Yesterday, we looked at whether GS was front-running, well, everyone, via a sniffer program that saw all trades on the NYSE prior to their execution. Theoretically, this would allow GS to buy (or sell) stocks, selling (or covering) them back to the now compromised trader towards the end of their purchase (sale). Or, they could take a position, assuming there was more flow behind the initial order. Or, they could arbitrage a few fractional cents each trade.

The idea is fascinating. If the allegations are true — and I have no idea if they are — there are all sorts of fascinating repercussions.

Consider whether any of these are realistic, or even possible:

•  The Goldman Sachs vig — a tax really — accompanies any trade large enough to catch their software’s attention: Meet the algo parameters, pay a GS tax;

• Why hasn’t the NYSE caught this? Is this another nail in the coffin of SRO (self-regulating organizations) ?

• Alternatively, if they saw it, why haven’t they done anything about it? Its not like the NYSE is run by Goldman alums (oh, wait . . . )

• What corporate or regulator can challenge GS? Congress? SEC? Federal Reserve?  How powerful is Goldman?  Is anyone, aside from Matt Taibbi, willing to take them on ?

• Perhaps Goldman Sachs is less smart as a group than previously believed — their returns are a function not of genius, but of cheating.

Now for a does of reality.

How might this work? The GS sniffer sees an order for 1 million shares. The computers pick up a 100,000 shares and based upon conditions, put them out for sale at some price higher. At 10 cents, its $10,000. In order for this to amount to any real amount of money, it would have to happen 1,000s of times a day. If GS’ program had 10% of daily volume of a billion shares, picking up a dime, its only $10 million per day.

One the other, hand, in what has been described by the pros as one of the most challenging trading environments in history, Goldman Sachs Trading Revenue is set to make all time records.

Any thoughts on this? How likely is a Goldman Sachs cheater program?

>

Previously:
Is Goldman Stealing $100 Million per Trading Day? (July 9, 2009)

http://www.ritholtz.com/blog/2009/07/is-goldman-stealing-100-million-per-trading-day/

Sources:
Goldman Sachs Trading Revenue May Beat Record
Christine Harper
Bloomberg, July 9 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6qIBznBttBc

Goldman Sachs’s $100 Million Trading Days Hit Record
Christine Harper
Bloomber, May 6

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7HGVAn8w73Y&:

Category: Markets, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

113 Responses to “The Goldman Sachs Tax”

  1. Byno says:

    Barry,

    Maybe my tinfoil hat is restricting oxygen flow to the brain, but I think we might be talking about a lot bigger scalps on a lot fewer trades. In your example, a 1M block trade in MSFT isn’t going to be worth doing, because that kind of volume is easily absorbed.

    But what if we’re talking a mid cap stock? 1 million shares is probably worth several percent, and on a stock such as, say, Autozone, that’s dollars, not cents. Granted, you’d have to have the perfect set of circumstances to match GS’s performance from the other day, but if the average scalp is $1, the number of executions just shrank by a lot. And, with the market’s volatility of late, those kind of scenarios should be plentiful.

    It’s 7:30 and I haven’t had my coffee, so that may be drivel.

  2. VennData says:

    Would make a great “trading system” ad on CNBC… “Learn to trade like the big boys. Front run your neighbor’s orders by tapping into their broadband connection… then scalp ‘em. I’m up 37% this year alone! Download this software for a free trial today.”

  3. constantnormal says:

    How about if you don’t do the front-running through the stock, but instead via options? i.e, watch the transaction stream for large blocks of a stock moving in one direction of the other and seek out arbitrage situations in the options market, exploiting the lag time between the option price movement and that of the underlying equity? One would also pick up some leverage that way, boosting the profits from such a scheme.

    All you would have to look for is changes in buying momentum in the stock, and you could hit the option in several places (strike prices+maturities) simultaneously, before the options market was even aware of the price change in the stock. By spreading the activity across several places in the put/call/strike price/maturity spectrum, it would be pretty hard to detect and would also spread your risk (of which there would be precious little to begin with).

  4. wunsacon says:

    With everything that’s been going on, I at least want to see an investigation.

  5. constantnormal says:

    It strikes me that this thread might well serve as a road map for Goldman to “improve” their trading engine, which will almost certainly get a major rewrite following its theft. Is GS paying you a “finder’s fee”, Barry?

  6. stnecld5 says:

    You also assume that this is only happening at the NYSE. I’d be willing to guess they do the same with fixed income and currencies at the CME, bringing them much closer to that $100 mil a day number. Would be even more efficient if they could see where the trades were coming from, possibly front-running large positions from other major banks and financial institutions. As a trader, we’ve always believed that Goldman, et. al were a step ahead of the market….maybe now we know why.

  7. I wish!

    They can investigate, GS will pay a $5M fine — half a days trading profits — then back to biz as usual…

    Does anyone really doubt that outcome?

  8. Michael M says:

    The SEC doesn’t care:

    “The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to trade against the machines without further regulation.

    “We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the managers themselves to make sure other traders aren’t manipulating their models.”

    http://online.wsj.com/article/BT-CO-20090618-707189.html

    but GATA does:

    http://zerohedge.blogspot.com/2009/07/gold-anti-trust-action-committee-urges.html

    So does Jonathan Weil at Bloomberg:

    http://zerohedge.blogspot.com/2009/07/bloombergs-jonathan-weil-on-goldmangate.html
    http://www.bloomberg.com/apps/news?pid=20601039&sid=aFeyqdzYcizc

    in general Zero Hedge is all over this one.

  9. danm says:

    In the mid 90s, I met with the head of IT for one the Big Broker Firms. It was to discuss how we could leverage our technology in order to better manage our information.

    Let me tell you that when I came out of the meeting it was clear that they were leveraging their technology (i.e. trading systems) in order to be ahead of the market.

  10. burrite says:

    Not sure I quite get your final point, where u say it “only” amounts to $10 million/day. Isn’t that $2.5bn/year (ie, a pretty good chunk of GS profits in a normal yr)?

    ~~~

    BR: Chump change! (heh heh)

    They do $15-25 billion in profits in a good year !

  11. wally says:

    What happens when they start front-running their own trades?

  12. Clem Stone says:

    It seems to me like it would be a lot easier and more profitable for GS to front run their own upgrades/downgrades. They’ve got a powerful short squeeze machine at their disposal whenever they feel like using it.

  13. cvienne says:

    At least we can keep it all simple now & call them

    “Goldman Tachs”

  14. jessica says:

    I have no capacity at all to judge the likelihood that Goldman Sachs is cheating.
    I am struck though that what they are accused of is what some people thought Bernie Madoff was doing.

    I don’t think back to biz as usual is actually a possibility. Their alleged activity may be a bit too abstract for the public at large, especially with a compliant mainstream media to confuse the issue on their behalf, but I think it would profoundly affect the reputation for integrity of the entire US financial system in the eyes of the pros and the big boys. I mean, if the Chinese and the Saudis and the other holders of massive cash want to invest in a corrupt system, they can do that at home.

