Goldman Finally Discloses True Intentions Vis-a-Vis Dark Pools, As SEC Now Actively Opposes These

Tyler Durden's picture

As Zero Hedge disclosed first three weeks ago in the form of a draft presentation prepared by Goldman, the firm is now actively doing all it can to defend dark pools and other key components of market opacity, unmasking all recent claims by the depositless Bank Holding Company that it was a staunch supporter of market transparency, as the empty posturing they are.

The full presentation is below. We have written numerous times as to why Goldman's purported "defense" is a duplicitous prevarication, whose only purpose is to extend and pretend the status quo of a market structure dominated by a monopolistic Sigma X, Sonar, Redi and the entire Spear Leads and Kellogg legacy portfolio complex of dubious products and methods (we will post Part 2 of our Overview of Goldman Sachs Electronic Trading series shortly).


It is amusing that this defense comes at a time when the SEC is finally actively looking at curbing numerous components of HFT and dark pools which after many years of spending hundreds of millions of dollars of taxpayer funded budgets (which at $900 million for 3,500 employees comes to over $250,000 per person... Please Mary Schapiro - cry us a river about how woefully underfunded you are). We present the following excerpt from Schapiro's speech before the SIFMA annual conference titled hilarious "The Road to Investor Confidence." Perhaps Goldman would like to chime in here.

Market Structure

As many of you know, we are already moving forward on our market structure initiative. In recent weeks, we have proposed rules that would address the inequities of flash orders and dark pools of liquidity.

Both of these undermine the integrity of the market by providing valuable pricing information to select market participants — information that is not widely available to the public. This in turn creates a risk of private markets and two-tiered access to information.

But I believe there is much more to do to bring about greater market transparency and fairness.

As regulators, we at the SEC are mindful of the extraordinary technological advances and the benefits they have brought over the years. But, we are also mindful of the potential for participants to exploit these advances in ways that harm, rather than help, investors.

As a result, we have been engaged in a thoughtful, deliberate and comprehensive review of market structure.

In addition to the actions already taken, we will seek public comment on dark liquidity in all of its forms, including dark pool alternative trading systems, internationalization, dark order types on exchanges, and ECNs. And, we'll seek input on high frequency trading and the wide range of strategies that may fall within this vaguely defined category.

A related issue, on which we also expect to seek public comment, involves co-location — the process where exchanges allow some broker-dealers to place their servers in close proximity to the matching engine of the exchange. This could result in significant advantages, at least for certain traders for whom speed is of the essence. In the interim, we are making sure that exchanges offer these co-location services on terms that are fair and non-discriminatory and that are transparent to the public.

I also have asked the staff to review the rules governing ATSs to assess whether those rules are still appropriate for all the different types of ATSs that exist today — systems that may not have been foreseeable when our rules were adopted 10 years ago. But in addition, I have directed our staff to come up with actual market structure proposals as well.

One proposal will address the risk of sponsored access to exchanges. It will focus on arrangements that enable unfiltered access by non-regulated entities — in many cases, high frequency traders — to exchange systems. I liken it to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied.

The reason this raises concerns is that broker-dealers perform vital gatekeeper functions — functions that are essential to maintaining the integrity of the markets. We should not sacrifice the stability and fairness of the markets to give a trader a millisecond advantage.

I recognize some markets have been seeking to address this issue, but I also worry that competitive pressures could delay an effective solution — one that would apply across all markets to assure a level playing field for all investors.

A second proposal would shed greater light on the activities of high frequency traders.

Compared to a few years ago, the current volume of orders and trades, and the speed of order routing and trading, are almost unimaginable. The high frequency traders largely responsible for these developments now likely represent more than 50 percent of trading volume.

I believe we need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated.

Dear Ms. Schapiro - thank you for being Zero Hedge's number one reader, and please continue to do so - after all, the page views and ad clicks keep us afloat.

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Anonymous's picture

Let's tax the HFT traders !

That's a solution the doofi gov't folks can get behind.

