Letter To Senator Charles Schumer - Ban Goldman's SIGMA X Dark Pool

Tyler Durden's picture

Dear Senator Schumer,

You recently approached SEC head Mary Schapiro with some very valid concerns about Flash trading, and the potential for investor abuse by advance looks to select market participants ahead of the general order pool. Your crusade was subsequently enjoined by such equity market luminaries as Robert Greifeld, president and CEO of the Nasdaq Stock Market, who had this to say regarding not just Flash trades in particular, but numerous other components of market topology, whose sole purpose is to obfuscate natural order flow and to provide loopholes for dominant market players to extract inefficiencies (i.e., scalp regular investors) arising from established and SEC-endorsed mechanisms of efficient market circumvention:

"Flash orders, which are a fundamental part of high-frequency trading, are but one symptom of the current evolving market structure. Nasdaq OMX is concerned that the securities industry appears
willing to accept more and more ‘darkness’ and limits on the
availability of order information. Instead, the policy goal should be
clear: to eliminate any order types or market structure policies that
do not contribute to public price formation and market transparency.”

"The industry has a unique opportunity at this time to take a hard look
at dark order types and the underlying market structure issues that do
not support public price information

Senator Schumer, while Zero Hedge applauds your initiative, the truth is that the wrongdoing in the context of potential investor market abuse runs far deeper and is much more pervasive than you realize. And while one can highlight the merits of the Op-Ed published in the New York Times earlier by quant titan Paul Wilmott entitled "Hurrying Into The Next Panic" (a recommended read for you and your staff), which notes numerous frightening implications brought about by the domination of Hiqh Frequency Trading, let us stick within the context of advance looks, which is at the basis of your letter seeking the ban of Flash-like behavior.

Zero Hedge would like to highlight that while your letter to Mary Schapiro indicated your concern with such market actors as DirectEdge, BATS and Nasdaq, the truth is there are substantially larger and more dangerous "fish" on which you should focus your attention.

As a primary example, I would like to refer you to Goldman Sachs' dark pool, SIGMA X.

As evidence I present an analytical paper prepared by none other than Goldman Sachs, compliments of the Bank Holdings Company's GSET (Goldman Sachs Electronic Trading) division.



While I recommend you read the full report and other related literature (especially if you wish to understand why VWAP or Volume-Weighted Average Price is such a critical concept in modern trading), I would like to bring your attention to page 6 of this report, and in particular the following sections:

"The child orders generated by Goldman Sachs algorithms interact with SIGMA X liquidity."


"When a client routes a marketable order through SIGMA, the smart router first exposes the order to SIGMA X liquidity."

This basically means that as a Goldman algo strategy splits an incoming block trade into smaller (child) components, these orders will first be advance-exposed to Goldman's own prop strategies which get a "first look" (no pun intended) at the order flow to dispose of as they desire. Additionally, due to the flashing advance window, Goldman implicitly knows in advance of a potential spike in order flow - in other words if there is a size buyer or seller of any given particular stock - an incalculable edge in today's market, allowing one to potentially take advantage (frontrun) of forced buyins and unwinds and major block trades.

This provides the firm with a material advantage over other market participants.

In order to get a sense of the size of this potential abuse, as Goldman itself discloses, SIGMA X traded over 123 million (matched-only, single counted) shares daily in May, over 600 million per week. This is a staggering amount of shares over a cumulative extended period of time, and could potentially provide the firm with a substantial unfair advantage over other participants.

Furthermore, Goldman is a dominant Program Trading market player on the New York Stock Exchange, by virtue of its participation in the NYSE's Supplemental Liquidity Provider program. As publicly disclosed, Goldman traded over 796 million principal shares (for its own benefit, not as an agent) in the prior week alone, almost double the next largest market participant Credit Suisse which traded a total volume of just over 420 million shares.

Whether or not Goldman can implicitly take advantage of the advance looks Goldman receives compliments of its own dark pool, SIGMA X, and then subsequently reroutes this informational advantage to trades executed on the NYSE, and other exchanges and ECNs, is also a very pertinent question.

However, even if acting in a vaccum exclusively within the confines of SIGMA X, Goldman's modus operandi begs the question: if, as your letter discloses, you believe Flash-like behavior is a detriment to investors, we encourage your team to focus its attention on this matter. The potential abuse in the context of SIGMA X, is substantial, and much more so if it is not confined to the dark pool exclusively.

