Goldman Sachs: No Global Financial Espionage Story Here

I was nice and relaxed Sunday evening, popped open a few websites to check for evening business news, and came across the latest shitstorm that's circulating with ZeroHedge in the eye of the storm.

Last week Zerohedge wrote a post about Goldman Sachs' (GS) continued dominance of the principal program trading statistics that the NYSE publishes weekly, and about the overall ramp up in program trading volume. Anyone who knows anything about program trading knows that this streetwide increase was due to expiration: large baskets of stock are traded against expiring index futures and options, and the S&P 500 also does a quarterly rebalance on the same day. Thus, the program trading numbers for the 3rd week in June are always large.

I took the time to comment on Tyler's post, "and yes - last week's large program trading numbers are from June expiration - and yes, this weeks will also be huge due to Russell Rebal." I even added "and there will be a massive jump next week in the "customer facilitation" numbers on the weekly program trading statistics. There is no conspiracy theory to be derived from it - it's the Russell data."

See, I know what I'm talking about when it comes to program trading, and this happens every year. The Russell Rebalance is the biggest event of the year, resulting in massive volumes. Of course, the weekly report came out, and the customer faciliation numbers were up massively. Although this is completely normal, and I'd even mentioned it on Zerohedge itself, Tyler still chose to characterize the data as follows: "This week's NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE has kept tabs on this data, and a datapoint which in itself was startling enough to cause some serious red flags," before getting into the real oddity, which I agree with, and will get to in a minute. I can't tolerate the fact that he chooses to mislead people with hype of "startling" data which should raise "serious red flags," when I had even taken the time to explain to him a week ago that this data would be coming! There is nothing surprising, conspiratorial, or doomsday about it!

There was something strange about the report - which I again took the time to mention as a comment on another Zerohedge post four days ago, as I think this is actually interesting: Goldman Sachs is completely missing from the report. This is a virtual impossibility for Russell week.

Sadly, the story quickly morphed into a self-feeding conspiracy theory, with Tyler @ Zerohedge and Matt Goldstein at Reuters somehow each quoting the other's article in their own story. Naturally, hype-first-ask-questions-and-do-proper-research-later savant Karl Denninger hopped right on the paranoia bandwagon.

There is definitely a story regarding Goldman's sudden falling off the program trading league tables, but it is most certainly not, as Reuters' Goldstein suggests:

"On the week ending June 19, Goldman was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didn’t appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE stopped reporting the numbers. The Zerohedge blog was all over this controversy a week ago."

We know, if we simply read the report from the NYSE, which I explained last week, that 1) The NYSE did NOT stop reporting the data. The report will continue, using automated, more accurate data, and that 2) the "NYSE stopped reporting the numbers" foil hat explanation is especially ridiculous considering that the changes haven't gone into effect yet! I would have expected more journalistic integrity from Reuters. Anyway.

Perhaps Goldman also misread the rule change (unlikely) and stopped reporting their DPTR numbers a few weeks ahead of time - this is extremely unlikely. Perhaps they totally pulled their quant models from the marketplace, as a result of the theft of some intellectual property, which Tyler covers extensively in his post. Still, I am very confident that GS would have still had significant program trading volumes to report. Perhaps there was a simple error in the report and Goldman's data got wiped off the grid portion - this seems most likely to me, as the numbers in the report appear to be inconsistent, with the "Total for all member firms" volume being lower than the "total for top 15 reporting member firms" volume, which shouldn't be possible.

There is an interesting coincident story which the Zerohedge post focuses on - that of a former employee of what appears to be the Goldman Sachs quant desk, who basically stole the code from his former firm and brought it to his new firm. He was stopped by the FBI on his way back from Chicago. This is a standard intellectual property case, although Tyler Durden is asking why the FBI is involved. Well jeez - for a guy who has a PhD in Goldman Sachs conspiracy theories, TD should have been able to answer his own question: you don't mess with Goldman. If you do, they release the hounds on you.

