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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Anonymous's picture

Let's talk about that on a quiet, no news sunday evening....futures are already up 8 handles (they just gapped up on no news).

At this point, anyone that thinks this isn't just a select few, very large market participants jamming the market up day in and day out via futures....are living on another planet.

When US traders come in tomorrow morning and see dow futures up 100 on no news it will continue the panic buying and short covering frenzie. Why? Because futures gap up overnight almost every night on no news...and low volume...

This entire market support/manipulation/craziness is undoubtedly futures driven...usually overnight...

What ever happened with tyler's investigation of that midnight ramp up a few months ago ahead of a major fed announcement??

Anonymous's picture

Then again, the futures were way down late Thursday night and bam, the market still shot up on Friday. I'm not so sure there's a rhyme or reason to the futures market.

Anonymous's picture

Ah, but there is rhyme and reason. Reasons such as:

0.15% Fed Funds rate. Cheap money for money center banks.

Quantitative easing = pricing support for riskier assets.

Other Fed and Treasury programs designed to prevent free market price discovery (i.e., reflation programs).

So, while market activity may not seem rational in relation to what one would think is responsible management of the national budget and debt , there are reasons behind the reflation of irrational exuberance.

A rational pilot knows when to reach down and yank that yellow handle.

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



Anonymous's picture

The FDIC going broke should have been enough to sink us back below 666 all by itself.

Does anyone in the media even know the FDIC is broke? WSJ, NYT, CNN? Hello? Hello? I can't seem to find the article, kids.

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.

Anonymous's picture

Overnight SP futures typically follow Asian and European markets overnight. Nikkei is up 3% as I write this, so its not surprising to see futures up also. It's the Asian kneejerk reaction to Friday's action in US (which BTW was option expiration day for SPQ09 options) which is so annoying. Reflexivity in action, I guess.

"Option exercise results in a position in the underlying cash-settled Futures contract. Options which are in-the-money on the last day of trading are automatically exercised. QUARTERLY OPTIONS are exercised into expiring cash-settled futures, which settle to the SOQ calculated the morning of the 3rd Friday of the contract month. SERIALS are exercised into underlying cash-settled futures at their closing price on 3:15 p.m. on the 3rd Friday of the contract month."

peterr's picture
peterr (not verified) Aug 24, 2009 11:26 AM

like ..... uh, they are still -- despite their "client" status, still lambs to the slaughter........

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

While this is unlikely to occur in the United States (given the acute shortage of guillotines), it might be time for the Wall Street banksters to take heed of history.

They may own the politicians. They may own the regulators. And they may simply own most of America. However, they don't own the billion or so guns currently in the possession of an increasingly angry American population.

Massive economic suffering and a billion guns is a very dangerous mix!

Anonymous's picture

Naaah, never happen, if the shit hits the fan the proles will be to busy shootin at each other to bother with the banksters. After the food runs out and the power is turned off it will be every man, woman, and child for themselves. After the pets have been eaten we'll probably be shootin our neighbors just to have some form of protien to barbeque come Friday night. With no gas for your car how to you plan on driving to NYC or D.C. to unload your clip? The way I see it, you'll see anarchy in the larger cities like the LA riots back in 92 with the rest of the population hunkering down to protect their own corner of the world.

There's a reason there's an ammunition shortage. Shortages make people want to hoard that which is scarce. Do you think you're gonna want to waste your tiny little stockpile of ammo fighting the Govt. Hell no! You'll be saving that for your personal protection. And you'll need every last bullet too!

It's a nice thought though. But the government has too many armaments that they won't be ashamed to use. Guns with no bullets are no match for nuclear, biological, and chemical weapons. Starvation and roving bands of death squads will be the norm. And how do you know that your neighbor believes the same as you do? Or the guy across town? He might see you as an enemy and shoot you down and ask questions later.

An uprising? Nah. No? Then why are people so placidly willing to live in tent cities. No my friend our only chance is in the 2010 mid-term elections. If Acorn and friends of Barack are capable of the swinging the election to the Democrats you might as well drink the Kool-Aid. Your stockpile of bullets is limited while they can import billions of rounds from their fellow political travellers in the PRC.

Anonymous's picture

Where the f**k is the SEC?

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?

Gordon_Gekko's picture

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

Anonymous's picture

It is amazing how this institutional frontrunning is ignored by FINRA and SEC. Seems like regulators are only interested in small time cheats and clearly not the big well-connected ones.

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 !

Cognitive Dissonance's picture

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

Anonymous's picture

Where are the class action lawyers when you need them. This is a perfect set up, the measure of damages is the difference between the price run up, when the "tip" is given to the select group of insiders, and the price when the stock research is released to John Q moron.

John Self's picture

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

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

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.

JohnKing's picture

Mary Landrieu sure left a lot on the table.

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.

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.

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!!!!!

Marshal Ney's picture

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

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."

e1even1's picture

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

peterr's picture

the goal should be to make a more perfect union .

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

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.

Anonymous's picture

Are you trading a margin account with stock in Type 2?

Apocalypse Now's picture

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

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". 

My cognitive dissonance's picture

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

Find another way in.

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).

Marshal Ney's picture

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

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.


Anonymous's picture

You're probably referring to Fed Reg T, which applies only to non-margin accounts or cash account with low equity.

Anonymous's picture

I have no problem with them giving a bit more to those that pay more, but they should disclose this.

Anonymous's picture

i called and then emailed the SEC in july about Morgan Stanley trying to recylce CDO trash and pass them off as AAA bonds

they got back to me 3 days ago

6 fucking weeks!!!!!

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

Sqworl's picture

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

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.

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?

Anonymous's picture

Unfortunately, Spitzer isn't the Attorney General anymore. Frankly, I think we would see a lot more pursuit of criminality right now if he were.

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.

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...


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


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.



Anonymous'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.

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

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.