Is Goldman Legally Frontrunning Its Clients?

Tyler Durden's picture

Everyone who is anyone on Wall Street has at some point used the Goldman 360 portal whether for research, news, keeping a track of prime brokerage portfolio or, disturbingly, for trading, via the REDI Plus 9.0 platform (now loaded with enhanced algo trading features to make life for you, dear soon to be frontran Goldman client, so much easier). A second widely accepted Wall Street concept is that a disclaimer is the last thing that anyone reads, if ever. Yet after taking a close look at the Goldman disclaimer for the 360 portal, which is an umbrella waiver or all downstream websites, including REDI, one discovers the following gem:

Monitoring by GS: Your use of the products and services on this Web site may be monitored by GS, and that the resultant information may be used by GS for its internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory organization.

 

One second: by using Goldman 360 a client voluntarily allows Goldman to provide keystroke by keystroke data of everything the client does, even if that includes launching trades via REDI, to Goldman for the internal business purposes? The third thing everyone on Wall Street agrees on is that "internal business purposes" usually (and in Goldman's case, almost exclusively) means proprietary trading.

Are Goldman 360 clients (in)voluntarily signing off a release to be front ran by Goldman on any portal-based trade? Could Goldman please clarify just what "internal business purposes" means in the context of this overarching disclaimer, and also whether Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk? Lucas Van Pragg: the floor is yours.

Update: several readers have presented some other Goldman Sachs and Spear, Leeds and Kellogg form documents that contain an even more crypitc warning in section 4(f) in Use Of Services:

You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation.

NOT FOR YOUR BENEFIT? I mean, come on, how more clearer does it need to get.

 

 

hat tip Greg and Richard

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Anonymous's picture

This is probably a naive question but wouldn't SEC rules re: front-running trump any release implicit release from client usage of the GS site?

Anonymous's picture

The SEC? The Selective Enforcement Commission? The Savior of Enabled Cronies? The Simulacra of Evil Capitalists? The Source of Enraged Consumers? Sorry, Everyone's Crooked? That SEC? Doing something against the will of the patron saint? I won't hold my breath.

Ben_the_Bald's picture

Are you of the type that wants to see the SEC abolished because of its ineffectivennes?

Socrates's picture

The SEC should be replaced with a true Elliott Ness (Mark Haynes, full-time CBNC shill, hillariously stated that Geithner looked like a young Elliott Ness (Robert Stack)) that has a collection of judges on call such that a forth-with subpoena can be issued and the individual(s) then starts producing the requested data without the benefit of a lawyer stating "He's not here now" when "here" means he's not in that room, but in another room acting like Chloe on "24" and destroying evidence.

The SEC, like the rest of government save for the military, is useless.

Socrates - It's the bottom line...your money is their money. "This town needs an enema."

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mediahuset's picture

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Ben_the_Bald's picture

You are correct. The disclaimer is boilerplate and can't be used to justify illegal acts. The most important question remains on the role of the regulators in making sure the big players don't get away with this type of illegal activities. And this is not an issue specific to Goldman Sachs, you've got to look at the entire spectrum of major players in this game. Just getting fixated by GS size and power and not looking at the overall problem of ineffective enforcement will get you to fight the wrong fight.

aminorex's picture

What law would be broken if GS used customer transaction data in proprietary trading?

mediahuset's picture

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Keyser Soze's picture

Well, we can be sure there's no revolving door between ZH and GS!

agrotera's picture

wait til the shills fly in to infest the site.

Socrates's picture

"An whhhh (breath of air blows out a match)....like that, they (GS) were gone!"

 

May the public backlash against Goldman Sachs begin. We could use a modern Nuremberg trial with Barney Franks and Christopher Dodd in cages that hold Paulson, Geithner, and Summers in one across the room. I realizes that short nooses haanging from inside them make it unlikely, so I'll take the orange jump suit. There are few things in life that would aallow me to say I can now die a happy man. I have to say Barney Franks in jail may well be one of them. For those who do not know, while Franks was saying "all is well", an upper eschelon individual at "Fannie" Mae had been his "lover" a few years before and said individual did not need to squat when they peed.