Unfortunately, the two stories get combined into a clusterfuck of a conspiracy theory that is sure to light up the blogosphere tomorrow. I would have really liked it if someone with the will and the means to get to the bottom of the mysterious program trading statistics without Goldman Sachs, such as Zerohedge, had stuck to that question first, instead of morphing the story into a global financial espionage conspiracy that they claim should require a disclosure from both Goldman and the NYSE (no doubt about the pending immolation of the stock market) as a result of a former employee stealing quant code.

Oy vey.

Comments

[Kid Dynamite:]

@Alan - you are more than welcome to click on my blog and read the numerous posts i have dedicated to the subject.

fridayinvegas.blogspot...

several posts are already on SeekingAlpha:

seekingalpha.com/artic...

seekingalpha.com/artic...

Jul 06 03:32 PM

[old boat guy:]

Well, Kid, I think this is your last hurrah. If you are following what is happening--rather than your blather here--you will see that your ship is sinking and Tyler has got it right.

Jul 06 03:48 PM

[Kid Dynamite:]

what IS happening, old boat guy? other than mass paranoia spreading from ZH's articles?

there is no jealousy - my blog is non-profit. That's another reason i don't have to resort to tabloid journalism to attract attention. I wish TD the very best, and the people he is pestering would probably be a lot more concerned if they thought he knew what he was talking about. On the contrary, many of his articles prove that he does not, and this just gives power to the people he is attacking.

Jul 06 03:57 PM

[old boat guy:]

Give me a break, Kid. Who are you. You blast in here with pitiful hedge fund credentials, try to stir up things on behalf of Goldman Sachs (need a job?) and miss the bet all around. You are a gamble, you LOST. Pick your cards up and walk away. Bye.

Jul 06 04:03 PM

[Kid Dynamite:]

i'm just trying to help pensioners like yourself keep their hard earned money, Old Boat Guy. If people are educated and actually understand how things work, they might actually have a shot. Alternatively, you can run around with your pitchfork ranting and spreading data that is unquestionably incorrect to incite a virtual riot. your choice.

TD @ Zerohedge write some fantastically well probed stories. He is clearly a credit guy (note: that means BONDS). When it comes to equities, he has some serious knowledge gaps where he could use some advice.

Jul 06 04:13 PM

[Kid Dynamite:]

oh Old Boat Guy - if you even understood that i'm not even attacking your beloved Overlord TD - i'm trying to HELP his cause by preventing him from discrediting himself when he writes blatantly incorrect stuff. This would HELP him, if he'd listen... it's all here:

seekingalpha.com/artic...

I can't leave this thread, Old Boat Guy, because i own it. I guess you'll have to be a man and stop with the personal attacks - you know nothing about me. I spend my time selflessly arguing with ignoramuses on the internet because it makes a difference - people LEARN from it (sorry - i didn't mean to imply that you would learn, but others will). I don't make any money from it - i have zero ulterior motives.

Jul 06 04:33 PM

[Kid Dynamite:]

point of information - i'm not trying to stir things up! i'm trying to calm things down! Also, No, i don't need a job.


On Jul 06 04:03 PM old boat guy wrote:

> Give me a break, Kid. Who are you. You blast in here with pitiful
> hedge fund credentials, try to stir up things on behalf of Goldman
> Sachs (need a job?)

Jul 06 04:34 PM

[old boat guy:]

Well, I am sure that Mike D. or Ray P. from GS will be contacting you soon--big bucks, screw the rest of us. Success. But I think that you protest too much--you have been found out. I stand by what I have said. Good luck at GS--you will fit right in.

