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Is Goldman's Selective Trading Disclosure A Legal Way For Preferred Clients To Front Run The Market?

Tyler Durden's picture


Zero Hedge has long been discussing the impact of selective informational disclosure, be it in the context of trading or research asymmetries, which promote a two-tiered market, where privileged accounts of major broker dealers receive "tips" ahead of "everyone else." The quid's pro quo is that these "privileged" few end up executing the bulk of their trades with the broker-dealer, thus ramping up riskless agency revenues. In essence the clients' capital risk is mitigated, while the return to the "perpetrator" is augmented by collecting a disproportionate share of the bid/offer spread in the given security. Whether this tiering mechanism occurs via Flash orders, SLP provisioning, actionable IOIs, advance selective notice of a large flow order, a phone call, a limited Bloomberg blast, or an Instant Message, the ethics of the practice are undoubtedly shady, and potentially borderline criminal. But no one is the wiser, as both sender and receiver of information know to keep their mouth shut. Until today, when the WSJ blows one aspect of this practice out of the water, by focusing on Goldman's selective informational disclosure to preferred clients, and is likely to create much more headache for Goldman's PR department and its staunchest CNBC-based prosecutor-turned-supporter and soon to be Sellout author.

In a long-overdue article titled "Goldman's Trading Tips Reward Its Biggest Clients" author Susanne Craig brings much of the firm's dirty laundry to the front page. While a must read for anyone interested in how Goldman Sachs "cultivates" its key client relationships, the summary is as follows:

Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group
Inc. was a lackluster "neutral" in early April 2008. But at an internal
meeting that month, the analyst told dozens of Goldman's traders the
stock was likely to head higher, company documents show.

The next day, research-department employees at Goldman called about 50
favored clients of the big securities firm with the same tip, including
hedge-fund companies Citadel Investment Group and SAC Capital Advisors
the documents indicate. Readers of Mr. Irizarry's research didn't find
out he was bullish until his written report was issued six days later,
after Janus shares had jumped 5.8%.

This pretty much summarizes the "magical" performance that many hedge funds generated in Wall Street's golden age: Goldman (and other firms, many of which however now are defunct) treated several clients preferentially, creating a "club" in any given name, running it up, then releasing what the club already knew to the broader investing public, as the club unloaded its positions to the witless majority. And this went on for many years, and in many aspects, still does.

Critics complain that Goldman's distribution of the trading ideas
only to its own traders and key clients hurts other customers who
aren't given the opportunity to trade on the information.

Securities laws require firms like Goldman to engage in "fair
dealing with customers," and prohibit analysts from issuing opinions
that are at odds with their true beliefs about a stock. Steven
Strongin, Goldman's stock research chief, says no one gains an unfair
advantage from its trading huddles, and that the short-term-trading
ideas are not contrary to the longer-term stock forecasts in its
written research.

Not contrary indeed, just useful, selective, tongue-in-cheek hints that provide a 10% front-running riskless arbitrage to those lucky enough to trade hundreds of millions of [stocks/bonds/CDS/options/fx/treasuries/munis] with the 85 Broad Financial Holding Company.

Ed Canaday, whom Zero Hedge respects very much for always proferring accurate and unspun information, is prompt in explaining this situation:

Goldman spokesman Edward Canaday says the tips are "market color" and
"always consistent with the fundamental analysis" in published research
reports. "Analysts are expected to discuss events that may have a
near-term or short-term impact on a stock's price," he says, even if
that is a different direction from an analyst's overall forecast.
Goldman's published research reports include a disclosure that
"salespeople, traders and other professionals" may take positions that
are contrary to the opinions expressed in reports.
But the firm doesn't
disclose the trading huddles.


Mr. Canaday says analysts are told that any comment at a meeting that
could result in a change in a rating, earnings estimate or stock-price
target "must be published and disseminated broadly to all clients." He
adds, however, that it is rare that tips arising from the meetings
reach that threshold.

Rare, last time we checked, had a special judicial meaning, that was almost on par with never. But not quite. Mr. Canaday elaborates further:

The tips usually go to top clients who have expressed interest in
having the information and have short-term investment horizons, he
says. Goldman doesn't want to overload other clients with information
that isn't relevant to them, he says. "We are not in the business of
serving thousands of retail customers
," he says.

Indeed- the firm is purely in the business of making sure the several dozen multi-billion hedge funds it does serve make practically risk free returns by taking advantage of the gullibility of John Q. Public, who is not relevant enough to be addressed by Goldman's massive trading floor, yet whose bail out is more than welcome when the firm's stock price is in the mid $50's, and about to hit $0.

So what does the law say about this:

"The spirit of the law is twofold," says Eric Dinallo, who in 2003,
when serving as a deputy to former New York Attorney General Eliot
Spitzer, helped negotiate a $1.4 billion stock-research settlement with
10 major Wall Street firms, including Goldman. "Analysts should give
consistent advice to all their customers, be they small investors or
big trading clients." Any views that differ from an analyst's published
rating but are "worth sharing with certain customers," he says, should
be made "available to everyone."

