Goldman Sachs' 97% Win Percentage Possible but Not Probable

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-dominated 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, there is 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 that 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 bettered 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 percentage 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 understand 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 which can see orders at 1/3000th of a second front running another computer which 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 become dominant in the markets - essentially we sit here watching 5-6 firms' computers trading among each other and everyone else are hood ornaments to the action among 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.

[Jul 17, 2009: Jon Stewart - the Pyramid Economy, with Goldman Sachs as the Eye]
[Jun 25, 2009: Rolling Stone - Goldman Sachs; the Wall Street Bubble Mafia]
[Mar 17, 2009: Your TARP Dollars Hard at Work Supporting Goldman Sachs Employees]
[Jul 21, 2008: It's Goldman Sachs World - We Just Live in It]

Comments

[Leftfield:]

Hillary Clinton had all them beat in the early 80's. 100 commodities trades in a row, all winners. GS looks a bit slow here.

Aug 05 04:57 PM

[Zaylyn:]

Goldman Sachs was the biggest packager and seller of collateralized debt obligations (CDOs), packaging thousands of mortgages together, 75% subprime, yet passing them off as AAA paper. When the market deteriorated, Goldman made profit by selling them short.

And many retirees, mutual funds, and city governments who bought these bonds with assurances of Goldman sales people were badly hurt.

Goldman Sachs also was a large purchaser of credit default swaps (CDSs), many from AIG. Representatives from Goldman placed pressure on Hank Paulson for government bailout funds for AIG. And where did billions of those bailout funds go? To pay off Goldman!

And we the taxpayers are picking up the tab.

Goldman Sachs developed computer algorithms for high frequency trading. As such, they insert themselves in rising or falling stocks, buying and selling with lightening speed and making huge profits.

As a result, the individual investor buys these stocks at higher prices and sells them at lower prices.

Goldman Sachs is profiting from the financial crisis recovery by taking the same huge risks with a bonus-driven culture.

And they have covered this risk by changing their designation from an investment bank to a bank holding company, which enables them to get FDIC protection and almost free Fed money.

So, please tell me how Goldman Sachs’ activities and business model benefit our society as a whole by creating useful financial products that contribute to the growth of American financial industry? What do they do that is valuable to other people? Or does Goldman merely create financial gimmicks to make money for Goldman, leaving the crumbs for the rest of us, and subjecting individual investors to a stock market with a casino mentality?

Aug 05 04:59 PM

[Jasper M:]

Mark's mathematical observation is eXACtly the formula I used when I first bought Goldman puts in '07: "Either they're geniuses . . . or their LYING!"
I made 10/1 on those.
But politics are involved now. Clearly heaven and Earth will be moved to keep the this particular golden calf from getting its just comuppance. I am near certain the effort will eventually fail, spectacularly, but I can't tell When, so no GS puts for me this time around.
(Bob Prechter once said, "Options are the very best choice when you are sure of the precise timing of your expectations . . . which is almost never")

Aug 05 06:57 PM

[jj Roberts:]

Thanks for the insight. The markets seem more manipulated in recent time, whether through corporations or governments. The inflation gig being feed to all the world markets through central banks is most alarming. People refuse to let go of the siren song of debt creation. Yes, it make us rich (in paper). Just another bubble going to burst.
I am sure that GS is on the leading edge of information collection worldwide. With this advantage they will bat .900. When they turn to shorting the market, watch out below!

Aug 05 07:00 PM

[John McLeod:]

Greetings from Conspiracy Theory Central ;-)

I mean, yesterday the WSJ posted the target solution, for $#%*'s sake: "Larry Summers argued forcefully that his team should have a say in the work of the new cyber official."

So ... one lousy independent COMSEC audit at the NYSE and this whole thing turns into custard. Melissa's free the rest of the summer, just turn *her* loose on the file. Too easy.

And now NYSE's new secret CoLo quarry in Mahwah NJ sounds like John Henry meets "Tom Swift and his Atomic Earth Blaster". Are these people completely out of their minds? What's even more remarkable is that Scott Reynolds Nelson, the W&M prof who actually figured out what just hit us did it through being a JH legend specialist, of all things. I can hardly wait for the FOB in AF where they get to replay Rorke's Drift. Nietzsche's eternal recurrence is starting to get on my nerves.

Turncoat?? GS themselves delivered Serge to the FBI on a silver platter over the holiday weekend. It's just like V.V. Nabokov said, the one thing that stops a totalitarian regime is that the guys running it are as dumb as a bag of hammers.

Aug 05 07:30 PM

[BigJake:]

Complaining about conspiracy theories is futile in two ways.

#1 - it is not possible to disprove something that hasn't occurred

and most importantly

#2 - it does not make one any money.

