Zero Hedge will attempt to categorize all the relevant players in FlashTradingGate. This is the initial focus of Senator Charles Schumer's recent campaign for market equality and transparency. As we will undoubtedly miss critical connections between these and other pertinent industry players, we solicit readers' insight as we develop this org chart: we invite readers to send emails to: flashtrading@zerohedge.com with any input.
For a sense of services provided by Direct Edge, Here is the Direct Edge fee schedule.
And here is the July 2007 commentary by Goldman Sachs and Citadel when the two firms purchased a 19.9% stake each in Direct Edge.
"Direct Edge has quickly become a major market center for U.S. equities by virtue of its innovative market model and competitive pricing schedule" said Greg Tusar, Managing Director, Goldman Sachs.
"Goldman Sachs is a fantastic addition to the Direct Edge partnership," said Mathew Andresen, Co-Head of Citadel Derivatives Group. "Volumes have grown significantly in recent weeks and we expect that trend to continue as Direct Edge becomes a more important liquidity destination for the marketplace."
For some other, more recent and relevant perspectives by Goldman's Greg Tusar, who has been abnormally vocal about another aspect of HFT, pre-trade monitoring, read here.
United States Securities and Exchange Commission Washington, D.C. 20549
July 20, 2009
Chris Powell, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. 7 Villa Louisa Road Manchester, Connecticut 06043-7541
Dear Mr. Powell:
Thank you for your letter of July 7, 2009, to Chairman Mary Schapiro of the U.S. Securities and Exchange Commission. Your letter has been referred to the SEC's Office of Investor Education and Advocacy for a response.
We are taking your complaint regarding Goldman Sachs and its proprietary software that may be used to manipulate the markets very seriously, and have referred it to the appropriate people within the SEC.
Please understand that the SEC conducts its investigations on a confidential basis and neither confirms nor denies the existence of an investigation unless we bring charges against someone involved. We do this to protect the integrity and effectiveness of our investigative process and to preserve the privacy of the individuals and entities involved. As a result, we will not be able to provide you with any future updates on the status of your complaint or of any pending SEC investigation.
I've attached a flyer that describes our policy as it will apply to your complaint. If you have any question, please contact Bonnie Dailey, an attorney on my staff, at 202-551-6364.
Sincerely,
Gloria Smith-Hill Branch Chief Office of Investor Education and Advocacy
A recent Bloomberg piece that for some reason was made available only to terminal subscribers, provides a very interesting discussion on the dangers of sponsored access, how the associated pre-trade vs post-trade monitoring deliberations by "regulators" will influence short selling curbs, and not surprisingly, the desire by Goldman to not only dominate this yet another aspect of high-frequency trading, but to dictate market policy at will.
What is sponsored access:
In sponsored access, a broker-dealer lends its market participation identification (MPID) number to clients for them to trade on exchanges without going through the broker's trading system, to avoid slowing down the execution. That places responsibility on the broker-dealer to make sure the participant abides by securities regulations, and that its trading, which can involve hundreds or thousands of orders a second, does not run amok.
Is it thus surprising, that none other than Goldman Sachs is muscling its way into providing not only a sponsored access platform to its clients, but a new form of sponsored access that needs the blessing of regulators:
Wall Street heavyweight Goldman Sachs, now launching its own sponsored-access service to lend clients its identification to access securities exchanges directly, said last week it favors monitoring client orders prior to execution.
"Our view is that there is a real need for pre-trade checks in the use of sponsored access to fulfill [broker-dealers'] regulatory responsibilities," said Greg Tusar, managing director at Goldman.
Goldman's stand in favor of pre-trade instead of post-trade monitoring of sponsored clients' activity is one side of a debate in which regulators may choose a middle ground. The regulators' decision on how to monitor sponsored access may also influence their deliberations on restricting short sales.
What is the difference between pre-trade and post-trade monitoring? In brief:
Pre-trade
Compliant with Reg SHO
Nip problems before they happen
View activity across exchanges
Post-trade
Faster order executions
Pre-trade systems still fallible
And another tidbit:
In traditional sponsored-access arrangements, a broker-dealer determines a client's suitability to access market centers directly and then allows the client to trade without monitoring its individual orders prior to execution.