    Also, at some point, there is the possibility of a “torches and pitchforks” third party that campaigns on the single issue of destroying the financial monster. Could there be a “Cross of Goldman” moment, perhaps on Twitter and YouTube?

    Another interesting point is that it may be impossible to undo the damage of the allegations. If you are the Chinese Central Bank or any American for whom Wall Street is hard to understand but easy to fear, exactly what organization could possible give Goldman Sachs a clean bill of health and be believable?

  15. larster says:

    So, we have an investigation that absolves GS. The distrust and the conspiracy theories will still perculate. If an investigation proves that there was “cheating”, everyone will distust the “free market”. This is a lose-lose either way.

  16. taylorhr says:

    “Only 10mm a week”? That’s “only” 2.6 billion a year, give or take. Add that to their other lines of business profit, and there’s their mystique.

  17. Mike in Nola says:

    Fun interview on Bloomberg. http://feedproxy.google.com/~r/ZeroHedge/~3/Z1rUANL9Hyk/bloombergs-jonathan-weil-on-goldmangate.html

    There really should be an investigation. I nominate Elliot Spitzer to head it. No jokes about “head.”

    A couple of theories:

    1. CNBC advertises trading programs for SOHO users all day. Don’t pay that much attention, but I do notice one from Fidelity. There are others. Also, I see stories about sales presentations to large crowds showing them how much money individual dopes can make without actually working or learning anything other than how to load this software on their computer and run it. If Goldman had a shll buy some of these programs, a group of smart programmers could decompile them and see how they work. Not that hard, I wrote my own decompiler for fun on the Apple II way back when to see what some programs were doing; for profit, you could get a lot better peole than me. Then you take advantage of the algorithms in the programs. Could be front running. Could be sending false signals. Who knows til you look. Drain the shmucks. Don’t know how much that would bring in. Don’t know about Fusion IQ, but assume it is a bit longer term than what’s going on with Goldman.

    2. Seek simplicity. It may just be simple market manipulation as many here have suspected. With the aid of computers, GS can do an analog of the old pool operations of the 1920′s. Look for a security that makes a good target for manipulation, e.g. certain parameters of price, shares outstanding, avg. volume, P/E or whatever. Could be a stock, etf, bond, option or whatever. Have the program buy and sell (or sell and buy) to create the appearance of activity in the security. This attracts the attention of programs like those above or maybe the not quite as sharp programs of smaller outfits, or maybe even those of big outfits. Some of those program traders buy in. Then those not using programs notice that the security is active. Once a sufficient price change has occured, feed it back into the market on the way down (or up) to cover.

  18. OkieLawyer says:

    Barry (or anyone else that can answer this):

    Is “frontrunning” a form of insider trading, or is it completely different. I am ignorant of this area of the law.

    [BR: Insider trading is using non-public information about a company itself. Front running is using confidential info about a client’s stock purchase]

    My understanding of insider trading is trading on any information not available to the general public. Would this not be “information not available to the general public” and therefore be “insider trading?”

    Furthermore, I can’t believe that you could have customers sign a waiver that allows you to work against their interest. (Only on Wall Street…) Even if you were able to argue that successfully, the class of harm (for purposes of “standing”) would be far greater than just your own customers that you had sign a waiver. I would think that it would include anyone who was actively trading any stock as the price swings could affect all stocks, not just the ones traded.

  19. Clem Stone says:

    I guess trying to hide $100 million a day would not be very easy using my previous scenario or any other scenario i can think of right now. If it were me, i could buy a bunch of MSFT July $23 Calls today, then upgrade the stock tomorrow and easily double my money in the blink of an eye. But we’re talking relatively small potatoes money….enough to make me rich but not enough to make GS rich. So i dunno.

  20. thatsabet says:

    Did we not just learn that there are no free rides? MADOFF didnt have a down month either. Where there is a fortune there is a crime.

  21. Moss says:

    As BR suggests even if true the chances of GS being punished in an equitable way are minimal.
    All they care about is maximizing their profit. This scenario is just another example of how the financial hegemony, with GS as the head, has compromised the most basic aspects of fair play. The amount and actual mechanics of how are not that important, the intent is what bothers me.

  22. dead hobo says:

    Excellent post, young Ritholtz. All that is left is for you to recognize oil prices are based on the demand for financial instruments and not the demand or supply of oil and your awakening will be complete and your powers will truly be formidable.

  23. Mike in Nola says:

    Completely OT: anyone running Vista32 who wants a stock gadget might want to check this out:
    http://gallery.live.com/results.aspx?bt=1&q=stocks3

    It pulls in real time data from yahoo and has lots of options. Like it a lot after trying several. Main problem is getting symbols for some indexes and commodities. Need to use yahoo’s.

    Haven’t tried it on Vista64 or Win7 yet.

  24. emmanuel117 says:

    I find it more likely they use the GS alumni network, if you know what I mean.

  25. willid3 says:

    ot also. saw this today.what does every one think about it?

    http://www.chron.com/disp/story.mpl/business/steffy/6522397.html

  26. Mark Wolfinger says:

    How likely? Very.
    As a CBOE market maker we saw GS front run their customer orders. We lodged complaints, but the powers that be just ignored them.

  27. dead hobo says:

    emmanuel117 Says:
    July 10th, 2009 at 9:40 am

    I find it more likely they use the GS alumni network, if you know what I mean.

    reply:
    —————
    What’s it like to sell Girl Scout Cookies using a pass around sheet at GS? Do they use forward contracts to cover guaranteed sales? How do you price one? Does the GS Alumni Network help out as a matter of expectation? Or is is simple extortion … buy my cookies or no bonus for you?

  28. call me ahab says:

    BR Says-

    “Is anyone, aside from Matt Taibbi, willing to take them on ?”

    Taibbi had an interesting observation in his interview w/ Damian Hoffman the other day-

    “Unlike almost any other sector of society, Wall Street is a place where people are reluctant to issue very strongly worded statements in public because they are worried about how powerful companies will react. The financial press is captive to a lot of these companies like Goldman Sachs or Morgan Stanley. A lot of the hedge fund managers I talk with have many complaints, but they are afraid to speak because they don’t want an unfavorable response from the big players on Wall Street. So, the only people who can really complain are complete outsiders.”

    it appears that the Rolling Stone’s of the world are our new purveyors of truth because they have nothing to lose- hard journalism brings them critical acclaim and their fan base is immune from the likes of Goldman Sachs

  29. The Curmudgeon says:

    All I can say is that this is the biggest story to break since Lehman’s bankruptcy (a Goldman competitor) and AIG’s rescue (which, of course, saved Goldman from its impossibly over-leveraged vulnerability).