Mr. Cuomo, we hope you read this (we know you are).

Yet, most entertaining, in this little transgression is the presence of who else than the Federal Reserve:

The research business is considered a loss leader at most firms,
despite persistent attempts by Goldman and other securities giants to
squeeze more revenue from it. Goldman was looking for a leg up on
rivals when it started the trading huddles in 2007. That year, Goldman
ranked ninth in Institutional Investor magazine's annual list of the
best equity analysts, as determined by a survey of big institutional
investors. Goldman was rated eighth in last year's competition.

The huddles began in earnest around the time Goldman's research
department got a new boss, Mr. Strongin. He came to the firm in 1994
from the Federal Reserve Bank of Chicago, where he had been director of
monetary-policy research.

The great confluence of the two greatest things in the world, the Fed, and Chicago-style goal pursuit, sure got the job done:

Mr. Strongin, 51 years old, set out to improve Goldman's research
operations. The firm asked important clients for suggestions. One idea
that took hold was giving certain customers and traders more access to
stock tips.

The idea was controversial with some Goldman research staffers. "I
am not sure we should be giving recommendations that go against our
said one Goldman employee at a meeting where the trading
huddles were discussed, according to one attendee.

Institutional memory truly is short - certain customers getting privileged information a mere 4 years after the settlement: have we gotten your attention now Mr. Cuomo?

So just who are the proud nominees of Goldman's insider club:

Documents reviewed by the Journal indicate that anywhere from six to 60
clients are contacted, depending on the investment. For example,
clients specializing in financial stocks are given recommendations
about that sector. Each call typically includes comments about the
overall market and the kinds of investors Goldman believes are
propelling it, and ends with a stock tip.

And lest someone think that Goldman's ubiquitous prop trading group is somehow exempt from benefiting in this backdoor arrangement, read on:

The meeting where Mr. Irizarry suggested that Janus shares were
worth buying, held on April 2, 2008, was attended by Goldman's
financial-research analysts and traders who handle customer orders. It
also included another class of traders called "franchise risk
managers," who sit with and advise the traders handling customer orders
-- and make bets with Goldman's money.

Typically, traders who wager firm capital are walled off from those
handling customer orders so that they don't take advantage of
information about client trading, which securities regulations forbid.
Goldman says its franchise risk managers don't trade on client
information and must first share trading-huddle tips with clients
before acting on the tips themselves.

"Typically", just like "rare", are two of legal counsel's favorite expressions. But at least we have Goldman's affirmations that everything at the big firms runs according to regulations. After all, in numerous prior transgressions that company has "neither admitted nor denied guilt" - why should this change now?

And as for the regulators: it is good to know that at least they are on top of this scheme.

Last year, the Financial Industry Regulatory Authority, the
industry's self-regulatory body, proposed new rules meant to clarify
existing disclosure obligations under the rule requiring "fair dealing"
with all clients. Firms could issue contradictory ratings as long as
clients were told that such inconsistencies were possible.

A Finra spokesman said the agency still is reviewing comment letters
filed in response to the proposal. Goldman hasn't commented on the
proposed rules.

Surely, upon reviewing the numerous comment letters, Finra will have something relevant to say on this about the time the recently issued 30 Year Bond matures.


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Sun, 08/23/2009 - 21:20 | Link to Comment Anonymous
Sun, 08/23/2009 - 21:42 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:22 | Link to Comment Anonymous
Mon, 08/24/2009 - 00:17 | Link to Comment Tripps
Tripps's picture

this guy is right though...its obvious someone is gunning them up overnite. only thing out there is asia is reacting to our friday close and stupid housing data


the negatives are huge: obama increased defecit projections to mind boggling #s

people pumping friday as a breakout. LOL

FDIC is broke



Mon, 08/24/2009 - 00:53 | Link to Comment Anonymous
Mon, 08/24/2009 - 10:49 | Link to Comment Arco
Arco's picture

I mentioned this to Tyler a while back and he never responded. I agree. The fact that the FDIC is broke is a big deal. The special assessments are also starving the smaller regional banks of much needed cash right now that they should be lending out.

Sun, 08/23/2009 - 22:13 | Link to Comment Anonymous
Mon, 08/24/2009 - 12:26 | Link to Comment peterr (not verified)
Sun, 08/23/2009 - 21:23 | Link to Comment Anonymous
Mon, 08/24/2009 - 00:52 | Link to Comment Anonymous
Sun, 08/23/2009 - 21:28 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:19 | Link to Comment Problem Is
Problem Is's picture

Aren't most SEC staffers in the Hamptons on an all expense paid lovely weekend courtsey of a couple of Lloyd "Cueball" Blankfein's flunkies--- I mean visiting some friends?

Mon, 08/24/2009 - 00:47 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Are you f--king kidding me? SEC is part of the problem, not a solution.

