XTX [Invades] Markets

At age 43, Alexander Gerko the founder of upstart proprietary trading juggernaut, XTX Markets Limited (XTX) is a modern capital markets phenomenon... 

As the author will demonstrate in this case study, Gerko is not a phenomenon simply because his quantitative methods appear to provide a generalizable and transferable trading edge. They do. He’s not a phenomenon because his technical infrastructure allows him to scale trading strategies - simultaneously and reliably in multiple asset classes and in multiple regions. It does. He’s not a phenomenon simply because his organizational structure - based on a relatively small, cohesive, and efficient team delivers unprecedented “operational alpha.” Check. Moreover, he’s not a phenomenon because he’s established expansive connections with exchanges and other liquidity venues as well as extensive bilateral partnerships with client counterparties. Been there, done that. And, he’s especially not a phenomenon because he’s taken a consistently vocal public stand on matters of market structure and common practice. He certainly has… 

No, Alex Gerko is a phenomenon because he has been the visionary force behind all of these highlights during a period of hyper-competition among proprietary electronic liquidity providers (ELPs); a period when new entrants - much less new entrants who capture significant market share from proprietary and traditional incumbents alike - have become increasingly rare… 

Perhaps as fascinating as the feat itself is the openness - and frankly, nonchalance - with which he and his team are telling - and showing - us the pillars of how they do what they do. From 2018: 

“Our cross-asset approach to quantitative research means that our core model is transferable across markets and instruments. It means we can be both nimble and confident that we can provide quality liquidity to the market [while quoting] two-way prices at very narrow bid/offer spreads. This is a result of our unique model, risk management and deep understanding of market structure combined with our solid relationships with venues and clients.” 

Translation: XTX is constantly solving their own version of a Sudoku puzzle. It leverages the fact that markets - and market actors - are interconnected in predictable ways and then employs advanced methods of machine learning and pattern recognition on the data exhaust from that interconnectedness to make those predictions… 

Now, lest we be accused of lathering too much praise on one individual, Gerko certainly had help from the early phases of the XTX journey. Among them was one guy who made a critical difference… 

However, before we get to all that, let’s start off properly with a bit of backstory about how - and why - we arrived here: Earlier in 2022, the publisher was on its way to developing Part II of its case study series “The Proprietary Traders” which, after focusing on a global roster and select rankings for proprietary trading firms (or “prop firms”) in Part I, was set to focus largely on revenue estimation for many of those leading prop firms. That research is still ongoing. Yet, when we arrived at XTX our incremental findings were so fascinating that we felt that it was important and timely to dig deeper into this specific story. Here’s why: 

The author is firmly on the record about how the technology-enabled capital markets ecosystem is fiercely - perhaps, prohibitively - competitive. Given our foundational focus on the secretive world of proprietary trading firms -and their hyperactive trading strategies - our research library is full of examples of how trading in predominantly listed markets is dominated by a few large, seemingly unbeatable, multi-strategy and multi-regional players. In other words, what we call the “structural alpha zone” of the capital markets ecosystem has become increasingly concentrated. 

Another way to think of this dynamic is that the barriers to entry - to become a successful market maker in US equities from scratch, for instance - are extremely high; higher than they’ve ever been. The investment in intellectual property, technical infrastructure, and human capital necessary to be successful in this space keeps increasing. Intangible factors - timing, serendipity, and culture - play a role, too. 

In turn, there have been very few new players entering - and successfully scaling - hyperactive trading strategies (an array that includes market making). XTX is an exception to all that. We have never witnessed a trading firm scale as quickly, in so many places, and achieve so much success in the modern technology-enabled market era... 

Furthermore, looking at XTX’s genesis and foundation in the context of the broader proprietary trading community yields considerable insight. Generally, beginning way back in the 1980’s, there were waves of prop firms being born. These waves typically occurred in response to technical innovations, new securities products, and market structure evolution. They also tended to stick to a product, asset class or region for years...

As the report will demonstrate, XTX has broken that mold where - in its first few years as an independent company - it achieved a leadership position in more than one product or asset class, and in more than one region. As a reminder for some of the competition XTX has been up against, Exhibit 1, next page, presents a ranking of leading proprietary trading firms - including US and European trading affiliates - by founding year. Here, XTX’s founding in 2015 makes it the youngest of the leading  proprietary trading firms in the world.

