Winning quant strategy

T

tonyzhou

What strategy and theory is used by KCG, Getco, etc for equity market making? They use GARCH? microstructure? Why other company cannot simply copy the strategy and drive the advantage to zero? Or a slightly variance of a theory is good enough to keep them alive? Or no matter how competitive is, they can just keep their edge?
 
KCG/Getco buy equity order flow from retail brokers ("wholesaler payment for order flow"), so they jump the queue on everyone else; the cost is worse executions for everyone else (including those same retail broker customers), but, hey, the equity market is fragmented and complicated, so who really notices? That is their biggest "edge", and since its very value is based on exclusivity, it's not available to anyone outside of a few large trading operations who form an oligopoly.
 
I believe GETCO and Knight merged forming KCG in 2013 after they and others bailed out Knight after the 2012 incident. It's unclear to me whether you're referring to them as separate entities or not. As mentioned above, their main business is market making. They're very involved in execution services; I don't know if it still exists, but GETCO operated its own dark pool and was also a designated market maker for NYSE. The type of market making they do is entirely out of reach for smaller entities so unless Virtu wants to copy them, their strategies will likely remain pretty novel. I can't speak to whether they use GARCH or any specific models, but they probably understand market microstructure as well as anybody. Interesting question.
 
In its infancy a unique strategy matters, but at this point I think it's more about their speed and positioning in the market. I'm sure many shops have a similar or the same strategy but due to the sheer speed and volume it's hard to compete. For many small firms the up front investment in infrastructure is a cost that is hard to justify.
 
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