Jul 06 04:46 PM

[Kid Dynamite:]

Thank you for contributing to this discussion. I'm sure everyone will find your insight valuable, Old Boat Guy

Jul 06 04:52 PM

[old boat guy:]

I am gone. But you need to realize that TD, intellectually, is far above both of us. You need to choose your victims more carefully. I do not know him, but I respect him greatly. He does not do what he does without great research. He is doing a magnificent job in the light of what is going on in our country. You are but a fly on the butt of a pig. Your arrogance is disgraceful.

I wish that there were more TDs, and maybe we would not be losing our country to these greedy, financial/wall-street bastards.

Jul 06 05:05 PM

[Kid Dynamite:]

ugggh. i hate to prolong this, but you still don't understand. I am not choosing "victims" or attacking TD. I want TD to succeed - i am on his side.

Jul 06 05:14 PM

[Marginaltho...:]

How's this for a conspiracy? The entire "scandal" of the scary foreigner stealing 32 megs of "code" is a strawman. Stories like that sure make trends like this more palatable:

www.npr.org/templates/...

Who wouldn't want our tax dollars used to track the financial decisions of "people of interest"? Sounds very above board to me. What a great use of our taxpayer dollars.

While we're at it, perhaps we can remove net neutrality, create a new "cyber security" department, put the internet back in the bottle, and let loose the thought police? That's not actually a conspiracy theory. That's just Jay Rockefeller's personal plan for our Country.

www.youtube.com/watch?...

You guys really need to work on your conspiracy theories. Weak. Weak. Weak.

Jul 06 06:14 PM

[pitchingpen...:]

I don't see what the fuss is all about.

Wasn't all this thoroughly explained in the GS December 2008 month-end financial statements?

Jul 06 10:00 PM

[Moon Kil Woong:]

First Golman should have disclosed to shareholders the security breach. This in itself is a coverup. Second, the FBI should never call it espionage dealing with national security, it is a private company last I heard. they should be chastised. Third, as I mentioned on Tyler's post getting such code is only half the task you need the data feed to use it. With Goldman monopolizing trading it can employ data that gives it an edge consistantly simply because they represent the bulk of the trading. As any trader knows, if you are the big swinging xxxx you can bully around prices all you want. Computer codes that take advantage of this are hardly worth much to someone who doesn't have the capital to punish anyone who goes against them in the market.

Remember Wall Street when the guy said "I can buy you four times over. I can dump the stock just to burn your ass." Well that guy is essentially Goldman Sacs, but a lot less nice.

Jul 06 10:43 PM

[ur2smrt4me:]

didn't you hear? December 2008 was canceled due to lack of interest


On Jul 06 10:00 PM pitchingpennies wrote:

> I don't see what the fuss is all about.
>
> Wasn't all this thoroughly explained in the GS December 2008 month-end
> financial statements?

Jul 06 11:52 PM

[Marginaltho...:]

You must mean the M3 money supply numbers. No one cared about those either.


On Jul 06 11:52 PM ur2smrt4me wrote:

> didn't you hear? December 2008 was canceled due to lack of interest
>

Jul 07 12:12 AM

[Philip Gvinter:]

Kid,

That is what makes market manipulation hard. With enough capital one can always drive a price in one's direction, the difficult part is either hedging out the exposure as you reach your max position size or selling out of/covering the position at a profit after taking on an excessive portion of overall market volume. The trick to doing this is to create hype or find the greater fool. I firmly believe that it was the entry of the prop desks and hedge funds which drove oil from the 60s to the 90s, it was the dumb money following on their heels and buying their positions with double digit cost basis in the triple digits and the real demand holding prices there until all speculative appetite collapsed and forced prices back to the 30s. Manipulating a market is easy, profitably manipulating a market is hard. GS are good at what they do so the difficulty of creating hype and finding greater fools to unload inflated positions on is not hard.


