Stiglitz Questions Goldman's Size, Potential For Front Running
One month ago Zero Hedge proposed the following questions to Goldman Sachs in response to their vehement denials of HFT abuse:
1. Regarding revenue percentages - We are happy to read Goldman's
broad generalizations: yet, if on 98% of SLP trades, which amount to
anywhere between 600 million and 1 billion weekly, Goldman collect the
generous $0.0015 rebate, it is a little troubling to see how this gift
from the NYSE to Goldman could be so marginal. Also, could Goldman
account for Implementation Shortfall costs associated of its SLP monopolization? We would be surprised if "slippage" profits did not fall
under the HFT revenue umbrella. Maybe in their next 10-Q Goldman can
provide some much needed detail to further elaborate this issue.
Regarding Flash - Perhaps Mr. Tusar can clarify some of the numerous
questions we have had regarding use of Flash on SIGMA X. Furthermore,
it is our understanding that Goldman does in fact allow external
liquidity providers on SIGMA X, which are known as XLPs. Can Goldman
please clarify who these are? By what definition would XLPs not be part
of "client order flow." And, additionally, we would be excited to find
out specifics on how GS' Dark Pool Flash knowledge is kept isolated
from Goldman SLP trading flow.
3. Regarding Physical separation -
It is refreshing that Goldman believes in the concept of Chinese walls.
Since we are on the topic, would it be possible for Goldman to provide
a snapshot of its trading floor and to distinguish where the flow
traders and major fixed income and equity account salespeople sit in
relation to prop traders and their analysts? We believe Goldman's
credibility of a "force for good" would benefit significantly if
readers knew that Goldman's prop traders were not constantly within
earshot of hearing how many million shares of company X Fidelity may be
buying, or how many million notional in CDS of company Y Och-Ziff may
be a size buyer of.
Today, question 3 gets broad exposure in an interview in Daily Finance, where none other than former Council of Economic Advisors Chair (where he was succeeded by San Fran Fed's Janet Yellen), and 2001 Nobel Prize Winner in Economics Joseph Stiglitz discusses the implications how Goldman Sachs could potentially be abusing what is affectionately known on Wall Street as Information Asymmetry:
The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information. That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior.
Stiglitz' other contention that Goldman is a market behemoth whose break up (and not merely in the context of too much risk) deserves close scrutiny, is well known and is shared by many finance professionals. Zero Hedge has repeatedly attempted to draw the attention of Chrstine Varney to the issues of not only market dominance by various HFT and related topics as the new paradigm that needs careful anti-trust evaluation, but of Goldman Sachs, as the biggest purveyor of such dominance, desperately begging a review of Monopolist status. And while Goldman's control of the equity market is second to none, would a Goldman overture to do a roll up of virtually the entire fixed income industry pass anti-competitive muster? The collapse of FI powerhouses Bear and Lehman allowed it to do just that, and at essentially no cost to it whatsoever. Net result: in the world of capital markets, Goldman has domination over both Fixed Income and Equity product trading, and not only that, but it is the venue through which the bulk of all other financial participants trade (see REDI, Sigma X, Sonar, Etc.) as well as having an infinitely backstopped balance sheet to trade out of its own account, which probably does not even need the Fed's daily liquidity pump to have a 99.999% profitable trading days ratio.
One hopes that anti-trust regulators wake up to this issue before it is too late. However, if the SEC is any proxy for government agency efficiency, it probably already is.