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Looks like a Million

"Goldman Sachs Has First Perfect Quarter With Zero Trading Loss"

Goldman Sachs Group Inc.'s traders made money every single day of the first quarter, a feat the firm has never accomplished before.

Daily trading net revenue was $25 million or higher in all of the first quarter's 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time.

Goldman Sachs, which is facing a fraud lawsuit from the SEC related to the sale of a mortgage-linked security in 2007, generated $9.74 billion in trading revenue in the first quarter, exceeding all of its Wall Street competitors. Trading accounted for 76 percent of first-quarter revenue. The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, said one shareholder.

Details here (if you're interested).

Zero Hedge sums it up in one word: Unfuckingbelievable

Why is this important? Among other reasons, we are still in a recession. While the economy is slowly showing some signs of recovery, we have simply not had the enough economic growth to justify the explosion in the Dow average, which nearly doubled from 6600 in March 2009 to 11,200 only thirteen months later. In other words, it's unlikely that enough wealth was being created by the US economy to pay for Goldman Sachs' trade profits; someone else had to be losing money in order for GS to be making money every day for 63 consecutive days.

The Democrats still want to prosecute Goldman Sachs (and hedge fund Paulson & Co.) for derivatives trades and credit default swaps that took place three years ago. They ought to be looking at what Goldman Sachs has been doing for the last three months.

You may recall that Barack Obama received $1 million in donations from GS during the 2008 presidential campaign. "Blind eye," anyone?

"Hope and change," etc.

_____________________________________


If you are interested in the mechanics of the post recession stock market, particularly why the DJIA has nearly doubled even though the economy is still in the dumps, Doug Ross has put together a disturbing post suggesting that major investment banks are deliberately gaming the market in order to artificially inflate stock prices and market performance indices.

Specifically, retail trading (individuals buying and selling relatively small numbers of shares) has been completely dwarfed by very high volume proprietary business-to-business trades between brokerage houses and investment banks. This has been a concern to market watchers for some time. And many people have speculated that it was a glitch in one of the computerized investment bank trading systems that caused the recent 1000 point plunge in the Dow.

I'm not a conspiracy monger, but I'm intelligent enough to know that Team Obama desperately needs signs of an economic recovery if the Democrats are to have any chance at all in this year's mid-term elections. Just as the Clinton-era SEC turned a blind eye to the flimsy IPO's that drove the late 1990's tech bubble, is the Obama Justice Department and SEC also deliberately ignoring what appears to be (at best) an egregious case of crony capitalism in order to be able to claim that their policies have resulted in large-scale economic growth?


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Comments (20)

High-frequency trading is a... (Below threshold)
Jim Addison:

High-frequency trading is a problem, and there is an outside chance a glitch triggered the free-fall, but the main reason it is a problem is that it is a total scam. It's not based on any investment strategy which could be verbalized, just speed-of-light trades designed to glean fractions of a cent per transaction. It's almost like the movie plot where employees discovered all the fractions of cents that were rounded down at their major bank could be siphoned off without detection.

The market is overbought for a much simpler reason, though. Artificially low interest rates and massive infusions of government cash give the market the illusion of lots of new capital available. The reality is that people don't loan money at no significant return for very long. It's like a man dying of thirst in the desert who sees the mirage of water in the distance and heads for it. He never gets to the oasis because there isn't one, just the optical illusion of one.

I've spent the last 35 years scoffing at the doomsayers who always claim the financial system is based on fiction and due to collapse at any time. Like a stopped clock that is correct twice a day, though, they may finally be right. None of our bailouts or "financial reform" moves, or the Euro-bailout of Greece, has done anything about the systemic problems. They have merely spread the debt out over a longer period and spread the risk among more players (taxpayers). Having bought enough time to actually do something, of course the governments will go right back to their spending orgies.

