Goldman's Defense Of HFT To The SEC

Tyler Durden's picture

In a leaked document of Goldman's internal defense of various trading practices including HFT and dark pools, before the SEC, the dominant force out of 85 Broad provides a very good if biased overview of virtually all issues that the SEC is currently evaluating and looking to address per the proddings from senator Kaufman.

The full document is presented below. What is interesting is that while Goldman makes token concessions about certain aspects of market topology, it is virtually adamant in its "do not touch" stance on precisely those components in which it is becoming a practical monopoly power.


One thing to note, which refutes much of the claims that HFT dominance has lowered trading costs, the argument at the core of Goldman's position, is that if one were to superimpose the VIX with the latest Implementation Shortfall data out of ITG, what is obvious is that even as market volatility has declined, the rise of the machines (best seen here) has not reduceed IS, and in fact trading costs have continued to creep higher over the past 3 years. We would be curious to hear Goldman's explanation of this particular phenomenon.

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deadhead's picture

thanks to zh as well as others instrumental in making the material public.

Anonymous's picture

1) you have to wonder what the clients think about HFT, and the front running situation......the people they are "advising" are the ones making the mega share buys/ clearly they are donating millions to the GS bonus pool with every trade that gets HFT'd another couple of pennies.

2) like the SEC is going to do anything about this in GS's case. gimme a break. Goldman will tell the SEC what to do about the other firms HFT'ing......and the rules will apply to all except it -- AGAIN -- the famed edge on the markets.

what was that saying? some pigs are more equal than other pigs?

Anonymous's picture

How the h*ll did you get this document? The SEC didn't leak it.

ZH is a wholly owned entity of Goldilox.

Hummm, I wonder if this comment will get deleted by the censors?

peterpeter's picture

Clusterstock ran it last week.

I'm seeing nothing in it that GS would like to keep private regardless.

You Cant Handle the Truth's picture

"The US equities market is increasingly efficient and is broadly regarded as the best in the world."

Wow, they are pumping out the bullshit from the very first bullet point.

peterpeter's picture

You may not like the valuations... but if you've ever tried to trade in any other market and car about depth of quotes, tight spreads and low costs of trade (factoring in all fees to agencies, ECN/Exchanges), they are correct.


You Cant Handle the Truth's picture

Empirically I believe the market has lost its ability to efficiently price-find.  That's my opinion, of course.

Anonymous's picture

Broadly efficient and regarded as the best in the world?

Uh no..... I do NOT trade anything connected with the US any more.... NO, not a bean or a toilet roll dollar's worth.

It is infested with computers that trade faster than the blink of an eye.

I see the rest of the world as more like markets than the infested gun running sneak peekers in the US

Anonymous's picture

"one of the primary advantages of co-location is the ability to establish queue position"....?!

...if that's not front running, what is?

Cognitive Dissonance's picture

Goldman Sachs has been putting lipstick on pigs for decades so making HFT trading look reasonable was a walk in the park.

Ando's picture

You don't have to contact GS.  Ill call your BS right here.

Just because the VIX says there isnt much volatility doesnt mean there isn't a ton of risk in this market right now.  Tyler points this out every day.  So liquidity providers should be compensated for the risk they take on, hence increased IS.

About that report from ITG.  Where do they get that data?  Its probably there own IS costs.  Looks to me like what they are showing is that they can't compete in the business anymore.  Maybe they need better algorithms.  I doubt Fidelity has costs that high.

Assetman's picture

When a 'liquidity provider' focuses its efforts in trading a billion shares a week and 40% of NYSE volume is concentrated in 5 stocks (not to mention a certain ETF), one would think the liquidity rebates the exchanges are providing would provide at least a decent amount of compensation for the risks being taken.  Well, except for the volume in the thousands of other issues to which the 'liqudity provider' has very limited participation.  That might be one explanation for higher IS trend since Mar-09.

I agree with the VIX... it's more a complacency measure than a risk measure, per se... though CDS spreads have also trended down significantly during the same time period risk assets.  I'm curious about the ITG data as well, but wouldn't it be a hoot if we could independently verify GS' own IS costs during the same time period.  Comparing the IS trend of GS against pure agency brokers would be a fascinating exercise. 

Perhaps these "smart routers" and their "algorithms" would to better in providing 'liquidity breadth', rather than 'liquidity depth' in a handful of very suspect (bankrupt) issues.  Otherwise the activity appears more like "momentum creating" than "liquidity proividing" to me.

Hephasteus's picture

If you call monemtum creating dressing corpses up in hot outfits and walking them around like it's freaking weekend at bernies... then yes.

Let em flip the stocks to crazy levels until the whole world tells them stick their full blown computers pretending to be routers up their butt.

This is just like Enron paying people to act like they are trading oil back and forth like crazy to impress visitors. It's all show and no go.

If we let these derivatives market infest EVERYTHING the entire country will have rolling blackouts just like california because some asswipe is playing i'm in charge of the wire because i've invested a few bucks in this electricity.

Enron isn't over. WTC 7 fell to keep it alive. It's not even half way over.

Hephasteus's picture

Would you GODDAMNED MOTHERFUCKERS stop calling complete order manipulation smart routers. There's nothing smart about grabbing a stock and pinging the exchange every 200 ms till you find a sucker to buy it. it's electronic stock flipping. Nothing more nothing less.

Anonymous's picture

actually visited 85 broad today. kinda weird down there with blocked off streets and cops with rifles

Careless Whisper's picture

"Proliferation of faster and less expensive hardware has leveled the playing field..."

Finally, a level playing field.

Hephasteus's picture

Prints money and loans it out at interest.

woo. I loves me a level playing field.

Anonymous's picture

Elliot Madison Accused Of Using Twitter To Tweet Police Actions At G-20 Protests

Who's next?