This extraordinary performance was not limited to Goldman - many of the high speed trading outfits managed to earn similarly impressive numbers (albeit on a smaller absolute scale)
As you can imagine, the market conditions in a period of such volatility were ripe for statistical arbitrage and other high speed strategies.
I'm no expert in such matters, but from the tone of his article (and those of the comments) I think the author is implying that this is due to a large amount of book-cooking, rather than any genuine HFT activities.
I'm not sure I understand what you're saying, as less than 5% of Goldman shares are owned by insiders. Perhaps you mean to argue that no large-scale businesses should exist in a healthy economy. If so, could you provide an argument?
They are taking a larger and larger portion of overall GDP, while performing a function of dubious value to the society in which they operate (many would say they have negative value). Banks provide a utility to society, or I should so, they should provide a utility, that of liquidity. Their speculation does no good for society, and should not be funded by society, which it is.
zerohedge is arguing that GS makes their profits from front-running clients rather than "true" high frequency trading or stat arb. I don't know if that is true or not.
Front-running is what the street assumed Madoff was doing. It is a convenient scapegoat to explain fabulous returns. Any firm who was getting front-ran would see this and switch brokers.
Funny how the company's employees need to fill in a pile of paperwork and wait for a month before they can buy/sell anything but the same rule doesn't apply to the company itself.
I have read more than one technical description of how they are in fact front running, one may have been on (or linked from) market-ticker.denninger.net.
We know they have access to a special tier, we know they have this real time software, and we know they have unprecedented profit records (not just in $, but in successful days). Do you think maybe something funny is going on?
Any statisticians care to estimate the probability a firm could do this without gaming the system?
If you ask a startup to create a simple computer-based trading system that allow the buying and selling of stocks, how much would capital would they need? Not much. Trading systems should be operated by a non-profit, this sounds like a hefty and unnecessary trading tax.
You can trivially opt out by not buying publicly-traded stocks. If you'd prefer the 5-20% transaction costs of buying into private companies, so long as Goldman doesn't get .05% of your purchase in exchange for making a market, nobody is going to stop you.
But that's not true. The essence of exchange trading is that you never see your counterparty. You say to the exchange"I want to buy X", they say to the exchange "I have X to sell" and the exchange makes the transaction. The only way to compete is to offer a better price, otherwise you'll never get matched! So Goldman are making a large profit yet, but that necessarily is less than the total profit that could have been made by its rivals had Goldman not been there.
Wall Street must be a huge export product. The financial institutions that have the knowledge and control over the market can create dips to force out unknowing foreign investors and bring back their wealth. It's a brilliant scheme.
This is outside my expertise, and its true that the market is doing very well compared to a few months ago, so big profits are not inconceivable. however, one has to wonder why Goldman needed in on the bank bailout last year (although they have since paid the taxpayer back) - did they just have a momentary lapse of genius?
On a broader level, the average person is just not going to find such consistent success credible. The best thing that could happen to GS right now is a top to bottom SEC audit, because otherwise more and more people are going to start screaming for its breakup.
one has to wonder why Goldman needed in on the bank bailout last year
All banks of that class were required to participate to avoid stigmatizing any single one and weakening their credit further. Goldman took the money and simply gave it right back.
There was a run on investment banks after Lehman's failure. Merrill Lynch was on the edge of the abyss before Ken Lewis made the deal of the century - for John Thain. Morgan Stanley was next. Their CEO John Mack successfully lobbied the government to institute a ban on short selling, much good that did. Goldman was next. Without the government backstop, Goldman would not exist today.
And if Goldman was entirely populated by "geniuses", why did they need $13 billion from AIG? They made all the same bad bets as everyone else, but they "hedged" them with a counterparty unable to pay out. And once AIG was downgraded to AA in 2005, everyone should have known that they'd be unable to pay out the ridiculous CDS contracts they guaranteed on subprime bonds. It'd be like buying volcano insurance from a homeless guy - and you live next to a volcano. Goldman isn't run by geniuses; its run by people who control the government.
And without the government backstop, your savings would not exist today (and anyone else with cash in a money market or savings account).
The chain of collapse without a backstop is not a robust argument in general, becuase at the point you say Morgan, etc. fail without a government backstop and then try to assume that those firms were the only (or majority) beneficiaries, it becomes shaky. Why? Because if the banks failed as you described, nearly most would have as well and then anybody holding cash in a bank (read all of us sans the mattress crowd) would have been in horrendous trouble. Remember, the government had to backstop not just investment banks, but money market funds as well (which were failing due to the related crisis of confidence issues). Remember the northern rock episode with huge lines of people unssucessfully trying to withdraw their money in the UK?
