SLP

Back in August 2009 we asked a very simple question: "Is Goldman's Selective Trading Disclosure A Legal Way For Preferred Clients To Front Run The Market?" Today, nearly three years later, the SEC answers our question. The answer - a resounding yes.

• Strauss-Kahn Case Seen as in Jeopardy (NYT)... yes, the soap opera is back.... although don't expect Lagarde to hand the keys back to DSK - after all the mission has been accomplished. Though president DSK would be a shoo in if cleared of all charges.
• China Salutes 90 Years of Communism (WSJ)... US salutes nearly 100 year of Federal Reserve central planning
• Obama Pushes for a Deficit Deal by July 22 (FT)
• China manufacturing at lowest in 2 years (FT)
• German Banks Agree to Greek Aid Deal (WSJ)
• Ex-Goldman director Gupta SEC Case Postponed Indefinitely (Fin Alternatives)
• Greek, Italian Bonds Lead Peripheral Rebound as Default Concern Ebbs (Bloomberg)
• Republicans boycott trade vote (FT)
• Obama Pushes for a Deficit Deal by July 22 (FT)

• Bernanke Public Approval Falls to Lowest (Bloomberg)
• On Governments as Portfolio Managers (El-Erian) - good read on the distinction between good and bad inflation
• Of Wealth and Incomes: Why Americans are so unhappy with this economic recovery (WSJ Editorial)
• Wen Says China Succeeding in Inflation Battle with Price Gains Set to Slow (Bloomberg)
• EU Halts New Greek Backtrack (WSJ)
• Greek Austerity Measures Still Unclear (Market News)
• Greek Default Insurance Costs Drop (WSJ).... yes, sub 1 point profit taking in 20 pts up CDS is now headline worthy
• Feds to Launch Probe of Google (WSJ)
• Italy’s Draghi Appointed to Succeed Trichet as ECB President (Bloomberg)

Zero Sum trading (in which the banks make money and taxpayers lose it) continues: following previous reports of trading perfection at both D-grade trading "powerhouse" Bank of Countrywide Lynch, and FRBNY-lite JP Morgan, Goldman craps the bad by being the only big bank so far to post a trading loss day in Q1 (even if it was for $0-25 million). This is unacceptable. As a result SLP latencies will be cut from 0 nanoseconds to -10, as Goldman will proceed to a Tachyon based trading infrastructure. In beta tests, such "frontrunning to the future" trading has already posted solid results: in addition to the humiliating trading day loss, GS had 32 days with profits of ">$100 million." And it still failed to impress... Now that HFT "girl around the block" Citi is no longer there for the taking by anyone with a growing liquidity rebate itch, this number will plunge.

Just in case there was any confusion in the interpretation of the M2 chart, here is the latest just released Adjusted Monetary Base.

One of the recurring topics on Zero Hedge since inception has been that Goldman's flow/prop operations, simply by dint of their massive, monopolistic size, allow the firm to manipulate various securities, among which equities, structured products, and especially CDS. And while the firm has migrated to a more wholesale market manipulation paradigm when it comes to equities due to the far smaller bid/ask spreads, requiring the need for Goldman to become either an SLP on the NYSE, or to create market manipulating algorithms, such as that it is currently accusing Sergey Aleynikov of stealing, where the firm has always excelled has been in the far thinner, and far more profitable, courtesy of wide bid/ask margins, CDS market. Today, we get confirmation from Senator Carl Levin, to whom it appears Goldman has the same trophy value as SAC to the New York District Attorney and Federal Task Force, that Goldman was engaged in precisely the kind of CDS manipulation we have previously alleged the company was involved with.

Must. not. let. price. break. $35.

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 n^th time, when will the anti-trust division of the DOJ finally dismantle the biggest market monopolist in the history of capital markets.

This piece was emailed to me by a friend. Its author, John Harris, according to his own bio, is “the founder and managing partner in Ceylon LLC, a provider of communication software libraries that enable traders to conduct electronic trading business on major industry platforms.” So… I get it; he is staked in the debate. Either he or his customers do not want their activities to be scrutinized by the SEC, who is charged with keeping our markets fair and safe. I am not sure I agree with the limits (2million shares per day/ or $20 million value… I would have gone way higher… higher to the point where this is aimed at the HFT the SEC is trying to understand, without catching any traditional mutual funds or hedge funds in the trap) that the SEC is proposing, but I can’t think of a more reasonable approach for the SEC to take, then to collect data on activities it does not understand, yet seeks to regulate. As industry participants who have watched this HFT defenses morph continually after each tactic fails, we are amused. - Sal Arnuk, Themis Trading

Earlier it was announced that the NYSE has added GETCO as a NYSE Designated Market Maker, and that GETCO has purchased 350 NYSE DMM assignment from Barclays Capital. GETCO is already a supplementary liquidity provider (a program that was conceived as a temporary measure, yet which is now running almost a year past its original expiration date, merely to pay "liquidity providers" Goldman and GETCO), as well as a market maker on the NYSE. Yet the question of just how much principal/prop exposure GETCO takes (as the WSJ disclosed previously this amount is staggering and is often 10-20% of daily volume) in "providing" all this liquidity, deserves additional analysis, as being so intimately linked in various cross-markets means that GETCO, which is struggling in the face of ever increasing HFT competition, will now need to become an ever greater "economy of scale" (think Goldman) in the markets to extract the same unleveraged returns it did in the past. And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes. Themis Trading shares some additional insight into just what this development means for both exchanges and investors.