Sun, 08/23/2009 - 21:29 | Link to Comment Anonymous
Mon, 08/24/2009 - 03:31 | Link to Comment agrotera
agrotera's picture

That is because the privately held Federal Resereve Corp is said to own half the Dow, and the majority of hedge funds...and as such, they also own most politicians, create policy that suits their gain, and of course, their beloveds like Goldman and other primary dealers, are sacrosanct, too big to fail, too sacrosanct to fail, too powerful to have anyone effectively stop their machine/cartel !

Sun, 08/23/2009 - 21:32 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The more things change, the more they stay the same.

Sun, 08/23/2009 - 21:49 | Link to Comment Anonymous
Mon, 08/24/2009 - 08:51 | Link to Comment John Self
John Self's picture

They're afraid that they'd have trouble establishing venue in West Virginia or Mississippi against Goldman.

Sun, 08/23/2009 - 21:51 | Link to Comment e1even1
e1even1's picture

according to

these are some of the people who pledge allegiance to GS. 2008 election cycle ...

Senate    Obama, Barack    $997,095 (AKA 'Change You Can Believe In')
Senate    Clinton, Hillary    $415,750
Presidential    Romney, Mitt    $234,275
Senate    McCain, John    $230,095
House    Himes, Jim    $152,798
Senate    Dodd, Chris    $112,500
Presidential    Giuliani, Rudolph W    $109,450
Presidential    Edwards, John    $68,750
Senate    Specter, Arlen    $47,600
House    Emanuel, Rahm    $37,750
Senate    Sununu, John E    $31,400
Senate    Reed, Jack    $30,100
House    Skelly, Michael Peter    $26,171
Senate    Baucus, Max    $26,000
Senate    Harkin, Tom    $24,580
Senate    Lautenberg, Frank R    $24,100
Senate    Chambliss, Saxby    $22,400
Senate    Collins, Susan M    $21,900
Senate    Warner, Mark    $21,800
Senate    Landrieu, Mary L    $20,700

Sun, 08/23/2009 - 22:41 | Link to Comment Apocalypse Now
Apocalypse Now's picture

Excellent, follow the money.

Notice there is no difference between Republican / Democrat.

The media is trying to position Romney as the next potential Republican candidate for the next election.

It would be nice to request a statement from each representative regarding their association with GS in light of the apparent fraudulent activities.

Sun, 08/23/2009 - 23:39 | Link to Comment JohnKing
JohnKing's picture

Mary Landrieu sure left a lot on the table.

Mon, 08/24/2009 - 03:38 | Link to Comment agrotera
agrotera's picture

That is great, but could you add together ALL of the Federal Reserve member banks, and primary dealers and take a look at how this group compares to the total of all contributions for each candidate? 

I think you would find that it is the backing of the private Federal Reserve and all their affiliates and agents which buys most politicians, and as such, this cartel basically controls all policy.  That is why it is such a ridiculous red herring for all of us to hear about how important it is for the Fed to remain "independent".  The translation of that is, how important that the Fed's money and powerdominating train doesnt get disturbed.

Mon, 08/24/2009 - 09:29 | Link to Comment e1even1
e1even1's picture

this is what i was able to find quickly.

the financial services industry select strategic campaign contributions in the last 20 years ...

Total $2,274,622,193 Democrats $1,017,919,054 Republicans $1,243,672,592 effectively neutralizing the ballot box. there's nowhere we can go to vote this down. the US government is the REAL vampire squid brokering our life blood.

you might dream of meaningful non-cosmetic change, but that's the only place it will happen. in your dreams.

Mon, 08/24/2009 - 17:24 | Link to Comment agrotera
agrotera's picture

It doesn't matter which party wins if you buy both parties!


eleven1 AWESOME work!!!  TYLER, MARLA, please take note of  Eleven1's numbers--they provide an incredible picture and they say a thousand words!

The reason why no one talks about this so much is that with so many agents, and affiliates, it is hard to believe that the privately held Federal Reserve and the toobigtofail and their affiliates, are really one big cartel with mutual goals getting purchased each time there is an election.  putting the picture together the way you did eleven1, makes a crystal clear statement of truth.  Thank you so much!!! I hope your work will get turned into an ongoing conversation here at ZH!!!!!

Mon, 08/24/2009 - 04:41 | Link to Comment Marshal Ney
Marshal Ney's picture

"The only thing we have to fear is..... the entire political and economic system." FDRRRRR

Mon, 08/24/2009 - 06:54 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

The odd amounts would seem to imply some of the "donations" are property that has been valued. Or, that sometimes contributions were made in response to requests for specific amounts, e.g., to provide funds to pay a specific invoice.   Maybe GS has some complicated algorithm to determine what you get:

"Yeah, I know it's a little light, Senator Landrieu, but our HAL 9000 values your allegiance at that amount, and I just don't have permission to write a check for more. Do more and we'll see what we can do next year."

