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Frontrunning: August 5

Submitted by Tyler Durden on 08/05/2009 08:42 -0400

Flash trading reversal by SEC may hit Direct Edge, Boost NYSE (Bloomberg) - let's see what happens to the NYSE when dark pools are unwound next...
Ethics, journalism, the web and the profits of brokerage businesses - oh, and Paul Krugman (Bronte Capital) - John, I can put it on the record that Zero Hedge represents no lobby interests and has never received any compensation either direct or indirect in its fight for market transparency, and stands to benefit in no way from the market topology either changing or staying the same (aside from the 0.5% of total market cap price I pay for liquidity any and every time i trade a stock, and which fee, which I disclosed in my observations on Implementation Shortfall, you failed to bring up in your cost-benefit analysis, and whose bottom line as to liquidity costs is dramatically different from your figure). While I am sure you can provide the same disclaimer, to say that a simple blog can dictate policy is a little far fetched (also, not sure how your journalistic colleagues feel about your condesending opinion of them, who, by your statement is a virtual majority, of everyone out there). Or maybe not, if your null assumption is that regulators were letting illegal activities go on for years and are now backpedalling once someone dares to shine some light. In fact, once Flash Trading is done away with, Zero Hedge is fully intent on exposing Dark Pools for the opaque, "liquidity providing" yet liquidity fee gobbling, IOI-based machinations they really are. Oh, and as a total aside, Goldman's record $100MM+ trading days in Q2, and Medallion's 40% compounded returns since inception at a 5.0 Sharpe (I am sure you understand what that means) - that's totally unrelated to HFT as well.
Credit crunch part deux (DollarDaze)
Why you've stopped watching CNBC (Slate)
S&P downgrades UK bank debt (FTAlphaville)
FDIC sends out warning on second mortgage loan accounting (The Truth About Mortgage)
The ramp visualized: 85% of stocks above 200 DMA (BreakPointTrades)
Lloyds loses $5.3 billion in H1 on bad loans (AP)
Tax revenues plummet... Again (Fundmastery)
Transportation Secretary says Cash For Clunkers program is a huge success for inflating U.S. subsidy program and does wonders to further isolating the U.S. in a non-WTO-induced trading bubble (AP)
Wild randomness (City Journal)
Why are company insiders selling? (MSN)
What does a double dip recession look like (Credit Writedowns)

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Wed, 08/05/2009 - 08:49 | 25524 vicelord

Anyone seen the new letter from GS to its customers, explaining Flash Trading and stating that, without a doubt, GS does. not. steal. Or something.

August, 2009

Goldman Sachs Electronic Trading: Our Practices in Handling Electronic Order Flow

To our GSEC clients –

Given the pace of change in the equities market structure and the recent public dialogue about trading
strategies, market venues and order handling, we thought it would be an ideal time to affirm our practices
relating to electronic order handling.

From its inception in 1992, our business model has been to provide agency brokerage and associated
technology services. We now provide services to over 2,000 clients, which include a diversified base of
institutions, hedge funds, broker-dealers and exchanges. We have designated resources to ensure that
our value proposition lives up to the highest standards, and we highlight these in the four sections below.

A. Organizational Structure
Since the acquisition of Spear, Leeds & Kellogg, L.P. in 2000, Goldman Sachs has operated two separate
U.S. broker-dealers: Goldman, Sachs & Co. (“GS & Co.”) and Goldman Sachs Execution & Clearing, L.P.
(“GSEC”). The following is a brief description about the structure of the two broker-dealers.

Separate Broker-Dealer – The services of Goldman Sachs Electronic Trading in the US are offered
through the agency-only broker-dealer GSEC. GSEC is a separately registered broker-dealer, distinct
from its affiliate, GS&Co, the broker-dealer that houses the more traditional, “upstairs” equity trading
businesses.

Separate Locations – GS&Co.’s U.S. equity trading business is primarily located in New York City, while
the GSEC business is primarily located in Jersey City, NJ. In the case of our regional US offices – in San
Francisco, Chicago, and Boston – the two broker-dealers are also physically separated, either via a
restricted access, walled-off enclosure within the same building or by being located in a different building.

Staff and Management – The employees who support, develop, and sell our electronic agency services
are designated for that business. GS&Co. and GSEC have independent management teams that oversee
the day-to-day operations of each broker-dealer. GSEC’s co-Chief Executive Officers have accountability
to senior managers in the Securities Division of GS&Co.

Information Exchange – We are committed to preserving the confidentiality of client information. Sharing
customer information for the purposes of trading ahead of, or otherwise disadvantaging, a customer order
would violate various regulations to which each of GSEC and GS&Co. is subject. Accordingly, both
broker-dealers enforce policies and procedures governing the safeguarding of confidential information.

B. Order Routing, Smart Routing, and Best Execution
Our foremost obligation is to provide clients with the best possible execution quality and a breadth of
choices to help manage their orders. Across all platforms, we allow clients to self-direct orders to a public
exchange or to our SIGMA X ATS; use our various smart router order types; and/or choose one of our
many algorithmic strategies. All of these choices have parameters that clients can either control on an
order level or by setting defaults in REDIPlus®, additional front-end systems, and/or GSEC’s order-
management infrastructure. We also provide the option to create customized order handling logic and
settings to provide customers additional order handling control.

In determining where or when to place an electronic order, best execution takes first priority. We
continuously strive to improve our order routing logic through ongoing research of execution performance

and market structure, and regularly modify the smart router and algorithms in response to the continuously
changing market micro structure. Orders are directed to all available liquidity venues, including SIGMA X,
unless directed otherwise by the client.

