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Why Goldman Is About To Become The Biggest HFT Firm In The World

Tyler Durden's picture




 

When faced with the choice of perpetuating a fake facade of morality or continuing its old ways, was there ever any doubt what Goldman would choose.

One year ago, just as Michael Lewis issued Flash Boys, a book which summarized everything we have said about broken markets and HFT manipulation since day one, Goldman decided to not only keep a lower profile, but to miraculously take the side of the "little guy" by not only providing backing to the new anti-HFT exchange IEX, but having Goldman COO's Gary Cohn pen a WSJ Op-Ed titled "The Responsible Way to Rein in Super-Fast Trading" in which the firm lamented the rise of algorithmic trading, and market fragmentation:

With the overwhelming majority of transactions now done over multiple electronic markets each with its own rule books, the equity-market structure is increasingly fragmented and complex. The risks associated with this fragmentation and complexity are amplified by the dramatic increase in the speed of execution and trading communications.

 

In the past year alone, multiple technology failures have occurred in the equities markets, with a severe impact on the markets' ability to operate. Even though industry groups have met after the market disruptions to discuss responses, there has not been enough progress. Execution venues are decentralized and unable to agree on common rules. While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response. Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.

Some were shocked by this moral position adopted by Goldman: after all, when in history has the great vampire squid with a penchant for parking its alumni in key central bank and regulatory positions ever foregone profits in order to do what is right.

More shocking, just a few days later, Goldman announced it would sell its designated market maker post on the NYSE, the last remnant of its legacy year 2000 $6.5 billion purchase of Spear Leeds & Kellogg, suggesting Goldman was waving goodbye to lit exchanges.

Even more shocking, a few weeks later Goldman was reported to be shutting down its own dark pool, the once massive Sigma X, thus exiting not only lit but dark exchanges as well.

Back then we said that "this is a momentous development, if true."

Turns out it wasn't true.

In fact, all Goldman did was a well-orchestrated PR campaign to avoid the public backlash for the prominent role it had in destroying Sergey Aleynikov not once, but on countless occasions, a programmer first profiled here in 2009, and whose life ever since has been a living hell thanks to Goldman's army of lawyers. As a reminder, Aleynikov's plight was one of the main topics of Flash Boys.

Well, now that both Lewis' book has been long forgotten, now that Virtu has successfully IPOed (with Goldman Sachs as lead underwriter), Goldman can finally drop the facade of doing the right thing for once and as Bloomberg reports, "Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis’s “Flash Boys” spurred an outcry last year, is diving back in."

Aka hypocrisy 101.

The bank’s electronic equity-execution unit is hiring executives including Keith Casuccio from Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to people with knowledge of the plan.

Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group Inc., portrayed in Lewis’s book as an antidote to the perceived ills of the super-fast, multi-venue electronic trading in today’s market. Now, after few major changes in the way stocks are traded, the investment bank is seeking to execute faster, catching up with competitors and leveling the playing field for its clients.

 

Goldman Sachs is one of the world’s top equity-trading banks, climbing to No. 1 by revenue in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest push, which included hiring Raj Mahajan as head of equity electronic-execution services this year, shows it’s focused on establishing itself as one of the top players in automated trading in particular.

But Gary Cohn warned about "fragmentation and complexity" risks... does that mean he was just pandering to the lowest common gullible denominator? And what about that stuff when Goldman said in a memo after the op-ed that "markets would be well-served if IEX achieved “critical mass,” even if that meant reduced volume at its own dark pool, Sigma X."

Why that was a lie too.

In reality all Goldman did was a rehash of its 2008 strategy when, trailing badly behind Lehman in fixed income revenue, it used its former employees at the Treasury department (Hank Paulson) and the NY Fed (Stephen Friedman) to let Lehman collapse thus allowing Goldman to become the undisputed champion of bond trading. That Goldman would end up the beneficiary of hundreds of billions in taxpayer bailout funds leading to record after record bonus season was only the icing on the cake.

Fast forward to 2014 when Michael Lewis no doubt gave Goldman advance notice of the shit storm Flash Boys would bring. Goldman, in post-crisis crossfire since day 1 and an expert at managing public anger, promptly realized this would lead to the collapse of numerous HFT competitors, and potentially the ascent of a brand new market entrant, the "spotless" IEX.  Which is why Goldman was one of the primary backers of the new exchange. After all, there was little downside for its nominal investment, substantial upside, and best of all, it would somehow end up looking like a good guy in Flash Boys despite everything it has done.

