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Overview Of Goldman Sachs Electronic Trading: Part 1

Tyler Durden's picture





 

Zero Hedge is starting a multi-part overview of Goldman Sachs' Electronic Trading client-focused product suite, to demonstrate just how extensively embedded in modern market architecture are Goldman's various DMA and "liquidity" facilitation schemes, and the depths of dark pool domination via Goldman's global order router, and other specific topical offerings.

Our first focus is on Goldman's DMA/liquidity/order router integrated suite, represented by REDIPlus and Sigma, as well as Goldman's privileged access dark pool, SIGMA X.

A first and key observation is that Goldman's Direct Market Access program accounts for over a whopping 1 billion shares daily, as disclosed to clients by Goldman itself. When one considers that the NYSE's trading volume has recently been in the 1-1.5 billion shares per day range (a number that has been consistenly dropping over the past decade, and explains the NYSE's animosity toward other new exchanges such as Direct Edge, which however shot themselves in the foot by procuring clients thru the adoption of such shady practices as Flash Orders), and one can see how Goldman is becoming a dominant force in the market landscape, and why all other market participants are sweating profusely. This is true now more than ever, now that the Fed and the U.S. government have indicated that no matter what happens, Goldman Sachs will never be allowed to fail, no matter how great of a risk it takes. If in the meantime, it is allowed to gain an exclusive monopoly in any one aspect of the market, so be it.

Goldman increasing domination via DMA routing also explains its careful treading when it comes to DMA discussions with the regulators: any major change (which also includes any hits to Goldman's well-greased machine that would result as a function of a ban on Naked Short Selling, and subsequent attempts by Goldman's well placed lobby efforts to prevent such a ban) would likely result in a need to dramatically overhaul its product offering which so far has been so efficient and attractive to new clients, it is on par to challenge the NYSE in share volume. For some very prophetic words of caution on how dangerous DMA could be if it were to go haywire, and slip out of control, we refer readers to the following discourse by Lime Brokerage principals. And, as one can expect, the debate here is about so much more than pre-trade or post-trade monitoring.

Orders routed through Goldman's router for the most part end up on various semi-dark exchanges, ECNs and crossing networks.

As Goldman itself discloses, the Objective/Strategy of its SIGMA Smart Order Router, consists of the following:

  • SIGMA is the Goldman Sachs smart router
  • SIGMA breaks up an order into smaller pieces with the objective of maximizing liquidity at the most favorable price
  • Accesses every ECN and public destination under Reg NMS
  • GSAT algorithms leverage the SIGMA smart router for all child orders
  • 15-20% of SIGMA volume is executed within SIGMA X

A graphical representation of the order routing distribution can be seen below:

And here is the simplified explanation of the three primary tracks in the diagram above, direct from Goldman Sachs:

  1. Algorithmic Orders systematically post liquidity to SIGMA X and other ATSs. Additionally, child orders are routed via the SIGMA router, accessing SIGMA X and other non-displayed liquidity before ultimately reaching the public markets.
  2. SIGMA Smart-Routed Orders are DMA orders that pass through SIGMA X, benefitting from potential price improvement due to enhanced liquidity.
  3. SIGMA X Posted Orders sit passively on the SIGMA X order book, where they can interact with pass-through DMA/algorithmic flow and other posted orders. Orders posted to SIGMA X receive full price improvement when interacting with opposite-side marketable flow.

In summary: Goldman keeps procuring more and more clients who use REDI, Sigma, etc., for the sole reason that Goldman now provides a practically alternative "exchange" to virtually every other full/major access venue. Obtaining "privileged access" to SIGMA X provides Goldman PB counterparties with what is quickly becoming the best populated and highest "inventoried" dark venue in the world. And the kicker: few if any know who trades what on SIGMA X. A major threat to technicians: open exchange volume is increasingly representative of exactly nothing, as all the real action occurs in the gray, and mostly dark, arenas (and of course, in OTC CDS). Which is why as the administration is transfixed on the DJIA, even that is becoming increasingly disjointed with whatever is left of the true market. And as Zero Hedge has been pointing out, the economy has long since stopped being represented by the stock market. It is only fitting that the market is only no longer representative of "itself" - compliments of Goldman Sachs.

