Goldman Defends Its Trading Practices, Claims It Does Not Front-Run The Market

Tyler Durden's picture

From Goldman Sachs Electronic Trading :

Our Practices in Handling Electronic Order Flow

To our Goldman Sachs Execution & Clearing, LP 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 and we highlight these in a letter to our customers.

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.



Zero Hedge will dissect these rebuttal shortly. In the meantime we bring readers' attention to this:

"The GSEC algorithms and smart router may receive Indications of Interest (“IOIs”) from other non-displayed pools."

Does Goldman think there is a problem with this practice? Who are these pools who Flash IOIs? Just what is so wrong with IOIs and why is Goldman steering away from it?

Also, where is the rebuttal that SIGMA X does not participate in "any so-called 'Flash' order type programs."

And here are some perspectives from an industry insider:

You do realize that Goldman has won and has achieved what they intended when they bought SLK, right? Total market making dominance. So now flash trading will become illegal and SLPs and co-locates will be forced to provide liquidity at all times (ala NASDAQ market makers). GS is perfectly positioned for this, they get to keep manipulating the markets, much like the specialist has always done since profits will eventually go against huge losses on 3 SDEV days, the only difference being that on 3 SDEV days, GS will go cry to uncle Sam and you and I will be paying for the losses much as we did now. In the meantime everyone else will bow out and GS and another few will legally be able to manipulate the market (which they can do without flash, through Sigma X for now). So heads they win, tails we loose. Well played Blankfein.

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Stuart's picture

Perfect. Then Goldman should have no complaints whatsoever about getting rid of flash orders and moving it's servers back across the street.   

Sqworl's picture

Why move back...they own the building?

MinnesotaNice's picture

The "4th" branch of government has spoken and there is no frontrunning going on... so keep moving along people... and we should all be very thankful that they are there as a SLP... in fact lets kiss the ground in front of 85 Broad Street.

Anonymous's picture

Thankful for what? That the markets don't bear any semblance of reality?

Forgive me if I pass on your invitation to bend over on Wall Street.

MinnesotaNice's picture

It was sarcasm... take it easy...

Anonymous's picture

It's amusing how sarcasm is equivalent to understanding Chinese for many people.

Anonymous's picture

It's amusing how sarcasm is equivalent to understanding Chinese for many people.

Anonymous's picture


Anonymous's picture



The only 'sideline' money that ever came into the market was amazingly enough the exact same amount as the bogus new equity issuances by broke companies. $400 billion. That is still the world's biggest pump and dump on unsuspecting clients for which Goldman made billions.

The extra 2+ trillion that piled into equities was due to the FED intentionally giving Goldman and others insider information about FED toxic junk bank stock purchases.

Anal_yst's picture

Just saying they're probs running the "fun" stuff out of 1 New York Plaza or Old Slip, last time I was at 85 Broad there wasn't much going on there.

Anonymous's picture

It's time to regulate/oversee GS as the hedge fund it is. Would we tolerate any other hedge fund to dominate and control the markets like GS?

Anonymous's picture

GS is a bank holding company, didn't you hear?

With exemptions...

Sort of like GE...

Anonymous's picture

Note that Immelt is a Director of the New York Fed, elected to represent "the public".

aldousd's picture

And also note how, in as many words, one of GE's subsidiaries is running 'news' articles today featuring the phrase "The markets can only go one way: up."  This is stuff you wouldn't be able to stomach in an Orwell novel, let alone begin to imagine would be real.

Sqworl's picture

He who pay's...picks the music!..ruskie proverb...

Ags Nightmare's picture

reading this reminds me of the last scene in the Godfather when Kay asked Michael if he did all those bad things she heard people saying he did and he paused, looked her in the eye...and said....."no".  

"hey you...look over there !"


Sqworl's picture

Kate: Never ask me about my business!! He then threw a mini ginney tantrum!

curbyourrisk's picture

This economy does not recover until goldman sucks go to ZERO.  Once the manipulation is completely gone...and only then...can we recover and begin to rebuild the great nation they have systematically attempted to destroy.

Anonymous's picture

The economy will never recover even if GS goes to zero unless there is a fundamental change in Washington. The democratic process has become corrupt to the core, the corporates can simply buy support and feed the masses Idol and another extra large cheese burger with diet coke

Cheeky Bastard's picture

you should REALLY understand that America is not a democracy, but was founded as a Republic ... there is a big difference ..