    This is not going away. I think the “cross of Goldman” comment is apt. There is a rising political leader out there somewhere that will be able to understand that this means that in many ways, the whole of the financial system, and even the exploitation of its self-created crisis, has morphed into one big fraudulent putsch by Goldman, and be able to exploit it for his advantage.

    And of course, it is insider trading, of the very sort that the feckless laws and regulations of the SEC are intended to prevent.

    For all those “efficient-market” theorists and apologists for investment banks, saying that they perform a valuable service by helping deploy capital to its most efficient uses, can you muster a defense for program trading that skims nickels and dimes off of transactions? Is capital that Goldman reduces to its possession by front-running the best and most efficient deployment of capital?

  30. bbishop says:

    curious if there was any change in goldman sachs’ relationship with the NYSE or access NYSE data after John Thain took over as CEO of the NYSE?

  31. Transor Z says:

    @jessica: “Cross of Goldman” moment — nice turn of phrase.

    @dead hobo:
    Slytherin kids don’t do the Girl Scout thing.

  32. constantnormal says:

    One thing here — if GS is perpetrating some sort of fraud via their trading software and privileged access to NYSE trading activity, then Sergey is in full possession of all the facts — and the proof thereof, as he has their software — and could easily become the tool of the prosecution (assuming there is any prosecutor with the cojones to take on GS) in legal actions against Goldman Sachs, that would be similar to the difficulties faced by Arthur Anderson from their entanglement in the Enron collapse.

    I can’t see Goldman complaining about the loss of their software if that were the case.

    But if it were … d’ya think that AIG would write me some credit default swaps against the fall of Goldman Sachs?

  33. I-Man says:

    @ Mark:

    “As a CBOE market maker we saw GS front run their customer orders. We lodged complaints, but the powers that be just ignored them.”

    I’ve heard this thing from people at the CBOE before too, from a source that I trust greatly, who has no reason to implement GS in anything they havent done.

    And I agree with you Barry, there will be some kind of shell investigation, they’ll get slapped on the wrist, and it will be back to biz as usual, because the folks that would regulate them, wont, because they either have people who have worked there high in the ranks, or because they’ve been paid.

    In any event, Goldman will likely find a better way to cheat, a “legal” way… of course.

    Just kind of makes you want to say: F*ck Goldman Sachs… If you are an American Tax Payer, or an honest Trader.

  34. Mike in Nola says:

    willid3:

    Interesting article. Hadn’t gotten to it in the paper yet as I always read here first. I suppose that’s the problem with papers these days.

    BTW, got the Houston Public Library to order Barry’s book. Was easy on their website with a link to yahoo and a little bit of talking it up. As a public service, others should do that in their towns. Unfortunately, not many of the general public will buy it, but they may read it if it’s on the shelf. It may also help some of the self educating young who can’t afford to buy such things; I was one 40 years ago.

  35. Moss says:

    @Curmudgeon;

    More likely that a DA with greater political aspirations will emerge to take them on. Think Rudy G. and E. Spitzer. We can only hope that someone with authority has the courage.

  36. call me ahab says:

    okie says-

    “I would think that it would include anyone who was actively trading any stock as the price swings could affect all stocks, not just the ones traded.”

    exactly- many have opined of front-running by the likes of Goldman Sachs on these very threads- including your’s truly-

    http://www.ritholtz.com/blog/2009/05/nasdaq-100-weekly-winning-streaks-1985-2009/#comment-167809

  37. franklin411 says:

    OT, but consumer sentiment for July came out at 64 vs 70 for June. That’s a green shoot when you consider how ludicrous some of the commentary was over last month’s outlier jobs number. It’s funny how one datapoint does not a trend make, unless it comports with our bearish bias of course!

  38. call me ahab says:

    geez franklin- you take completely bad news and spin it into “green shoots”

    makes me want to tie you to a chair and make you watch Glen Beck in a continuous loop

  39. constantnormal says:

    @willid3 9:42 am

    I saw the exact same similarities when I read John Kenneth Galbraith’s classic economic history of the Great Depression, The Great Crash of 1929. Everyone should read this excellent short work, to understand the mental obstacles we face.

    “Eerie” is exactly the word to describe the sensation, as one reads the refusal to recognize the symtoms, the blind faith that solution XYZ will turn things around, all the while ignoring the conditions that caused the downturn and scrambling for all they were worth to resurrect a long-departed economy of a few weeks/months/years earlier instead of addressing the situation at hand.

    Deflation is a very tough nut to crack, which is why central bankers (rightly) fear it over all other economic calamities, including hyperinflation.

  40. bergsten says:

    Leaving GS aside for a moment, let’s ponder what’s even possible…

    With sufficient resources one can place “the world’s fastest” computers in the same building, maybe even the same room as the NYSE (and probably other exchanges) ones. These can be connected to the NYSE networks at 10 gigabit speeds, easily 10-100x faster than anyone on the outside. Since the cables are short and directly connected there is virtually no latency (delay) in transmission or recption of message traffic.

    This, by itself, gives you a significant timing advantage.

    The next question is, now that you’re there, what data can you monitor, and what data can you intercept?

    If you’re allowed to be part of the transaction datastream “pipe” (say, you’re an Ethernet switch) you can easily insert your own messages (trades) ahead of intercepted ones, maybe even “dissapear” messages. There are some real problems here, though. FIrst of all, the exchange would have to be insane to allow any outside entity to do this. Secondly, the exchange would have to be insane to not encrypt these data (their knowledgable big customers would have insisted on this). Finally, such insertions would introduce additional latency into the pipe (message reception plus compute time plus new messages if any plus retransmit of the original message). Such latency, however small, would have been noticed by the other big users (has anyone considered there could be a whole SERIES of bigfoots doing the same thing?).

    If you’re allowed (or able) to ONLY monitor the pipe (but ahead of everybody else), you get an “information received” timing advantage. Such monitoring (unless completely illicit) would have to be with the acquiescence of the exchange (“Plunge Protection Team” access, perhaps?). If not sanctioned, you’d need amazingly fast computation ability to crack encryption real time and very sophisticasted algorithms to decide in microseconds what to do.

    I would think that both of these cases would be too risky to attempt as they’d be too easy to detect (just follow the wires) and too hard to cover up (too many people involved).

    So, if we eliminate these two possibilities what remains is what can be done really fast and quickly (pinging to detect pending orders for example, or front-running your own customer’s orders).
    One would have to be intimately familiar with order flow, flow priority, and “exchange membership at this level” costs and privileges to opine on what else could be done, how cost effective it would be, and its risk profile.

    Whatever it is, it sure seems to be making them money.

  41. hopeImwrong says:

    Imagine if this story was about the Chinese Government and the Hong Kong and Shanghai markets, instead of Goldman Sachs. How much more light would this be getting on CNBC and MSM?

