Zero Hedge is starting a multi-part overview of Goldman Sachs' Electronic Trading client-focused product suite, to demonstrate just how extensively embedded in modern market architecture are Goldman's various DMA and "liquidity" facilitation schemes, and the depths of dark pool domination via Goldman's global order router, and other specific topical offerings.
Our first focus is on Goldman's DMA/liquidity/order router integrated suite, represented by REDIPlus and Sigma, as well as Goldman's privileged access dark pool, SIGMA X.
A first and key observation is that Goldman's Direct Market Access program accounts for over a whopping 1 billion shares daily, as disclosed to clients by Goldman itself. When one considers that the NYSE's trading volume has recently been in the 1-1.5 billion shares per day range (a number that has been consistenly dropping over the past decade, and explains the NYSE's animosity toward other new exchanges such as Direct Edge, which however shot themselves in the foot by procuring clients thru the adoption of such shady practices as Flash Orders), and one can see how Goldman is becoming a dominant force in the market landscape, and why all other market participants are sweating profusely. This is true now more than ever, now that the Fed and the U.S. government have indicated that no matter what happens, Goldman Sachs will never be allowed to fail, no matter how great of a risk it takes. If in the meantime, it is allowed to gain an exclusive monopoly in any one aspect of the market, so be it.
Goldman increasing domination via DMA routing also explains its careful treading when it comes to DMA discussions with the regulators: any major change (which also includes any hits to Goldman's well-greased machine that would result as a function of a ban on Naked Short Selling, and subsequent attempts by Goldman's well placed lobby efforts to prevent such a ban) would likely result in a need to dramatically overhaul its product offering which so far has been so efficient and attractive to new clients, it is on par to challenge the NYSE in share volume. For some very prophetic words of caution on how dangerous DMA could be if it were to go haywire, and slip out of control, we refer readers to the following discourse by Lime Brokerage principals. And, as one can expect, the debate here is about so much more than pre-trade or post-trade monitoring.
Orders routed through Goldman's router for the most part end up on various semi-dark exchanges, ECNs and crossing networks.
As Goldman itself discloses, the Objective/Strategy of its SIGMA Smart Order Router, consists of the following:
- SIGMA is the Goldman Sachs smart router
- SIGMA breaks up an order into smaller pieces with the objective of maximizing liquidity at the most favorable price
- Accesses every ECN and public destination under Reg NMS
- GSAT algorithms leverage the SIGMA smart router for all child orders
- 15-20% of SIGMA volume is executed within SIGMA X
A graphical representation of the order routing distribution can be seen below:
And here is the simplified explanation of the three primary tracks in the diagram above, direct from Goldman Sachs:
- Algorithmic Orders systematically post liquidity to SIGMA X and other ATSs. Additionally, child orders are routed via the SIGMA router, accessing SIGMA X and other non-displayed liquidity before ultimately reaching the public markets.
- SIGMA Smart-Routed Orders are DMA orders that pass through SIGMA X, benefitting from potential price improvement due to enhanced liquidity.
- SIGMA X Posted Orders sit passively on the SIGMA X order book, where they can interact with pass-through DMA/algorithmic flow and other posted orders. Orders posted to SIGMA X receive full price improvement when interacting with opposite-side marketable flow.
In summary: Goldman keeps procuring more and more clients who use REDI, Sigma, etc., for the sole reason that Goldman now provides a practically alternative "exchange" to virtually every other full/major access venue. Obtaining "privileged access" to SIGMA X provides Goldman PB counterparties with what is quickly becoming the best populated and highest "inventoried" dark venue in the world. And the kicker: few if any know who trades what on SIGMA X. A major threat to technicians: open exchange volume is increasingly representative of exactly nothing, as all the real action occurs in the gray, and mostly dark, arenas (and of course, in OTC CDS). Which is why as the administration is transfixed on the DJIA, even that is becoming increasingly disjointed with whatever is left of the true market. And as Zero Hedge has been pointing out, the economy has long since stopped being represented by the stock market. It is only fitting that the market is only no longer representative of "itself" - compliments of Goldman Sachs.
In future posts of this series, we review Sonar, Sonar Dark, benchmark matching via OptimIS, PortX, VWAP, TWAP, dynamic participation, reactive participation, price and liquidity seeking, and other topics where Goldman has stealthily become the primary market force.