Ask yourself. If you are convinced that GS controls the market and it pushing it up and down at will, why not use that information and profit from it. Ride the waves. They are going up for a few more years because it would not be in the powers that be's interest that another hideous crash occur due to the instability that would bring to their grip on power. It won't travel in a straight line, but it will be obvious when the crest falls and the trough turns up.

Aug 05 10:03 PM

[untrusting ...:]

Very good information. Thanks.

97% win percentage. What more evidence count anyone want? What's the probability of that..... a trillion to 1?

Reminds one of the internet poker fraud, a couple of years ago, where a few insiders could see all the cards of the other players and raked off tens of millions in profits against the best players in the world. A few smart players calculated the odds and they were like the GS 97% win percentages. Fortunately the smart players got a break and were able to obtain replay records for a large number of the hands and mathematically proved it was impossible for the poker cheats to have won any other way than by cheating. Subsequent follow-up confirmed the scam and how it was done by the cheats.

Sounds like we need to get a few of these poker brains to get after GS and prove the same thing.

Aug 06 01:07 AM

[basehitz:]

To supplement the HFT “skim machine”, imagine you could also take positions knowing your “analysts” tomorrow would upgrade on Cheerleading Central. How could you not win? “Smartest guys in the room” my arse. Best cheaters perhaps.

Most people I talk to don’t believe the market or the hype shoveled by CNBC daily. These are regular folks, not traders (most of them). Still they see this as phony. But Investors Intelligence survey up sharply the last 2 weeks. So some are getting sucked in.
www.schaeffersresearch...

“ . . . 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).”

Bazooka Ben and Pelosi have stonewalled proposed legislation to audit the Fed, and embarrassed themselves when questioned. Can you imagine the scandal, and the effect in the markets if this were found to be true. So it won't.

Aug 06 08:37 AM

[Fred W:]

What Black Swan event will ultimately be the catalyst for GS's downfall? GS's business model is that of a parasite--bleed the host just to the point where it is too weak to "fight" but won't die. W/O the AIG bailout GS would have killed its host and itself...but GS knew that the U.S. taxpayer would "save the day".
And here WE are getting sucked dry like a sacrificial goat, as weak as the U.S. has ever been--and the swine flu could be the event that Black Swan that brings it all down. A decade from now, analysts will look back and be astounded at what "we" let go as business as usual--Madoff's Ponzi will be looked at as a minor event--as Wall Street itself is playing a Ponzi game of chicken with us.

Aug 06 10:32 AM

[John Galt:]

I think one of the main problems you highlight is the public vs private markets.

Private: As much as we all hate them, you do have brilliant, money hungry, smart, win at all cost people at Goldman Sachs. They just can't tolerate being 2nd best.

Public: The lawyers trying to regulate them.

It just isn't going to work. As you say, you need turn coats from Goldman etc. who understand the game, can anticipate future moves, who think like them, walk like them etc. to be able to regulate.

You want to see that contrast, go to downtown Washington DC before about 8 AM. Yes there are some people on the streets, but it isn't packed, it isn't nuts, people aren't rushing to get to work.

Then go to New York city before 8 AM and tell me you have the same feeling? The downtown DC Starbucks don't even open until 7AM.

Don't just do that, go to the lunch areas in Washington... See the heavy set government workers with their badges, taking the "executive" lunches... Then look at the private sector areas, thinner healthier people, good looking, black berries going off.

In reality, it would be very difficult to regulate Government Sachs when they are so connected and smarter than the average government worker.

Who is John Galt?

Aug 06 10:32 AM

[TraderMark:]

Sort of like Madoff. No one should question his returns. He was "good" and regulators had vouched for him many times. Hence questioning him was just a conspiracy theorist angle.

It's really the same. There is a black box called Goldman here that no one understands how it works. Its 70% hedge fund and 30% bank at this point yet the US taxpayer now has am implicit put ala the Greenspan put. THey are borrowing money at sub 2% and speculating, if they win - they keep it. If they lose we will be there to help them. And how do they win? No one knows - and please don't ask. Just like we should not ask about Madoff. He was just smarter than everyone else.

I am not saying Ponzi scheme here with Goldman, but more of what many thought Madoff was doing - more of the front running which is basically information advantage. Except its a lot bigger than HFT with Goldman. What exactly is it? I have no idea and I'm sure some of the things I would not even have a clue about. But to sit and say no one should ask questions about a company who has lost money 8 days in half a year? Hmm


On Aug 05 10:03 PM BigJake wrote:

> Complaining about conspiracy theories is futile in two ways.
>
> #1 - it is not possible to disprove something that hasn't occurred
>
>
> and most importantly
>
> #2 - it does not make one any money.
>
> Ask yourself. If you are convinced that GS controls the market and
> it pushing it up and down at will, why not use that information and
> profit from it. Ride the waves. They are going up for a few more
> years because it would not be in the powers that be's interest that
> another hideous crash occur due to the instability that would bring
> to their grip on power. It won't travel in a straight line, but
> it will be obvious when the crest falls and the trough turns up.

