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It has been noted that one of the factors favoring the speed of the GS operation is that they "co-locate" their hardware on the floors of the exchanges.  Others also do the same, but GS seems to do it better.  By integrating their proprietary, or prop trading with their market monitoring and their market making capability it has been claimed that GS has been making $100 million per day since March.  They are being paid by the exchange and the government to "provide liquidity" both as electronic market makers by the exchange and as "Supplementary Liquidity Providers" by the government.  Providing half or more of the trades on any given day is quite a supplement.  $100 million per day at a penny or so per trade has certainly provided GS with excellent liquidity.

There were those, possibly including Tyler Durden, who complained loudly last September that Paulson was proposing a scheme in which the Fed and Treasury would pick winners and losers in the market.  Paulson was the former CEO of GS.  Surprise!  GS is a BIG winner.  Given that, it hardly would be surprising that the Fed and Treasury knew that this is what GS would do with the SLP provision and thought it was a good thing.

  From their point of view strengthening GS IS strengthening the economy.  THAT POINT OF VIEW IS THE REAL PROBLEM.  They just didn't think that this whole arrangement would be exposed so publicly.  And it is still not too bad.  Most of the MSM is still ignoring it.  This could be related to the fact that only GS has taken advantage of the incredibly lucrative opportunity provided by the SLP program, through intimidation, IMO.  Only one SLP provider at a time would be readily able to combine the fraction of a penny incentive for "market making" with the monitoring and proprietary desk trading as GS has done and GS has the mojo with Treasury.

As the saying goes "THERE CAN BE ONLY ONE!"  The others don't want to volunteer to have their heads cut off in a failed challenge.  Neither do the heads of most financially troubled MSM organizations.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 13th, 2009 at 01:41:13 PM EST
It would be irresponsible not to speculate, so I'm guessing that Goldman Sachs is extracting significant monopoly rents through its domination of program trading. $6.5 billion profits in a quarter might represent both pennies per trade in terms of the market volume and a big share of overall profits.
by nanne (zwaerdenmaecker@gmail.com) on Tue Jul 14th, 2009 at 04:02:41 PM EST
[ Parent ]
How can we tell the difference between profits from market-making and front-loading?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:15:24 PM EST
[ Parent ]
To disentangle tailgating, normal trading, market making and front-loading we'd have to raid Goldman Sachs, I guess.

I'm not so much addressing the illegality of the practice (interesting enough, in itself) as the implications for the overall cost (overhead) of the financial system.

To go into more speculation, I don't know what Goldman Sachs charges for executing program trades. I guess it ends up as pennies. These are costs of doing transactions. People who trade through Goldman Sachs should know that the costs don't end there. There's tailgating, possible front-loading, a range of practices to steer or manipulate the market (the difference may be hard to tell). These are hidden transaction costs of doing business through Goldman Sachs. They may not affect your individual trade negatively, but they extract rents from the market that would not exist if there were no dominant firm.

by nanne (zwaerdenmaecker@gmail.com) on Tue Jul 14th, 2009 at 04:32:15 PM EST
[ Parent ]
You can assume costs (interest, commissions) are measured in basis points (0.01%).

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:36:44 PM EST
[ Parent ]
During the bubble (and during the early bust, when people still believe that happy times can come again if just the "organised support" - read: Large-scale manipulation - arrives in time), people do not mind manipulations, as long as they think they have a chance to get in on the action.

Galbraith has (as usual) a couple of pithy quotes about that, but my copy of The Great Crash of 1929 is at a friend's house right now...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 14th, 2009 at 04:47:14 PM EST
[ Parent ]
How can we tell the difference between profits from market-making and front-loading?

Simple, presuming you meant front-running.  The exchange pays them ~1/4 cent per trade "to provide liquidity."  Subtract that out.  GS should be paying the exchange for the "cover" that this "liquidity provision" service affords, IMO.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:10:41 PM EST
[ Parent ]
AIRC, the quoted figure was 1/4 cent per trade for providing liquidity.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:12:01 PM EST
[ Parent ]
There were those, possibly including Tyler Durden, who complained loudly last September that Paulson was proposing a scheme in which the Fed and Treasury would pick winners and losers in the market.  Paulson was the former CEO of GS.  Surprise!  GS is a BIG winner.  Given that, it hardly would be surprising that the Fed and Treasury knew that this is what GS would do with the SLP provision and thought it was a good thing.
Thinking about this and about the perception of Goldman Sachs as being the dominant intermediary for program trading, I'd like to revisit what happened in the third week of September 2008.

On the weekend of September 13-14, Lehman Brothers and Merrill Lynch, respectively the 4th and 3rd "pure" investment banks in the US, were in talks brokered by the US treasury and the Fed to avert bankruptcy. Merrill Lynch was taken over by Bank of America. Lehman Brothers failed. This left Goldman Sachs and Morgan Stanley as the remaining two investment banks.

On Wednesday the 17th, the stock of Goldman Sachs lost about 15% and the stock of Merrill Lynch lost about 25%. There was also a run on both banks' prime brokerage businesses. Clients (such as hedge funds) who used MS and GS as intermediaries decided they didn't trust them to not collapse taking their portfolios down with them (like Lehman did) and started switching their portfolios to "supermarket" banks with broad retail and commercial banking operations such as Citi and JP Morgan.

It was then that Paulson and Bernanke went to Congress and told them that a meltdown of the entire financial system was looming.

On Thursday the 18th, Paulson introduced the TARP. As we soon found out, this was a 3-page plan drafted in huge haste, clearly in reaction to the events of the day before and not the result of a longer contingency planning process.

I wrote at the time that Paulson had acted to save GS's from a run on its prime brokerage business.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:59:17 PM EST
[ Parent ]
I wrote at the time

Well, not exactly at the time. That was February, and I had an earlier version in December...

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 05:20:26 PM EST
[ Parent ]
the stock of Goldman Sachs lost about 15% and the stock of Merrill LynchMorgan Stanley lost about 25%


The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 05:45:35 PM EST
[ Parent ]

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