Anonymous's picture

Yes there most certainly is a big difference.

And history will show that in a Republic the "representatives" are trotted out every 200 to 400 years or so and EXECUTED for the good of the Republic and the Electorate.

We are due.

Anonymous's picture

Goldman's new M.O.-- STEALTH WEALTH.

It's ok to steal massively from the taxpayers, we just can't show them what we are spending it on"...

Lloyd Blankfein

When will this LOOTING of the Taxpayer and Treasury END???

Anonymous's picture

Goldman's plan to generously help the economy they repeatedly assfucked is to.....not purchase stuff and hide your money from the common man.

That'll really kick start this economy. THANKS GOLDMAN!!

waterdog's picture

I listened to the Senate Banking Committee tea party and Sheila yesterday (thanks to ZH). I came away from the show even more worried about future regulation of bank holding companies. My concern is that there is still no discussion about making a downside to participating in the schemes that got us here. That is, there are no penalties for all the players when they get caught.


I believe that Madoff would not have pulled his scheme if he knew he was going to get a life sentence. At point, he asked for 12 years, about one year for each year the scheme was in place. I believe that if we are to prevent the collapse of the economy in 2018, we need to implement the following sentencing guidelines.


All of these sentences are mandatory. No pardons, exclusions, commutations.


Completing fraudulent credit applications                  3 years

Accepting fraudulent credit applications                    5 years

Packaging fraudulent credit backed securities           7 years

Providing fraudulent credit rating services               10 years

Failure to uncover fraudulent security schemes       10 years

Theft of investor funds through fraudulent investment schemes         50 years

Assisting in fraudulent investment schemes                                        50 years



The big boys would not have been able to pull off the massive fraud without the help of the little boys. Little boys are fools. They make $ 50 per hour to create fraudulent documents. For them, $100,000 a year is big money. For every big boy caught, there are 1000’s of little boys who built the framework for the big boy to steal billions. The little boys have no fear of conviction because they are paid- they did not steal.


The big boy cannot loot without the little boy. A little boy is not going to complete a fraudulent credit application for a borrower if he knows when he gets caught he will spend three years as cell block D’s little darling. The regulatory auditors are not going to falsify their audit reports if they are going to the big house for ten years if they do.


Wringing our white little hands while discussing hypothetical solutions to an on-going criminal enterprise know as Wall Street will not stop the next generation of thieves from nesting in the investment banking industry. Mandatory sentencing will prevent the recruitment of middle class soldiers by the upper-class organized crime lords.

Anonymous's picture

You are absolutly spot on. It is only when everyone knows that their tiny individual push will be regarded as the condictio sine qua non, and sentenced accordingly, that this will stop.

Anonymous's picture

waterdog, this is dead center on the money. Thanks.

Anonymous's picture

Of course Goldman is risking more than they ever have...they now get full access to Taxpayer fun money!


Anonymous's picture

in other words, thanks to the misinformed campaign you've been conducting, GS is manipulating the populist energy to secure an even stronger hold on market making. Ignorance has its costs, TD. Nice job.

Tyler Durden's picture

the "misinformed campaign" i have been conducting starts at flash, goes thru dark liquidity and ends with HFT.

have a nice day.

ptoemmes's picture

Perhaps it really ends with the "caging" of GS and its ilk.

I and many of us certainly hope so.  Keep up the good work - I suspect you haven't even begun to see the "personal" attacks yet.



Anonymous's picture

Or just burn Goldman to the ground and drag their bodies thru the street?

Let's get 'new normal China' on their ass.

Gordon_Gekko's picture

"Or just burn Goldman to the ground and drag their bodies thru the street?"

That would be a nice way to get things rolling.

Anonymous's picture

Wow, this place is turning into a jihadist website.

Anonymous's picture

What really galls me is the fact that when this market goes down (which it will) they'll also be on the winning side of that as well. They have no interest in the 'real' market, all they are concerned with is the profit and being in the halls of power.

redbabe46's picture

Dumb question from financial markets naif:

Have Goldman and other flash traders violated securities laws? Or is it the case that they simply gamed the system? I have read news stories on the topic that refer to "loopholes" in securities regulations that allow flash traders to obtain advance information on the trades of other market participants. So: Is it the case that the flash traders' action, though unethical, are legal?