In conclusion, SIGMA X was conceived and brought to market via Spear, Leeds and Kellogg: I would like to present to you the form contract with Goldman that new customers have to sign when they agree to engage SLK for any client purposes. I bring your attention to the highlighted area:

Zero Hedge is happy to answer any questions at your convenience. You may contact us at sigmax@zerohedge.com

PS. In case readers are having trouble grabbing the original document, here is the link to the file saved internally.

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Anonymous's picture

Uhh, it is banned.

Anonymous's picture

Why? The horse was 21. I think it's legal in SC if the horse is at least 21.

buzzsaw99's picture

Only in Goldman's world can you add liquidity by taking money out.

VegasBD's picture

Ha! Thats a good way to put it

Alexander Supertramp's picture

Namaste, you righteous bastards.  "Every generation needs a new revolution," said Thomas Jefferson.  Thanks for your part in leading ours. 

Anonymous's picture

well done.

Anonymous's picture

This is the most relevant & important website in the financial universe.

Anonymous's picture

I second that. No comparison between ZH and CR. Can't think of another site that gives this sort of "insider" information. I just hope ZH remains free.

Cheeky Bastard's picture

i third that and if i might add that ZH is in the financial blogosphere what Gutenberg's press machine was in .... well the sphere of books, and i have no doubt whatsoever that there is a Pulitzer prize stashed somewhere in the following years for this blog and its creators ...

dnarby's picture

How cool would that be if a Pulitzer was given to someone who remained anonymous.


If they took it to their grave...  Talk about creating a freakin' legend.

VegasBD's picture

The character Tyler Durden will eventually bring down the credit markets. love it.


Wonder if Chuck Palahniuk reads zero hedge?


Cheeky Bastard's picture

use your imagination, there is always someone to pick up the prize without breaking the true identity of TD

Anonymous's picture

here here. I couldn't agree more. Senator Schumer, I assume you will be preparing a subpoena for the good folks here at ZeroHedge so they can share further their learned insights into the workings of HFT.

kote's picture

More Street Smart SIGMA X goodness:


How long til they take these offline do you think?

Oso's picture

already happened.

kote's picture

WOW.  Google cache of the same URL below.  It actually was there.  It took 2 minutes for them to take it down... and it's been up for months at that URL.


More also at http://gset.gs.com/gset/education/thought.asp

Project Mayhem's picture

holy **** it's now deleted off docs.google.com   (click download on the cached page and see what happens)


Tyler you better have some backup copies of this little monster

kote's picture

Still up at the thought link posted above.  Check the third page.  Very weird.

Anonymous's picture

select the print (7pages) hyperlink...it will open as a pdf and just cancel the print

agrotera's picture

NO coincidence--there is alot of history getting rewritten, and facts suppressed.  I have noticed it a few times on wikipedia, but i just thought my memory was off, until i read the deepcapture.com essay on how the whole naked short selling scandal that they helped to expose, is being blocked from report on wikipedia.

Cow's picture

ummm... how about ...already

kote's picture

Hey Cow, the bear beat you to it.  Just sayin' :)

Also, to GS, THAT WASN'T A CHALLENGE.  But, I'm still impressed.

Anonymous's picture

Jesus, TD you are the best. That said are you stocked up on kevlar longjohns?

Anonymous's picture

everything on their site self-destructs after a short period of time - e.g. you need to reload the search terms - and then save the PDF

kote's picture

Looks like you're right.  However, it doesn't make any sense at all to be doing this.  Security through obscurity?  Force internal sites to use dynamic code to recreate the links every few minutes?  When it's already publically available and cached?

Whatever.  Someone got a nice bonus for the implementation I'm sure.

We Are Legion's picture

Yeah... someone NOT the IT person who made it...

Veteran's picture

Killer as always


As an aside, saw on Bloomie ol' Obama said we is at the beginning of the end.  Think a Churchill quote, (paraphrased of course because my memory is shot) might be more appropriate:

This isn't the end, or even the beginning of the end.  It is perhaps the end of the beginning. . .


dark pools of soros's picture

why just Sigma X?  ban ALL dark pools

rickets's picture

Further, no more invisible orders via ECNs which allows participants to step in front of what others see as the best bit/offer.  I also have to ask if multiple ecns/marketcenters are really a good idea.  One centralized marketcenter - with no competition, would make a flatter, more fair marketplace.  The more avenues for execution the harder to regulate and the higher the chance of inequality.  Now, I say that knowing that means someone has to run it fairly...which is an issue....