In other words, the Goldman endorsed pre-trade approach will allow "monitoring of individual orders prior to execution." Whether or not pre-trade checks provide the capacity to observe not just wholesale exchange activity in the context of sponsored access but from a much broader market angle is a discussion for another time, although this could be one place where Sergey Aleynikov could shed an infinite amount of light, especially as pertains to Goldman's sponsored-access service. Conveniently, his gag order will prevent him from saying much if anything until such time as there is an appetizing settlement to keep him gagged in perpetuity. The bottom line is that with a pre-trade environment, the sponsored access providers will be able to have the potential to front run all those who use their platforms. The residual question of how far they go to comply with regulations to prevent this from happening, and remain true to their ethics standards is also a topic for another day.
Going back to the topic at hand. Here is why sponsored access could easily be quite a bother to capital markets sooner rather than later:
Unchecked errors or unintended repeat orders could deplete broker- dealers' capital, and potentially wreak havoc in the broader market. Concerns have arisen, however, about whether all broker-dealers are able to fulfill that duty in today's electronic trading environment, and according to which standards.
And here Goldman chimes in to not only promote their proposed architecture but to expound on the virtues of pre-trade checking.
"In the case of high-frequency trading, in particular guarding against technology failures, oversized orders and other situations where there's potentially systemic market impact, we believe strongly that pre-trade checks are a prerequisite," Tusar says.
Nasdaq's proposal as well as Securities and Exchange Commission officials' speeches a few months ago appeared to lean toward bolstering the traditional approach.
"We don't believe that's strong enough or what the regulators want now, because of the potentially dire consequences, and because we-as broker-dealers-bear much of that risk," Tusar says.
Now the reason why this is very relevant in the context of not just potential front running, but also market structure is that Regulation SHO, which is the primary regulatory framework for short selling (and the purvey of potential Uptick Rule reinstatement, which will happen once the market is allowed to hit a bid) is a post-trade architecture.
Wedbush [Morgan] routinely tests clients' systems to ensure they are compliant with Reg SHO. In addition, he says, the brokerage sets limits on clients available locates-as well as credit and trading limits--before the start of each trading day that its system tracks, prohibiting shorts without locates and providing a type of pre-trade check.
Or as has recently become the case, seeing rolling buy ins in the middle of the day as borrowable shares in even the most liquid stocks mysteriously disappear (look at today's market action for yet another blatant example of this practice).
Anticipating the regulators' likely response, one should not be surprised to see them siding with Goldman and against shorters:
As the SEC also seeks to appease investor concerns over rampant short selling, especially naked short selling, new sponsored-access standards may provide part of the solution. Given that day-traders may be the last remaining culprits of such activity,, increasing and standardizing scrutiny over their trading may reduce uncovered (and illegal) shorts even further.
How about appeasing concerns over rampant, unjustified buying? When will the downtick buy rule be implemented? But we jest.
And I digress again. Why should all this be concerning to advocates of stability of high-frequency trading:
The mother of all concerns is a sponsored firm's algorithm going awry and executing thousands of problematic trades across a range of securities and market centers.
Well, this is not really a problem when it happens to the upside as has been the case for months now - it is only a threat when Joe Sixpack's 401(k) may be impacted, i.e., to the downside.
And here is where a SEC Comment submitted by broker Lime Brokerage is a very troubling must read by all who naively claim that High-frequency trading is a boon to an efficient market (which doesn't provide . Well, yes and no - it is, until such moment that it causes the market to, literally, break. I will post a critical excerpt from the Lime submission, and leave the rest to our readers' independent analysis:
Lime's familiarity with high speed trading allows us to benchmark some of the fastest computer traders on the planet, and we have seen CDT (Computerized Day Trading) order placement rates easily exceed 1,000 orders per second. Should a CDT algorithm go awry, where a large amount of orders are placed erroneously or where the orders should not have passed order validation, the Sponsor will incur a substantial timelag in addressing the issue. From the moment the Sponsor’s representative detects the problem until the time the problematic orders can be addressed by the Sponsor, at least two mintues will have passed. The Sponsor’s only tools to control Sponsored Access flow are to log into the Trading Center’s website (if available), place a phone call to the Trading Center, or call the Sponsee to disable trading and cancel these erroneous orders – all sub-optimal processes which require human intervention. With a two minute delay to cancel these erroneous orders, 120,000 orders could have gone into the market and been executed, even though an order validation problem was detected previously. At 1,000 shares per order and an average price of $20 per share, $2.4 billion of improper trades could be executed in this short timeframe. The sheer volume of activity in a concentrated period of time is extremely disruptive to the process of maintaining a “fair and orderly” market. This shortcoming needs to be addressed if the practice of Naked Access is going to be permitted to continue; otherwise, the next “Long Term Capital” meltdown will happen in a five-minute time period.