I always have felt that the... (Below threshold)
Patrick:

I always have felt that the run up in the stock market over the last year or so was very puzzling because the economic news did not seem to justify that kind of an increase in the Dow average. I certainly did not buy that initial explanation that a trader fat-fingered a transaction. I think the economic problems in Europe (specifically Greece) had a lot to do with the 1000 point drop in the Dow but I am suspicious as to what entity came in to rescue the market went it was clearly crashing hard.

In short, none of this adds up and at some point I don't think even the financial markets will be able to hide the bad news for much longer. I firmly believe we will see a crash back to the early 2009 levels or perhaps even lower than that - and that probably won't be the extent of our economic problems either. Commercial real estate is in big trouble and we continue to see way too many bank failures and residential real estate is in no way out of the woods yet - foreclosures are on the rise again. The dollar very well could crash as well and there is no question that rampant inflation is imminent. We cannot continue to fund these bailouts any longer because we simply don't have the money.

Wow. I'm speechless, Michae... (Below threshold)
bobdog:

Wow. I'm speechless, Michael.

Open markets have nothing whatsoever to do with profits, nor the scrap value of the underlying assets, nor the economic value of the products the companies produce. Nor do they have anything to do with the political worthiness of the individual traders.

Stocks and other freely traded investments are worth whatever value a willing buyer and a willing seller place on them. Much of the time, values are based on the greater fool theory, but it's always been that way, and it always will be. Considering the current wreckage of the economy, how else do you explain the Dow?

Any time you buy a stock, you're betting the value of the stock will go up - from some other fool who's equally convinced that the stock will go down. Even futures and derivatives have a legitimate purpose - to lay off risk. Ask any farmer. Or any economics teacher to the right of Barack Obama (which is almost everyone).

Complaining that an investment banker like Goldman made too much money is simply based on resentment, a sentiment that usually comes from liberals, socialists and the unwashed.

I'm surprised at you. To borrow a line from Clint Eastwood, deserve's got nothing to do with it.

Barak prefers we talk in ne... (Below threshold)
914:

Barak prefers we talk in negative trillions.

I wish for every American t... (Below threshold)
914:

I wish for every American to have a million bucks tucked away safely somewheres away from the wookies bossy ass nostils.

bobdog,The complai... (Below threshold)

bobdog,

The complaint isn't that GS "made too much money"; it's that in a truly open or natural market it is virtually impossible to make money every single day, 63 trading days in a row.

Huge trading firms like GS and Morgan Stanley Smith Barney use sophisticated computer algorithms to analyze trading data and make predictions about the up-or-down direction of share prices. They use this information to make numerous inter-day "arbitrage" trades, trades designed to make only a few cents per share on the daily price swings of publicly traded stocks. But when each arbitrage trade involves millions of shares, you can make a lot of money. And by using computerized trading, these large volume trades can be executed almost instantaneously.

Two questions come to mind. First, are the brokerage houses "front-running" client orders; that is, spotting trends in client orders and placing their own arbitrage trades first (which will slightly increase the share price) before placing their client orders? A client trading only a small number of shares won't suffer much if the share price swings up only a few cents, but the brokerage firm will make a significant amount of money in an arbitrage trade. BTW, front-running is illegal.

The second question is, where is the money for the arbitrage trading coming from? In order to make money off penny swings in stock prices, you have to trade a lot of shares. Arbitrage trades are usually made with leveraged (that is, borrowed) funds, which are bounced back and forth during the trading process, with the brokerage house keeping the profits. Most brokerage houses are also directly tied to huge banks -- JP Morgan Chase, Morgan Stanley Smith Barney (CitiGroup), etc. -- the same banks that received billions in TARP bailouts and billions more in Federal Reserve funds, and the same banks that are NOT lending these funds to small and medium sized business, and that are paying nearly ZERO % interest on savings accounts.

Are these banks using their cash reserves to rake in profits for their brokerage houses? I don't think this is "illegal" but it certainly is frustrating for those trying to save money or borrow capital for business growth.