Be sure to tell your friends at any party this weekend that GS made over $100 million on 34 of 58 trading days in the 1st Quarter. I did last night and I assure you, people get steamed. One man's son joined the Marines as he graduated from college and has looked for jobs since March and it is hopeless. He's hoping to get into Officers Candidate School and is now in Okinowa training. The economy is in many wways a zero-sum game. The oligarchs at GS are sucking the life out like that slat creaature in Star Trek (the TV show) and their tentacles are everywhere. I'm hoping a G-7 opposition type movement floods their offices so they can't work.

Semper Fi

Socrates

Hondo's picture

These guys are dogs

Keyser Soze's picture

We don't know what it's used for yet. Maybe they were just covering themselves so they knew they wouldn't get nailed if they found a use for the data, even in aggregate.

Tyler - if you were as smart as them you wouldn't ask this, obviously.

Hondo's picture

Read this article in BB and tell me that the Banks are scamming again with the help of the

Fed.http://www.bloomberg.com/apps/news?pid=20601087&sid=aImf5u463oUc

Anonymous's picture

I really enjoy your site. I have actually started looking into your Goldman conspiracy theory, for I feel they get away with murder as well. Here are some stats on their program trading - http://boombustblog.com/200907011028/Market-Manipulation-from-the-Big-Bo... and more importantly, one should keep in mind that garnering such a large share of trades on the NYSE does not come without its costs. Even before GS went berserk with dominating these trades, their VaR was spiking at the same time their risk adjusted return on risk adjusted capital was dipping. See http://boombustblog.com/20090420923/Whose-the-Newest-Riskiest-Bank-on-th...

Goldman wouldn't have the nifty sheen of superiority if one actually viewed the risk they took to generate accounting earnings, in lieu of just looking at quarterly accounting earnings.

I'll have plenty more soon...

Intuition's picture

It's utterly amazing how far the cabal is willing to stretch the law in pursuit of short-term gain. How anyone still has any trust in the system is beyond me.

NorthenSoul's picture

It's not that there is any trust left in the system. We're (as a society) at this painful stage of recognizing there is deep need for meaningful change but can't see how to do it without acting outside the usual channels. More importantly, we very much fear the unknowns that would come with change. A known unhappiness still appears preferable to an unknown happiness.

Which means that more pain and suffering shall be necessary to overcome fear.

Anonymous's picture

And now you know the real reason for electronic trading. Capture the order flow, so you can get ahead of it.

Undertaker's picture
Undertaker (not verified) Jul 1, 2009 11:55 AM

One can only lose money in a rigged casino where the cops have been bribed if one is stupid enough to enter it in the first place, just as anyone who partakes in the services from the dirtiest little whore house on the street shouldn't be surprised if they end up with the clap.

quant-this's picture

I've been saying this for a while and people think I'm nuts but if we give it a name like "Latency Arbitrage" it makes it ok.

I place a large buy order at the same time they lift the offer and place an offer a penny above and sell to me there. They do this all day long and while they are not creating momentum in this particular scheme, they are helping it along.

wiskeyrunner's picture

Keep at em , keep hitting them, don't back off. The way to beat Goldman is from the inside out, from the inside out.

channel_zero's picture

TD: IMHO, that disclaimer is used to allow them to create PHB reporting. For example, 3200 customers visited last month, a 10% decline Y/Y, etc.

Going further than that is a long, shaky, bridge no one in GS's IT/programming departments would want to go over. GS would be able to build it, but it would be a large, unwieldy project that probably doesn't integrate with their trading platforms.

If I follow your suggestions correctly, there would be a timing element involved between what's happening on the web site and GS trades. This is very unlikely.

Typically the trading stuff is more than one very complicated hardware/software silo and the web interface stuff is another slightly less complicated silo. The typical IT mindset is never the two shall meet. Ever. So, the web site somehow updating a trading platform would be a big infosec no-no and software-wise very, very difficult.

I recommend demoting this story. You post interesting stuff. But this one is improbable at best.

Arm's picture

I agree that this disclaimer could be used for legitimate business purposes. This, even though, there are very clear standard disclaimers available for the aggregation of data.

However, I do find your IT approach naive. You are basically saying that GS (or anybody for that matter) would lose out on a multi-billion dollar revenue stream in exchange for system stability/reliability? Does not seem likely. If they need to buy a more robust architecture to filter, and leech the data in real time, they would simply invest the money.