  42. cvienne says:

    @Franklin

    Even your boy “dumbo ears” has to mince his words on this…

    Obama says economic recovery ‘a long way off’

    http://www.msnbc.msn.com/id/31842856/ns/world_news-europe

    He even said there the world has “apparently” avoided crisis (couldn’t go as far as to be sure)…

    What makes you so optimistic, besides the fact that you get paid by government?

  43. The Curmudgeon says:

    F411…your comment is not so off-topic. Consumer confidence is inextricably tied to the stock market, particularly the Dow, with an almost 1-1 correlation. There has been a pull-back recently for reasons unknown, but if the reality of the fraud that is the market, as represented by Goldman’s manipulations, become generally well-known, you can kiss consumer confidence, and the market, good-bye.

  44. call me ahab says:

    OT

    also- franklin- your observation please on the proposal to tax health benefits-

    that would be a crushing political blunder for the new prez- no?

  45. KidDynamite says:

    part 1: it’s funny how the world’s lack of understanding about what program trading really is morphs stories into theories like “GS is frontrunning orders”

    here’s what happens: Barry wants to buy 10k shares of IBM, so he throws an order into DOT (that means, electronically) with a $85 top. Now, everyone sees an $85 bid for 10k IBM. Well, a few years ago, people (we can call them GS) figured out that Barry might panic if the offers start to disappear, or even simply that if he’s showing a bid for 10k shares, the buy interest is stronger than the sell interest. So they decide to take the $85.01 and maybe the $85.02 offers – they buy the stock that is offered.

    Now GS is long IBM, and Barry is still bidding for it. note: there is nothing REMOTELY illegal here yet. This is NOT frontrunning. Also, GS doesn’t make any money doing this unless Barry capitulates. Now, the way GS does this is by using sophisticated computer programs, and doing it in small quantities, at high speeds, in hundreds of stocks at once. In addition, many of the marketplaces now offer rebates to PROVIDERS of liquidity – so if GS offers stock out (or bids for it) and their market is traded on, they get, say 2/10ths of a penny back from the exchange.

    So, after lifting the 85.01 offer, GS may even offer the stock back to barry at the same price, breakeven on the trade, JUST so they can earn the rebate. There is still nothing illegal here yet.

  46. KidDynamite says:

    Part II:
    So, after lifting the 85.01 offer, GS may even offer the stock back to barry at the same price, breakeven on the trade, JUST so they can earn the rebate. There is still nothing illegal here yet.

    Sadly, the public misunderstands this simple concept, and it gets morphed into “GS is manipulating the market” or “GS is frontrunning everyone,” when in reality, we’ve just progressed from people trying to outtrade each other, to COMPUTERS trying to outtrade people, to now computers trying to outtrade each other. Barry’s executions have to get smarter, so he uses an algorithm that only bids for 100 shares at a time instead of 10k… GS retaliates with algorithms that “ping” – sending out bids and offers trying to see if they can find the ones that instantly replenish, and then go back to strategy A – reacting to the bigger order.

    The end result is that we have much narrower spreads, and are paying a much smaller “vig” than we used to when specialists ran stocks for 12.5c spreads (And more!). The problem is that day traders watch stocks rip up and down on low volume and they panic (remember – PSYCHOLOGY is perhaps the key input in the market) – top ticking their buys and bottom ticking their sells, BEATEN by the computers. Is that the algorithm’s fault? Is GS to be hated because their computer is smarter than you? I don’t think so.

    Oh – and there is a ZERO percent chance GS is making $100mm a day doing this. NONE.

  47. flipspiceland says:

    If it walks like a duck, quacks like a duck, and swims like a duck, it’s not an armadillo.

  48. Transor Z says:

    Van Eck Phreaking?

  49. aitrader says:

    The computers pick up a 100,000 shares and based upon conditions, put them out for sale at some price higher

    Why? Isn’t GS a broker-dealer? Just sell short an equivalent amount at a fractionally higher price. I can’t remember when the NYSE moved from fractions to decimals (sometime in the 1980′s if memory serves). Front running plus short selling opens the window for broker-dealers to offset large trades with fractional differences on a short that would be seen as rounding errors.

    A similar tactic was used by a programmer long ago to put the interest payment rounding errors on savings accounts normally kept by the bank into his personal bank account. It wasn’t discovered at the bank as I recall. The guy who pulled it off got caught coming back into the US with $8 million USD in Russian diamonds hidden in his sock and confessed to the scam.

    GS is most likely doing the something similar with short trades that are bought back milliseconds later for a fractional profit in percentage terms constituting a “sure bet”and profit.

    There is another parallel that most would also call a scam. The vast majority of the Forex “market makers” run a similar scam against their clients and front run the larger transactions. Another parallelto the GS “scam” is that the most popular software used in the Forex world is also written by Russian programmers.

  50. KidDynamite says:

    Sadly, the public misunderstands this simple concept, and it gets morphed into “GS is manipulating the market” or “GS is frontrunning everyone,” when in reality, we’ve just progressed from people trying to outtrade each other, to COMPUTERS trying to outtrade people, to now computers trying to outtrade each other. Barry’s executions have to get smarter, so he uses an algorithm that only bids for 100 shares at a time instead of 10k… GS retaliates with algorithms that “ping” – sending out bids and offers trying to see if they can find the ones that instantly replenish, and then go back to strategy A – reacting to the bigger order.

    The end result is that we have much narrower spreads, and are paying a much smaller “vig” than we used to when specialists ran stocks for 12.5c spreads (And more!). The problem is that day traders watch stocks rip up and down on low volume and they panic (remember – PSYCHOLOGY is perhaps the key input in the market) – top ticking their buys and bottom ticking their sells, BEATEN by the computers. Is that the algorithm’s fault? Is GS to be hated because their computer is smarter than you or yours? I don’t think so.

    Oh – and there is a ZERO percent chance GS is making $100mm a day doing this. NONE.

    i refer you to the quote on this thread – the first comment – to sum it up:

    http://www.ritholtz.com/blog/2009/07/king-report-more-goldman-intrigue/

  51. Transor Z says:

    A similar tactic was used by a programmer long ago to put the interest payment rounding errors on savings accounts normally kept by the bank into his personal bank account.

    You sure that wasn’t the movie “Office Space”? :)

  52. aitrader says:

    Van Eck phreaking – using the radio signals sent out by CRT computer monitors to reconstitute the screen remotely via an antenna and amplifier tuned to the signal frequencies. Supposedly it can also be used to read keystrokes remotely when tuned to the internal keyboard chip’s frequency.

    LCD monitors are supposedly immune to this kind of eavesdropping.

  53. KidDynamite says:

    part 2:
    Sadly, the public misunderstands this simple concept, and it gets morphed into “GS is manipulating the market” or “GS is frontrunning everyone,” when in reality, we’ve just progressed from people trying to outtrade each other, to COMPUTERS trying to outtrade people, to now computers trying to outtrade each other. Barry’s executions have to get smarter, so he uses an algorithm that only bids for 100 shares at a time instead of 10k… GS retaliates with algorithms that “ping” – sending out bids and offers trying to see if they can find the ones that instantly replenish, and then go back to strategy A – reacting to the bigger order.