Careless Whisper's picture

GoldmanSachs is a hedge fund, not a financial holding company.

DaveyJones's picture

The road to investor confidence:

The advice comes at the end

Anonymous's picture

Listen it is...

The BATS model has quickly proven that all
markets can be quickly de-fragemented and
electronically regulated....

This simplifies regulation....
ie Short selling....not to exceed float....first come first served by electronic upticks

ie Size limitations per account....
this gets rid of naked shorting when combined with SS tags....

ie EAsy to spot unusual activity around announcement times....

ie All price discovery should be all out in the open first come first served....

Individual traders have a "small size" and performance advantage if they know how to trade....not unlike any of the businesses that provide the majority of US jobs....

The exchange needs lots of small players ....not a few large players....The smartest....and the least smart....

Large players are not a good idea because of high concentrations and nowhere to go when everyone wants to exit at the same time....

Direct access technology has taken the place of the ancient market makers and specialists who bilked traders for decades...Their end has come....

Today....with electronic exchange has just become time stamp software that can be located in any country....The cost of transferring, time stamping a different name should not exceed 20 cents per 100 units....
Why...because it is done today....

Also the de-fragmented exchange should have no account minimums or maximums....

Margin should be a simple 4:1 intraday or overnight....

The technology is already here today...and is already being used....

Anonymous's picture

Wake up fool ! Where has BATS model shown any regulatory teeth or leadership ?

Anonymous's picture

How has BATS de-fragmented the markets ?

chet's picture

Here's the Cliffnotes version:  "We make a lot of money off HFT and black pools.  Stop asking about HFT and black pools."

agrotera's picture

claw back all profits period, and let it bankrupt GS.

mitack's picture

peterpeter, where are you ?


I cant wait to read your insighfull defense of the posted nonsense.


Anonymous's picture

He's at a summit meeting with Kid Dynamite who believes that the most efficient market is a locked market. Or is he at an investment policy meeting with Cheeky Bastard, you know the long term uber bear, short term uber bull my bank account says it all guy.

FreakuentFlyer's picture

I've just read the entire presentation. Personally, I have no issues with any one thing in this doc. My only issue is what was not covered in the doc - which is vertical integration and its potential for monopoly like consequences: as far as i know, some of the brokers which "specialize" in providing services to automated trades (incl. HFT shops) are Lime, Lek, Genesis, Lightspeed, GS etc. but, unlike the 1st 4 i mentioned, as far as i know, only GS also runs a dark pool, and also only GS trades for their own account. therefore potential issue is not if sponsored/naked/direct/dark is good/bad, but should any one entity be allowed to be in the business of all such things:

a) facilitating order flow/executions (e.g. broker service to market connectivity)

b) as well as order matching (e.g. internalization and/or via dark pool)

c) as well as trading for self profit of the same instruments in #a and #b business.

basically NASDAQ/NYSE/ECNs only match orders and are not a broker nor do they trade for their own account, where as GS does all 3 of these activities - however, i suspect NASDAQ/NYSE/ECNs are much more closely "monitored" than GS.

Tyler, perhaps such an argument would be more reflective of the true issues with the state of the markets' structures and potential areas of (feasible) improvements. I say this because i really fail to see how a retail trader entering 100-2000 share orders in their eTrade account gets "shafted" by SigmaX or some HFT shop. Whereas no one institutional entity should be entering "regular" manual orders for tens of thousands of shares (since they should have really had an account with a broker providing routing algos)? And as far as the HFT casino thing like what we saw in AIG a few weeks ago - wasn't it no different effect than the flotation driven rollercoasters of the late dotcom casino?

Anonymous's picture

why would you stop co-location at the exchanges? all that will happen is the high frequency traders will set up shop across the street. they'll still get their 'unfair' advantage, you just can't stop them! effectively there will be a wealth transfer from the exchanges (who currently charge for co-location services) to the guy who owns the properties surrounding exchange buildings who will smartly increase his rent.