In future posts of this series, we review Sonar, Sonar Dark, benchmark matching via OptimIS, PortX, VWAP, TWAP, dynamic participation, reactive participation, price and liquidity seeking, and other topics where Goldman has stealthily become the primary market force.

 


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Sun, 10/04/2009 - 22:24 | Link to Comment Fritz
Fritz's picture

Pay no attention to that man behind the curtain!

 

Sun, 10/04/2009 - 22:29 | Link to Comment kaiserwongze
kaiserwongze's picture

Question, the dark pool prints all still go to the tape, don't they?

Sun, 10/04/2009 - 22:33 | Link to Comment spekulatn
spekulatn's picture

Nope.

Cool huh?

 

"MARK IT ZERO, DUDE"

Sun, 10/04/2009 - 23:05 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:12 | Link to Comment Anonymous
Mon, 10/05/2009 - 08:37 | Link to Comment Anonymous
Mon, 10/05/2009 - 01:07 | Link to Comment Anal_yst
Anal_yst's picture

seems to be how the heirarchy works, so you'll never see it coming and then BAM down 5%+ in a heartbeat.

Mon, 10/05/2009 - 09:13 | Link to Comment Anonymous
Mon, 10/05/2009 - 10:10 | Link to Comment Anonymous
Sun, 10/04/2009 - 22:39 | Link to Comment TumblingDice
TumblingDice's picture

And the absurdity of it all continues. Don't these parasites realize that in the end they're going to end up destroying their host? Sure they can garner special advantages in the short run, but down the road all of this always comes back to bite you in the ass.

Karma points to this ultimate result, but real world reasons are plenty. If people realize the amount to which they are gamed they might flee the stock exchange altogether. Sure they might not care now with the rising prices, but if that ever stops being the case Goldman, because of their huge exposure, will be the first to get the blame. This is the price a company pays for being overleveraged. There aren't enough jets for everybody.

Sun, 10/04/2009 - 22:33 | Link to Comment Mazarin
Mazarin's picture

Thanks for this ZH/Tyler. Keep it coming.

Sun, 10/04/2009 - 22:38 | Link to Comment Pizza Delivery Man
Pizza Delivery Man's picture

Why does no one challenge Goldman in this arena? The must have competitors right?

 

How is it that Goldman has a monopoly on anything money?

Sun, 10/04/2009 - 22:48 | Link to Comment Jus7tme
Jus7tme's picture

I noticed the phrase "price improvement". Is that not just doublespeak for "we are allowed to front-run you in exchange for paying you a penny more than what your limit sell order says" ?

 

Or in other words, if the market prioce suddenly jumps past your limit sell order, the customer has permitted GS (somewhere in the fine print) to sell at the higher price but keeping most of the added profit while giving  the customer only a token amount from the same profit.

Someone who knows, please explain....

Mon, 10/05/2009 - 09:25 | Link to Comment Anonymous
Mon, 10/05/2009 - 09:27 | Link to Comment Anonymous
Sun, 10/04/2009 - 22:49 | Link to Comment Anonymous
Mon, 10/05/2009 - 02:17 | Link to Comment Enkidu
Enkidu's picture

Me too - I can't work out who does all the buying from these computers!