    The end result is that we have much narrower spreads, and are paying a much smaller “vig” than we used to when specialists ran stocks for 12.5c spreads (And more!). The problem is that day traders watch stocks rip up and down on low volume and they panic (remember – PSYCHOLOGY is perhaps the key input in the market) – top ticking their buys and bottom ticking their sells, BEATEN by the computers. Is that the algorithm’s fault? Is GS to be hated because their computer is smarter than you? I don’t think so.

    Oh – and there is a ZERO percent chance GS is making $100mm a day doing this. NONE.

    i refer you to the quote on this thread – the first comment – to sum it up:

    http://www.ritholtz.com/blog/2009/07/king-report-more-goldman-intrigue/

  54. KidDynamite says:

    barry – sorry if my post got posted mulitple times – nothing was showing up, so i broke it into two pieces… but they still weren’t showing up. apologies if it gets multi-posted.

    ~~~

    BR: You have “Vegas” in your URL — that’s a spam word, and why your posts keep getting caught inthe filter

  55. insite986 says:

    i think the chance that an unencrypted NYSE stream that pipes every trade directly through goldman’s basement is an absurd proposition. they may be up to some funny stuff with their algo trading, but this is grasping at straws.

    i am also hesitant to believe that, even if they COULD do this, they would even TRY. it would require a LOT of manpower to pull it off, and people talk. i don’t think they would take this kind of risk, as it’s a virtual CERTAINTY something like this would eventually come to light, either through loose lips, inside whisleblowers, etc.

  56. aitrader says:

    @ Transor Z

    http://www.bookrags.com/research/stanley-rifkin-omc/

    I am probably mixing up the movie and Rifkin. Same principle applies though to the GS stuff re: front-running.

  57. I-Man says:

    Dammit Kid D…

    How do you know this shit?!

    I wanna know this shit too.

    Looks like I gotta fav your blog.

  58. ReturnFreeRiskManager says:

    Could someone please comment on the black and white LEGAL issues at hand here? I suppose I am a bit ignorant in that realm. I read the white paper on Zero Hedge where all of these algo sniping strategies are explained. I also comprehend the grey area here that can be described as “cheating”. If GS is frontrunning I think a thorough investigation would uncover some instances that would lead to prosecution, fines, (slap on the wrist, right)etc. But I still see ending up where all new electronic trading strategies end up –in the sandbox with players kicking it in each others eyes until the playing field is leveled a bit. Maybe there will be some complaining about economies of scale…location, infrastructure, IT budget…ultimately dollars and global presence. But other Great Recession problems overshadowing eventually. Back to the white paper…if an algo sets its buy limit at 20.10 and GS pings it up to that limit, wont that be argued as some form of price discovery?

  59. darth beta says:

    You need to think like Goldielocks to undertstand this. It is not a question of cheating or not cheating, what Goldman does is skate the razors edge between ethical and unethical. The “Great American Bubble Machine” article did nice job of highlighting this.

    My guess on what Goldielocks does is not forntrun clients but use better technology to trade in micro seconds between slower dumber clients. Nothing really illegal about being better.

    The question is should trading technology be an “arms” race? To me the answer is no, providing liquidity is one thing, giving the largest most advance firms the ability to place their supercomputers on your system (as the NYSE does for a fee) to trade in microseconds is another.

  60. KidDynamite says:

    I-man – this was by business. That’s why i’m so defensive of program trading – not because i have any love for GS (i don’t) – but because PT is totally misunderstood and maligned due to fear that it’s computers like the T1000 stealing everyone’s money. It’s not – it’s just portfolio trading.

  61. CTB says:

    The underlying subtext of the Justice Department’s quick response to GS request for investigation is what annoys me the most. There are probably hundreds of cases of fraud that go without investigation every day. It is transparently preferential treatment.

    I think this South Park clip is apropos (… and it’s gone…):
    http://www.southparkstudios.com/clips/222624/?tag=and+it%27s+gone

  62. The Curmudgeon says:

    @Kid D…second I-man.

    But here’s the problem. Even if everything you say is true that GS couldn’t be doing this, GS making $700,000 per employee is not going to look good. Perceptions are reality, and the peeps will be looking for scapegoat on the next leg down. They’ll wonder how come Goldman keeps minting money when their 401K went from a 201K to about an 01K. Goldman might want a better answer than its because they’re so much smarter than everyone else, because a) most peeps wouldn’t believe it, or b) if they did, it’d make them hate Goldman more.

  63. Mannwich says:

    You guys are harshing my summer green shoots mellow.

  64. bergsten says:

    @ I-man
    “How do you know this s##t”…

    http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf

    (hat tip to whoever posted this link first…

  65. Pete from CA says:

    @bergsten & KidDynamite

    Thanks for your level-headed comments.

  66. Al Bergette says:

    This is no surprise to me.

    I too once met an IT guy at a Chicago dinner party who said he worked for a very large Wall Street firm which he did not name. What I’ll never forget him saying is that the average investor rarely has a chance given the computer program trading of the large firms.

    He explained the big firms are constantly tweaking there computer program to identify what is being bought and sold and then the program executes buying or selling action. He continued to explain that with the blocks of trades and the sums of money involved his firm made huge profits on spreads of nickles and dimes. He emphisized that a very important factor in all of this was the nanoseconds it took to identify what stock had the activity and the time it took to get in and out.

    He laughed as he said, oh and those high paid brokers? They just sit in front of the screen and watch the computer trading.

  67. I-Man says:

    @ bergsten:

    I’ve read that bro- even took some notes, and it still just scratches the surface for me… guess I gotta “padawan” under the Kid for awhile…

    Gotta say that as a “tape reader” or wannabe tape reader that this PT stuff absolutely fascinates me. Its like thinking you know the game, and then all of a sudden you take the shades off and you realize you didnt know what you thought you did.

    :)

  68. Andy T says:

    It’s VERY easy to imagine how they might do this “if” they really were “seeing” order flow. Using your example of 1mm share purchase or sell….GS certainly has an extensive database/history of what a 1MM share transaction will due to any stock of any size. So EXAMPLE:

    Let’s say you have midcap stock trading for $10.00. GS knows that a 1MM buy order will move the stock 5c based on historical patterns. If, in a split second, GS can “see” that order hitting, they would buy the some amount of the stock up to 1MM shares. At that point, GS themselves would move the market 5c. Then, when the actual order hits, GS clips the order back to the real buyer. Of course, when the real order hits, the market won’t actually move the full 5c, because GS will be filling the order. So, maybe GS only scalps for 2c. On a 1mm block order in this case they would pocket $20,000.

    Now, multiply this strategy across the day and across thousands of issues.

    The actual scalping being done may be far less than the example cited here. Was using some round numbers for examples sake.