Mon, 08/24/2009 - 09:14 | Link to Comment e1even1
e1even1's picture

that's the way it looks to me. an incentive plan.

Mon, 08/24/2009 - 12:26 | Link to Comment peterr (not verified)
Sun, 08/23/2009 - 21:51 | Link to Comment vicelord
vicelord's picture

I can attest that the SEC is doing their job - I myself just got a notice from them about a week ago for making one too many round-trips in and out of a particular stock.  I was (gasp) day-trading.  I use several accounts to try and get away with this.  And 2 of them are in my wife's name.  I usually have no problem doing it.  But, evidently, they've stepped up their game a bit these days.  I was given a warning.  But God forbid I get a free-ride restriction; they're ALL OVER MY ASS with that these days.  If I get one more in the next 3 months, I'm fooked.  And, I swear to God, they are NOT fooking around when it comes to that.  Try it - buy a stock, sell it, buy another with the same money, and - if you don't hold it for 3 days - see what happens.  THIS is what they spend their days doing.  Going after you're average retail trader looking for any lapses they can find.  And, yet, all this other stuff ZH talks about on a daily basis seems to be escaping their notice.  Go figure.

Sun, 08/23/2009 - 22:18 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:43 | Link to Comment Apocalypse Now
Apocalypse Now's picture

With all the volatility, this can happen if you just put a stop limit on within the 3 days.

Sun, 08/23/2009 - 23:41 | Link to Comment D.O.D.
D.O.D.'s picture

Actually your transactions are being monitored by your broker, and they are reporting your account infractions to the SEC, who in turn notifies you, warns and eventually fines you.  In this case your assertion that the SEC has "...stepped up their game..." is misguided.  No doubt your broker has stepped up THEIR game, whether through fear or gain. Meaning...

A)The SEC will fine brokers who do not file trading transgressions

B)Brokers are rewarded for filling trading transgressions


To what end? You might ask.

So that fools will be inclined to believe that the SEC has "stepped up it's game". 

Mon, 08/24/2009 - 00:09 | Link to Comment My cognitive di...
My cognitive dissonance's picture

Obviously, they didn't like you coming in through the front door.

Find another way in.

Mon, 08/24/2009 - 00:53 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

The only function of SEC is to protect Goldman. Period. Even when they are after someone else, it's only because they are encroaching upon Goldman's turf (of engaging in criminal activities).

Mon, 08/24/2009 - 04:44 | Link to Comment Marshal Ney
Marshal Ney's picture

"All the animals are equal, except some animals are more equal than others."

Mon, 08/24/2009 - 10:22 | Link to Comment River Tam
River Tam's picture

Mr. Douglas, I am beginning to see the light. Its funny that you hold yourself out as Gordon Gecko, a moniker for the "greed is good" point of view. And yet your posts take the opposite viewpoint.


Mon, 08/24/2009 - 07:55 | Link to Comment Anonymous
Sun, 08/23/2009 - 21:54 | Link to Comment Anonymous
Sun, 08/23/2009 - 21:56 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:17 | Link to Comment Sqworl
Sqworl's picture

May I suggest ZH provide a column for cc's SEC and AG complaints...It should be named

Harry Markopolous In-Box

Sun, 08/23/2009 - 22:00 | Link to Comment Sqworl
Sqworl's picture

The problem with greed is that its blind....

Sun, 08/23/2009 - 22:00 | Link to Comment Careless Whisper
Careless Whisper's picture

Another fine bit of documented research exposing the people at 85 Broad and 200 West for the perps that they really are.
There's no need asking the SEC to investigate. We all know that's a complete waste of keyboard strokes. This type of behavior needs to be looked at through the scope of RICO and possible criminal violations.
Since Mr. Spitzer is gone maybe the boys think Mr. Cuomo isn't going to play hardball.

Sun, 08/23/2009 - 22:05 | Link to Comment tom a taxpayer
tom a taxpayer's picture

From April 16, 2003 Frontline interview with Eliot Spitzer on the $1.4 billion stock-research settlement with 10 major Wall Street firms, including Goldman:

Frontline: "From the standpoint of the banks and the analysts, what do you think is the most serious deterrent to future misbehavior, abuse, corruption, and fraud, versus investing?"

Eliot Spizer: "The next time there will be absolutely no inhibition to bringing criminal cases."

With the WSJ disclosures on Goldman Sachs, looks like this is "the next time", right, Mr. Attorney General?

Sun, 08/23/2009 - 23:26 | Link to Comment Anonymous
Mon, 08/24/2009 - 06:57 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Spitzer handed over his "neutralize me" zapper gun on a silver platter, and the door on that enforcement avenue closed for good.  There have been no replacements - no prosecutor is permitted to delve into this.

Sun, 08/23/2009 - 22:06 | Link to Comment monmick
monmick's picture

Unfortunately, this type of behavior is next to impossible to prosecute under the existing laws and enforcement regimes. Kind of reminds me of the investigation into CSFB's propensity in allocating hot IPO's during the 1990s -- an investigation with which Mr. Quattrone was accused of interfering. In the end, even the charges against FQ did not stick. Plus ça change...