Anonymous's picture


Regarding flash, check out the second to last post here

Gordon_Gekko's picture

"Have Goldman and other flash traders violated securities laws"

Well, I am not sure if they have followed any.

Anonymous's picture

A hedge fund masquerading as a commercial bank with free money from the FED and absolutely no risk because they are too big to fail. Yahoo. What a pitiful joke these folks really are.

Anonymous's picture

Sounds like we should buy GS stock ;)

kaptainkrunch's picture

Mary "ourhero" Schapiro on cnbs @ 2pm..should be good for a couple of laughs


deadhead's picture

thank you for the info. haven't watched that station in several months, but I think I will tune into that one.  like you said, should be good for some laughs.

Sqworl's picture

Let me know when she appears on Jon Stewart! 

aldousd's picture

It used to be funny when they said "Where more Americans get their news... than probably should."  Ok, well it's still funny. But it has a flip side that it didn't before.

Anonymous's picture

So the moral of the story is own GS. It is betting on a sure thing.

They have effectively gamed the market. I have zero confidence that any regulatory agency will have the chutzpah to actual call this what it is and take corrective action.

Well played Lloyd.

Anonymous's picture

The market needs to be made 100% egalitarian. Tear down the whole existence and power of these market making firms that can manipulate stock prices, gain insider information ahead of the public, frontrun... redesign it so that everybody has an equal shot.. Otherwise there is no point for retails to even participate

Anonymous's picture

Once again, we get a flagrant insider trading event. The markets started selling off on volume 10 mns before ISM hit. Flash trading is not the problem, it's plain insider crimes. Tyler, please get in on this one above anything else, as any futures trader has seen this go on now for frigging years.

Sancho Ponzi's picture

OT: It looks like there's some HEAVY profit taking going on this morning.  Ideas, anyone?

Anonymous's picture

It's not going to take chutzpah, it's only going to take someone in the halls of power with some integrity and moral backbone.

GS's trading results are not statistically not possible in a 'normal' market.

Not quite relevant but Geithner's outburst at the beginning of this week was that of a three or four year old, Paulson's responses during his testimony last week were, frankly, embarrassing to watch and Bernanke's 'tour of the provinces' smacks of desperation.

gammaman's picture

If NBBO subsecond HFT routing/execution is raising hackles about frontrunning concerns and dark pools are obfuscating trading from public view, what about the 90 second delay in reporting to the consolidated tape?

The following is from the Consolidated Tap Association (CTA) Plan:

The reporting party shall agree to its contract with Processor to report last sale price information relating to Eligible Securities to the Processor as promptly after the time of execution as practical and in accordance with Sections VIII and X hereof.

From CTA Plan Exhibits, Forms of Processor Contracts:

PARTICIPANT agrees that it will report all subject prices to SIAC as promptly as possible; will establish and maintain collection and reporting procedures and facilities such as to assure that under normal conditions not les than 90% of all subject prices will be reported to SIAC within that period of time (not in excess of 1 1/2 minutes after the time of execution) as may be determned from time to time by CTA; and will designate as "late" any subject price reported by it which is not collected and reported in accordance with the above-mentioned collection and reporting procedures or as to which PARTICIPANT has knowledge that the time interval after the time of execution is significantly greater than the period of time referred to above as from time to time determined by CTA.

The following lists Exchange Participant's subject to the "CTA Plan" with respect to transactions in Eligible Securities taking place on its floor: AMEX, BATS, BSE, CBOE, CHX, ISE Nasdaq, NSX, NYSE, NYSE Arca and PHLX.

In addition, FINRA shall collect from its members all last sale price information to be included in the consolidated tape relating to transactions in Eligible Securities not taking place on the floor of an exchange and shall report all such last sale price information to the processor in accordance with the provisions of Section VIII(b) hereof.

Section VIII(b):

FINRA responsibility. The FINRA shall develop and adopt rules governing the reporting of last sale price information to be reported by its members to the Processor for inclusion on the consolidated tape. Such rules shall (i) specify FINRA member having responsibility for reporting each particular transaction, (ii) be designed to avoid duplicate reporting of transactions on the consolidated tape, and (iii) specify procedures for determining the price to be reported with respect to each particular transaction.