Exhibit 2: GSA Capital Partners LLP - Pro-Forma Revenue Analysis (£ Millions), FY2005-FY2021

DATA  SAMPLE 

The Storyboard and select findings contained in this case study represent an interpretation of a total of at least 200 documents, filings and reports representing 25 affiliated entities of the “XTX group of companies” (hereinafter known as XTX or XTX Group), including - most notably ‐ XTX Markets Limited (London) and XTX Markets, LLC (New York), among others. 

The supporting data sample for this report is comprised specifically of the following: 

• 7 annual full account reports disclosing financial and operational data for the years ending December 31, 2015 thru December 31, 2021 filed by XTX Markets Limited (London) with the United Kingdom’s registrar of companies, Companies House;
• 1 annual full account report disclosing financial and operational data for the year ending December 31, 2021 filed by for XTX Markets Trading Limited (London) for fiscal year ending December 2021 with the United Kingdom’s registrar of companies, Companies House;
• 11 quarterly 13F holdings reports (including 13F-HR/A amendment reports, wherever applicable) for the nearly 3-year time range beginning December 31, 2019 (or, Q4 2019) and ending June 30, 20202 (or, Q2 2022) filed by XTX Topco, Ltd wherein XTX Markets, LLC (New York) is listed as an “other included manager” as of Q1 2021 and XTX Markets, LLC as the filing manager prior to Q1 2021;
• 3 4 annual FOCUS reports (on Forms X-17A-5 and X-17A-5/A, wherever applicable) for the years ending December 31, 2018 thru December 31, 2021 filed by XTX Markets, LLC with the SEC, FINRA and SIPC;
• 1 annual FOCUS report (on Forms X-17A-5 and X-17A-5/A, wherever applicable) for December 31, 2021 filed by XTX Execution Services, LLC (New York) with the SEC, FINRA and SIPC;
• 18 monthly execution quality reports (on Form 605) beginning March 2021 and ending August 2022 filed by XTX Execution Services, LLC with FINRA;
• 1 corporate compliance and financial profile for XTX Markets Pte. Ltd. (Singapore) covering financial highlights for the 3 years ending December 31, 2019, December 31, 2020, and December 31, 2021 filed with Accounting and Corporate Regulatory Authority (ACRA) of Singapore;
• 3 annual reports for XTX Markets SAS (Paris) covering 3 years ending December 31, 2019, December 31, 2020, and December 31, 2021 filed with Institut National de la Propriété Industrielle (INPI);
• 52 corporate documents related to XTX Markets LLP (Mumbai) for the period beginning August 24, 2019 and ending October 4, 2021 originally filed with Securities and Exchange Board of India (SEBI);
• 139 corporate documents related to XTX Securities Private Limited (Mumbai) for the period beginning May 30, 2019 and ending November 10, 2021 originally filed with Securities and Exchange Board of India (SEBI);
• 3 annual full account reports disclosing financial and operational data for the years ending December 31, 2018 thru December 31, 2020 filed by XTX Investments Limited (Cayman) with the United Kingdom’s registrar of companies, Companies House;
• 3 annual full account reports disclosing financial and operational data for the years ending December 31, 2018 thru December 31, 2020 filed by XTX Investments UK Limited (London) with the United Kingdom’s registrar of companies, Companies House;
• 2 annual full account reports disclosing financial and operational data for the years ending December 31, 2020 thru December 31, 2021 filed by XTX Markets Technologies Limited (London) with the United Kingdom’s registrar of companies, Companies House;
• 7 annual full account reports disclosing financial and operational data for the years ending December 31, 2015 thru December 31, 2021 filed by XTX Research LLP (London) with the United Kingdom’s registrar of companies, Companies House;
• 4 annual full account reports disclosing financial and operational data for the years ending December 31, 2017 thru December 31, 2020 filed by XTX Holdings Limited (Cayman, formerly Malta) with the United Kingdom’s registrar of companies, Companies House;
• 1 annual full account report disclosing financial and operational data for the year ending December 31, 2021 filed by XTX Holdings (UK) Limited (London) 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;
• Competitive and other contextual modeling, exhibits, case studies, Feed posts and/or any other pre‐ existing content from the publisher's research library.