    Of course, all of that is highly illegal. If they’re doing anything like that, that would be extremely foolish….

  69. Jessica6 says:

    Granted, this isn’t anything more than a ‘hunch’ right now, but when it comes to Goldman Sachs, there’s blood in the water and the piranhas are starting to smell it..

    It’s kind of like in history, when the king or the noblemen would over-reach with their power that the peasants would revolt. There seems to be a growing – both in size and terms of influence – group of people who are fed up with the reach and influence and possible profiteering of Goldman Sachs and are shining a spotlight up every dark, dank, junkie-infested alleyway they can find.

    When I say group, I don’t necessarily mean people acting in any sort of co-ordinated fashion necessarily – welcome to the Internet Age – but H1N1 flu seems to have nothing on the spread of this meme :)

  70. Transor Z says:

    @KD:

    Could you comment on this quote from the Arnuk & Saluzzi piece that bergsten posted? Agree? Disagree?

    High frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.

  71. KidDynamite says:

    @TransorZ – I don’t like that Themis Trading piece that Bergsten posted, but i think it pretty much proves my point – the piece spends most of its time detailing how computer A is trying to outsmart computer B… remember – we used to have brokers doing the same thing in the pit in front of the specialist – now it’s just faster and for smaller spreads. They also mention how now stocks move “10c on a few hundred shares” – GUESS WHAT – that’s still less than what the bid/ask spread used to be! In other words, high frequency trading has resulted in a huge decrease in the tax paid by retail investors – that’s another way to rephrase their claim.

    as for the “tax” – as i’ve said – i’d much rather pay a fraction of a penny “tax” to some computer who is trying to outtrade me than a 13c tax to a specialist who is trying to outtrade me at much wider spreads. I’d also refer you to the comment on the post in the link of my comment above – which states that “alpha belongs to no one” – it’s belongs to whomever gets there first.

    How do you beat these computers? well, when you want to buy IBM at $85, put in a limit order and go play golf. Don’t watch the stock move – don’t watch the computers try to out-pysche you, causing you to panic and pay up. If you don’t change your limit price, they can’t beat you.

  72. KidDynamite says:

    @Transor Z – one more thought. SOMEONE will always be the best. (I’m thinking of some quote from the Karate Kid here…) Someone will always be scalping something from someone – there’s no way to prevent that. I think we’re all better off now than we were 10 years ago – with tighter spreads and lower execution costs.

  73. Mannwich says:

    Great points, KD. Thanks for the insight. Another thing we can all do is simply not play the game.

  74. wally says:

    “Sadly, the public misunderstands this simple concept…”

    Perception is everything; never think that Goldman, or anybody else, will even have markets to play in if other people even THINK they smell a rat.

  75. Andy T says:

    Some other thoughts on GS….I’ve noticed how they talk about bid/offer spreads being wide and thus, they can take advantage of this and make money, blah, blah, blah. I understand that theory, and it’s certainly possible that in crazy wide markets you can step in and interemediate. So, it got to me thinking about the Enron days….

    Enron used to run a trading platform, “Enron OnLine.” It was a trade execution platform for the energy trading community. It was the CME Globex before there was a CME Globex. It was a slick system. Enron was the counterparty to every transaction and the Enron traders always had to have a bid/offer to the market for many different contracts (tighter bid/offers for more liquid markets; wide bid/offers for less liquid markets). I always thought it was pretty ingenious, because “theoretically”, as long as markets had some liquidity Enron would always be able to unwind the trade. If the market was very liquid, you could see situations where they were holding very little risk as various counterparties kept hitting bids and offers. Also, Enron would be privy to the order flow of the very large commercial players.

    Of course, the major flaw is when the market to starts to VIOLENTLY trend one way or another. There were times when the market started to move so hard one way, all the trade became one sided and Enron trapped itself either very long or very short. And, then it all went horrible wrong in 2001 when both Natural gas and crude trended sharply lower for many days/weeks in a row. Tough to be an intermediary when all the trade wants to go one way!

    So, back to our current story. The stock market has had periods in the last year of violent uni-directional moves where it was either “all offers” or “all bids”. Thus, it makes it very hard for me to believe in the meme that “Goldman’s profits are a result of wide bid-offer spreads.” If that were the case, then GS must have been taking on some EXTRAORDINARY risks for extended periods of time.

  76. Transor Z says:

    @KD: Thanks. Kudos for taking a contrarian position out in front of the lynch mob.

  77. donna says:

    Gosh, maybe what we need is a real market again where people invest in companies that are actually making real products instead of everyone just trying to make a buck…

    Nah, that wouldn’t work….

  78. farmera1 says:

    As an employee of Goldman, Kramer admits in this tape he manipulated stock prices. No real surprise here.

    http://ml-implode.com/staticnews/2009-03-11_CramerAdmitsMarketManipulationca2006.html

  79. Mannwich says:

    @donna: Real business and investing is hard. Fraud and gaming things are easier.

  80. Hal says:

    I remember the good old days when GS made the big money by buying bonds for clients at the ask–selling them at the bid–keep the spread for themselves and them charging $15 a bond for the trade.

    Look at what automation and technology has done to help.

  81. [...] The world of high frequency trading is in turmoil.  (FT Alphaville, Big Picture) [...]

  82. Transor Z says:

    This discussion highlights some important question about the role of blogs in replacing MSM.

    Two big problems facing those of us migrating to blogs to satisfy our information jones:

    1. Lack of access
    2. Lack of code of ethics

    1. The first problem we experience in part by the occasional troll comment along the lines of “Ha, you all suck, you ignorant loser outsiders! I work for [insert company/government agency here] and I can tell you none of you know what you’re talking about and the only reason [insert host name here] is even posting this crap is that s/he is a bitter loser wannabe who couldn’t get a job at [insert company/government agency here].”

    Yes, these trolls are probably 99% FOS and get flamed unmercifully — and quite rightly. But . . . admit it. They do sometimes get under your skin just a little bit, don’t they?

    Interestingly, we’re seeing established bloggers like Barry invited in on conference calls and being included in PR circulation. So that’s a good start. Plus, high profile bloggers like Barry who actually have real-life reputations in the business world do get some access — e.g., Congressman Grayson’s video post here a while back. So it’s not all bleak, but it certainly is fragmented.

    2. Goldman Sachs may have been responsible for the Kennedy assassinations (both), Vietnam, the Great Depression and every other bubble, laundering money for narcotraffickers and human traffickers, staging a phony lunar landing, etc., etc. — BUT they may very well have done nothing illegal when it comes to alleged program trading/frontrunning.

    Nevertheless, we have people (mostly anonymous) who post here, citing anonymous sources, claiming to know a buddy who knows for sure that Goldman or JPM or whoever were frontrunning or doing whatever. I don’t doubt that those comments were 100% truthful. I’m just saying that they probably wouldn’t get printed in an ethical journalism piece because they are uncorroborated and anonymous.