Imagine not being able to withdraw your cash from a money market or savings account. Banks being structurally exposed to runs and therefore requiring government backstops is actually a well understood issue. The point is we all benefited from the federal backstop, and this argument that, why should banks benefit from an implied or explicit backstop ignores the fact that all of us are backstopped by this as well, whether you realize it or not. Nobody can claim that people keeping their life savings in a money market or savings account and earning 5% interest a year is not also implicitly benefiting from government backstops in general, so let's not single out the investment banks in this case.
As for AIG, this has been discussed in infinite more detail so the interested reader can look up articles on this, but the essence of the point is that of the 13 billion owed, most of it was already collateralized (which means they would have just kept the US treasury collateral had AIG collapsed). Yes, there was a smaller portion that was hedged via CDS that could have failed as insurance, but let's not claim this is the entire 13 billion, in fact, it was far from that. And let's also remember had CDS truly failed it would have reflected a state of the world where most banks were in default, and forget about some investment bank not being able to collect their insurance, we are talking about ATMs not working anymore at this point. So the point is the backstop prevented things from getting to this nightmare, saving banks but also the rest of us as well.
The overwhelmingly vast majority of Goldman's profits this year have come from market making. Spreads are wide and other banks have been taking down risk. Goldman's profits this year have nothing to do with stat arb or HFT.
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[ 1.1 ms ] story [ 85.5 ms ] threadRegulatory capture anyone?
Yep. Sadly I personally don't see anything I can do about it.
As you can imagine, the market conditions in a period of such volatility were ripe for statistical arbitrage and other high speed strategies.
To me this is hacker news as what the high-frequency traders is pretty serious technology.
4.2 billion in profit in 42 days is just nuts. That sum could keep 100.000 "regular" people afloat for a full year.
We know they have access to a special tier, we know they have this real time software, and we know they have unprecedented profit records (not just in $, but in successful days). Do you think maybe something funny is going on?
If you ask a startup to create a simple computer-based trading system that allow the buying and selling of stocks, how much would capital would they need? Not much. Trading systems should be operated by a non-profit, this sounds like a hefty and unnecessary trading tax.
This is outside my expertise, and its true that the market is doing very well compared to a few months ago, so big profits are not inconceivable. however, one has to wonder why Goldman needed in on the bank bailout last year (although they have since paid the taxpayer back) - did they just have a momentary lapse of genius?
On a broader level, the average person is just not going to find such consistent success credible. The best thing that could happen to GS right now is a top to bottom SEC audit, because otherwise more and more people are going to start screaming for its breakup.
All banks of that class were required to participate to avoid stigmatizing any single one and weakening their credit further. Goldman took the money and simply gave it right back.
And if Goldman was entirely populated by "geniuses", why did they need $13 billion from AIG? They made all the same bad bets as everyone else, but they "hedged" them with a counterparty unable to pay out. And once AIG was downgraded to AA in 2005, everyone should have known that they'd be unable to pay out the ridiculous CDS contracts they guaranteed on subprime bonds. It'd be like buying volcano insurance from a homeless guy - and you live next to a volcano. Goldman isn't run by geniuses; its run by people who control the government.
The chain of collapse without a backstop is not a robust argument in general, becuase at the point you say Morgan, etc. fail without a government backstop and then try to assume that those firms were the only (or majority) beneficiaries, it becomes shaky. Why? Because if the banks failed as you described, nearly most would have as well and then anybody holding cash in a bank (read all of us sans the mattress crowd) would have been in horrendous trouble. Remember, the government had to backstop not just investment banks, but money market funds as well (which were failing due to the related crisis of confidence issues). Remember the northern rock episode with huge lines of people unssucessfully trying to withdraw their money in the UK?
Imagine not being able to withdraw your cash from a money market or savings account. Banks being structurally exposed to runs and therefore requiring government backstops is actually a well understood issue. The point is we all benefited from the federal backstop, and this argument that, why should banks benefit from an implied or explicit backstop ignores the fact that all of us are backstopped by this as well, whether you realize it or not. Nobody can claim that people keeping their life savings in a money market or savings account and earning 5% interest a year is not also implicitly benefiting from government backstops in general, so let's not single out the investment banks in this case.
As for AIG, this has been discussed in infinite more detail so the interested reader can look up articles on this, but the essence of the point is that of the 13 billion owed, most of it was already collateralized (which means they would have just kept the US treasury collateral had AIG collapsed). Yes, there was a smaller portion that was hedged via CDS that could have failed as insurance, but let's not claim this is the entire 13 billion, in fact, it was far from that. And let's also remember had CDS truly failed it would have reflected a state of the world where most banks were in default, and forget about some investment bank not being able to collect their insurance, we are talking about ATMs not working anymore at this point. So the point is the backstop prevented things from getting to this nightmare, saving banks but also the rest of us as well.