In addition to having said many things about HFT in general in the last year, over the past 12 months Zero Hedge has focused a lot of attention specifically on Goldman's dominance of the NYSE's Program Trading platform, where in addition to recent entrant GETCO, it has been to date an explicit monopolist of the so-called Supplementary Liquidity Provider program, a role which affords the company greater liquidity rebates for, well providing liquidity (more on this below), and generating who knows what other possible front market-looking, flow-prop integration (presumably legal) benefits. Yesterday, Goldman's SLP function was non-existent. One wonders - was the Goldman SLP team in fact liquidity taking, or to put it bluntly, among the main reasons for the market collapse. We are confident the SEC will aggressively pursue this line of questioning as they attempt to justify their $1 billion porn download budget. We are also confident, that should the SEC truly take its role of protectors of investor interest seriously for once, it will uncover such criminality and corruption at the level of trading integration of open exchange and ATS venues (and the "but it's so complicated - let's just leave it untouched because nobody understands it" excuse is not flying any more), that it will make Goldman's CDO criminal and civil case seems like a dimestore misdemeanor. We have written about 1,000 posts about this. Readers are welcome to go back through our archives and acquaint themselves with the NYSE's SLP program, with Goldman's domination of program trading, with Goldman's domination of dark trading venues via the Sigma X suite, with Goldman's domination of flow trading via Redi X, and with Goldman's domination of virtually every vertical of the capital markets, which would be terrific if monopolies were encouraged in the US. Alas (last time we checked with the DOJ), they are not. Which is why we ask, for the nth time, when will the anti-trust division of the DOJ finally dismantle the biggest market monopolist in the history of capital markets.
First, as a reminder, here is the most recently disclosed NYSE program trading data:
What is notable here is that of the 1.4 billion in principal shares, or shares traded for the firm's own account, Goldman was the top trader by a margin of over 100% compared to the second biggest program trader.
We have long claimed that Goldman is the de facto monopolist of the NYSE's program trading platform. As such, it is certainly the case that Goldman was instrumental in either a) precipitating yesterday's crash or b) not providing the critical liquidity which it is required to do, when the time came. There are no other options.
We will gladly work with any Attorney General to provide them all the critical data and questions they need to build a criminal case, or in the DOJ's case, an anti-trust case.
And there is lots of data. For those unfamiliar with the NYSE's SLP operation (which was supposed to be long-extinct, yet continue pluhging along in good times, but disappearing in bad), and Goldman's domination of program trading, we republish in its entirey a post we wrote in May of 2009, titled Observations on NYSE Program Trading.
Recently, there has been quite a bit of discussion of Goldman Sachs'
principal program trading dominance in the NYSE, culminating with none
other than Goldman Sachs themselves providing their perspective on the
matter, via spokesman Ed Canaday:
The NYSE report that Zero
Hedge discussed shows Goldman Sachs trading over 1 billion shares in
the principal program trading category. What the table doesn’t show,
but a deeper look at the numbers reveals is that the vast majority of
this total is trades by our quantitative trading desk. This desk is
participating in a relatively new NYSE program
called Supplemental Liquidity Providers. The NYSE started the program
to attract liquidity to the exchange. As an SLP, this the desk makes
markets in NYSE stocks. They often do high-frequency trading (which is
simply auto-quote market making) where they send out hundreds of
“baskets” of stocks at one time. Program trading, as defined by the
NYSE report is any strategy that sends out a “basket” of 15+stocks at
one time. I am happy to discuss this with you if that description
doesn’t make sense.
In order to dig deeper into Canaday's
statement, Zero Hedge performed a historical analysis of NYSE Program
Trading (PT) data (which is public) and came up with some curious
observations. But before I get into the results, it makes sense to
evaluate the facts behind Goldman's retort and in order to do that,
let's first observe just what this Supplemental Liquidity Provider
The NYSE's most recent classification of the three main market participants is as follows:
Designated Market Makers
Market Makers (DMMs) are at the center of the NYSE market and are the
only participants in any market who have true accountability for
maintaining a fair and orderly market. DMMs:
- Convene both a
physical auction convened by DMMs and a completely automated auction
that includes algorithmic quotes from DMMs and other market
- Have the obligation to maintain an
orderly market in their stocks, quote at the national best bid or offer
a specified percentage of the time, and facilitate price discovery at
the open, close and in periods of significant imbalances;
price improvement and match incoming orders based on a pre-programmed
Capital Commitment Schedule, which has been added to the NYSE Display
Book, minimizing order latency. DMMs and their algorithms do not
receive a “look” at incoming orders. This ensures that an intermediary
does not see orders first, and that DMMs compete as a market
- Are on parity with quotes from floor
brokers and those on the Display Book, encouraging DMM participation
and higher market quality.
