable) for the 6-year time range beginning December 31, 2014 (or, Q4 2014) and ending September 30, 2020 (or, Q3 2020) for HRT Financial, LP (HRTF; formerly known as HRT Financial, LLC as of November 2020);
- 9 annual FOCUS reports (on Forms X-17A-5 and X-17A-5/A, wherever applicable) for the years ending December 31, 2011 thru December 31, 2019 filed by HRT Financial, LP (HRTF;
- formerly known as HRT Financial, LLC as of November 2020) with the SEC, FINRA and SIPC;
- 16 annual FOCUS reports (on Forms X-17A-5 and X-17A-5/A, wherever applicable) for the years ending December 31, 2004 thru December 31, 2019 filed by HRT Execution Services, LLC (HRTX; formerly known as Sun Trading, LLC for the period beginning 2004 and ending 2017) with the SEC, FINRA and SIPC;
- 11 full account reports disclosing financial and operational data for the years ending December 31, 2009 thru December 31, 2019 filed by Hudson River Trading Europe Ltd (HRTE) with the United Kingdom’s registrar of companies, Companies House;
- 13 full account reports disclosing financial and operational data for the years ending December 31, 2005 thru December 31, 2017 filed by Sun Trading International Limited (STI; formerly known as EOS Trading Limited for the years 2005, 2006 and 2007) with the United Kingdom’s registrar of companies, Companies House;
- Any other peripheral data or content referenced in this report that was available from open and public sources or searchable on the surface internet; and, Contextual modeling, exhibits, case studies, Feed posts and/or any other pre-existing content from the analyst’s research library.
Note: Both Hudson River Trading Europe Ltd (HRTE) and HRTEU Limited (Dublin) submit best execution venue reports for RTS 27 and 28 under MiFID II due to their status as systematic internalisers (SIs). As of the development of this report, any modeling that may result from this data remains in process, and therefore, not included in this case study.
Furthermore, in US equivalence to European SIs, HRT Execution Services (HRTX) is known as an electronic liquidity provider (ELP). ELPs, alternative trading systems (ATSs), national exchanges, and other market centers typically file monthly Rule 605 reports on order execution quality for “covered orders” in National Market System (NMS) stocks. Orders for which customers request special handling are excluded from the definition of covered orders. Though the analyst identified Rule 605 reports on covered orders for many other ELPs - like Citadel Securities, GTS Securities, IMC Financial Markets, Jane Street, Two Sigma Securities, Virtu Financial, and Latour Trading - HRTX’s 605 reporting consistently reported “no covered orders.”
Table of Contents
- Introduction
- Data Sample
- Glossary
- Table of Contents
- Table of Exhibits
- Storyboard
- History Lesson
- European Risk
- US Risk
- US Equity Strategy
- US Option Strategy
- Comparative Analysis
- Revenue Estimation Model
- Conclusion
- Next Steps
- Appendix I - Vignettes
- Cusips
- Dashboard
- Appendix II - Supplemental Exhibits
- European Trading Entities
- US Trading Entities
- Appendix III - Landscape
- Alpha Capacity Elasticity
- Historical Perspective
- Key Landscape Drivers
- About the Publisher
- The Analyst
Table of Exhibits
Exhibit 1A: 25 Leading Proprietary Trading Firms w/ US and EU Trading Affiliates, by Founding Year
Exhibit 1B: 25 Leading Proprietary Trading Firms w/ US and EU Trading Affiliates, by Founding Year
Exhibit 2: Jason E. Carroll - Broker Registration History, 2006-2020
Exhibit 3: Jason E. Carroll - Broker Employment History, February 2002 - Present
Exhibit 4: Hudson River Trading, LLC - Global Constellation of Operating and Holding Entities, 2020
Exhibit 5: Hudson River Trading, LP - Global Office Locations, 2020
Exhibit 6: Sun Trading International Limited - Securities Values (US$ Millions), 2013-2017
Exhibit 7: Sun Trading International Limited - Net Securities Value (% Total Gross Value), 2013-2017
Exhibit 8: Sun Trading International Limited - Headcount by Role, 2008-2017
Exhibit 9: Sun Trading International Limited - Total Revenue by Region, 2005-2017
Exhibit 10: Sun Trading International Limited - Margin Analysis, 2006-2017
Exhibit 11: Hudson River Trading Europe Ltd - Gross Securities Value by Product Class, 2012-2018
Exhibit 12: Hudson River Trading Europe Ltd - Securities Values, 2009-2019
Exhibit 13: Hudson River Trading Europe Ltd - Core Strategy Components, 2018