Sun, 08/23/2009 - 22:32 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

"The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate."

GS, Steve Cohen and Ken Griffin...the schmooze fest continues? If you can't beat them, try joining them:

MFFAIS activity for Citadel LP

MFFAIS activity for SAC Capital Advisors

MFFAIS activity for Goldman Sachs


Sun, 08/23/2009 - 23:40 | Link to Comment straightershooter
straightershooter's picture

Correct me if I am wrong:

So, the game is played like GS frontrun its most favored clients who frontrun the John-Q-Public via the convinction buy list  issued days later. Brilliant!! No wonder GS had an almost perfect trading records in 2Q. I shall not be surprised if GS shall report perfect trading records for q3.

John-Q-Public, it appears that you deserve being  frontrun by GS. Don't do what GS says, do what GS does.



Sun, 08/23/2009 - 22:16 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:19 | Link to Comment Hangtime79
Hangtime79's picture

Right on tom a taxpayer

The settlement was to forestall any criminal charges being filed against the firms. Yet just a few short years later here comes the same behavior again. I think its indictment time ie death for any firm see Arthur Andersen. You do not need to win a conviction, you just need a grand jury indictment.

Until some firm gets put in a body bag this behavior will continue.

Sun, 08/23/2009 - 23:07 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Exactly. It has to be pursuit of criminal charges, not just civil settlements or fines. Fines are just a cost of doing business, and now, GS could be using taxpayer money (e.g. routed thru AIG) to pay their fines. Only criminal charges have any hope of arresting the rape and pillage of investors and taxpayers.

It takes only one prosecutor (or Attorney General) to investigate just one crime, and follow the money and the connected crimes, and bring down the overlapping criminal enterprises using Racketeer Influenced and Corrupt Organizations Act (RICO) prosecutions. Once a tough prosecutor get serious, the white-collar softies will crumble like feta cheese. The guilty will trample over each other to be witnesses against the masterminds of the greatest financial crimes in U.S. history.

When a prosecutor takes off the kid gloves, and hits the criminals with the iron fist of justice, the prosecutor will become a national hero.

Mon, 08/24/2009 - 06:58 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Or dead. 

Mon, 08/24/2009 - 07:42 | Link to Comment Chumly
Chumly's picture

3 to 1 odds dead vs. hero

Sun, 08/23/2009 - 22:29 | Link to Comment Anonymous
Mon, 08/24/2009 - 00:41 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:35 | Link to Comment Arm
Arm's picture

The entire institution of institutional research is about insider information.  Just look how funds fight with each other to have private meetings with top analysts.  Why?  Analysts are not supposed to say disclose any new information in these private meetings.  They should be just the same as reading their research notes. 

Of course, anybody that has ever been in these meetings knows that the analyst will start telling you everything that he did not include in the note; including the private discussions he has had with sector CEO's while playing golf.

There are some good analysts out there, but it's just that the entire function is too prone to ethical conflicts.


Sun, 08/23/2009 - 22:38 | Link to Comment Sqworl
Sqworl's picture

If I were GS, I would hire food taster's..for canteen

Mon, 08/24/2009 - 07:44 | Link to Comment Chumly
Chumly's picture

Well, there went that idea.

Sun, 08/23/2009 - 22:48 | Link to Comment Anonymous
Sun, 08/23/2009 - 22:53 | Link to Comment Rollerball
Rollerball's picture

You don't have to worry about the cannibals if you stay off the island.  

The ninjas will make sushi out of Squidworld ('nuke me once, shame on you; nuke me twice, shame on me'), while the mongol dragon heatmaps chickenhawkturkeyeagles on the barbie.  Call it "Red Dawn  October".  


Sun, 08/23/2009 - 23:06 | Link to Comment madmax
madmax's picture

"We are not in the business of serving thousands of retail customers"

They're in the business of serving themselves and a few other elites. Now that the retail guy has bailed their asses out with our tax dollars they have no use for us anymore.

When their ass was dirty they used us for toilet paper.

Mon, 08/24/2009 - 03:43 | Link to Comment agrotera
agrotera's picture

...the thousands of retail customers are the sitting ducks for their target practice.  And, it obviously isn't just the retail customers that they target, it is anyone who is not a client, since their clients use their frontrun research and use everyone else as target practice when the research gets to everyone else.

Mon, 08/24/2009 - 12:26 | Link to Comment peterr (not verified)
Mon, 08/24/2009 - 11:30 | Link to Comment Anonymous
Mon, 08/24/2009 - 17:31 | Link to Comment agrotera
agrotera's picture

It is excellent that you are discriminating...i am talking about the millions of people sitting in these models, and believing that somehow that is what they "should" do, when it is more or less the financial services machine that built these models and also built the montra that the "invester" should live by them except ( but there is no way "they" live by the models....can you imagine, proprietary trading desks, "yea we have a moderate strategy, 60% stocks 40% bonds" --what a joke.