Sun, 10/04/2009 - 22:51 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:03 | Link to Comment nopat
nopat's picture

Wait, so let me make sure I understand this:

Customer places a bid on a stock and the order is routed first internally to see if there are any takers.  If not, the stock goes out into the wild.  However, if there is a match between the bid and ask, the transaction occurs inside GS's servers and everyone is none the wiser, right?  So the only time you'd see these types of transactions are the shadows where no match could be made, or GS is attempting to create a market where one might not exist?  Mix in some creative programming to determine the max amount of main/min amount of pleasure one party is willing to take, and we have a winner?  Now that I think about it, this does kind of provide an "elegant" explanation for all the stock price movements in the past couple of months.  Kind of like sending out an investment letter on a class of stocks to two separate lists, both taking opposite positions, and then finally reporting X% returns and some obscene ability to stay above the market to a much smaller sample that only saw the "right" answers. 

 

Except they're doing it in real-time.  And they're not reducing their sample.  Fuckin-a, I'll put money on the guy who created this model is named Milo Minderbinder; the addage about fact being stranger than fiction is becoming a truism to the point of almost gothic proportions.  So how long do we have until this asset bubble collapses in on itself?

Sun, 10/04/2009 - 23:22 | Link to Comment Cistercian
Cistercian's picture

 I suspect not too long. What a mess....and the clean up will be ugly.

 

 Very, very ugly.

Mon, 10/05/2009 - 00:44 | Link to Comment nopat
nopat's picture

That's the thing, tho.  You create a blind auction where neither party knows what the other is asking/bidding and the broker (GS) takes advantage of both by temporarily inserting itself into the auction, but only so far as one party is willing to go and creating a self-fulfilling prophecy.  This is just like buying a car:  you know the maximum price you can pay (sticker), but you know know what the "market" price is.  The seller also knows the maximum, but knows exactly how little they're willing to take.  The broker massages these two such that the seller never sells below their cost, but the buyer never gets the "best price".  GS takes a cut on both ends.

The trick comes from having to report.  You "create liquidity" on the open market by transacting massive volumes of stock back and forth with yourself and hide the orders in the stampede.  You then time the transactions such that, predictably and contractually at 3:30 every day, the accounts are settled, relieving any duty on one party or another to abide by insider trading rules.   Since there's essentially no price discovery, the price keeps getting inflated.  Allow the barnacle-feeders to get a slice of the action so they can maintain some interest and make it look like a not-so-rigged casino.

Wow...I'm not even mad, I'm actually kind of impressed...

Tue, 10/06/2009 - 20:14 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:05 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:05 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:10 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:06 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:12 | Link to Comment ShankyS
ShankyS's picture

Why do we need exchanges any more? Can't we just let GS rip everyone off?

Sun, 10/04/2009 - 23:31 | Link to Comment Sqworl
Sqworl's picture

Its foreplay...lol

Sun, 10/04/2009 - 23:13 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:32 | Link to Comment Sqworl
Sqworl's picture

Go to FT front page above the fold..GS wins, the american tax payers loses 2.3B...they bought insurance!  Wonder who the counterparty is?????

Mon, 10/05/2009 - 08:31 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:33 | Link to Comment D.O.D.
D.O.D.'s picture

I've posted it before and I'll post it again...

You can run on for a long time,

But sooner or later, gotta cut'chu down...

http://www.youtube.com/watch?v=Bzx2LGbMxiY

Mon, 10/05/2009 - 00:58 | Link to Comment Miles Kendig
Miles Kendig's picture

True enough

Sun, 10/04/2009 - 23:34 | Link to Comment Benthamite
Benthamite's picture

Maybe Mr. Canaday would like to comment on how we should be perceiving this other than for what it really is ... ?

Sun, 10/04/2009 - 23:41 | Link to Comment ShankyS
ShankyS's picture

Has anyone ever seen Porn: Business of Pleasure on CNBS? If not they are running it for the 15th time this month at 12:00. Hmmm, are they going after the Cinemax late night viewership?

Sun, 10/04/2009 - 23:42 | Link to Comment Sqworl
Sqworl's picture

Desperate times call for desperate content...They reap what they Ho...

