By TraderMark

The data coming out from Goldman Sachs (GS) Q2 trading activities leaves one incredulous. I won't go into rehashing all the conspiracy theories but as Gordon Gecko says - this is a game of information. And no one is more connected to the loop than Goldman. I have not had time to write a piece on the high frequency trading scandal erupting but I've often said I only know so much about the market, and even what I know scares me as its a Wild Wild West environment. Our sheriff (SEC) is one most consider inept if not captured by those firms it is supposed to regulate. Harry Markopolos who was trying to hand the SEC the Madoff case for a decade pretty much explained the issues [Mar 1, 2009: 60 Minutes, Harry Markopolos - the Man who Figured Out Bernie Madoff]

"If you had executives at the biggest investment houses on Wall Street that knew something was wrong, why do you think they didn't go to the SEC?" Kroft asked.

"Because people in glass houses don't throw stones. And self regulation on Wall Street doesn't work," Markopolos said.

Why this guy is not SEC chief right now is beyond me. Well it's not really beyond me because his appointment would never happen when the financial firms call the shots.

I have been talking about the computer dominating trading that has taken over our markets since blog inception 2 years ago. I give it the name HAL9000 jokingly - because it's come to the point that humans are irrelevent. But it has changed the face of the markets, so it is not a joke. And as I said above, I only can speak about what I know - those in the investment banking world and a few select hedge funds like the Renaissance Capitals, Citadels, know a lot more of what dirty laundry is out there - so I can only imagine the "truth". High Frequency Trading? Never heard of it until a few weeks ago. Flash orders - effectively front running everyone else? A scam - but not "illegal". (if you missed all this high frequency trading hubbub a great summary in the New York Times of all the views on it)

What I love is everytime you try to call out a scam, the scammers tell you 'all we are doing is providing liquidity!' Ah yes, because in the market of the 70s, 80s, 90s how did we ever function without your extra liquidity? How did we even have a stock market before your liquidity fellas?

I am being tangential here but I wrote last quarter than Goldman Sachs only lost money on their trading desk 8 days out of the entire quarter. I said that is like a baseball player hitting .600 plus for 3 months... maybe mathmetically possible, but not probable.

Well they better that this quarter - Bloomberg reports in the SEC filings that Goldman only lost money on 2 days out the entire quarter. So they are now hitting something like .900 for 3 months in baseball terms. Folks, there are 13 weeks a quarter, with generally 5 weekdays. That is 65 days. They made money 63 days. That's a 97% win percentage. I know they are the "smartest guys" in the room but no one does that. No one. Are the folks over at Morgan Stanely complete idiots? They can't even get close to these figures.

•Goldman Sachs made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months. 

•Trading losses occurred on two days during the months of April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days during the quarter, or 89 percent of the time. 

•New York Stock Exchange statistics show that Goldman Sachs is the most active member firm by volume of shares traded by “program trading,” or computer-assisted trading. In the latest period posted on the NYSE’s Web site, July 20-24, Goldman Sachs and its subsidiaries traded 924.8 million shares, roughly double the 463.7 million traded by its nearest competitor in the week, Morgan Stanley. 

I am not so concerned with the money - $50M or $100M each day is irrelevant ... the more you risk (with taxpayer backstop) the more you can make. The winning % is what gets me... it's simply impossible. For those who argue they have the best risk management - kudos. That still does not get you a 97% win ratio. Goldman has tons of traders, some win - some lose each day. There is no way they are ALL hitting on cylinders. What this data tells me is they have a daily cash machine running by being ahead of regulators.

Why do I say that? Look at the High Frequency Trading - it is like doping that goes on in athletics. The financial firms are always ahead of the regulators. Markopolos says the SEC is full of attorneys ... no offense to attorneys but to actually regulate brilliant profit driven financial people who are smarter than you, you need to have brilliant people with deep financial acumen who understanding how the (dark parts) of the markets work. Not attorneys - frankly you need turncoats from inside these firms you try to regulate - but due to the pay scale you will never get them. So the technology is way ahead of the regulators, even if the regulators were not already captured in our financial oligarch system. Goldman says it themselves when they tried to explain to clients that "hey only 1% of our revenue is HFT!"

•“The most significant challenge ahead is for the regulatory framework to keep current with the rapid pace of innovation in the marketplace.”
That should send a chill down your back. From Goldman's own mouth - they say to the world: look - it is not our fault the regulators are behind the times. And we're certainly not going to tell them about our innovations or how we make money - we're a big black box, we just make money. Period. Until they (the regulators) catch up, we will have this sandbox and do as we please. By the time they (the regulators) ban what we are doing now, we'll have innovated to the next step of getting around the regulators.

Again, it is just like sports doping - which is why regulatory bodies in sports now are keeping testing sample for 7, 8, 10 years. So that by the time they catch up to the technology of the "free market" of cheating they still have evidence. Not so much in financial markets.

Leaving aside the question of what the heck the stock market is for - i.e. was the intention ever that the market is about some computer who can see orders at 1/3000th of a second front running another computer who can see them at 1/2000th of a second and/or make 800 trades within that 1 second? - my main worry is this field has become so weighted to a few players that many of the common folk will just throw up their hands in despair at how rigged the game is. (if they pay attention of course) The market has always been weighted to those in the know - that has not changed - but it appears now its taken on extreme levels that we have never seen before. It makes me wonder what the PhDs at Renaissance Capital who we celebrate as geniuses have been doing with their algorithms all these years to create their 40% year after year returns.

Now if you really sit on a grassy knoll you could say this is all part of a game - the Fed and Treasury looking the other way, letting Goldman and JPMorgan do as they please and in return for "not noticing anything" those firms help to stoke this stock market up. They have becomedo dominant in the markets - essentially we sit here watching 5-6 firms computers trading amongst each other and everyone else are hood ornaments to the action amongst those 5-6. I am not going to go that far other than to say we've been saying for months how every time this market shows even the least bit of technical damage we've seen a flurry of buying of S&P futures, sometimes of the magnitude that no one other than government could pay for ($10s of billions in minutes). And who best to execute these orders? In fact, who else COULD do it.

But even if you are not living on the grassy knoll - you just have to ask how is 1 firm so good that with thousands of traders it only lost money 2 days in an entire quarter. The answer is obvious - information access like no firm on the planet, and technological systems that the regulators will catch up to circa 2014.

p.s. one might also ask why a company that is now 70% hedge fund/30% bank is being treated as a bank. With all the benefits of.... i.e. borrow at rates no other hedge fund can get, speculate at will, if things blow up - the taxpayer is there to help again. Oh, oligarchs....

•Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 1.70 percent in June from 2.14 percent in March and from 3.37 percent in November. 

•Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.