GSEC monitors execution performance and metrics for the handling of customer order flow via an
independent best execution committee, which is separate from GS&Co.’s best execution committee.
Further, as prescribed by the SEC, all GSEC execution statistics are available to the public, as per Rules
605/606.

C. Execution Quality Practices
In a highly fragmented, competitive trading environment, it is critical that our practices ensure that
customer orders are handled in accordance with the customer’s instructions and regulatory requirements.
Accordingly, we have incorporated certain features into our algorithmic strategies and SIGMA X to protect
orders.

Our Algorithmic Policies and Practices
• Neither GSEC algorithms, nor our smart router, participate in any so-called exchange “Flash”
order type programs.
• We protect our algorithmic flow by employing all of the following: child order placement
randomization; price limits; volume limits; spread monitoring; minimum execution quantities;
reserve orders; discretion logic; and Immediate or Cancel orders (“IOCs”).
• The GSEC algorithms and smart router may receive Indications of Interest (“IOIs”) from other
non-displayed pools. When GSEC orders are sent to destinations that publish IOIs, we opt out of
this functionality.

SIGMA X Policies and Practices
• SIGMA X is a 100% non-displayed liquidity pool. Orders on the ATS book are not viewable by any
market participant. Any orders from GS&Co. are treated identically to other customer orders and
are not given priority in the ATS.
• SIGMA X does not generate any sort of IOI messaging. Symbol-specific SIGMA X volumes are
not available, in any form, intra-day. GSEC offers clients a symbol-specific data point of
combined SIGMA router plus SIGMA X executed shares, on a delayed basis, through both
REDIPlus and Bloomberg’s IOIA page. Customers are also given the opportunity to opt out of this
calculation if they prefer to do so.

• A designated team insures proper operation and performance of the ATS. Monitoring tools allow
GSEC business managers to review participants’ performance.

D. Transparency and Reporting
Clients receive access only to their own execution information and may receive this information real-time
or post-trade. Full transparency – including destination, quantity, and price information – is provided for
every execution. By offering clients a flexible range of options for pre-, intra-, and post-trade analytics, we
aim to make clients’ execution process as transparent as possible.

We hope this description offers you some basic information about our order handling practices. We
welcome your questions and are happy to provide more details. Furthermore, we invite you to
visit us in our offices at 30 Hudson Street in Jersey City to engage in that dialogue. We welcome
your feedback.

Wed, 08/05/2009 - 09:11 | 25539 Anonymous

The article from Slate.com is a complete bunch of drivel. If Daniel Gross really believes that CNBS is an ultra right-wing, outlet, he is functionally retarded and incapable of critical thought.

Fox Business = Right-Wing? Yes.
CNBC = Right-Wing? HAHAHAHAHA ... yeah right.

Wed, 08/05/2009 - 09:34 | 25551 ptoemmes

But Charlie, or is that you Larry, you do stagger to the right when you RUI.

Wed, 08/05/2009 - 09:42 | 25582 Anonymous

I concur. CNBC is not right wing. In fact, it's not for the left or the right. It's a stooge for special financial interests of all stripes. I'm a Freeper and if you posted that CNBC was right-wing on that right-wing website, I doubt you would get much agreement.

Wed, 08/05/2009 - 12:20 | 25825 Anonymous

I'm sorry.

Wed, 08/05/2009 - 10:11 | 25625 Anonymous

Talk about missing the mark. CNBC lost me when they started spinning everything as a green shoot. I hope CNBC hires Gross as a media consultant, that should finally put an end to the network.

Wed, 08/05/2009 - 10:48 | 25690 Anonymous

who needs hapless cheer-leading?

Wed, 08/05/2009 - 12:15 | 25816 Anonymous

Concur.... The CNBC floks are a bunch of Wall Street cheerleaders and GE peddling flacks. I fine most of their commentators very annoying....

Wed, 08/05/2009 - 09:13 | 25540 SWRichmond

Slate: "In this past year, we've witnessed the most fundamental failure of capitalism since the Great Depression..."

I never got past that line, comrades.

Wed, 08/05/2009 - 09:38 | 25580 Anonymous

Agreed, comrade.

Wed, 08/05/2009 - 09:18 | 25546 Anonymous

The guy at bronte capital is useless. Though he esposues to understand "the big issues" he is incapable of understanding that the big issue - e.g. the balance sheets of investment banks - are comprised of a bunch of small issues, which are articulated daily on zerohedge.

Wed, 08/05/2009 - 09:21 | 25549 . . .

If people want to fight the Goldman Sachs / Geitner / Summers cap and trade plan, they should support the bipartisan group of republican and democrat politicians pushing for a carbon tax.

Republicans like Bob Inglis and Jeff Inglish and Democrats like John Larson have pushed for a carbon tax, since it is less subject to waste, fraud, and abuse.

here is coverage re Larson:

http://www.nytimes.com/2009/03/07/us/politics/07carbon.html

Here is coverage re Inglis and Flake.

http://www.mcclatchydc.com/homepage/story/68130.html

Here is testimoney from AEI re the merits of a carbon tax over cap and trade.

http://finance.senate.gov/hearings/testimony/2009test/080409avtest.pdf

Wed, 08/05/2009 - 10:53 | 25700 Gilgamesh

ACAS hit the Ruh-Roh button again today. But it seems that all ACAS sell order $ was immediately turned around into CIT buy orders. Can't possibly reduce portfolio risk by a nanometer in this market, can we?

Wed, 11/10/2010 - 04:18 | 715302 cheap uggs for sale

Frontrunning: August 5

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