Well, "peak" IEX came and went, and the start up exchange was unable to dethrone the reigning king of dark pools Credit Suisse, while corrupt to the bone regulators paid by the HFT lobby, showed that Goldman has no concerns about a wholesale crackdown on HFT: after all, without the Flash Boys, not only will the SEC have vastly less "retirement" funds, but the market itself may well implode now that algorithms have embedded themselves in every trade in the process sucking away virtually all market liquidity.

So where does that leave Goldman now?

Goldman Sachs plans to pitch its improved systems to customers by highlighting fill rates, the percentage of orders that are executed, according to one of the people, who asked not to be identified talking about internal strategy. Part of the focus will be on winning business from quantitative hedge funds that already are clients of other parts of the bank, such as the prime brokerage.

 

Casuccio, an executive director at Morgan Stanley, will join Goldman Sachs as a managing director reporting to Mahajan later this year, the person said. Tiffany Galvin, a spokeswoman for New York-based Goldman Sachs, declined to comment. Casuccio didn’t return a phone call to a listed number seeking comment.

Who is Raj Mahajan?

Mahajan, the first partner-level hire in the bank’s equities group in more than a decade, was recruited in January from high-frequency trader Allston Trading to guide the overhaul.

He was the CEO at Allston, the same Allston which in January announced it would withdraw from trading US equities altogether (although you won't find it on his LinkedIn profile).

The same Allston which as we profiled in March in "Parasite Turns On Parasite" was sued by fellow HFT firm HTG Capital, accusing Allston of pervasive manipulation in the US Treasury market.

In other words, HFT powerhouse Allston is dead and all of its secrets including how to manipulate the US Treasury market better than anyone, were just funneled into, drumroll, Goldman Sachs.

What appens nest:

The electronic group aims to add more people in coming months, specifically technology specialists, according to the person. Upgrading Sigma X also is on the agenda, said the person, who added that the company believes the group could achieve a double-digit growth rate if the changes are successful.

So much for Goldman shutting down Sigma X. Instead, Goldman once again played its cards beautifully:

  • It pretended to be the champion of the "retail investor" just as the anti-HFT backlash erupted after Flash Boys was published.
  • It pretended to be getting out of HFT and dark pools.
  • It pretended to be truly sorry for the fate of Sergey Aleynikov (even though a year later Aleynikov is facing prison time after he was found guilty, again, of stealing "secret scientific material" from Goldman, a charge the repentant vampire squid forgot to drop).
  • It did its underwriter due diligence on Virtu and now knows the top HFT firm's most intimate secrets, including the magic behind its "holy grail of trading" or how it had just one trading day loss in 6 years of trading.
  • It just bought the brains behind one of Virtu's main competitors, Allston Trading, a firm embroiled in litigation for manipulating the Treasury market, which recently exited the US equity market (most likely with some hush payments from none other than Lloyd Blankfein).

In short, Goldman is about to aggressively expand into High Frequency Trading and Dark Pools, and courtesy of its captured regulators and Federal Reserve officials, we give Goldman 12-18 months before it is the dominant HFT trading firm in the US and the entire world. And this time, unlike 2008, Goldman did not even have to blow up the financial system to achieve its goal.

Shorter yet: Goldman wins again.

Which, incidentally is good news. Recall that at this point since the current system is far beyond the point of no fixable return, the only real option is letting the status quo burn itself out as fast as possible in a supernova of unbridled greed and endless liquidity, leading to the inevitable systemic reset. A reset which, amusingly, was predicted by none other than Goldman partners and co-heads of Goldman's global stock markets, Ron Morgan and Brian Levine.  

From page 24 of Flash Boys:

And nobody more so than the hypocrites at Goldman Sachs.

 

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Sat, 06/13/2015 - 16:02 | 6193871 q99x2
q99x2's picture

It would be more profitable for GS to close all its operation and keep the money the FED gives it. But no, it has to destroy its opposition as part of the banksters war for world dominance. 

Sat, 06/13/2015 - 16:05 | 6193878 Haus-Targaryen
Haus-Targaryen's picture

Has anyone else noticed that this is the *third* time in a row that things got fiesty here in Euro-Rainbow land and Ghordo disappears?  

Why is it that when the EUR gets itself into trouble, Ghordo is no where to be found?  