Source: CTA Plan, Composite as of July 1, 2009

Moving on to FINRA's Order Audit Trail System (OATS):

FINRA Rules 7400 through 7470 (OATS Rules), require member firms to develop a means for electornically capturing and reporting to OATS order data on specified events in the life cycle of each order for OATS reportable securities, including convertible bonds, and to record the times of these events to the second. On September 28, 2005, the SEC approved rule filing SRNASD-00-23 relating to the OATS rules. As approved, the amendments (1) implement the OATS requirements for manual orders (OATS Phase III)... (4) permit NASD to grant exemptive relief from the OATS reporting requirements in certain circumstances to members that meet specified criteria.

Technical Requirements: reportable Order Events must be packaged into one or more Firm Order Report files (FOREs) and submitted to OATS on a daily basis... FOREs do not [note: bolded in source doc] need to be transmitted to OATS on a real-time basis. 

Order Reporting Scenarios: OATS is not a real-time system. Some order information, such as timestamps, must be recorded real-time, but order events occuring during one OATS Business Day are only required to be submitted to OATS by 05:00:00 Eastern Time the next calendar day or be considered late.

What is interesting to note in the OATS Reporting Technical Specifications is FINRA Rule 7430 - Synchronization of Member Business Clocks. Rule7430 requires any FINRA member firm that records order, transaction or related data to synchronize all business clocks used to record the date and time of any market event. Clocks, including computer system clocks and manual time stamp machines, must record time in hours, minutes and seconds with to-the-seocnd granularity and must be synchronized to a source that is synchronized to wihtin three seconds of the Nationa Institute of Standards' (NIST) atomic clock.

[So while everyone is freaking out about subsecond flash orders, the above rasies the whole question as to how to define latency when a 3 second latency around synchronization of clocks is permitted! As an aside, this may be far-fetched but could frontrunning be hidden by setting back clock on system which documents order/trade reporting?]

With respect to dark pools, for example, GS transacts riskless principal "parent" orders sliced into "child" orders on Sigma X (GS' "internal pool of non-displayed liquidity"), but as per CTA Plan is not required to disseminate trade to consolidated tape for 90 seconds. Hypothetically an in-house prop desk is in position to perform "technical analysis" of executed trade data prior to public knowledge of trade via CTA Plan (not saying that this is happening as it is "considered conduct inconsistent with just and equitable principles of trade"). With this in mind, it is interesting historical footnote that FDR pushed through the 1934 Act, his administration advocated that securities firms should be segregated into (a) brokers and (b) underwriters and dealers. Lobbying at the time resulted in a compromise, that broker-dealer segregation should be studied. Tactic sound familiar?

Here is another interesting item per FINRA Manual:

Information as to a block transaction shall be considered to be publicly available when it has been disseminated via the tape... Also, The general prohibitions stated above [ref: IM-2110-3 Front Running Policy] shall not apply to transactions executed by member participants in automatic execution systems in those instances where participants must accept automatic executions.


As has been alluded to by others, market makers have always had an "unfair" competitive advantage as to knowing order flow, bid-ask spread, etc. HFT techniques such as flash orders provide a computerized method to continuously "sense" real-time where the best bid and offer is (in public and dark markets alike). The public, in the meantime, must rely on delayed reporting to the consolidated tape of executed block transactions (10,000 shares) based on legacy 90 second parameters.

No doubt, HFT firms co-locating with exchanges/dark pools or routing flash orders (or IOIs) have an upper hand "observing" a constant stream of real-time (subsecond) NBBO quotes. As for "analog traders" reading the tape the old fashion way, think about the latency between trade execution, and the potential for 90 second delayed reporting to consolidated tape before you even see the quotes on your terminal. By the time the market is being bid-up or down in fast market conditions, you are potentially seeing quotes 1-1/2 minutes after they occurred before you even start typing a electronic trade into your computer.

The moral to the story is that any short-term/day-trading strategy employed by humans is now at a severe disadvantage to HFT prop shops. However, theoretically, the edge remains for "humans" trading longer term time horizons.

Anonymous's picture

Wasn't Blankfein one of James Bond's enemies? This time the secret lair is hidden at 85 Broad. Except now Blofeld I mean Blankfein isn't just going after Bond, it's going after Equity too.