Couple dozen million in IT vs a couple billion in profits? I would sign that check

ShankyS's picture

Respectfully to Channel_zero - A big IT no-no? A long, shaky bridge? This bridge is just on a tiny little path on a side road. If it makes millions and the SEC is in the bag, then you get a fine and admit no wrongdoing. This is how the system works. Exploit it till profits run dry or someone catches on, pay the 10% penalty to the man and admit nothing, move on to the next scam and get big bonus in the process for the scammers. Wash, rinse and repeat. Just MHO.

FischerBlack's picture

You make some decent points, but all orders flow to the floor, no matter the source. It's really not inconceivable that a program could see an order that meets certain specifications and trigger one or more other orders based on it. The reason front-running rules exist is because front-running is and has always been trivial (and widespread). The digital age and program trading make it much more efficient.

I don't know that Goldman really needs to be singled out, since any broker could front-run ther clients. But I hate Goldman and accusations of frontrunning are mild in comparison to how evil that firm is. So this post has my support.

channel_zero's picture

Arm: the risks/benefits on the project would not be clear. Also keep in mind in the rank-and-file no one wants to be on the failed end of a project. This one is too risky as TD lays it out. A career-minded dev would do their best to stay away from this one.

Shankys: I cannot briefly describe how complex an undertaking writing front-running software would be.

FischerBlack: It's not inconceivable, but there have to be cheaper ways to make more money cheating.

wiskeyrunner's picture

It’s bothersome when I hear people say, Goldman is just smarter then everyone else. That’s simply not true. What is true is Goldman has insiders in every form of government. They buy influence. They are indeed the smartest crooks on the street.

They play to win, but they cheat!

Arm's picture

Agreed. Don't get me wrong, I have met great people working at Goldman, however I have also met some of the worst there also. There is a quiet arrogance to many goldmanites who actually drink the Kool-aid and believe they have superior skills.

ShankyS's picture

Sounds like some of the ex Notre Dame football players I know LOL. god - I think NOT.

Arm's picture

The best way of detecting a rotten goldmanite (or most rotten ibankers for that) is by the strength of their tan... I am only partially joking.

Strangely enough, all the bad bankers seem to work on their tans more than they read books. I guess it is a give away to superficiality and conceit.

Anonymous's picture

I’m sure Goldman is working day and night to come up with there next gimmick. What new financial product and we introduce to remove the masses dollar from there pocket and into ours. All with the help of congress the enablers who let Goldman steal us blind.

Anonymous's picture

Are there still suckers out there trading on a daily basis? Who are these nutjobs? Every single day, five or six times a day, for the past few months -- we've had a constant stream of evidence that the markets are rigged against the little guy. Just who are these idiots who still need convincing? And what exactly will it take to get them to leave the table?

Then again -- there are idiots who will stay in a casino until all their money is gone. And even after they've lost everything, they'll continue to think that they were "just unlucky". Never once does it cross their barely-functional minds that mathematical probability was stacked against them the entire time -- and that given enough bets, their loss was 100% guaranteed.

If someone doesn't understand the market they shouldn't trade. And if anyone's trading right now, they clearly don't understand the market.

ie: What the f*ck are these people doing?

Anonymous's picture

I was at an interview at a similar outfit, and got feeling, that there might be possibilities for "dataminning" the current mind set of investors based on their viewing patterns.

Lets say for example, that institutional clients are all checking the resource sector analysis, it is a fair bet that this sector may see increased turnover. Or lets say everybody is setting "alerts" when S&P reaches xxx, it would be a fair bet that this would be an important resistance point.

This information could be used for both good and bad on the part of investors. But building a "trading" profile of all you clients could probably be turned to Goldmanns advantage.

Anonymous's picture

The next game will be Carbon Credits trading - they will package these up and set up another Roullete Wheel to spin at the expense of industry

agrotera's picture

Dont forget the other scam that is in full operation-- simply knowing what the PPT is up to, and they probably write the PPT agenda thus used it for their inside advantage...but since they have immunity the SEC, FBI, CIA,and (all other government acronyms) wouldn't care, that is, they've got full protection....unless the federal reserve system is exposed and revoked as a privately held corporation.

This is your friendly broken record signing off...have a nice day.

Anonymous's picture

what the fuck do you think the commodity role is? its a fucking joke, its the only reason they announce it

Anonymous's picture

Terrific site. How about abolishing the Fed and rebuild how this country manages it's money because replacing a cartel protected by government is a good first step. Good article on GS, the prime driver of the Fed.

