The Collapse Of Liquidity Provisioning Since The Goldman SLP Coup

The HFRXEMN plotted since the time that Goldman Sachs barged on the liquidity provisioning scene with their SLP cover for PT domination. Maybe the NASDAQ should take a look at this and come up with some follow up complaints about what a scam the NYSE's program to gift 5 millisecond latency packet sniffing to 85 Broad truly is.

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"Predators Sensing Your Orders: Trading “Battlebots” Earn Est. $15-25 Billion Annually"

The last must read presentation in this Program Trading infused weekend day.
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Liquidity Quality In A Changing Market

My focus on various topics in the realm of program trading and market liquidity has engendered quite a few vitriolic responses, some of which have argued bitterly that Zero Hedge is on the wrong path in describing the somewhat vampiric qualities of liquidity extraction by recent artificial constructs, most notably those undertaken by the NYSE. I present to our readers an original paper by two BNY ConvergEx managing directors from 2007 which should provide some additional datapoints in the great debate on whether or not liquidity benefits at all from the recent domination of computers in the "open" market, and touches on other such highly contested issues as dark pool and dark liquidity value and execution.

I want to bring our readers' attention particularly to Exhibit 4 which indicates that from a liquidity standpoint, intra-day prop trading is the worst (Goldman Sachs domination anyone?) followed by black box algo and automated market making.

In essence these observations dovetail with the findings in a recent guest post by Joe Saluzzi.

I would also like to bring attention to the finding on page 27, according to which intra-day prop trading and black box trading is low quality because both compete with long and intermediate term traders for the best price. "From the portfolio manager’s and trader’s perspective, these are sources of low-quality liquidity that can be viewed as competition for buying or selling a stock at the best price." Maybe in this more theoretical light, it is useful to again readdress the very pertinent complaint that the NASDAQ launched against the NYSE SLP program which has as of yet still generated no response either by the exchange or by the Securities and Exchange Commission.

BNY Beyond Execution 2007 Fall

Hat tip Richard

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New York Stock Exchange: "We Screwed Up"

The story of Goldman's missing PT data has now entered the twilight zone. Matt Goldstein at Reuters reports that Goldman spokesman Michael Duvally notified him that Goldman did in fact not only perform its usual NYSE SLP domination, but also reported of this, as it does every week:

“According to the data Goldman Sachs submitted, we are certain we were among the
top firms in terms of program trading volume for the week ending June 26.”

And guess who is taking the blame: our old friend Ray Pellecchia over at the NYSE:

“Due to an error on our part, the program trading report needs to be revised and we will have a revised list out later this week. It was a system error on our part.”

Ray... just what system does the NYSE use that mysteriously drops the top Program Trading participant: is there a [if shares traded > 1 billion; AND; NYSE vows to Zero Hedge infinite transparency, do "Report 0"] line somewhere in that particular system? Our debugging skills are a little rusty but we would be happy to go through the code line by line and find all other comparable possible systemic errors. In fact, we would make it a crowdsourced event and allow all our readers to participate in that endeavor. Imagine just how bug free the NYSE system would be as a result of this voluntary venture. Of course, this would also prevent such dramas as 15 extra minutes of trading tacked on during the lowest volume day of the year, due to the NYSE's inability to clear and process this abnormally low trade volume.

Of course, Zero Hedge will gladly report the "adjusted" weekly PT data to the millions of people who have all of a sudden found a great interest in the NYSE's PT reporting. Furthermore, all those millions have somehow found their way to our new website, which unfortunately is still in the process of transferring over to its new much faster servers, and as a result of the unexpected explosion in traffic, has been either down or painfully slow all day. We appreciate readers' patience as we address this unprecedented traffic spike. Sphere: Related Content

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It Is Time For The SEC/NYSE To Respond To The NASDAQ's SLP Clarification Requests

Now that Goldman and the NYSE's Supplemental Liquidity Provider program have finally attracted a critical mass of necessary (and hopefully sufficient) public attention, Zero Hedge would like to readdress an overlooked complaint in which none other than the NASDAQ Stock Market LLC vociferously blasts the NYSE, the SLP program, and some of the underlying assumptions. Zero Hedge has discussed this issue extensively in the past, yet neither the SEC nor the NYSE (essentially, FINRA) seem to have ever addressed any of the NASDAQ's concerns. Zero Hedge believes the time has come for the later two regulatory organizations to provide some feedback to NASDAQ's concerns.

To summarize the concerns highlighted previously, as part of the NYSE's public solicitation for comments when launching the SLP program, only the NASDAQ provided its perspectives on this program. Keep in mind, one would have to be a very aggressive anti-conspiratorial vigilante to accuse the NASDAQ of being an enterprise which sees patterns where others don't (or assume impossible).

The key objections from the Nasdaq are presented below, and the entire paper is provided for our readers' convenience (highlights and italics added).