And here is the punchline: our wise exchanges and broker-dealers have already set the stage for an outcome that will be extremely disadvantageous to anyone who is not a member of the "club." The strawman is total market collapse (which will happen sooner or later regardless) - just look at this chart from the CME indicating the phenomenal growth in prop trading across clients and the increasing domination of computerized trading:
So in essence the forced choice to regulators and traders by the likes of Goldman and exchanges it the following: pre-trade clearance, i.e., seeing ahead of all trades for entities who use sponsored access, a platform that all will soon need to be used be everyone who wishes to remain competitive in this day and age where one extra millisecond of latency over a long enough timeline renders a speculator (or basically trader, now that "buy and hold" is dead) useless, or the threat of complete market collapse. In other words: do what we want or the repercussions will destroy the free market.
It is time to call the bluff on all these alternatives by the administration and by Wall Street that have the apocalypse as one of the two options.
Charlie Gasparino's recap of his behind the scenes meeting with Van Praag - apparently Goldman's most recent noble cause: "Providing liquidity" and their "proclivity for electronic trading." Odd... So odd.
Oh Michelle, as for the Nasdaq opening every morning just fine, maybe you should read this Bloomberg article from earlier today :
By Adam Ewing July 20 (Bloomberg) -- NASDAQ OMX markets in Sweden, Finland and Denmark have resumed trading after failing to open on time this morning, delaying the start of trading by nearly 30 minutes. “The markets are up and running,” Anna Rasin, a NASDAQ OMX spokeswoman in Stockholm, said by telephone. “There is still a problem with the data dissemination system, but if you are trading, you can still see quotes and prices.” Rasin said there was a fire in a data room over the weekend, adding it is unclear whether that was the cause of today’s problems. The Dow Jones Nordic 30 Index, a measure for the region, rose 59.16, or 1.2 percent, to 5,027.7 as of 9:59 a.m. in Stockholm. Norway’s OBX Index gained 1.7 percent, while Finland’s Helsinki 25 Index advanced 1.2 percent. The OMX Stockholm 30 rose 0.8 percent. The Copenhagen OMX 20 Index also increased 0.8 percent.
The only benefit from Sergey's recent brush with Goldman Sachs, a/k/a the FBI, seems to have been an increased curiosity if not awareness in this most nebulous topic by pretty much everyone with an even remote interest in Wall Street... a 500% increase over one month in fact. The people demand answers: it is time for Goldman and the NYSE to provide much more color on just how High Frequency Trading impacts the general public's investing, or as it is correctly known these days speculating, decisions.
A recent story in Advanced Trading goes after some of the minutae of High Frequency Trading and provides a glimpse of the total value that HFT may provide to behemoth PT powerhouses such as Goldman Sachs. The article presents a very valuable perspective on just why HFT is so critical these days, especially when cash traders go for 6 hour Starbucks breaks between 10 am and 3:30 pm: "high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind—capture profit opportunities by being smarter and faster than the closest competition." And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT's that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.
The reason for this, as the AT article points out, is that HFT has become the biggest cash cow for Wall Street: "The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize." How big of a cash cow:
"Proprietary trading takes in a number of unique strategies, including market making, arbitrage (ETFs, futures, options), pairs trading and others based on the linked trading of more than one asset class, e.g., futures index and cash equities. In fact, TABB Group estimates that annual aggregate profits of low latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them."