Exhibit 14: Hudson River Trading Europe Ltd - Net Securities Value (% Gross Value), 2012-2019
Exhibit 15: Hudson River Trading Europe Ltd - Revenue by Region (% Total Revenue), 2011-2015
Exhibit 16: Hudson River Trading Europe Ltd - Revenue by Country (% Total EU Revenue), 2013-2015
Exhibit 17: Hudson River Trading Europe Ltd - Revenue Sources, 2009-2019
Exhibit 18: HRTE / STI - Estimated and Observed Revenue Per Employee (RPE), 2009-20120E
Exhibit 19: HRTF / HRTX - Business Activities by Broker-Dealer Entity, 2020
Exhibit 20: Hudson River Trading, LP - Exchange / Regulatory Approval Chronology by Entity, 2003-2020
Exhibit 21: HRT Financial, LP - Securities Value Analysis, Q4 2014 - Q3 2020
Exhibit 22A: HRT Financial, LLC / Sun Trading, LLC - Gross Securities Value, 2004-2020E
Exhibit 22B: HRT Financial, LLC / Sun Trading, LLC - Gross Securities Value, 2004-2020E
Exhibit 23: HRTF - Gross Securities Value by Asset Class (% Total Gross Value), 2012-2019
Exhibit 24: HRTF - Gross Securities Value by Product Class (% Total Gross Value), 2012-2019
Exhibit 25: HRTF - Gross Equities Value by Product Class (% Total Gross Value), 2012-2019
Exhibit 26: HRTF - Gross Fixed Income Value by Percentage (% Total Gross Fixed Income Value), 2012-2019
Exhibit 27: HRTF - Gross Fixed Income Value by Percentage (% Total Gross Fixed Income Value), 2012-2019
Exhibit 28: Citadel Securities, LLC - Gross Value by Asset and Product Class (% Total GV), 2009-2018
Exhibit 29: Two Sigma Securities, LLC - Gross Value by Product Class (% Total GV), 2012-2018
Exhibit 30: Jane Street Group, LLC - Gross Value by Asset and Product Class (% Total GV), 2008-2019
Exhibit 31: Sun Trading, LLC - Gross Equities Value by Percentage (% Total Gross Equities Value), 2008-2019
Exhibit 32: HRT Financial, LLC - Securities Value Analysis, 2012-2020E
Exhibit 33: Sun Trading, LLC - Securities Value Analysis, 2012-2020E
Exhibit 34: Sun Trading, LLC - All Positions Net Securities Value (% Total GV), 2012-2020E
Exhibit 35: HRT Financial, LLC - All Positions Net Securities Value (% Total Gross Value), 2012-2020E
Exhibit 36: Sun - Gross Futures and Forwards Fair Value by Asset Class ($ Millions), 2009-2017
Exhibit 37: HRT Financial, LLC / Sun Trading, LLC - Estimated and Observed Members’ Capital, 2004-2019
Exhibit 38: HRT Financial, LLC / Sun Trading, LLC - Estimated Implied Leverage*, 2004-2019
Exhibit 39: HRTF / Sun / Select Competitors - Estimated Implied Leverage*, 2004-2019
Exhibit 40: HRT Financial, LLC / Sun Trading, LLC / Select Peers - Gross Securities Value, 2004-2019
Exhibit 41: HRTF - Avg. 13F Position Concentration by Percentage (Pre-/Post-Sun Acquisition), Q4 2014 - Q3 2020
Exhibit 42: HRT Financial, LP - 13F Positions by Percentage (% Total 13F Positions), Q4 2014 - Q3 2020
Exhibit 43: HRT Financial, LP - 13F Positions by Cash Products, Q4 2014 - Q3 2020
Exhibit 44: HRT Financial, LP - 13F Gross Values by Product Class (% Total GV), Q4 2014 - Q3 2020
Exhibit 45: HRT Financial, LP - 13F Gross Values by Cash Products, Q4 2014 - Q3 2020
Exhibit 46: HRT Financial, LP - Avg. 13F Position Value by Cash Percentage ($ Millions), Q4 2014 - Q3 2020
Exhibit 47: HRT Financial, LP - Average 13F Cash Position in Shares by Percentage, Q4 2014 - Q3 2020
Exhibit 48: HRTF - Net Securities Value by Percentage (% Total Gross Product Class Value), 2012-2019
Exhibit 49: Sun Trading, LLC - Net Securities Value by Percentage (% Gross Product Class Value), 2004-2019
Exhibit 50: HRT Financial, LP - 13F Derivative Positions, Q4 2014 - Q3 2020
Exhibit 51: HRT Financial, LP - 13F Put-Call Position Ratio by Percentage, Q4 2014 - Q3 2020
Exhibit 52: HRT Financial, LP - 13F Gross Values by Derivative Products, Q4 2014 - Q3 2020
Exhibit 53: HRT Financial, LP - 13F Net Option Value by Percentage (%)*, Q4 2014 - Q3 2020
Exhibit 54: HRT Financial, LP - 13F Net Option Value by Percentage (%)* - Wide Axis, Q4 2014 - Q3 2020
Exhibit 55: HRT Financial, LP - 13F Net Option Value by Percentage (%)* - Tight Axis, Q4 2014 - Q3 2020
Exhibit 56: HRT Financial, LP - 13F Net Option Value by Product Class ($)*, Q4 2014 - Q3 2020
Exhibit 57: HRT Financial, LP - Average Stock Position in Shares, Q4 2014 - Q3 2020
Exhibit 58: HRTF and Select Competitors - Ranking of Avg. Stock Position in Shares, Q4 2014 - Q3 2020
Exhibit 59: HRTF - 13F Portfolio Concentration Analytics (% Total 13F Gross Value), Q4 2014 - Q3 2020
Exhibit 60: Latour Trading - 13F Position Ranking by Value - All Positions, Q4 2012 - Q3 2020 (2-Yr Int.)