Sun, 10/04/2009 - 23:42 | Link to Comment Anonymous
Sun, 10/04/2009 - 23:58 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:02 | Link to Comment Anonymous
Mon, 10/05/2009 - 10:20 | Link to Comment Anonymous
Mon, 10/05/2009 - 10:39 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:11 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:16 | Link to Comment contrabandista13
contrabandista13's picture

OT:

 

 

Darwin In Chile

Alvaro Fischer, Daniel C. Dennett, Leda Cosmides, John Tooby, Steven Pinker, Matt Ridley, Helena Cronin, Nicholas Humhrey, Ian McEwan

Santiago — Punta Arenas — Puerto Williams — The Beagle Channel — Tierra del Fuego — The Extreme South

Edge
Video


http://www.edge.org/documents/archive/edge300.html
I thought that you may find this interesting. Matt Ridley was one of the speakers.  I have read a great deal of his work and found it enlightening as it relates to collective genetic impulses and human belief systems.  I have constructed mechanisms and applied them successfully to my trading strategies, based on theories premised from his book "The Origins of Virtue" (recommended reading for all traders and students of collective human behavior).  I highly recommend watching his video titled....  

PARALLELS BETWEEN ECONOMICS AND EVOLUTION, OR — WHAT HAPPENS WHEN IDEAS HAVE SEX
By 
Matt Ridley
 

Best regards,

Econolicious

 


Mon, 10/05/2009 - 00:37 | Link to Comment Anonymous
Mon, 10/05/2009 - 00:40 | Link to Comment blackebitda
blackebitda's picture

monopolies do not tend to hold. why not ban "internalization". i guess its time to invest in some sonar, guided missiles and counter measures. perhaps even time to drop some mines into the dark pools. if you poison the food, it could also kill the operators, like the red ant mound destroyers. so who is willing and able to craft the implementation thereof in trading terms. 

Mon, 10/05/2009 - 01:11 | Link to Comment Miles Kendig
Miles Kendig's picture

And, as one can expect, the debate here is about so much more than pre-trade or post-trade monitoring.

Three cheers for someone who is willing to broaden the scope of the fields of view that have been generated to date.  If the first installment is any indicator, this series will be a must read for some time to come.

Mon, 10/05/2009 - 01:14 | Link to Comment hardball22
hardball22's picture

Wait, TD:
So what happens when an institutional investor buys thru GS's dark pool then looks for an arb and tries to sell in the public, visible arena (say NYSE)? Conventionally, that investor will be buying and selling w GS, but what if they DVP to another B/D? Then we all see large blocks hitting the tape, with that institutional investor's name tied to them--and it calls attn cuz nobody knew they held, say, 900m shs of GE.
If there's a detachment btwn dark pool pricing and NYSE, investors would be playing the arb, and ZH would catch it. No?

Mon, 10/05/2009 - 01:15 | Link to Comment hardball22
hardball22's picture

Wait, TD:
So what happens when an institutional investor buys thru GS's dark pool then looks for an arb and tries to sell in the public, visible arena (say NYSE)? Conventionally, that investor will be buying and selling w GS, but what if they DVP to another B/D? Then we all see large blocks hitting the tape, with that institutional investor's name tied to them--and it calls attn cuz nobody knew they held, say, 900m shs of GE.
If there's a detachment btwn dark pool pricing and NYSE, investors would be playing the arb, and ZH would catch it. No?

Mon, 10/05/2009 - 01:54 | Link to Comment Anonymous
Mon, 10/05/2009 - 01:59 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:41 | Link to Comment Anonymous
Mon, 10/05/2009 - 04:18 | Link to Comment Anonymous
Mon, 10/05/2009 - 06:22 | Link to Comment Anonymous
Mon, 10/05/2009 - 11:01 | Link to Comment Anonymous
Mon, 10/05/2009 - 08:06 | Link to Comment Anonymous
Mon, 10/05/2009 - 08:10 | Link to Comment Shylock81611
Shylock81611's picture

Sigma X is a/k/a Redi +==it is a Spear, Leeds, and Kellog invention--those that brought front running as a science to Wall ST

Mon, 10/05/2009 - 08:10 | Link to Comment deadhead
deadhead's picture

Most of us who understand banks and balance sheets know that we have some genuinely negative solvency issues in our TBTF group.