Derivatives trading volumes in January 2010 were stronger, with European derivatives volumes increasing 32.4% and U.S. options trading volumes increasing a whopping 102.4% y/o/y. Cash equities trading volumes were mixed, with European cash transactions increasing 4.1% and U.S. cash equities trading volumes declining 23.7% from Jan '09. Total interest rate products ADV of 2.7 million contracts in January 2010 increased 37.8% from January 2009, and increased 50.5% from December 2009. Total interest rate product ADV is at the highest level since March 2008 !

Nearly a year ago, Zero Hedge first brought broad public attention to the nebulous aspects of the dark and dirty underworld of the market, exposing the "second-tier" of privileged market participants, consisting of quant traders, high frequency trading, flash trading, sponsored access, co-location, latency arbitrage, Morgan Stanley's discussed-below PDT operation, and many other topics (check our Glossary for much more). In April, Zero Hedge wrote an open letter to the quant community, pleading for more transparency absent which the eventual result would be "larger, systematic problems at the largest, most sophisticated quant managers." Since April, the impact of market neutral quants has progressively declined, as factors, one after another, have failed, and market neutral indexes are probing multiyear lows (HSKAX). The question of who has stepped in to replace the whales' liquidity provisioning is still unanswered, although the explosion of small, inexperienced 3 man quant shops consisting of a math Ph.D. and two programmers, may be part of the answer. The integration of Goldman within the structure of the NYSE and other exchanges, may be another: at last check, Goldman is still a key component of the NYSE's SLP program, regarding which there is still barely any information, despite promises by NYSE representatives to the contrary (and with Goldman's prop operation potentially terminally crippled, the question of how extensively intertwined prop trading is with liquidity provisioning, will be a major topic going forward). Today, the WSJ's Scott Patterson takes advantage of the recent furor over quants and in extensive article promotes his new book "The Quants" in which "he suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown." We are glad that, after nearly a year of writing about it, the topic of the market systemic threat presented by a small subcommunity of quantitative traders is finally emerging on the mainstream scene.

The topic of Goldman frontrunning clients using its prop desk, which has long bothered Zero Hedge, and which in the past received Goldman's vehement refutation, seems to have resurfaced, and to have proven our initial speculations correct. Jane Lattin, assistant to Thomas Mazarakis, head of fundamental strategies, sent out an email to clients earlier, notifying them that the firm in the past has traded ahead of them in its Fundamental Strategies Group, aka its Prop Trading desk, which is, by definition, frontrunning: "The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you." This answers our repeated queries from July as to whether Goldman is legally front-running its clients for its own prop positions.

Dark pool operators, who have quietly been redirecting shady order flow via dark pools of "liquidity" with minimal supervision and below the radar for many years, are getting spooked by a proposed SEC rule which would have these same dark pools identifying their trades in real time, thus removing the benefits associated with what is effectively an OTC equities market. Their response: blame it all on the HFT guys, who use the information that would leak to front-run the crap out of the "long-onlies." Yet weren't these same HFTs claiming just yesterday that all they do is provide liquidity and tighten spreads? ... Someone is lying.

It has been a while since we revisited Goldman's domination of NYSE program trading courtesy of the SLP. For the past two months we have been waiting for additional information from the NYSE on what other firms are currently SLP vendors to the exchange. By the lack of any data from the NYSE we can only assume that Goldman is still the defacto monopolist in SLP, and in essence the primary privileged DMM on the NYSE. One wonders with liquidity "back to normal" when the NYSE, SEC and Goldman will agree to disassemble the SLP program so that the market can go back to its efficient old-school ways (this is rhetorical). As the data suggests, Goldman Sachs & Co. now has a staggering 22-to-1 ratio of principal to agency transactions: in the last week Goldman traded 662million shares in principal capacity (instead of blaming all of this on Goldman's prop trading cash machine, we would love to be able to break down how much of this is attributable to SLP, but a reborn NYSE which believes in nothing but transparency will simply not provide that data). Taking into account GSEC adds another measly 10 million agency shares doesn't change the big picture that out of the top 10 NYSE firms, Goldman trades the third lowest amount on an agency basis. Goldman's casino is now not even pretending to trade on behalf of clients, as all of its money is made on FICC spreads and volumes (aka trading monopoly).