Taken together, the SLP Proposals provide NYSE with the unparalleled ability to burden competition for order flow and executions without explaining why such ability is necessary or even prudent. For example, the SLP Creation Proposal limits SLPs to firms that engage in proprietary trading, excluding NES and others that operate on an agency basis either to comply [*6] with Regulation NMS (in the case of NES) or by choice. NYSE fails to explain why this limitation is necessary or prudent. As stated earlier, NASDAQ has often been the largest liquidity provider to the NYSE and yet would be disqualified from serving as an SLP under the SLP Proposals. NYSE fails to explain why proprietary liquidity is more valuable than agency liquidity, or why proprietary liquidity should be favored over agency liquidity. NYSE claims that the proposal is designed to prompt liquidity provision but it simultaneously disqualifies large liquidity providers.

In NASDAQ's view, these irregularities reveal that NYSE's true motivation for the SLP Proposals is to discriminate among its members and to burden some members' ability to compete with NYSE. NYSE's failure to explain adequately either the operation or the rationale for its proposed rule is evidence that NYSE's stated basis for the proposal is a pretext. NYSE's proposals are a naked attempt to disadvantage one group of members -- those that compete with NYSE -- to benefit another class of members -- those that do not compete with NYSE...

Perhaps most surprising is the NYSE's aggressive attempt to implement these proposals on an immediately- effective basis. In doing so, the NYSE prompted the Commission to act inconsistently with past practice, inconsistently with its Rule Streamlining Guidance issued in July of 2008 n5, and inconsistently with its obligation to ensure that self-regulatory organizations comply with their obligations under Section 6 of the Securities and Exchange Act [*8] of 1934. NASDAQ, as an active proponent of the Rule Streamlining Guidance, is concerned that the NYSE will undermine that streamlining effort by attempting to leverage the Guidance in an inappropriate manner.

To support immediate effectiveness, the NYSE SLP Creation Proposal cleverly collects numerous past rule proposals that touch tangentially upon the topic of market makers and fees. None of the cited proposals is directly appurtenant to NYSE's SLP Proposals. For example, the Commission has not previously approved the creation of a new class of market participants on an immediately effective basis, and none of the cited proposals stands for that proposition. The Commission [*9] has not approved a new process for discriminating between members without requiring member representation or other governance protection for members. The NYSE attempted to overwhelm this weakness through sheer numbers of citations.

The NYSE has demonstrated there are many latent questions regarding its closeness with the main and only SLP provider, Goldman Sachs. In order to faciltitate the spirit of transparency and deobfuscation, Zero Hedge kindly requests that Mr. Ray Pellecchia answer these questions which not only the NASDAQ but Zero Hedge and its readers find of great interest.

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Goldman Sachs Responds To Zero Hedge

It seems quite a few individuals noticed our post attempting to justify some very peculiar language in not just a certain Goldman Sachs Internet disclaimer, but also the strange wording prominently featured in critical GS-client agreements. One happened to be Goldman Sachs itself. We take this opportunity to present the response by Goldman Sachs' spokesman Ed Canaday:

Dear Mr Durbin:

This is in response to your recent blog about our web site disclaimer. It is quite usual for websites to have disclaimers that refer to the monitoring of site usage. Most web sites, including yours we noticed, track usage by their visitors. This is primarily used for marketing and to help inform decision about enhancing content.

Your suggestion that we monitor our web site to facilitate front-running is untrue and offensive.

Sincerely

Ed Canaday
Vice President
Goldman, Sachs & Co.

____________________
Ed Canaday
Office: xxx-xxx-xxxx
Cell: xxx-xxx-xxxx

We are happy to have caught the attention of Mr. Canaday. We believe this is the start of a great ongoing dialog. In that vein, Marla has replied to Mr. Canaday and Goldman Sachs, attempting to elaborate on some of the point that Ed did not touch upon. I present it below and am looking forward for Goldman's forthcoming reponse:

Dear Mr. Canady:

Thanks for your quick reply.

For your future reference, the correct spelling for "Tyler" is "Tyler Durden." (A re-viewing of "Fight Club" might be in order, but I know Goldman VPs probably rarely have time for such luxuries).

Obviously, we want to make sure we have our facts correct so I am pleased to see your email. Perhaps you can lay to rest some questions we have for the record:

1. Indeed, data use disclaimers are a common feature on most websites. Still, I think you will agree that where usage patterns are so directly linked with potential investment activity and customer intentions it is a bit unusual not to have a more explicit description of the kind of use Goldman intends here. This is particularly so where customer attitudes are concerned, and appearances are important. "Internal business purposes" is a bit vague in this respect, don't you find? This seems unlike Goldman, usually a firm known for very careful attention to detail. Why is a more specific description of such purposes not included? I would think that easier than explaining the matter repeatedly to random bloggers (and customers).

2. I notice that you have not taken the opportunity to address similar disclaimer language in the form contracts used by Goldman and Spear, Leeds and Kellogg. Was this omission intentional or an oversight? (For your reference you can find the language we are curious about here: http://www.zerohedge.com/node/12083). "You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation."

Not to be a stickler, but the drafting here seems quite careless.
Note the differing terms between the website disclaimer "...the resultant information may be used by GS for its internal business purposes OR in accordance with the rules of any applicable regulatory or self-regulatory organization...." (emphasis added) and the form disclaimer "...we may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body AND in compliance with applicable law and regulation...." (emphasis added).