Anonymous's picture

Channel Zero,

Since late 80s these companies have employed Nuclear Physicist/Mathematicians to develop their models/controls who had a lot of experience dealing with real time systems of sub atomic particle reactions in accelerators/colliders. For them merging or extracting info from trading platforms moving at human speed is no sweat.

ttime

Anonymous's picture

Improper Proprietary Trading by GSEC and SHD
8. During the Relevant Period, GSEC and SHD breached their duty to refrain from dealing for
their own accounts while in possession of executable buy and sell customer orders. Instead, GSEC
and SHD effected improper proprietary trades that disadvantaged customer orders.
9. On each of the Exchanges, GSEC and SHD specialists possessed or had access to
information concerning customer orders on both sides of the market. Where there are matchable
orders on both sides of the market, specialists are obligated to “pair off” or cross the buy and sell
orders by executing each side of the market for identical prices and in commensurate order
quantities. In numerous instances, however, GSEC and SHD specialists did not “pair off” or cross

Anonymous's picture

10. Trading Ahead. In certain instances, GSEC and SHD specialists filled one agency order
through a proprietary trade for their firm’s account while a matchable agency order was present on
the opposite side of the market, thereby improperly “trading ahead” of such opposite-side
executable agency order. The customer order that was traded ahead of was then disadvantaged
when it was subsequently executed at a price that was inferior to the price received by the firm’s
proprietary account. For example, if a specialist has present on his book, at the same time, a
marketable customer order to buy five contracts of an options series and a marketable customer
order to sell five contracts of the same options series, the specialist would be obligated to pair off
those matchable orders. Trading ahead would occur if the specialist filled the sell order from the
firm’s proprietary account at $5.00 per share per contract, and then subsequently executed the buy
order at the inferior price of $5.05 per share per contract. In this example, the buy order received a
price inferior to that to which it was entitled ($5.00) and the customer was disadvantaged by $25.00
(5 contracts x $0.05 per share per contract x 100 shares per contract).

Anonymous's picture

Administrative Proceeding: Goldman Sachs Execution & Clearing, L.P. and SLK-Hull Derivatives LLC
Administrative Proceeding: Goldman Sachs Execution & Clearing, L.P. and SLK-Hull Derivatives LLC. Administrative Proceeding: Goldman Sachs Execution & Clearing, L.P. and SLK-Hull Derivatives LLC. SECURITIES EXCHANGE ACT OF 1934 Release No. 59505 / March 4, 2009 ADMINISTRATIVE PROCEEDING File No. 3-13394 In the Matter of Goldman Sachs Execution & Clearing, L.P. and SLK-Hull Derivatives LLC, Respondents. Goldman Sachs Execution & Clearing, L.P. ( GSEC ) is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. GSEC is an indirect wholly owned subsidiary of The Goldman Sachs Group, Inc. ( GS ), and a member of the American Stock Exchange ( AMEX ), the Chicago Board Options Exchange ( CBOE ) and the Philadelphia Stock Exchange ( PHLX, ... Prior to January 14, 2005, GSEC was known as Spear, Leeds & Kellogg LP ( Spear Leeds ).
Section: Litigation | Size: 101 kb | Type: pdf | Date: March 4, 2009
http://www.sec.gov/litigation/admin/2009/34-59505.pdf

Anonymous's picture

D. CONCLUSION
29. GSEC and SHD willfully committed violations of Section 11(b) of the Exchange Act, and
Rule 11b-1 thereunder, as described above.

Anonymous's picture

And the fine..... drumroll..........

Respondents shall, within ten days of the entry of the Order, jointly pay
disgorgement of $6 million to the Commission.

Goldman Sachs truly rips off their clients, and when caught only pays a fraction of what they made

Anonymous's picture

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Anonymous's picture

In the world ,onbody can Leaves time ,maybe i should say nobody

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Anonymous's picture

Goldman- Sachs refuses to clean up their act! First by accepting a bail-out for their own gambling mishap and now with the possibility that they may be front-running millions per day.

Goldman-Sachs deserves to be voted into Corporate Accountability Hall of Shame. Please vote here: http://salsa.democracyinaction.org/o/2215/t/8981/signUp.jsp?key=4278

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Anonymous's picture

Well Goldman has many issues which needs to be tackled very carefully. Well I think they should formulate such as step that it gives a complete user satisfaction.

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