Sat, 06/13/2015 - 18:13 | 6194112 knukles
knukles's picture

The Book of Vanities

Sat, 06/13/2015 - 19:25 | 6194267 Squid-puppets a...
Squid-puppets a-go-go's picture

one of these days, one of GS's tentacles will reach so far around dark corners that it will touch something and start throttling, only to realise its its own head

Sat, 06/13/2015 - 23:29 | 6194741 Manthong
Manthong's picture

All in a day doing Satan’s work.

Sat, 06/13/2015 - 16:03 | 6193874 HowdyDoody
HowdyDoody's picture

Goldman Sachs is the Samson Option

Sat, 06/13/2015 - 16:47 | 6193945 Kirk2NCC1701
Kirk2NCC1701's picture

The giants/lowlife of High Flying Traitors 

Sat, 06/13/2015 - 16:15 | 6193890 Arnold
Arnold's picture

What is good for Goldie is good for the nation(s).

 

The end is coming sooner then? Under funded pension funds, Institutional investments are the few players left to skim , and some days I wonder  about them.

IPO a gogo or crowd funding sources still seem to draw liquid assets out of the vault though.

Sat, 06/13/2015 - 17:02 | 6193962 two hoots
two hoots's picture

We should have let the banking system fail.  Now, there is nothing anyone can or will do anything about it.  Until so, like earthquakes, hurricanes and tornados we are at their mercy.  Best we can do is be aware and plan our lives around such potential knowng we can be crushed by it anytime no matter how we prepare/live our lives.  Kinda like going outside the cave looking for food when you know T-Rex's are out there. 

Why Congress can't find a connection in our constitution that would prohibt this, who knows?  Laws can shut down a lemonade stand but let these vandals run wild and uncontrolled?  Who needs these assholes stressing out the rest of planet, a fool's errand, what is the aim?

Sat, 06/13/2015 - 23:04 | 6194682 TwoHoot
TwoHoot's picture

Imitation is the sincerest form of flattery.

Sat, 06/13/2015 - 16:18 | 6193894 Dubaibanker
Dubaibanker's picture

Goldman is called 'Vice Sachs' by RT.com. Must watch show. Talks about Clintons and how they manipulate stock markets to get paid! lol.

We already know most of it, but an eye opening show for many more: http://rt.com/shows/in-the-now-summary/266653-iraq-fifa-bildenberg-goldm...

No matter who wins the next US Presidency, Goldman has all the candidates in its pockets or in it's tentatcles!

Talks about Bilderberg too. Max Keiser is fun as usual.

Sat, 06/13/2015 - 16:29 | 6193917 cougar_w
cougar_w's picture

I would say now that it is abundantly clear TheFed has contracted with GS to keep the markets from tanking. There will hardly ever be a red day. Watch the money pour in.

It's central planning. What did you think it would look like? It would look like it was planned -- centrally. The only thing left is government control of corporations, and then government control of consumption patterns. And if you think they cannot centrally plan both of those then you have no idea how easy it is to con people.

Let's see. When does it end. I'll take a guess.

Central planning is how you handle an extended crisis and it works fine so long as there are resources to control. That means humans and nature. When either of those resources cannot be controlled any more (meaning they might simply no longer exist) then the deal we have with the planners falls apart. Right now it's debatable if we'll run out of humans, or run out of nature, first. And that is the final play here; burning up natural resources will dying off the people, in the right balance, until the global economy prime driving resource (daily sunlight) will support the actual number of people. The latter being about 1 billion against the former would be about right. So you'll see markets in the black, all good news, buy buy buy ... until we are about 1 billion people total left in the world.

Do they even have a choice? Can you think of even one other way they can handle that kind of a die-off? I can't think of anything. They need a way to make everyone think this is a cake walk while sitting by and watching 6 billion people die with the rest of us too busy being rich (or complaining about wealth inequality) to notice.

Sat, 06/13/2015 - 17:15 | 6193977 two hoots
two hoots's picture

I too am touched by that conspiracy theory.  I think 1B is a little high for their (?) needs.  Think of the pollution, disease, sucking of resources, chance of revolt, not bothered by unemployed/sick/lame/lazy/old people, eliminate it all and enjoy life, a long trouble free life free of the masses.  Have plenty of water, foods of choice, wines, music and just enough servants.  No more wars, just peace as God planned it in the Garden.  

Sat, 06/13/2015 - 23:05 | 6194683 TwoHoot
TwoHoot's picture

Imitation is the sincerest form of flattery.

