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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Fritz's picture

Pay no attention to that man behind the curtain!


kaiserwongze's picture

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

spekulatn's picture


Cool huh?



Anonymous's picture

What happens when everyone decides it's time to get out? Are all of the orders dumped into Public?

Anonymous's picture

I think that's the point, if you're a large seller of a security, lets say you hold a million shares of XOM. You put in an order to sell, your order gets diced up into blocks of 1000 and parsed out throughout the day. Now the HFT's come in and buy/sell your blocks as part of their daily arbs. You can wipe your hands of the whole affair and in a day or two GS gives you an avg price at which your block was distributed and the HFT's do the dirty work of dumping this 1m share order into different retail, penion, mutual fund, foreign investors etc. Basically you can mask the real movement into and out of stocks.... duh.

If you want to know how it works think about maximizing your benefit at the expense of everyone else.

Anonymous's picture

I meant in a crash type scenario. Was last year a dry run or, this hasn't been fully tested in a real crash. (1,000+ down day type of crash)

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.

Anonymous's picture

Yes. All dark pool trades are reported in real time to NASD using ACT. The price of dark pool trades must be between the current inside bid/offer of the light markets. Lower volumes on the light markets increases the risk of manipulation which would effect the price of trades on dark pools. There is latency between inside bid/offer changes on the light markets and receipt of these changes by the dark pools. This is another avenue for manipulation.

Anonymous's picture

Spek is incorrect. Reg NMS stipulates that all orders are (ECN, dark, or other) get posted to the consolidated tape.

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.

Mazarin's picture

Thanks for this ZH/Tyler. Keep it coming.

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?

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....

Anonymous's picture

The client should receive the price improvement. Consider a client sell order for $1.00. This would be matched with a buy order for $0.98 at a price less than $1.00. There may be situations where the sell order would execute at a $1, but other trading cost reductions (clearing ,etc ) would have to offset the higher trade price. I'm not sure if "front running" could be used by GS to buy at 0.98 and sell to their client at $1. This would require GS to put their order ahead of the client order.

Anonymous's picture

Previous post was backward. Sell order at $1 would be price improved with buy order at $1.02. I don't know how GS could buy from client at $1 and sell at $1.02 via "front running".

Anonymous's picture

this is all greek to me

Enkidu's picture

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

Anonymous's picture

Look, the competition to GS is not a exclusive block of retail investors. They are up against everyone else,
Pension Funds, Index Funds, Mutual Funds, Insurance Companies, Corporations, etc, etc, etc.

If it's all really as bad as all this, these very powerful entities (especially collectively and even in their own right), will eventually just refuse to play along and the whole thing will collapse in on GS.

Who's gonna willingly throw money in a game that's rigged against them? What's the barrier to just creating a new game?

As far as GS in concerned, you can trade with yourself, but who cares?

An individual investor may elect to participate in a market where they feel powerless to the whims of the gods, but no one else will and if they all end up playing the same game then there is no advantage, just speed, and the individual investor is no better or worse off than before as a result.

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?

Cistercian's picture

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


 Very, very ugly.

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...

Anonymous's picture

When the S&P reaches 1111, the racket will start the heavy selling that will drop the S&P below 250. The United States is being liquidated by the money printers.

I will have more in depth detail on the totality of the liquidation process at fUny1.blogspot.com

For now, the scoffers should laugh in order to get caught up in the liquidation process that will lead to Cannibalism on Wall and Broad within 10 years.

Yes, the 10 year forecast is outrageous but shorter term is not as drastic.

The system has already collapsed. Rail Road shipping is down 17% YOY from last year's "catastrophic summer/fall"

Take those green shoots and smoke them for I have no use for opiates.

I don't knead you to brain wash me. using my internet information gathering abilities, I will wash my own brain thank you very much.


Anonymous's picture

It's all about the regulators not the banks,Regulators have to decide what is and isn't allowable and if they don't well Tumblin Dice is right and then governments have to act and split up destabilising monopolies.....wasn't that what Glass Steagall was all about?