    So in that sense, guess what? Dennis Kneale had a point the other day. How do you like dem apples?

  83. darth beta says:

    KD, consistently agree with you. I am sure we are light years away from the games that got played when we ran a broker/broker buddy system, but i am not convince all the vwap and other algo programs provide pure benefit. Yes spreads are lower no argo there.

    My belief is that we replaced what was once a shady broker system that had it flaws with a computer dominated algo world with its own flaws. If you work in a firm like I do and research is consistently done on artifical intell trading/quant programs (so dont mock the T1000 ((joking)) ) you have to sit back and ask yourself is this for the better. At some point we have to remember that stock and bond markets are about allocating capital to companies that provide tangible products/services. I question how program trading/high freq/nano second trading is getting us there.

    As far as Goldie is concerned, they are as smart and profit driven as they come, if they are not making money off this they wouldnt be doing it. What they are doing is much different then asset managers running vwaps/algos. There is a difference between trying to get best execution for your clients and trying to profit off of nano second discrepancies at the NYSE because you are one of the few firms with access. But greed dominates, people know they are shady but if it is your shady guy no big deal.

  84. Jessica6 says:

    @Transor Z: Your assertion about ethical (as in mainstream publication, name attached in by-line) journalism using named and corroborated sources simply isn’t true. This is particularly true of breaking and often speculative news – keep your ears out next time for “sources close to the situation” or something similar. In fact, ‘unnamed’ sources are critical to GOOD journalism since these are often whistleblowers and so on. On the flip side, public relations is now a very advanced profession and oftentimes ‘named and corroborated’ sources are really just PR people with a particular agenda (make the client/boss company look good) and mainstream journalism’s increasing tendency to rely primarily on them and less on investigative journalism (always due to budget cuts, of course, though there’s always cash around to buy up a competitor or some chain of small town regional dailies) has driven people to blogs as a counterpoint to all the spin out there.

    You were right though – it was a scam in Office Space :) Love that movie.

    For every tinfoil-hatted conspiracy theorist there’s also a rosy-eyed ‘green shoots’ nothing’s wrong go out and shop cheerleading article that’s probably even more divorced from reality.

    As for the issue of Goldman front-running clients, at least, this Time Magizine writer seems to think so:

    http://www.time.com/time/business/article/0,8599,1908562,00.html

    “contained in Goldman’s client form is this disclaimer, “You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit).” The firm seems to be announcing out loud that it plans to trade against its clients.”

  85. Transor Z says:

    @Jessica:

    Source+s, sources. Plural. Corroboration.

    A single unnamed source wouldn’t fly at a good news desk.

    To illustrate, here’s an unlikely lead:

    According to “Transor Z,” a blog commentor, a buddy of his said he saw Lloyd smoking crack.

    Relaying totem pole hearsay isn’t corroboration. Or good journalism. :)

  86. bergsten says:

    Mike Judge (brilliant as he is) didn’t think of this first in “Office Space.” Or even second or third…

    http://www.snopes.com/business/bank/salami.asp

  87. KidDynamite says:

    @Darth beta -the interesting thing about VWAP is that it’s kinda what started the whole quant warfare. Buy side managers would want to spread their executions over the day, participating in volume – so they used VWAP as an execution method. now, don’t worry about questioning why a buy side trader should ever get paid to execute his trades at VWAP (basically admitting that he doesn’t want to take a view and wants to accept whatever the market tells him…)…

    Computers can trade VWAP better than humans can, so we wrote all sorts of algos to trade VWAP, breaking up a 1mm share order into 30 smaller orders that execute in 15 minute increments, themselves using OTHER algorithms within those increments.

    Other people noticed a trend, that the dumb VWAP algos would come in 9:45, 10am, 10:15, etc, and that’s when they started writing the kinds of “predatory algos” that the Themis trading piece mentioned – that I mentioned in my first comment. they lift offers when the dumb algo bids… The T1000 becomes obsolete, and we need the T5000

    now is it unfair that GS can gain a special timing edge if their servers are co-located at the exchange, and thus can execute and transmit milliseconds faster? that’s an interesting question. It depends on why they have that advantage. As a free markets guy, i think anyone who wants to pay the price should be able to have the same access GS does. i’m not quite sure how they get it – but they are CERTAINLY not the only ones – so I don’t think it’s an atrocity. They have better access than I do – tough luck for me. Either I can pay to develop the same access, or I can concede them the fractional penny advantage. now, if they are the only ones who are allowed to have that access because the guys who are in charge of granting the access are bought and paid for by GS, that’s a different story.

    this now probably evolves into a discussion of GS’s unique role in the NYSE’s SLP program, which again, requires them to PROVIDE LIQUIDITY, so it doesn’t really bug me even though they make money doing it. They have the best algo’s so they may be uniquely positioned to do that. and then we see why other firms are trying to buy their programmers and steal their code.

  88. johnbougearel says:

    ZeroHedge has fleshed this out beautifully in this expose (http://zerohedge.blogspot.com/2009/05/observations-on-nyse-program-trading.html)

    This is not strictly a GS problem. GS is only high frequency trading system out there scalping the market for millions each day, though theirs is considered to be the best. Use of High Frequency Trading Systems are encouraged by the NYSE exchange to attract more liquidity to their exchange and increase their revenues via exchange fees for transactions.

    Providing liquidity to markets is what exchanges do. In the old days, this used to be done by market makers standing in the trading pits of Chicago or NY. Now it is done through electronic exchanges. Instead of market makers scalping the markets for tens of thousands of dollars each day, now the electronic black boxes are scalping the market for millions of dollars each day.

    Under the old system, GS had to go through the market makers to execute their trades. The market makers would always scalp GS and other big houses for a few ticks off the market. No big deal, this is how the trade flow worked. Some local pit traders were better than others at this high frequency trading game in the pits. It was to a degree a function of where you stood in the pit (location location location), your natural abilities, and to another degree who you knew. Now, as one of the high frequency electronic traders, GS is one the market makers.

    GS and other high frequency traders have supplanted the market makers with their electronic black box systems. The NYSE exchange callse them “Supplemental Liquidity Providers” or SLP’s. The very use of the word “supplemental” indicates this type of liquidity is not necessary for the NYSE exchange to function and serve their role to the financial community. SLP’s function to beef up the profits of the NYSE exchange. In the process they are handsomely rewarded for their efforts.

    In fact, according to the ZH article, ” The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.” Still, a rebate to provide liquidity is not surprising, exchange members from the open outcry system enjoy lower exchange fees as well.

    More interesting is that “The SLP program was developed in the days after the Lehman collapse when market volatility spiked and major questions about liquidity premia emerged, resulting in program roll out on October 29 of 2008.” Hmmm, looks like there may be some self-serving behaviors going on here at the NYSE.

