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

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.