Anonymous's picture

There is also a problem with having more than one ecn or execution avenue: it is not a first come first serve market. Years ago this was not as much of an issue, but now with so many ECNs and dark pools, investors bidding stock at a level first are often not the first filled as they may be unlucky and sitting on a different ecn than a sellor elects to take. The market should reward the first participant at the best price the first fill.

newera22's picture

Great post. Reading between the lines here, I suspect that Schumer may not be as benevolent as you think. In fact by pointing out some bad apples he may be finding a way that protects his key backers. I will leave it at that.

Anonymous's picture

Apocalypse Now- My sentiments exactly. This is a test. Testing, testing 1,2,3...

Anonymous's picture

I doubt that Schumer is benevolent--and I'm sure he's taken quite a bit of money from the FIRE industries. However, Schumer needs to at least play up doing something about this, lest the plebs (some of them well armed) become very, very unhappy with blatant giveaways. He can make noise and possibly get bigger bribes from GS or whoever gets in the crosshairs. But at least he can't say he didn't know, because Tyler is pointing it out to him in technicolor detail.
P.S. I just got my Zero Intelligence shirt, can't wait to parade around town!

aldousd's picture

Tyler and friends you have to love it. You have the smartest people in the room walking around town with shirts on that say "Zero Intelligence."  Like they're all like little Hugh Axtons.

milkum bilkum pc's picture

My exact thought..., or could be they are so dumb that they stepped in the crap before looking and now opened up further inspection of GS and others.... One can only hope on the latter.

ToNYC's picture

Perhaps it might be simpler to note that even the sharpest minds couldn't possibly be thinking about anything in 30 msec..they only feel comfortable trading 123 million shares in a day for its own account when there is zero risk..and they thus have exactly no need to hedge..duh! they are zero hedgers! VAR can be astromonical because the divisor is close to zero..packet drop errors only.

Too simple for the unRegulators?..too Big to be Challenged..the Joseph Jett effect at Kidder Peabody - 1994

What is the sound of a whistle-blower in a vacuum?


Project Mayhem's picture

Yeah don't forget Baikal and Turquoise  ;)

ptoemmes's picture

As good as I have read from you especially, as a novice at best, I understood it.



silencedogood's picture

Dennis Kneale,

If your station ACTUALLY did research instead of waiting for reuters and the AP to put stories out you can parrot...you may actually get a viewing audience.  The CNBC 'Money Honeys' are spectacular but basicly lip syncing a story put out by Reuters or the AP is NOT analysis.  Dennis, you are old enough to remember Milli Vanilli...try to learn from their mistakes!

-Silence Dogood

molecool's picture

Kick ass letter, Tyler - these guys are picking a fight with the masters in obfuscation - plus they have half of Congress at their beck and call. Schumer and his crew will need all the help they can get to make a case that is 'politically too inconvenient' to pass up. Not sure if this ever goes anywhere - whenever we think the heat is on those cats don't seem to break a sweat.

Miles Kendig's picture

There is ample history in Washington of seemingly friendly persons who, in fact end up end up acting as as an agent provocateur.  I hope that Senator Schumer is in fact looking to assist in reclaiming the prospect of free markets from those that now hold them hostage.  However, of all the folks in the US Senate that could address this issue Schumer is one I would have lingering questions about.  Tread cautiously.

Great letter!

Anonymous's picture

I will never forget (or forgive) Chuck Schumer for his disgusting strutting in support of the federal assassins during the Waco Hearings. Go watch Waco: Rules of Engagement if you want to see what I mean. I watched every day of those hearings back when they happened, and there were moments where that man made my blood boil. A disgusting power-tripper he is. He's also been said for years to be in the pocket of banks. Use him as a vehicle of convenience, but remember: Your Mileage May Vary.

Anonymous's picture


This area is way off by bailiwick. But, it is manifesting, that you will have to hand-hold and walk every step for not just readers like me, but for the regulators and most everybody else.

Your patience will be tested, because you sir, I emphasize again, will have much hand-holding to do and connect every single dot.

Thanks for your hard work.

Honest Abe

Comrade de Chaos's picture

"it appears the original link to the paper was taken down within 10 minutes of this post."

priceless, hm, someone does pay attention :) . if only they knew what ZH does or does not know :) , keep them guessing!