Anonymous's picture

what is the problem with the dark pools? The accepted thinking is that people that trade in dark pools somehow get advantages over the rest of us who trade in the open market. I do not see how. There are always 2 parts to the trade. So if one wins the other looses. If someone got a better buy price that means the seller lost. So who cares? If you want to try the system - open account with GS and see for yourself that there is no advantage when trading in dark pools. You will most certainly be taken as you are when tradin in the open market. So what all the fuss about? Let them trade between themselfs if they want. This is free country.

Anonymous's picture

Yea, but the broader "market" does not see the trades. Where's the transparency douche.

Anonymous's picture

An extremely excellent and well presented piece of journalism. I would call it"The art of presenting what evrybody knowos,but easy to deny conspiracy theory,to a fact finding,well decomunted and presented facts."

ShankyS's picture

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

Anonymous's picture

Goldman May Get $1 Billion if CIT Files for Chapter 11, FT Says


the article is very superficial. if i understand it correctly, goldman gave CIT $3 billion back in June 2008.
And if CIT files for chapter 11, goldman is first in line to recoup $1 billion. A net loss of $2 billion for GS? really? GS made a bad bet? I doubt it...need more details

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?????

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...


Benthamite's picture

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

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?

Sqworl's picture

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

Anonymous's picture

Lol so they got an aggresive routed order and your mad about that? If you want to complain about lots of volume on SIGMA x why not complain about the volume on BATS/DIRECT EDGE?

I don't get what they are doing wrong?
They own a dark pool so they post on it.
What's so bad about that?

Anonymous's picture

The most slimy thing about that presentation which Goldman made to the people in DC was the constant harping on the theme that it was for the good of "retail".

I distinctly remember Viniar clarifying that they catered exclusively to wholesale clients and didn't have anything to do with us poor, uninformed retail folk.

Here is the exact quote from Viniar:
Goldman's new status won't change the company's focus. "We will largely remain a wholesale company, and we don't like or know the retail business very well," Mr. Viniar said.


Why the sudden sympathy now for unloved retail? Van Praag? Viniar? Anyone?

Anonymous's picture

The author has repeatedly confused DMA (direct market access) with "sponsored access". This is an astronomical blunder and should shake any reader's faith in the writing standards of this blog on the topic of US equities markets.

Anonymous's picture

There is a lot of confusion here. People also probably don't realize who uses "algorithmic trading" in this context. Institutional investors, mutual funds etc. These guys are professional, but they are investing retail money (401ks etc.). They want to get the best prices on their large orders, so use algorithmic trading to avoid impacting the market. This has been going on throughout the entire history of the stock market, only now its automated by computers rather than done by rooms full of guys shouting.

Anonymous's picture

That happened long ago. March '09 ish

Anonymous's picture

Why isn't this illegal gaming?

Call it gaming, legalize it and tax it.

contrabandista13's picture




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Anonymous's picture

Goldman owed $1 billion if CIT fails:http://news.yahoo.com/s/nm/20091005/bs_nm/us_goldman_cit_4
I will bet on CIT failing !!

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. 

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.

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?

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?

Anonymous's picture

I think some commenters are missing the point here; efficient markets (such as they are) depend on, at least, open price information. Smart routing systems have been around for years, but only recently have they had access to actual deep hidden liquidity, with provisions to not print their crosses.

Mix in the fact that GS has succeeded in becoming the premiere intermediary for all these various formerly-known-as-ECNs, they've accumulated an impressive systemic information asymmetry. It is this asymmetry which contributes to the success of their prop/HFT operations, and this is the real competitive advantage they have, and are presumably exploiting.

Anonymous's picture

Does anyone remember when Goldman bought Hull Trading?...


Hull was widely rumored at the time to have an electronic 'black box'... please note, this was over 10 years ago. Apparently, they were using genetic algorithms:


Also, please note the Madoff reference in the NYT article. Hummm....