Aug 06 11:47 AM

[Graham and ...:]

A 97% win percentage is certainly suspicious. Maybe it's for real, but it should certainly be looked into. "Once burned, [with Madoff] twice wary."

Aug 06 12:05 PM

[BRUCE E. W.:]

BRUCE E. WOYCH
en.wikipedia.org/wiki/...
Too little and way too late. A great deal of damage was done by manipulations that were perceived as business as usual for the insider and tough luck for the poor sap who tried to use hard earned money to work towards a better future. Instead they end up with a dog working retirement. Just "numbers" to the market professional as long as they are enjoying the easy "flash and flip-it" to so called creative wealth (by creative/destruction) on their end. But keep this in mind: Those same people along with people like Richard Posner would want you to believe that this asymmetrical arrangement is actually a healthy market practice. They thrive on "privaledged" knowledge and what essentially works out to be an old boy network of backroom "insider" dealings in traditional corporate terms. IF PEOPLE WERE NOT BEING HURT DAILY...BOTH INVESTORS AS INDIVIDUALS AND WHOLE HONEST CORPORATIONS... SCAVENGED AND SCUTTLED BY THESE PRACTICES...IF THEY DIDN'T CONTINUOUSLY GROW IN NUMBERS AND START TO MASSIVELY COMPLAIN...THERE WOULD HAVE BEEN NO RESPONSE FROM THE "SEC". THIS WAS A POPULAR UPRISING BASED ON "INFORMATION" THAT WAS PAINFULLY EARNED (AND VIRTUALLY KEPT AWAY FROM THEM) WITH GREAT LOSSES AND PERSONAL DAMAGES IN TOW. THEN, ADDING INSULT TO INJURY, THESE FINANCIAL WIZZARDS POSTED THOSE VIRTUALLY STOLEN PROFITS AS HARD WORKING CAPITAL AND PROPAGATED IT ALL AS ADVANCING FINANCIAL SUCCESS STORIES AT THE TOP.... If anything this saga needs to be formidably recognized for what it has been doing to the foundation of investment capital and equity in America. There are more actions that need to be taken. Intelligent business community interests need to help stop this type of financialization of monetary "CAPTURE" by propagating destructive zero sum games of exploitation against open and free flowing honest markets. Basic systems theory: A CLOSED SYSTEM IS A DYING SYSTEM. Markets equilibrium must be an open system to work and it will not balance good and evil even at that. This is not the end of the story by any means. Every correction is eventually circumvented. We should be asking for more and demanding to know why it took so long to act. Afterall...THOSE PEOPLE AT THE SEC AND OTHERS SUPPOSEDLY KNEW WHAT WAS GOING ON WELL BEFORE THE POPULAR UPSURGE OF DAMAGES CRIED OUT FOR RECOURSIVE ACTION. WHERE THE HECK WERE THEY ALL ALONG. IS'NT THIS JUST ANOTHER EXAMPLE OF HOW SELF-REGULATION BY COMMISSIONS SIMPLY ARE INSULTS TO OUR INTELLIGENCE? SO...why do we act so complacent and let them continually get away with it. Just watch what a boondoggle the "regulartory commission" becomes as its whiittled and shaped into a cloister of insiders. This is just another example of the "Bootleggers and the Babtists" with the regulators in between as a firewall for the politicians

Aug 06 12:45 PM

[Jason722:]

I like a good conspiracy as much as the next guy. I am hooked on this story because I believe in math, what GS has accomplished definitely improbable. Do I think they are cheating? Yep.

So what I want to know is: Which 2 days, the only 2 days all quarter, did GS lose money? I want to look at those two days to see what happened. To try to understand why they lost on only 2 days. For a record like theirs, something significant would have had to occur on those 2 days because every other day, regardless of market movement, financial/geopolitical news, or anything else, GS made money. Does anyone have this information?

.....if I had to guess, I would guess two words: code theft. Wasn't it 2 days for the Feds to track and arrest Sergie (I think that was his name) from the time GS pointed the finger?

Aug 06 02:02 PM

[Moon Kil Woong:]

Actually I'm amazed they lost 2 days. They are basically the house in the casino. If they loose it's because they actually had to gamble agains someone big at the craps table. All the other players are considered net losers the second they walk in.

Aug 06 10:32 PM

[Jonny:]

The question of rigged poker sites is alwys a topic that never gets a definitive or well-proved answer. I found this article which may help further explain it and hope it helps!
prowritemarketing.com/.../

Sep 10 07:20 AM