    The NYSE filed proposed rule changes regarding a new class of mkt participants called “SLP’s” with the SEC in October 2009. It was to be a 6 month trial balloon which was obviously very well liked by both the SLP’s and NYSE.

  89. KidDynamite says:

    @ Jessica – I wrote a post a few weeks ago about how although blogs have done a tremendous job breaking and covering stories the mainstream media could never cover (mostly due to a lack of expertise), there is also a massive amount of misinformation in the financial blogosphere.

    The problem with a lot of the recent stuff is it’s easily disproved by talking to someone who has any clue about the businesses in question, or even actually READING the story they are reporting on! The key point that comes to mind is the NYSE’s recent change regarding their weekly program trading statistics, which was erroneously reported (in a follow the leader fashion) all over the place as “THE NYSE IS NO LONGER PUTTING OUT THESE STATS BECAUSE THEY DON”T WANT YOU TO SEE THAT GOLDMAN SACHS CONTROLS THE NYSE”… in fact, they’ll still be putting out the report, using only the data that their systems already take in upon orders entered on the NYSE. Thus, it will absolutely NOT hide GS”s dominance of the NYSE, although if firms trade volumes on other exchanges, those volumes may become less transparent. The reason the NYSE did this is because they want to twist the arms of the big boys to bring their volume back to the NYSE so it can be counted in the stats – the NYSE has been losing market share, and the firms WANT these volumes counted.

  90. bergsten says:

    Y’all want to install servers in NYSE over the weekend can look here:
    http://www.nyse.com/technologies/sfti/1228187874506.html
    I find the number of “NDA-only” documents a tad troubling (not that one would need an NDA, but that this implies they can refuse to execute one with you).

  91. Transor Z says:

    For anyone who might be interested, here’s the NYT policy on anonymity:

    http://www.nytco.com/company/business_units/sources.html

    Excerpt:

    The use of unidentified sources is reserved for situations in which the newspaper could not otherwise print information it considers reliable and newsworthy. When we use such sources, we accept an obligation not only to convince a reader of their reliability but also to convey what we can learn of their motivation – as much as we can supply to let a reader know whether the sources have a clear point of view on the issue under discussion.

    I think there may be confusion between the rather passive collection of news information from unknown sources who refuse to identify themselves (even to the reporter writing a story) and the use of anonymity as a protection or to reflect policy.

    In the blogging context, “Transor Z” ain’t talking about who he really is or what his buddy’s name is or where his buddy allegedly worked when he supposedly saw Lloyd smoking crack. Thus, a journalist has very little (if anything) to go on in terms of performing the professional function of vetting information for credibility. This is very different than when an interview is conducted in Transor Z’s office but on condition that he be identified only as “a very senior Japanese animated character with knowledge of the crack trade in the Boston area.” That, at least, gives the reporter/newspaper something to give their readers about who this wackjob is and why he’s talking about Lloyd smoking crack, what his motivations might be, etc.

    If you stop to think about it, many of us who comment anonymously naturally divulge (truthfully, we can only hope) details about ourselves that establish credibility with fellow blog followers. So it’s kind of a “qualified anonymity” because it’s rarely absolute.

    And I never meant to suggest that the little nuggets people leave here aren’t valuable/interesting. My point earlier was just to put it in the context of how we are using blogs nowadays to supplement/supplant MSM sources.

  92. Like many of us, Robert Iati, a partner at TABB Group, is fascinated by the alleged theft of proprietary trading code from Goldman Sachs Group Inc.

    Goldman accused a former employee, Sergey Aleynikov, of stealing 35 megabytes of trading code from the investment bank, an accusation Marketbeat discussed in a post July 6.

    In a commentary Thursday Iati offers some thoughts about how important algorithmic trading has become to the market. His conclusion hints at the significant power of the programmers.

    “Electronic routing and execution has become the mechanism by which our capital markets operate. Algorithms account for more than 25% of all shares traded by the buy side today—a number steadily rising for several years now. However, the incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize. The familiar names of Lehman, Bear and Merrill are being replaced by less familiar ones like Wolverine, IMC and Getco.”

    Iati notes that high-frequency trading firms include proprietary trading desks for a small number of major investment banks. Only 2% of the nation’s 20,000 trading firms in the U.S. markets, they account for 73% of all U.S. equity volume.

    These funds are designed to “capture profit opportunities by being smarter and faster than the closest competition. They are, as a rule, secretive, stealthy, smart, and relatively unknown. The key to being smarter is their unique technology that enables them to profit on a number of these quantitative strategies, which they will protect at all costs.”

  93. Marc1 says:

    I’m no expert in market operations, so forgive me if this is obvious to others. A few years ago the NYSE changed from pricing in eighths to decimal pricing. At the time I thought that it was odd that the NYSE went to pricing to the penny rather than tenths. Did this change allow GS to play its game with smaller price movements? It would seem that this would have two effects: it increases the number of situations where there could be a profit, even thought the per-unit profit is far less. The players who can get those profits are fewer, since it takes massive volume efficiencies to take advantage. Thus favorable to GS.

    Is there a connection between GS and the decision to change to pricing by the penny?

  94. call me ahab says:

    marci-

    the SEC mandated conversion to the decimal system

  95. Marc1 says:

    Ahab, sorry, that’s Marc as in Marco, and 1 as in “one.”

    Thanks for the info. Who pushed the SEC to convert to hundredths? And more important, am I off base here? Does the use of hundredths assist a program trade front-runner?

  96. call me ahab says:

    sorry dude- marc1 it is – I believe the rational was that it would lower the spreads between the bid and ask price-

    the securities industry would keep the spread for themselves- so the lower the spread- the greater benefit to the customer- the 1/8 spreads were advantageous to the brokers

  97. bergsten says:

    When you’re done here, you can start the entire conversation all over again here:
    http://www.ritholtz.com/blog/2009/07/king-report-hft/

    (there’s weirdness here — this post was on the Blog’s “home page” for about five minutes. Then it moved over to “Think Tank” — I don’t get it).

  98. Marc1 says:

    Thanks, bergston. The King Report has this answer to my question:

    “When a firm has an 87.5% trading accuracy record, something unnatural is occurring. And we wonder why the buy side has been so docile and malleable when the money is being derived from them!

    Over the past decade the move to electronic trading and pricing in pennies was heralded by Street insiders as a means to improve liquidity for clients. This appears to be a deception. Virtually every facility benefitted proprietary trading at a select few firms. Who’s the patsy?”

  99. Simon says:

    That GS servers are located right in the NYSE or almost I don’t know the details but you can guarentee it gives them a big advantage. Who’s to say maybe they own the company that maintains the exchanges computers or have “illumi” working for that company. Maybe its as simple as a stray dark fiber cable that loops into their server before it arrives at the NYSE. Maybe it loops through their server before it leaves the NYSE. Say it wouldn’t be nice to be able to paint the tape without having to pay…You know create those nice little end of day ramps and things without committing the funds to do it.