Goldman E-Mail Message Lays Bare Trading Conflicts

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

"We adviseren jullie over een 'trading strategy' en we kunnen deze
strategy zelf al hebben uitgevoerd of dit doen na het geven van dit advies."
Dit is synoniem met, we hebben de val gezet en zodra je er in hebt
getrapt gaat hij dicht (oftewel we handelen contra wat jullie gaan doen).
Wat niet hieronder tot uiting komt is dat GS kans ziet om dit vaak te
doen tot rond 50% van de omzet van de stock exchange. Is het dan niet
altijd het geval? Immers 50% GS + 50% anderen is toch 100% ;)

Bovendien is er ook nog High Frequency Trading. En hier is helemaal géén
sprake van overleg, maar gewoon data tussen beurs en klanten
onderscheppen, en dan binnen 5ms (dus voordat de order van de klant is
uitgevoerd) een contra order plaatsen en deze daarna aanbieden aan de
klant. Als de klant de GS aanbieding niet accepteerde, werd de eigen
order geannuleerd binnen de daarvoor toegestane tijd. Winst (en eigen
bonus) verzekerd!

Vorig jaar kwam ook naar voren dat GS na overleg met klanten orders
uitvoerde in b.v. NYC en hun kantoor in Londen deze short kocht of
verkocht (en dus in feite tégen de eigen klant in handelde).

http://www.nytimes.com/2010/01/13/business/13goldman.html
January 13, 2010
Goldman E-Mail Message Lays Bare Trading Conflicts
By ANDREW ROSS SORKIN

For years, Wall Street whispered that Goldman Sachs profited handsomely
by trading ahead of — or even against — its own clients.

On Tuesday, a Goldman executive made an unusual admission that, in some
cases, the rumors were true.

In an e-mail message to select clients, Thomas C. Mazarakis, the head of
Goldman’s fundamental strategies group, acknowledged that his unit often
provided investment ideas that the firm had already traded on. Sometimes
Goldman has even taken the opposite approach, betting against particular
instruments that the group has recommended.

“We may trade, and may have existing positions, based on trading ideas
before we have discussed those trading ideas with you,” he wrote.

The statement comes as the firm faces growing criticism over its role in
the financial crisis, and is a rare acknowledgment of Goldman’s
conflicts with certain of its clients.

“The way that the business is evolving is that it is laden with
conflicts of interest,” Anant K. Sundaram, a professor of finance at
Dartmouth’s Tuck School of Business, said.

Last month, the Securities and Exchange Commission and Congress began
investigating how Goldman and other firms had created bundles of
mortgages known as collateralized debt obligations, or C.D.O.’s, that
were sold to investors at the same time that the banks had privately bet
against the instruments. Some of these C.D.O.’s later fell in value,
creating losses for those clients who bought them — and profits for Goldman.

Goldman also prevailed upon ratings agencies to assign the C.D.O.’s high
investment grades, even as it planned to short, or bet against, the
securities.

The e-mail message is a blunt acknowledgment of what often appeared in
the fine print of Goldman’s marketing materials. Lucas van Praag, a
Goldman spokesman, said in a statement: “We have been providing this
disclosure, which we think is best practice, for a number of years and
there is nothing new in the disclosure you were sent.”

But Mr. Mazarakis’s letter also highlights the enormous clout wielded by
Goldman’s army of traders, many of whom make enormous bets using the
firm’s own capital and who provide the bulk of the firm’s immense
profits. Goldman insists that its trading business is done on behalf of
its clients.

Since the firm went public in 1999, traders have come to dominate
Goldman’s mix of businesses, overshadowing the firm’s traditional
investment banking practice. Both its chief executive, Lloyd C.
Blankfein, and its president, Gary D. Cohn, rose from the traders’ ranks.

Unlike Goldman’s equity research department, which issues buy and sell
recommendations about specific stocks, the fundamental strategies
group’s primary job is to supply investment ideas to the firm’s own
traders. (Still, Goldman attracted scrutiny last year for “huddles” that
its research analysts held with the firm’s traders, information that it
only later shared with clients, if at all. That has prompted inquiries
by regulators like the Financial Industry Regulatory Authority into how
banks distribute their research.)

But the fundamental strategies group also disseminates some of those
strategies to select Goldman clients, typically big institutional
investors and hedge funds. Because of its role, the unit does not have
to conform to the traditional rules governing equity research departments.

Under federal rules, research analysts cannot mislead clients by
promoting stocks that the analysts privately do not believe in or that
the firm has a vested interest in. Research analysts are also prevented
from providing information to their firms’ own traders before
disseminating their reports more broadly.

But according to clients who receive notes from the fundamental
strategies group, Goldman does not always disclose its own positions
when it shares its trading ideas.

Mr. Mazarakis’s e-mail statement was clearly meant to reinforce
Goldman’s conflict-of-interest policy and head off any legal liability.
“As part of our commitment to managing conflicts of interest
appropriately, this message is to explain how the Fundamental Strategies
Group interacts with other parts of our organization and how that
impacts on the Trading Ideas,” Mr. Mazarakis wrote. Mr. van Praag said
the language in the message had been vetted by the Financial Services
Authority in Britain.

But Mr. Mazarakis makes clear that when it comes to his unit’s advice,
the firm comes first. “We may continue to act on trading ideas, and may
trade out of any position, based on trading ideas, at any time after we
have discussed them with you,” he wrote.

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