Sun, 08/23/2009 - 23:08 | Link to Comment Sqworl
Sqworl's picture

Asia is rocking double

Sun, 08/23/2009 - 23:10 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:16 | Link to Comment Anonymous
Mon, 08/24/2009 - 01:24 | Link to Comment aldousd
aldousd's picture

Right. Finally someone who knows the definition of Facism is using it in context. (This is not meant to patronize you mr anonymous, but all the other ones, like some of my obama fan collegues, who think that facism cannot exist in the US because everyone still smiles on TV.)

Mon, 08/24/2009 - 05:03 | Link to Comment agrotera
agrotera's picture


Sun, 08/23/2009 - 23:27 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:27 | Link to Comment TumblingDice
TumblingDice's picture

I've been short LAW for the past two years now, but your blog may just get me to flip my position. Great article.

Sun, 08/23/2009 - 23:30 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:55 | Link to Comment TumblingDice
TumblingDice's picture

Some serious confirmation signals started cropping up in 07. I was worried it was a crowded trade but at some point the light bulb went off that told me "there's only gonna be one short squeeze for this trade in my lifetime" so I jumped on board.

Sun, 08/23/2009 - 23:31 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:33 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:50 | Link to Comment Assetman
Assetman's picture

By the way, I'm the one who made that last post... bad spelling and all.  Just wanted to make sure you knew this wasn't coming from just another random hater.

Mon, 08/24/2009 - 00:12 | Link to Comment Tyler Durden
Tyler Durden's picture

Your observations are spot on. Yet your claim seems to be that the status quo is "as is" and just because the system is rigged but works, there is no changing it.

Well, why not limit investing to just the top 100 in AUM then? While we are at it, let's have an MLB for the Barry Bonds of the world, and an olympics for those who openly dope themselves instead of getting their ideas from Trueblood and sucking on erythropoietin. Why do we even pretend any more that the market is fair and impartial for the small guy? And like any game of chance, the small guys have the 00 against them.

Zero Hedge would immediately stop its criticism of Wall Street practices (HFT, dark pools, flash, wide  spreads, advance looks, etc, etc, etc - in fact any loophole beating practice, which is really all the innovation on Wall Street is geared at anyway) if Goldman et al were a broker to a market which included only Citadel, Paulson, Och Ziff, Millennium, SAC, DE Shaw and a few others, and these entities gave and took daily from each other, while the retail guy played in the minors (and had an even chance of winning).

Case in point - there are exactly 0 retail participants in the CDS market (ok, slight exaggeration: you will find the occassional $10mm minimum margin poster here and there) - and that's fair: the big boys playing know the rules of the game intimiately, and if you lose your money, it is fair and square. If you lose enough times, you are out.

Well - just do it for all other products -that is what tiering has led to. And the tiering is not just between Main Street and Wall Street, it is between institutions, and between broker dealers, the latter of which now seem to have unfettered access to the taxpayer's coffers.

So don't pretend it is a fair, efficient and equitable market for everyone, because it is not. And the big boys, in addition to stealing from each other, will always steal from the guy with the $25,000 E-Trade account (especially now that Citadel will know every single trade that E-trade submits). And the sooner this is done, the better, as retail pulling all its money from the market will be far more destructive than a side pool for those in the general public who are addicted to the rush from 50 cent wide put bid/offer spreads (where did all those liquidity providers go: oh yeah, trading AIG all day long).

Mon, 08/24/2009 - 00:53 | Link to Comment monmick
monmick's picture

OT, but I'm not sure where else to post the info.

Alex Berenson has a piece on the Sergey Aleynikov affair in this morning's NYT, in case you have not yet seen it...


 Arrest Over Software Illuminates Wall St. Secret


Published: August 23, 2009

Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.

He was not expecting Special Agent Michael G. McSwain of the F.B.I.

At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate” stock prices.

This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.

Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.

Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.

Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.

But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.

“It is certainly growing,” said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.”

The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

“A geek who writes code — those guys are now the valuable guys,” Mr. Donefer said.

The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.

Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.

Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.

As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.

Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.

He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.

A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.

This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.

At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.

After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.


Mon, 08/24/2009 - 01:00 | Link to Comment Ducky
Ducky's picture


Mon, 08/24/2009 - 01:09 | Link to Comment Assetman
Assetman's picture

Your observations are spot on. Yet your claim seems to be that the status quo is "as is" and just because the system is rigged but works, there is no changing it.

Thanks for the response, TD.

Acutally, my claim is that this form of "staus quo" has been going on for decades-- this is the furthest thing from being a new revelation. 

The reality is the more nimble and smaller institutional firms (such as the one I'm working for currently) have found effective ways to circumvent the front running ways of The Street.  If not, most of us would not have been able to survive.