The $21 billion estimate is smack in the middle of the FIXProtocol estimated $15-$25 billion in revenue that HFT generates. So let's do a back of the envelope calculation: Goldman controls roughly 50-60% of principal program trading on the NYSE, which in turn accounts for 30% of all global program trading. Throw in Goldman's domination of dark pool trading through Sigma X, and one can come up to quite a sizable number - It would not be a stretch to conclude that, through various conduits, Goldman is directly responsible for over 20% of global HFT trading. 20% of $21 billion is over $4 billion a year. As margins on HFT are sky high (it doesn't cost all that much to tweak a few hundred lines of code - and if Sergey Aleynikov is any indication, $400,000/year for VPs in the program is peanuts for a firm like Goldman), this $4 billion likely drops to the bottom line almost dollar for dollar. Let's recall that Goldman's Q2 earnings were $3.44 billion. Does this mean that HFT/PT accounts for roughly 25% of earnings for the firm that is a hedge fund in all but FDIC backing? Zero Hedge would in fact take the over, especially in this environment where M&A fees are a distant memory. We leave this question open, but even if we are off, it would not be by order of magnitude, and would explain why Goldman has thrown the kitchen sink into dominating such NYSE programs as the SLP, and is expending so much energy to dominate dark pools as well.
Going back to the AT article, which provides some additional critical observations, especially with regard to the Aleynikov arrest and his ludicrous $750,000 bail which surpasses that of indicted Ponzier Sir Allen Stanford:
First, strategies that optimize the value of high frequency algorithmic trading are highly dependent on ultra-low latency. The right decisions are based on flowing information into your algorithm microseconds sooner than your competitors. To realize any real benefit from implementing these strategies, a trading firm must have a real-time, colocated, high-frequency trading platform—one where data is collected, and orders are created and routed to execution venues in sub-millisecond times.
Next, since many of these strategies require transacting in more than one asset class and across multiple exchanges often located hundreds of miles apart, i.e., NY to Chicago, that infrastructure will often require roundtrip long haul connectivity between the data centers.[TD:Any real estate professionals out there who can determine just how easy it is to set up a colocated station within millisecond distance of the NYSE, and whether or not Goldman has any rights of first refusal on this real estate optionality? Nothing like a little derivative monopoly to keep potential SLP vendors at bay]
Lastly and most importantly, this code has a limited shelf life, whose competitive advantage is diluted with each second it is outstanding. While a prop desk's high level trading strategy may be consistent over time, the micro-level strategies are constantly altered—growing stale after a few days if not sooner—for two important reasons. Firstly, because high frequency trading depends on ridiculously precise interaction of markets and mathematical correlations between securities, traders need to regularly adjust code—sometimes slightly, sometimes more—to reflect the subtle changes in the dynamic market. The speed and volatility of today's markets is such that the relationships forming the core of our algorithm strategies often change within seconds of our ability to implement the very strategies that exploit them. Secondly, competitive intelligence is so good across all rival trading firms that each is exposed to the increasing susceptibility of their strategies being reverse engineered, turning their most profitable ideas into their most risky. As a result, any firm acquiring the "stolen" code would gain benefit from it for no more than a few days before that firm would need to adjust the code to the dynamic conditions. Since these changes build on themselves, in a matter of weeks that code would look quite different from that which was originally "stolen."
And the conclusion:
There's no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen—and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front run or trade against it, ruining even the most well-planned tactics. This news story contains many very important sub-plots: trading espionage, the necessity for a trading firm to have sophisticated security systems built around its technology, the requirements for risk management, and even the potential for proprietary trading software to be targeted on a wider scale for terrorist activity; but more than anything else it highlights the critical role played by high frequency prop trading in this new market.
This is indeed, a conclusion that Zero Hedge has been pounding the table on for months. It is imperative that Wall Street firms shed much more light into this astronomically profitable yet highly misunderstood and under the radar concept. In the absence of more information, the likelihood that Wall Street firms who dominate order flow and have material unfair advantages over virtually everyone else, should be isolated from trading up to the point where they provide sufficient information to make the market a fair and equal playing field for all investors. Until that moment, investing, trading and speculating is doomed to have the same outcome for the majority of market participants as playing roulette with 35 instances of 00, a much lower fun coefficient and no ability to be comped for your room in light of significant trading losses.
"They are literally stealing a hundred million dollars a day. Goldman Sachs is stealing every day on the floor of the exchange. They should be in the Hague, they should be taken on financial terrorism charges. They should all be thrown in jail"
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.
Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero Hedge disclosed yesterday, it hit a record high. The implications for this were large enough that even Bloomberg picked up on this story. Many readers raised questions of how is it even remotely possible for the company to have a VaR in the low-mid $200 MM ballpark, yet to post a record number of $100MM+ trading days in Q1; Zero Hedge is willing to wager that the upcoming 10-Q release will demonstrate another record number of $100MM+ days in the just closed quarter as well.How is that possible?
The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith. The letter had come in response to GS requests for "temporary exemptions from the application of certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies and the Board's general risk-based capital rules for bank holding companies." Basically through the end of 2009 Goldman is basically using non-traditional. SEC approved VaR models as can be seen here:
GSGI has requested that (1) through December 31, 2009, GSGI and Bank be permitted to use certain Value-at-Risk ("VaR") models approved by the SEC... to determine their capital requirements for specific risk under the Market Risk Rules; (2) through December 31, 2009, GSGI and Bank be permitted to use methods approved by the SEC to determine their capital requirements under the Market Risk Rules for those trading assets, including distressed debt and restricted stock investments that the SEC did not require to be included in the VaR-based models of GSGI and Bank; and (3) GSGI be allowed to use methods approved by the SEC to calculate risk-based capital requirements for its nonfinancial equity investments that are subject to the Board's Credit Risk Capital Rules.
The letter goes into detail explaining why a bank needs to follow a MRR VaR methodology. Yet what is not made clear is i) why does Goldman need almost a full year of alternative VaR calculation and MRR exemption and ii) what is the protocol for the SEC to enforce VaR compliance when Goldman's ultimate regulator is the Federal Reserve. The exemption raises critical questions not only with regard to the validity of the company's indicate VaR, but also downstreaming capital requirement reports. Zero Hedge would be remiss to point out that a very close relationship between the most critical financial company in the world and the most discredited regulator (SEC) does not bode well for confidence in this critical risk indicator, which as many have pointed out, is clearly the main metric by which to measure not only the performance, but the risk capacity of the world's largest government-backstopped hedge fund. Mr. Canaday, Mr. Van Praag - the floor is, again, yours. In your absence, Zero Hedge will, and encourages it readers to, contact Mr. Homer Hill at the Federal Reserve Bank Of New York at (212) 720-2164 to provide additional clarity on the matter.
Sphere: Related Content
The anti-Goldman sentiment keeps on growing: next up is Bloomberg's interview with former Attorney General Eliot Spitzer in which he chimes in with his views of Taibbi's Goldman Sachs article and Goldman's money making prowess ("becuase it is a conspiracy does not mean it is wrong"). In an impressively coherent presentation, the former Governor also talks about bankrupt states and the lack of regulation (his family life disclosure may be fast forwarded). Must watch.
David Faber discusses Goldman's real estate losses, and draws some conclusions about the upcoming pain for REITs. And yet, thanks to Goldman, which has been instrumental in upgrading and issuing stock for the REITs (and having a massive blow out quarter thanks in large part to its REIT underwriting activity), the sector is doing unprecedentedly well. Surely one has to wonder just what must happen at this point for people to wake up and realize what a ticking time bomb Commercial REITs are?
By the way, Jonathan, the Zero Hedge brain trust believes it is about time to downgrade your former Conviction Buy CBL soon (this is obviously not a threat or advice, investment or otherwise).
One of the least understood concepts on Wall Street - Value At Risk aka VaR. For a good practical example of what happens when it goes ballistic, see the Goldman Press Release. And for some observations on why VaR could be the latest black swan-in-waiting, as well as for a much more in depth overview of liquidity, especially as it pertains to lack of diversity, please read the attached presentation out of the Professional Risk Managers' International Association.
Liquidity black holes, such as the ones we see growing all around us these days, imply that the VaR methodology of "risk evaluation" is likely the next major risk factor for the capital markets. Trust Goldman to leads the charge in seeing how much they can get away with before another market "event."
Also, some good introductory material for all those who have been consistently inquiring about more information on market liquidity and the lack thereof.
As if anyone expected less than one of the most ridiculous beats ever.