Another possible explanatio... (Below threshold)
_Mike_:

Another possible explanation for the market is that... while the Fed can increase the supply of money in the economy, it cannot control where that money flows.

In the late '90s, the "irrational exuberance" was caused partially by artificially low rates. Greenspan stated that he kept rates low due to concerns over Y2K causing problems in the financial sector. After Y2K proved to be a non-event, that excess money had to be mopped up.

Simply put - in trying to re-inflate the housing bubble, it would appear that instead they've created an bubble in the stock market. So, I'm not buying the market's bull - literally.

Goldman Sacs obviously foll... (Below threshold)
retired military:

Goldman Sacs obviously followed Paul hosoon's business model for making money in these trying times.

Michael -Front run... (Below threshold)
bobdog:

Michael -

Front running may be illegal, but hiring the smartest, brightest, and most aggressive financial analysts and traders to focus on a tiny but lucrative topic for years is not. These guys are pros, or they'd be driving cabs. It's all they do, 12 hours a day, and they're pretty good at it. They know how to play both sides of a bet and to respond instantly if things go wrong. They can catch every twitch in the market. We don't have the time, the interest or the capital to do it.

Second, since the guys from investment banking, brokerage firms and arbitrage houses make up the bulk of the trading, they're making money from each other to a large extent. Little guys like us are just along for the ride. I'm not an active trader at all, but I'm always a little surprised when a make a few bucks on a stock every once in a while, because it's dumb luck. Most of the time, it's musical chairs.

I'm not saying it's always fair, but it never has been. The markets still provide a useful function.

I've got mixed feelings about TARP, but on the simplest level, I suspect that things would have been a lot worse without it when the housing bubble burst. Politics aside, we might well have had a complete collapse of the economy without it.

Anyway, my $.02.

Instant trading ? Please .... (Below threshold)
Jeff:

Instant trading ? Please ... try doing your homework first and maybe take a visit to the NYSE ...
At the end of every trade on the exchange is a person, the specialist, not a computer. If you are trading on an ECN the volumes are much smaller. If you are trading on a crossing network the volumes are invisible.

The idea that any firm would trade a large quantity of shares on a single security to make a couple of cents is just a fiction.

For one thing being able to be sure you can buy (or sell) your large quantity at your desired price to initiate or close the trade is almost impossible to guarantee.

The high volume trading programs trade alot of small qualtity trades not a few high quantity trades.

Jeff,I'll admit I'... (Below threshold)

Jeff,

I'll admit I'm not an expert on the intricacies of stock trading, but the math speaks for itself:

Of the 1.2 billion shares traded per day, 876,000,000 shares change hands because of short-term trades executed by "stat arbs" (statistical arbitrageurs)- and not because of investors.

In order to process that many share exchanges, you either need high volume orders, or a huge number of small volume orders. I assumed high volume orders; if the volume of orders is small, as you suggest, then the huge number of orders necessary to move nearly 900 million shares still means that those orders must be continous, and must be done very quickly. Experts claim that sophisticated computer trading programs can execute orders in as little as a billionth of a second.

I'm sure there are all kinds of ways that high frequency traders could claim that what they are doing is fair and is actually helping the market. But what concerns me is the fact that so many orders (and trades) are controlled by a relatively small number of people. That fact alone seems wrong, given that an open market is supposed to be a representative aggregation of the activities of everyone (more or less) within the system, not just a handful of financial powerhouses.

And if it is the government's job to ensure that market practices are fair, shouldn't they be looking into the disproportionately high number of high frequency trades?

I don't pretend to understa... (Below threshold)
GarandFan:

I don't pretend to understand "high finance", but am curious as to how all this money is 'made' when the unemployment rate is still hovering around 17%. If the demand for products is stifled, how is the economy 'growing' in order to generate these 'profits'?

It's not the answer you wan... (Below threshold)
bobdog:

It's not the answer you want, GarandFan, but it's for the same reason that a few people win money in Las Vegas every day. It's a disconnected process, just like the markets.