I wholeheartedly agree with you that there is nothing fair about the preferential tiered treatment firms like GS (and again, they are far from alone) give their clients.  It is admirable that you are attacking these issues with such zeal, but to be quite honest, the value of research from these bulge bracket firms have lost their inherent value (and that is common knowledge on the buy-side).  They lost it years ago to the independents.  In fact over 90% of trades we place today are to agency-only brokerages with independent research arms.  And I'm pretty sure we were well behind the game.

As for the retail investor?  They've been screwed and continue to be screwed.  No disagreement there.  But I just don't think that is a revelation, either.

If you find away to effectively attack the status quo in regards to front running research-- I'm behind you 100%.  I just don't think this issue is as easy to "cherry pick" as HFT, though. 

Keep fighting the good fight...

Mon, 08/24/2009 - 03:58 | Link to Comment agrotera
agrotera's picture

Sadly, portfolio models and asset allocation models for 401k plans, seems to be a very steady target around which to shoot as well.  It is really tragic that people are so indoctrinated by "stocks for the long run" and "buy and hold" etc, that again, these static portfolios are like very steady sitting ducks for target practice surely designed by the old investment banks. 


Mon, 08/24/2009 - 11:10 | Link to Comment Anonymous
Sun, 08/23/2009 - 23:39 | Link to Comment pros
pros's picture



Goldman earns money the old-fashioned way...


they steal it

Mon, 08/24/2009 - 00:57 | Link to Comment rapier
rapier's picture

This is as old as The Street. The basic methods that is. Back in the days when specialists meant something.  Of course in those day there were long periods when there wasn't a bull market. Now that the government, the Fed and the Street are in full partnership the bull runs are more of a sure thing.

That said I was stupid enough to think that was over. Pretty dumb I know.

Still to criticize ZH a bit. There are far too many breathless reports implying scandal where there isn't quite one or where the scandal is just business as usual. While this does serve a function of stirring the pot aimed at helping to bring about a critical mass of opposition to the status quo using crude propoganda techniques so widely is going to lesson the impact if not outright make it fail.

Mon, 08/24/2009 - 01:07 | Link to Comment Anonymous
Mon, 08/24/2009 - 01:18 | Link to Comment Ags Nightmare
Ags Nightmare's picture

A lot of this stuff gets buried in options. Look at the activity of Goog calls mid week last week before they put their "convict buy" on it and raised their price target. The price target competition  is the next rancid abuse of power you are going to see now that we are in bubble mode again. What better way to hide it then in the options pits. More leverage, less capital outlay on a sure thing. As for Goog, options that were trading at .50 cents ended up in the double digits making someone a boatload of cash. I don't think it was Joe Six pack buying thousands of out of the money contracts with two days to go. Saw bizzrre stuff in July as well the Wednesday before Op Ex. This ain't small time money in front of these trades. A hundred shares of this piece of paper is a 20 % down payment on a 250k house.  

Look at the price target bidding war on Apple. It's like going to the county fair steer auction. It started at 175 and is up to 275 now.

I find it hard to beleive when we are in mania mode, someone "doesn't" know whats coming. Like you said, these are risk free trades. Can you imagine if somone called and said buy 200 contracts at .50 cents costing you 10k and you can't lose. That bet was worth 200k in 2 days. 




Mon, 08/24/2009 - 01:25 | Link to Comment Anonymous
Mon, 08/24/2009 - 01:52 | Link to Comment Anonymous
Mon, 08/24/2009 - 21:49 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Author! Author!

Thank you, Anonymous playwright, for the great One Act Tragicomedy.

Mon, 08/24/2009 - 01:57 | Link to Comment Anonymous
Mon, 08/24/2009 - 02:12 | Link to Comment Anonymous
Mon, 08/24/2009 - 02:12 | Link to Comment Anonymous
Mon, 08/24/2009 - 02:12 | Link to Comment Hephasteus
Hephasteus's picture

Power always backfires. Sooner or later people stop trying to get into heaven or the earthly gated communities. Weld the gates shut. Land mine all around and it and set up machine gun nests.

I don't have data but I do have great sensitivities. This market is going to get inflated as hard and fast as it can and then the chinese saudis and russians are going to stick a squirrel up it's ass.


Mon, 08/24/2009 - 04:11 | Link to Comment Pizza Delivery Man
Pizza Delivery Man's picture

ZH has a hard on for GS.

ZH- I love the content of your blog. However, can you find something to bitch about other than GS?

Kind of immature to pound GS, over, and over, and over, and over, and over, and over, and over ad infinitum.

You're either not diggin deep enough, don't know how, or just dont give a.....;)

Mon, 08/24/2009 - 04:30 | Link to Comment Hephasteus
Hephasteus's picture

GS does all the interesting stuff. All morganchase does is manipulate gold and silver markets. All AIG does is present it's numbers in pretty paintings that regulators swallow.