Trading Floor Brokers
on the NYSE Trading Floor leverage their physical point-of
sale-presence with information technologies and algorithmic tools to
offer customers the benefits of flexibility, judgment, automation and
anonymity with minimal market impact. Trading Floor Brokers:
parity with DMMs and the NYSE Display Book, no matter whether the
Broker’s order is represented physically or via an algorithm or
e-Quote. That is, they can join the first displayed quote on the Book,
and split stock with that order.
- Have the ability to
route all or part of a customer order to an external algo engine from
their handheld order-management device. These algorithms offer Floor
Brokers the ability to provide customers with additional execution
capabilities in an environment that offers a balanced combination of
technology for fast, automated and anonymous order execution; and a
physical marketplace for discovering block-sized liquidity and
- Can utilize a technology feature
called Block Talk to more efficiently locate deep liquidity. Block Talk
is designed allow Floor Brokers to broadcast and subscribe to specific
stocks they have an interest in, creating an opportunity to trade
block-sized liquidity that is not accessible electronically. Since the
messages contain no specific order information, customers benefit from
a discovery process in a secure environment free of impact, information
leakage or intermediation.
- Also have the ability to
identify via their hand-held order-management system the last five
buyers and sellers in a stock by badge number. They can message a
specific member that they are in touch with the contra side. This is
valuable information for pricing blocks, as it is about real buyers and
sellers, not indications of interest.
- Have a special
feature with their reserve orders: when the displayed amount is
exhausted, reserve interest replenishes on parity. In contrast, the
“upstairs” reserve order functions as it does in an electronic market:
replenishing at the back of the queue.
- Are positioned
to act on the expanded imbalance and indication information at the open
and close of the market. They can participate as agent, or convey
insight into the open or close for customers’ decision making.
And most relevantly, Supplemental Liquidity Providers
Supplemental Liquidity Providers (SLPs) are upstairs, electronic, high-volume members incented to add liquidity on the NYSE.
- The pilot SLP program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.
are obligated to maintain a bid or offer at the National Best Bid or
Offer (NBBO) in each assigned security at least 5 percent of the
- The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.
- SLPs trade only for their proprietary accounts, not for public customers or on an agency basis.
- An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
- A member organization cannot act as a Designated Market Maker and SLP in the same security.
- SLPs have the same publicly available trading information and market data that all other NYSE customers have available to them.
is important to note that the SLP rebate is $0.0015, usually less than
half of the rebate plain vanilla Designated Market Makers receive,
which is between $0.0030 and $0.0035, and
as the NYSE plainly says, a member organization cannot act as a DMM and
SLP in the same security. Obviously based on the rebate structure and
the mutual exclusion,
it would make much more sense to trade as a DMM as opposed to an SLP,
not in the least since SLPs (at least according to currently available
information) are very limited in terms of which securities they can
actually trade for supplemental liquidity provision. Quoting Robert Airo, VP of relationship management and sales at NYSE Euronext, from late October 2008:
rolling [the SLP pilot program] out in the 500 most active names where
we believe incenting SLPs by compensating them to provide liquidity
will supplement all of the other initiatives that we’ve put in place to
build the NYSE book."
The SLP program was developed in the days after the Lehman collapse
when market volatility spiked and major questions about liquidity
premia emerged, resulting in program roll out on October 29 of 2008.
The full SEC filing describing the minutae of the program is presented
In late November Canaday is quoted as follows:
quoting will provide more liquidity and should make the NYSE more
competitive. We have begun to see significant shifts in terms of the
frequency with which the NYSE is at the NBBO, and we expect increases
in volume and market share to follow."
With a mere 500
securities to work with, especially being excluded from being a DMM in
SLP names, maybe Canaday can explain the economics to GS' program
trading desk from participating in the SLP?
question is just who are the current SLPs? It seems the answer is
difficult to pin point. It is known for a fact that Goldman Sachs and
Spear, Leeds and Kellogg (owned by GS) are currently definitive SLPs,
with Knight Trading and Barclays also presumably becoming SLPs as well,
but there has been no confirmation either way, potentially implying
that Goldman could have a monopoly in liquidity provisioning. If the
program is truly as attractive as GS' spokesman makes it seem, why are
other major equity players not clamoring to participate in it? After
all, the benefits to SLPs are "obvious."
Following up on that,
has there been an extension of the SLP program recently? Zero Hedge has
not heard of one. The SLP, which was approved in late October (see
above) was supposed to terminate on April 30,
this last Thursday: "The proposed pilot program will commence on the
date upon which the SEC will approve the New Market Model and will
continue for six months thereafter ending on April 30, 2009." If the
SLP is now over, should one expect GS's principal volume trading to
drop dramatically, if, as Canaday says, the volume is mostly SLP
driven? Also, does that mean volatility in the market is about to spike
as there are no entities (well, one entity) providing NBB and NBOs?
many questions arise when one digs into the nebulous world of NYSE
liquidity providers, many more than there are clear cut answers to.