Otherwise, how do you explain the Dow? Ya can't.

That said, it could be a hell of a lot worse. We could have Congress "protecting" us from market risk. Got a 401(k)? That's exactly what they're warming up to propose.

Markets? Ya pays yer money, ya takes yer chances.

Congress nationalizing private pension funds? Chance has nothing to do with it. Get the pitchforks and torches, because I'll be right beside you with a rope.

Interesting that all Marxis... (Below threshold)
Don L:

Interesting that all Marxist types have to pretend there's a real vote supporting them.

It was so much more honest when they merely shot anyone who opposed them, but then honesty isn't really what they're about - just deception.

Wait until their own supporters find out that deception is all they too will receive.

As the evil king once said, "I only need two votes; my own and the executioner's.

OOps - meant to post this u... (Below threshold)
Don L:

OOps - meant to post this under the card check article.

Barry would nail us to the ... (Below threshold)
914:

Barry would nail us to the cross if there were a buck to be swindeled.

In other economic news Barr... (Below threshold)
GarandFan:

In other economic news Barry probably didn't want published this morning:

The Treasury Department said Wednesday the April deficit soared to $82.7 billion, the largest imbalance for that month on record. That was significantly higher than last year's April deficit of $20 billion and above the $30 billion deficit private economists had anticipated.

The government normally runs surpluses in April as millions of taxpayers file their income tax returns. However, income tax payments were down this April, reflecting the impact of a severe recession which has pushed millions of people out of work.

What a SURPRISE! I notice they didn't even bother to say "UNEXPECTED" this time.

Looks like a million but in... (Below threshold)
914:

Looks like a million but in all honesty its -22 trillion. Right Berry?

The stock market is not sn... (Below threshold)
hcddbz:

The stock market is not snap shot of today it is prediction what is to come. Now that prediction maybe based on certain factors but then a gain it can be based on smoke and mirrors and not a real indication of wealth.
A fair market price should be 3 to 4 time earnings.

1. Dot BOMB you had companies that were infinite times earnings.
They did not make any were losing it but they we selling 100,000 shares at 100 USD.
2. Housing Bust Multiple Trillions of dollars were lost but the entire US housing market was never really worth

3. Remember Long Term Capital ? Was there really all that money in hedge funds?

I worked at GS from many years and we all knew the Dot Com mania was BS but as one of the VP said we could not afford to not be in the game.

Companies want Investment banks to be in the market.
Investors want Broker Dealer operations to occur. As technology increase companies have to keep up with it. If they do not they will die and Companies will take their business elsewhere.

So GS traded well managed risk and made money but this is only second most profitable quarter.

Goldman Sachs job is to make a profit and they utilize tools to do that.
The Wall Street banks employ large computer systems MainFrames, AS400, Unix and Windows HPC clusters to exploit the market, They actively recruit the best IT people, mathematicians to support the trading desk. Along with all that every trade that is made has to have time stamp which comes from a Stratum NTP source. Then all communications related to business as such has to be recored and kept for 7 years and kept in such a manner that an independent party can get all that data.

Roughly looking at Moore's Law Computing processing power in crease every 18-20 Months. If you look at ever major vendor of computing Hardware over the last 4 years (Intel Xeon, IA64, IBM Power, and SPACR have all more than double, along with ultra interfaces.) So a growth in their use over 4 year period is just expected especially when one consider that you have highly motived programers technologist who want to work at making money.

Just in case anyone still t... (Below threshold)
Morrissimo:

Just in case anyone still thinks it plausible that GS had a quarter in which they did not lose money on one single trading day due to nothing more than their good, honest, and shrewd trading labors, Mr. Denninger provides a breakdown of the math: More On Goldman's Perfect Record

The tl;dr version: you are forty MILLION times more likely to be hit by lightning this year than for GS to have pulled this off without gaming the system.

To further cement the argument that the big trading houses have the system rigged and front-run from top to bottom: all four of the big banks - Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase - scored perfect trading quarters.




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