Exhibit 61: XTX Markets, LLC - 13F Position Value Ranking - All Positions, Q4 2019 - Q3 2020
Exhibit 62: HRTF - 13F Position Value Ranking - All Positions (Pre-Sun), Q4 2014 - Q4 2017 (1-Year Int.)
Exhibit 63: HRTF - 13F Position Value Ranking - All Positions, Q4 2014 - Q3 2020 (~1-Year Int.)
Exhibit 64: Hudson River Trading, LLC - Estimated Global Headcount*, 2004-2020E
Exhibit 65: HRTE / STI / Competitors - Estimated and Observed Revenue Per Employee (RPE), 2009-2020E
Exhibit 66: Hudson River Trading, LLC - Estimated Revenue by Affiliate, 2004-2020E
Exhibit 67: HRT / Sun - Pro Forma Estimated Revenue by Affiliate, 2004-2020E
Exhibit 68: Hudson River Trading, LP - Pro Forma Shareholders’ Capital ($Millions), 2004-2019
Exhibit 69: HRT Financial, LP - Unique Cusips, Q4 2014 - Q3 2020
Exhibit 70: HRT Financial, LP - Total 13F Position Count, Q4 2014 - Q3 2020
Exhibit 71: Sun - Gross Value by Percentage (P1); Members’ Capital (P2); Est. US Revenue (P3), 2004-2019
Exhibit 72: Hudson River Trading Europe Ltd - Headcount, 2009-2019
Exhibit 73: Hudson River Trading Europe Ltd - Avg. Annual Compensation Per Employee*, 2009-2019
Exhibit 74: HRTE vs. STI - Shareholders’ Capital, 2005-2019
Exhibit 75: Hudson River Trading Europe Ltd - Margin Analysis (% Total Revenue), 2009-2019
Exhibit 76: Sun Trading International Limited - Avg. Total Annual Compensation* Per Employee, 2008-2017
Exhibit 77: Sun Trading International Limited - Revenue Per Employee, 2008-2017
Exhibit 78: HRTE / STI - Pro Forma Revenue, 2005-2019
Exhibit 79: HRTE vs. STI - Gross and Net Securities Values, 2009-2019
Exhibit 80: HRT Financial, LP - Estimated Portfolio Leverage, Q4 2014 - Q3 2020
Exhibit 81: HRT Financial, LP - Total 13F Shares and Share Equivalents by Percentage, Q4 2014 - Q3 2020
Exhibit 82: HRTF - Avg. 13F Shares by Percentage (Pre- and Post-Sun Trading Acquisition), Q4 2014 - Q3 2020
Exhibit 83: HRT Financial, LP - Avg. 13F Position Value (% Total 13F Gross Value), Q4 2014 - Q3 2020
Exhibit 84: HRTF - Avg. 13F Option Position Gross Value by Percentage ($ Millions), Q4 2014 - Q3 2020
Exhibit 85: HRTF - Avg. 13F Option Position in Share Equivalents by Product Class, Q4 2014 - Q3 2020
Exhibit 86: HRT Financial, LLC - Net Securities Value by Asset Class (% Total Gross Value), 2012-2019
Exhibit 87: HRT Financial, LLC - Net Securities Value by Product Class, 2012-2019
Exhibit 88: Sun Trading, LLC - Members’ Capital, 2004-2019
Exhibit 89: Sun Trading, LLC - Gross Securities Value by Product Class ($ Millions), 2004-2019
Exhibit 90: Sun Trading, LLC - Net Securities Value by Product Class ($ Millions), 2004-2019
Exhibit 91: Toro Trading, LLC - Securities Value Analysis ($ Millions), 2007-2012
Exhibit 92: Sun Trading, LLC w/ Toro Trading, LLC - Securities Value Analysis ($ Billions), 2004-2019
Exhibit 93: Sun Trading, LLC - Estimated US Revenue ($ Millions), 2004-2019
Exhibit 94: Sun Trading, LLC / Sun Trading International Ltd - Est. Global Revenue by Region, 2004-2019
Exhibit 95: Annotated Framework Hypothesis - Technical and Human Capital Leverage Benchmarks
Exhibit 96: Converting Framework Hypothesis into Map of Strategy Categories, Manager Coordinates
Exhibit 97: Top 100 Players in US Listed Market Structure - The Analyst's “Structural Alpha Zone” 2019
Exhibit 98: Asset Management Ecosystem Map With Liquidity Pools, Top Manager Selections
Exhibit 99: Market Ecosystem Information Consumption-Dissemination Mechanism
Exhibit 100: Information Asymmetry Waves and Alpha Capacity Elasticity