The gov't oversight committee reports today per cnbc dot com that the health of the TBTFs was exagerrated by paulson/bernanke.  We know that.

GS today reiterates conviction list buy on BAC and JPM.

GS today upgrades WFC to buy.

Someone is very, very wrong here.

Mon, 10/05/2009 - 08:25 | Link to Comment Screwball
Screwball's picture

GS must want to punish the shorts - again.  Futures up, should be an interesting day.

Mon, 10/05/2009 - 08:49 | Link to Comment deadhead
deadhead's picture

nope, not punishing shorts....continued distribution.

the gs conviction buy list continues to move up my list as a priority contrarian signal.

Mon, 10/05/2009 - 08:52 | Link to Comment Miles Kendig
Mon, 10/05/2009 - 09:13 | Link to Comment deadhead
deadhead's picture

miles...thanks much!  I did not see that though I check in with ira/whalen frequently.  what an outstanding piece.

yep, that gs conviction buy on bac reiteration looks great.

wish lb would just throw wfc on the conviction list (after today's upgrade to buy) and get it over with !!

this was an excellent analystical piece.

my only question is the stated heloc loss estimates....frankly, i thought it might be higher than the 15%

Mon, 10/05/2009 - 09:03 | Link to Comment Screwball
Screwball's picture

Come on Deadhead, your being rational. There is no place for that in this market. :-)

Mon, 10/05/2009 - 09:14 | Link to Comment deadhead
deadhead's picture

you're correct screwball.....just hoping that Mr. Efficient Market theory makes a return presence for a change.....

Mon, 10/05/2009 - 08:58 | Link to Comment Anonymous
Mon, 10/05/2009 - 09:18 | Link to Comment deadhead
deadhead's picture

again, for any doubters that the House of Obama messiah worshippers absolutely detest Obama's handling of cheat street, take a look at the current front pager of HuffPo.

LB, you gotta get some better pics of yourself out there.  also, make sure to reiterate to the wife not to being doing stupid stuff again, those ny rags are following her all over town ya know...

Mon, 10/05/2009 - 09:23 | Link to Comment peterpeter
peterpeter's picture

> Goldman increasing domination via DMA routing
> also explains its careful treading when it comes to
> DMA discussions with the regulators.... For some very
> prophetic words of caution on how dangerous DMA could
> be if it were to go haywire, and slip out of control, we refer
> readers to the following discourse by Lime Brokerage
> principal

You are confusing 2 different products.  Rediplus offers direct market access *after* trades are sent through and checked by the GS systems to ensure trade compliance (i.e. there is enough cash in the margin account to cover a trade, Reg SHO compliance etc).

What Lime is railing against is "sponsored access", in which an entity can enter orders directly to an exchange/ECN without going through pre-trade compliance and capital checks.

Take some time to actually read what Lime is concerned with here: http://www.tradersmagazine.com/news/lime-lek-unfiltered-access-103947-1.html and keep in mind when reading this that while clearly making good points, their business interests are clearly aligned with the end of sponsored access, since Lime is one of the fastest DMA brokers (i.e. they can do the Reg SHO and capital checks faster than other brokers).

A broker offering direct market access should be entirely unoffensive to anyone.  You can place directed orders with an Interactive Brokers account if you want too, as well as many better brokers happy to give accounts to retail traders.

Mon, 10/05/2009 - 10:32 | Link to Comment Anonymous
Mon, 10/05/2009 - 11:11 | Link to Comment Anonymous
Mon, 10/05/2009 - 18:38 | Link to Comment Anonymous
Sun, 12/13/2009 - 19:38 | Link to Comment Anonymous
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Karston1234's picture

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