On Jul 06 12:39 PM Kid Dynamite wrote:

> Paul, I don't know where you are getting your information (PLEASE
> tell me you're not reading Deep Capture), but this is the EXACT business
> i used to do. What you're describing is just the broker shorting
> the stock to the customer. I have no idea what you mean by "delivering
> index receipts"... if Barclays wants to buy 5x the average volume
> of an illiquid stock from me, I still need to locate it (borrow it)
> to short it to them. There is no market maker exemption here on
> the index rebalancing. And note - this HELPS the customer - as instead
> of them ripping the stock higher as they try to buy an illiquid issue,
> I have provided liquidity to them and prevented the stock from moving
> as much as it otherwise would have. The alternative is that the
> broker does NOT short the stock to the customer, and the stock just
> moves up 50% as the broker tries to buy it all at one time - is that
> preferable?
>
> Your point about the broker (GS/LEH, whoever) "driving the shares
> into the dirt" to cover positions is a massive misconception. First
> of all, the broker is SHORT the stock - he needs to buy it (or, if
> he's long it, he needs to sell it)... it does him no good to sell
> more of a stock he's already short to "push it down."... remember
> - when the broker covers the short position, he has to buy the stock
> from someone, and we already know these are illiquid stocks! So
> you can't just drive it down and then "cover it" - the act of covering
> the short will drive the stock right back up.
>
> This is what i hated about Taiibi's piece about GS manipulating the
> oil market - if GS is long oil, they can absolutely make oil go up
> by buying MORE oil... but then they need to SELL the oil! when they
> sell all this massive position that they've been using to "push the
> market around" - the price would go right back down, and they wouldn't
> make money,.
>
> In short, Paul, I have never heard of a broker holding an unreported
> unlocated market maker exempt short position in a stock for the length
> of time you're talking about in reaction to an index rebalancing
> trade.

Jul 07 09:50 AM

[Kid Dynamite:]

philip - that's a very important observation, and one that i think most people miss. Just because you can move the price of a stock, which any firm can, if they so choose, doesn't mean you can make money doing it.

The key is to avoid becoming the greater fool that gets sucked in - usually via greed or fear.

Note, this was the basis for the separation of commercial and investment banking operations (which have now been combined again!) - to prevent things like BAC's equity analyst hyping the REITS while the investment banking division underwrites a secondary offering of common stock so they can sell it into the marketplace and raise money to pay back the line of credit which BAC had issued! that, to me, was the sickest example of manipulation recently.

Alternatively, you have the Administration hyping the health of the economy and the banks (stress tests!) so that the stock prices all doubled, so that the banks could promptly plug everyone with massive amounts of new stock issued at higher prices.

Jul 07 11:28 AM

[wobatus:]

See, now THAT was a nice piece by Zero hedge which I gave them credit for covering. You are right, they have much to offer and only discredit themselves with overdoing the conspiracy angle especially when they are wrong AND by the entire snarky attitude they have.

Good work Kid.


On Jul 07 11:28 AM Kid Dynamite wrote:

> philip - that's a very important observation, and one that i think
> most people miss. Just because you can move the price of a stock,
> which any firm can, if they so choose, doesn't mean you can make
> money doing it.
>
> The key is to avoid becoming the greater fool that gets sucked in
> - usually via greed or fear.
>
> Note, this was the basis for the separation of commercial and investment
> banking operations (which have now been combined again!) - to prevent
> things like BAC's equity analyst hyping the REITS while the investment
> banking division underwrites a secondary offering of common stock
> so they can sell it into the marketplace and raise money to pay back
> the line of credit which BAC had issued! that, to me, was the sickest
> example of manipulation recently.
>
> Alternatively, you have the Administration hyping the health of the
> economy and the banks (stress tests!) so that the stock prices all
> doubled, so that the banks could promptly plug everyone with massive
> amounts of new stock issued at higher prices.

Jul 07 04:02 PM

[sandman4224:]

You all seem to folly in the fodder. I'll stick with the advice from a true prognosticator like Robert Chapman who has been spot on for decades. If he calls it conspiracy then I am apt to listen.

Jul 08 10:21 AM