Mon, 08/24/2009 - 05:02 | Link to Comment Anonymous
Mon, 08/24/2009 - 06:53 | Link to Comment GlassHammer
GlassHammer's picture

"All the luck in the world isn't gonna change things for these guys. Theyr'e simply overmatched. We're not playing together, but we're not playing against each other, either. It's like the Nature Channel. You do'nt see piranhas eating each other, do you?"

The quote seems appropriate.

Mon, 08/24/2009 - 07:04 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

ZH: Keep pounding on GS.

Mon, 08/24/2009 - 07:52 | Link to Comment Anonymous
Mon, 08/24/2009 - 08:18 | Link to Comment Miles Kendig
Miles Kendig's picture

TD, one day we will really see what a gone Tharn GS PR and their associates at the SEC, CFTC & OTS looks like... Keep on keeping on it.

Mon, 08/24/2009 - 08:52 | Link to Comment Anonymous
Mon, 08/24/2009 - 08:53 | Link to Comment mule65
mule65's picture

If sheeple quit trading on ANALyst recommendations then this wouldn't be much of an issue.  This practice should be banned.

Mon, 08/24/2009 - 08:56 | Link to Comment quant-this
quant-this's picture

So against the CFA institute research disclosure standards. 

Mon, 08/24/2009 - 10:30 | Link to Comment Assetman
Assetman's picture

Did you ever wonder why the sell-side has such few CFAs?

I find it hard to believe that any CFA doing sell-side research at a bulge bracket firm would qualify for publishing "independent and objective" research.

My biggest beef about the CFA Institiute is their lack of teeth when it comes to advocacy issues.  But their focus has improved greatly over the past 3-4 years.

Mon, 08/24/2009 - 10:45 | Link to Comment quant-this
quant-this's picture

I think they're thinking is that it is so hard to get the charter that members will generally behave and self-police. It would be nice for them to come out and criticize some of the sell side firms and make it a point that charter holders are held to a higher standard; certainly good advertising in this environment. 


There really is no reason for the SEC to step it up and adopt the CFA code of ethics and enforce it. But in the end, it is practitioners and clients that need to show disapproval or support by whom they hire and whom they do business with. For example, everyone bitches about GS and them front running clients, special tips, etc, but I don't see any large institutional clients complain and take their business elsewhere.

Mon, 08/24/2009 - 11:00 | Link to Comment Assetman
Assetman's picture

Good points.  I suppose we start imposing these higher CFA standards by taking away Abby Joseph Cohen's charter.

Well, that may not be the best place to start. :)

I wouldn't want the SEC coming in to enforce the CFA Code of Ethics-- they do a bad enough job as it is with the regulations they have in force.

Just so you know, while we are a small institutional shop, we do not do business with GS-- or any bulge bracket firm-- for that matter.  We also don't do business with firms that have prop desk operations.  That narrows things down quite a bit from a broker perspective.

Mon, 08/24/2009 - 13:57 | Link to Comment quant-this
quant-this's picture

I run a small operation as well and we have the same attitude as you. First, I consider myself a fiduciary to the people whose money we manage (most of it is ours, family and friends), so my job is to make money for them. I also think financial service firms should be fiduciaries to the companies they provide services for, so their job is to make mine more efficient. That is a huge problem in Wall Street and I think that is what I like about the CFA code of ethics and conduct, the emphasis on fiduciary duty.

About the SEC, I did not imply that they police charter holders but that they impose a similar code to all registrants and that they actually enforce it. It's amazing because when I sit down with a friend and if I am asked financial advice, I throw in 1000 disclosures and make sure that I am not leading anyone in the wrong direction. Not that it would happen, but that person could call the CFA Institute and get me in trouble. That fear does not exist with any sort of securities registration from the SEC to the FSA.

Mon, 08/24/2009 - 15:40 | Link to Comment Arm
Arm's picture

Unfortunately CFA Institute has shown a strong preference to catering to big buy-side firm interests.  As such, it has essentially done nothing ragarding all the current market shennanigans.  (just look at the standards and performance standards; they can only be implemented organizations with a very large back-office)

On a personal level, CFA Institute never followed up on a clear enforcement case I sent them.  This is a very sad realization for me, as I have been very active in the local society. 

Mon, 08/24/2009 - 12:26 | Link to Comment peterr (not verified)
Mon, 08/24/2009 - 10:51 | Link to Comment kid canuck
kid canuck's picture

I've seen every large dealer with a research department  playing this game one way or another throughout my career (30 years) in this industry so there's nothing new here.  However, it does appear as if the survivors are taking this to a new level and that at present regulators only care about getting the market (and confidence) up no matter what.

Mon, 08/24/2009 - 11:01 | Link to Comment Assetman
Assetman's picture

Good observations, kid.

Mon, 08/24/2009 - 12:53 | Link to Comment Anonymous
Mon, 08/24/2009 - 16:56 | Link to Comment Anonymous
Tue, 08/25/2009 - 01:45 | Link to Comment Anonymous
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