Sat, 06/13/2015 - 17:29 | 6194011 Low Tech Future
Low Tech Future's picture

TPP will take govt control of corporations and turn it into

.........corporate control of govts.............

 

Sat, 06/13/2015 - 16:40 | 6193927 One And Only
One And Only's picture

If you want to buy stock you should have to take possession of the stock certificate deliverable via certified mail. That should put the kabosh on all this god damn nonsense. The stock market has turned into nothing other than high frequency 3 card Monte and it's fucking bullshit. Could you imagine if ownership in your local diner traded 50 million times per nano second or whatever the fuck? This is fucking garbage.

 

 

 

 

Sat, 06/13/2015 - 17:21 | 6193991 Spectre
Spectre's picture

I agree and have always told others that if it was mandated when you purchased any equity or & bonds that you have to own them for at least 5 business days.  It would end 95% of this Bullshit Casino action......

Sat, 06/13/2015 - 18:01 | 6194088 buzzsaw99
buzzsaw99's picture

the squid is an omnipresent undead ghoulish beastie

Sat, 06/13/2015 - 20:05 | 6194337 e_goldstein
e_goldstein's picture

Excellent article. Well done, Tyler.

Sat, 06/13/2015 - 21:00 | 6194445 luna_man
luna_man's picture

 

 

No worries here, it's still only paper and people are still broke/broker.

 

Go For The Gold

Sat, 06/13/2015 - 21:36 | 6194512 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

oy vey

 

dont see what the big deal about TPP is..the corps and banks already control the U-ESSAy

 

 

Sat, 06/13/2015 - 22:19 | 6194597 MedicalQuack
MedicalQuack's picture

News rigging has arrived...Goldman orchestrated the "perfect fake grass roots campaign" and your article spells it out...it's not just pharma doing all of it...the journobots can write and write and write...and so on...and big media is a bit afraid to cross some of what goes on today as some of the same folks who create all these fake grass root campaigns are the same ones who continue to pay them for advertising...but papers don't have much choice today as they are all starving for money...so we will continue to have news rigging and it's a lot easier now as bots are writing about 60% of what you see out there today.  

So stock bots read the news feeds, news bots read the stock bots and make up a story, we've come full circle now, it's bot to bot world.

http://ducknetweb.blogspot.com/2015/04/news-rigging-has-arrived-astroturf-and.html

 

Sat, 06/13/2015 - 23:03 | 6194679 BoPeople
BoPeople's picture

The bots would be useless to their users unless they could actually control and manage price.

Sun, 06/14/2015 - 08:54 | 6195174 Arnold
Arnold's picture

"High-frequency traders do not just look at order flows and run ahead of them to gain an edge; they also try to get ahead of market-moving news as well. Using news analytics services, they deduce  content in milliseconds to anticipate market movements and trade on them. These trades are the subject of a paper titled, “Media-Driven High Frequency Trading: Evidence from News Analytics” by Wharton finance professor Donald Keim, INSEAD banking and finance professor Massimo Massa and INSEAD doctoral student Bastian von Beschwitz."

 

http://knowledge.wharton.upenn.edu/article/high-frequency-trading-profit...

Sun, 06/14/2015 - 00:05 | 6194676 BoPeople
BoPeople's picture

There are a lot of things that the world would be better without. Gang rape, pustulent boils and Goldman Sachs come to mind.

Sat, 06/13/2015 - 23:29 | 6194740 Teknopagan
Teknopagan's picture

I say that everytime the Octopus is shown an e-copy of Crozier's book "US Money vs Corporation Currency" should be offered as prior.  It would just be good manners. 

 

Teknopagan

Sun, 06/14/2015 - 02:51 | 6194923 HYMN
HYMN's picture

Hell is getting hotter and the devil is getting smarter all the time.

Sun, 06/14/2015 - 11:57 | 6195450 PrimalScream
PrimalScream's picture

Amen!  It's certainly Easy Pickings for the Devil, when so many people are money-oriented, and everything in the word has such a "short time window".  Whatever happened to a long-term view of life?  When did the word "Eternal" fall out of the dictionary?

Sun, 06/14/2015 - 12:00 | 6195456 PrimalScream
PrimalScream's picture

The people at Goldman should be amongst the first to know - NEVER put all your eggs in one basket.  This viewpoint doesn't just apply only the the selection of markets that you trade - it also applies to trading strategies aswell.  Excessive reliance on HFT's has the potential to decimate Goldman Sachs.

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