Perhaps it is time for Mr. Canaday to address as many of these
questions as possible head on. Zero Hedge would be happy to provide him
with a forum for clarification.
In the meantime, here are the facts, courtesy of the NYSE's public record keeping system.
first chart below demonstrates total program trading in the NYSE since
mid August, a month before the Lehman bankruptcy. The black line
demonstrates total indicated program trading, which absent volatility,
has remained relatively stable, averaging roughly 4 billion shares
weekly. And while most other NYSE member firms have seen their PT
volumes stay relatively flat as well, GS has seen a dramatic ramp up,
controlling about 15% of PT in Q3 of 2008 which has risen to almost a
quarter of all NYSE PT over the past quarter.
while total Program Trading includes Principal trading (i.e., trading
not on behalf of its clients but for its own benefit; this is the
category where SLP would also fall in under NYSE guidelines), as well
as Facilitation and Agency trades, the big surprise arises when one
looks at a historical analysis of merely Principal trading. The chart
below pulls only the Principal trading data for the top 10 NYSE
members. And like before, while the total amount of total Principal
trading as a portion of NYSE PT has stayed relatively flat, at about
half of total PT volumes, Goldman's share has exploded over the past six months: while GS was responsible for around 27% of Principal NYSE stock trading in Q3 and most of Q4, that number has risen to the low 50% range over the past 3 months.
last two charts demonstrate the divergence of Principal trading as a
fraction of total PT by any given broker. It is obvious that while the
majority of top NYSE member firms have had Principal trades stay around
40% of their total PT volume, Goldman has seen its share of Principal
trading go from 60% all the way into 90%: a vast majority of all its
trades are merely for its own benefit (and potentially as an SLP
lastly, demonstrating Non-Principal trading indicates, as expected, a
trend where GS' client have taken a progressively smaller relative role
as part of its total PT, and currently GS Agency volume as a % of Total
PT is the lowest of all top NYSE brokers, with total NYSE Agency volume remaining relatively stable.
what is really going on here? Connecting the dots is difficult with so
little freely available information, and the NYSE seems to be keeping
mum on disclosing anything above the absolute minimum when it comes to
the SLP, and brokers' participation in it.
My interest was
piqued by one of the points Canaday brought up: "What the table doesn’t
show, but a deeper look at the numbers reveals is that the vast
majority of this total is trades by our quantitative trading desk."
Maybe Canaday can expand on this a little more, as it is public
knowledge that recently the heads of GSAM and Goldman Global Alpha left
the company: Ray Iwanowski and Mark Carhart, who ran the quant
operation, and Giorgio De Santis who ran research, are no longer at the company.
Their departures in themselves are not surprising considering Global
Alpha lost over 80% of assets or roughly $10 billion in the course of
2008 (precipitated by the quant shakeout of August 2007).
But is there something else going on here? Their departures occurred at
the end of March, just as Goldman's Principal % of total NYSE trades
had peaked at almost 55%, yet when they departed, this number dropped
by a not insignificant 12% to 43%, only to rebound promptly thereafter.
Is there more here than meets the eye?
As regular readers of
Zero Hedge know, the topic of market liquidity has been a major one
over the past 3 weeks, and I have demonstrated that traditional market
neutral, high-frequency quants, aka independent liquidity providers
have not only suffered significant P&L losses in
April, but have deleveraged to a point where their presence in the
market is negligible, resulting in dramatic volatility spikes on low
volume. Could it be that Goldman is singlehandedly benefitting from
being the liquidity provider of last resort, even more so as there are
virtually no other participants in the SLP program? And, as is
expected, with a liquidity "monopoly", come unprecedented opportunities
to take advantage of this, depending on one's view of the market. Of
course, Zero Hedge is not suggesting Goldman has done this, but in a
world where so little transparency exists into the core workings of the
equity market, which most market traders have been clamoring has a
"very fishy feel" about it, with Hard To Borrow notices appearing for
such major index hedging securities as the SPY and IWR, it is no wonder
that explanations are being sought.
In order to provide some
much needed visibility, Zero Hedge, as noted above, is hoping Mr.
Canaday will approach Zero Hedge and give a more elaborate explanation
of what is really happing, and why GS is dominating NYSE program
trading, which lately has become a major percentage of total NYSE
volume. It is easy to see why market participants could be concerned
about this particular breed of opacity. In the meantime, I will
continue presenting NYSE program data, as it is everybody's right to be
caught up with all the facts.