As a reformed legal professional myself, this seems a bit sloppy to me. Can you comment on the language and in particular why a more explicit definition of "internal business purposes" is not included?

3. I also notice that you do not specifically address our question:
"...has Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk?" Could you give us a response there? Perhaps you might augment that to include the decision making process of any Goldman investment decisions rather than just the prop desk and all information Goldman collects about 360 users.

And lastly, while we have your attention, we were hoping you could make a statement for Zero Hedge and its readers on the long discussed topic on our pages regarding Goldman Sachs' effective monopolization of Principal Program Trading in the New York Stock Exchange. In other venues you have attributed this domination solely to Goldman's selection as the one and only SLP currently used by the NYSE. Would you care to elaborate how that fits in with the NYSE's upcoming changes to their DPTR (http://www.zerohedge.com/node/11769)
specifically as pertaining to J and K account type indicators. Was Goldman in any way consulted in the making of this decision by the NYSE? Did Goldman have any direct communication with the SEC on this issue?

Thanks for your help with these matters. As an aside, if there is a contact at Goldman we can routinely direct these questions to that might be helpful for both of us going forward. I look forward to hearing from you.

Best Regards,

"Marla Singer"

Zero Hedge

Of course, as soon as we receive additional disclosure on this matter, we will post it promptly. Sphere: Related Content

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Goldman Sachs Responds To Dark Pool Impropriety Allegations

It is good that Goldman at least acknowledges the issue of perceived "dark pool"/Sigma X impropriety. I hope Mr. Ed Canaday can now respond in a comparable fashion to the Zero Hedge queries about Program Trading/SLP issues presented here over the past 2 months: after all such disclosures would go a long way toward increasing "transparency, confidence in our industry, and the understanding of our complex market structure."

Emphasis mine.

Valued Clients:

We live in a complex world where technology is driving the evolution of market structure at an exponentially increasing pace. Improved technology has fostered greater competition, lowered barriers to entry for new participants, and increased the total amount of liquidity available in the market. However, this evolution has come at the cost of much greater complexity in our markets.

Recently, much has been written about the need for greater transparency in our securities markets broadly and, of late, this topic has been connected to the dialogue about non-displayed liquidity (so called “dark pools”), and certain order routing practices. However, today, U.S. cash equities operate in one of the more transparent market environments. Trades are reported to the Consolidated Tape, and regulations applicable to this market, such as Regulation NMS, are quite prescriptive with regard to the manner in which orders are executed.

I actually view the current discussion on transparency in U.S. cash equities as an attempt to understand an increasingly complex market structure and set of order routing practices. Currently, it may be difficult for all market participants to clearly understand what transactions have taken place in which liquidity pool, how each pool chooses to disclose its volumes, and, furthermore, how those volumes are accounted for.

To that end, we support the recent suggestion of more disclosure with regards to where transactions have taken place, as well as a move to a standardized volume reporting regime. This will make it easier to compare market venues and understand the true relative size of each liquidity pool. More specifically, we support the reporting of “single-counted” and “matched only” volume as a standard, similar to what exchanges have followed for some time. We believe these suggestions will go a long way to increase transparency, confidence in our industry, and the understanding of our complex market structure.

Accordingly, starting in June, 2009, all SIGMA X volumes will be reported on the basis of a single-count of customer-to-customer shares executed in the SIGMA X AT S. It is our hope that the industry will adopt a similar reporting practice as soon as practically possible.

Thank you,

xxxxxxxxxx

Goldman Sachs Execution & Clearing, L.P

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Goldman Sachs Principal Transactions Update: 741 Million Shares

Latest NYSE Program Trading data out. Program trading last week ramped up by 27% from 26.5% the week before, to 33.7% of all NYSE buy+sell volume, and much higher than the 52 week average of 25.3%. The 15 most active member firms traded 1.9 billion shares for principal accounts, compared to 1.6 in the prior week. The top principal trader is and has always been (at least for the past 9 months) Goldman Sachs, with 741.7 million principal trades, virtually nothing in facilitation and 115 million in agency, keeping the principal to non-principal ratio at just under 7x.



And if the Goldman Supplemental Liquidity Provider team is patting itself on the back for its tremendous contribution of being the major (and likely only) liquidity provider, maybe they can explain the insane bid/offer spreads on the SPY at close today (and everyday): one could drive a Tengzhong Sichuan-made Hummer/forklift through that spread blindfolded (no, JPM, nobody is interested in your constant SPY machinegunning with 5k SPY blocks on every single goddamn market dip).

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SLP Brokers Taking Their Role Not Too Seriously, Others Gunning Market

Good to see that we have a perfectly normal, efficient and gapless market. Goldman deserves a golf clap for providing sublime hi-fi liquidity through the SLP. The chart below is not some crazy 5.0 + beta stock, it is the Standard and Poors 500 index, which, last time we checked, had about 500 5.0+ beta stocks (I jest for regulatory impact).



And just to facilitate FINRA in their investigation of IOI manipulation, and also to assuage any questions about who guns the market and paints the tape like clockwork, I present the intraday SPY IOIA chart.




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