Some amusing Q1 over Q2 comparisons:
Equity Underwriting: $48 million vs $736 million
Equities Trading (not commissions): $1,027 vs $2,157 million
Total Trading and Principal Investments: $5,706 vs $9.322 million
ICBC: ($151) vs $948 million
Notable: VaR hits what looks like another record high at $245 million, higher by $5 million from the last March record. Also, the fudge "diversification factor" is almost at $100 million: excluding it the company has a VaR of almost $345 million. One can barely hold their breath to see the number of $100 MM+ trading days in the quarter.
Also, for those curious what comp will be like at Goldman, here is some color:
Compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as payroll taxes, severance costs and benefits) were $6.65 billion, which was higher than the second quarter of 2008, primarily due to higher net revenues. The ratio of compensation and benefits to net revenues was 49% for the first half of 2009. Total staff decreased 1% during the quarter.
FYI: $6.65 billion for the quarter, $4.712 billion for Q1, annualized this is $22.7 billion, divided by 29,400 employees, means an average comp of $772,925/employee. Enjoy, dear taxpayer.
The lately abnormally notorious Goldman Sachs received a little pat on the back today compliments of Bank Of America and its analyst Guy Moszkowski, who in a report published this morning announced his expectation of an "unexpected" Q2 surprise (quick, someone find the next big counterparty that Goldman shorted and also has several tens of billions in collateral exposure with the 85 Broad oracles) and also anticipates forecasts to rise. Maybe now that Goldman's fate allegedly is in the hands of a few good hackers, Guy may want to redo his hypothesis. But I digress. From the report:
Investment thesis: GS is arguably the most well-respected inv. bank, especially after deftly navigating the 07-08 credit crisis. We view GS as the best-diversified, most global franchise in the industry, with ample intl. growth prospects. The firm has consolidated its toptier position among Capital Markets firms, enabling it to generate strong through-cycle ROEs and book value growth.
Wow, not sure even where to start with Guy's opening salvo. If it was made a little clearer that a "inv. bank" has the implicit backing of the U.S. government for any and every blunder it may make, and the potentially explicit backing of all the collocation facilities at the 60 Hudson carrier hotel, maybe Guy's fascination would be a little more subdued. As to the "most well-respected" bit... well, Zero Hedge won't touch that topic. But Guy may consider adjusting the boilerplate investment thesis shortly.
Trading conditions remained favorable through 2Q. Buoyed by stable volumes as spreads tightened, fixed income markets continued to see wide bid/ask spreads on muted competition. Thus, we’ve again raised Trading forecasts. Also, cont’d asset price improvement (ICBC, equities and debt), offset by likely real estate losses, should drive increased Principal revs. In IB, M&A remained weak, but Equity and Debt U/W rallied significantly. 2Q could be a record quarter for GS in Equity U/W, though volume data is skewed by their own capital raises. Comp. leverage could drive significant 4Q earnings boost
At current accrual rate (and assuming rev forecasts correct), GS appears on track to accrue significantly more comp than ‘08, despite little change in headcount. Even with 4Q accrual of 25%, comp would still be up 64% YoY by our estimate. In this scenario, ‘09E would reach $16.30, with ROE of 16%.
Buy: PO to $175 (from $144); 16%+ ROE achievable
PO increase reflects ‘09E/’10E ROE of 16%+, bringing BVPS to over $113 by the end of 2009 and $122 in 12-months. Based on this, ROE suggests 1.6x BV multiple or ~$175, after 10% “haircut” to account for market fluctuations. GS has consolidated its top-tier position among Capital Markets firms, combining front-rank Banking franchise with unmatched risk-taking/risk-management skills in a market that strongly rewards these because of decline in competitor risk appetite. Risk/reward appealing, with upside potential to 1.6x BV, downside unlikely below 1.1x BV.
Decline in competitor risk appetite? How about outright decline in competitors? And how about the unwillingness of competitors to directly engage GS in core fields in which the firm seems to have achieved a barrier to entry with a blessing as if from above? What is so difficult about calling up two firms to gauge investor interest in a REIT offering and then following through with one, if all it takes is a simple analyst upgrade and a brief stay on the Goldman Conviction Buy List (sorry, bad example, Merrill recently figured out just how simple it is to beat Goldman in its, allegedly, own game)... But fixed income sales and trading? At 40 bps bid/offer spreads for a 300 bps trading CDS or 1.5 points pick on a bond, a blind monkey with Down's syndroms would be rolling in cash. As for being a Supplemental Liquidity Provider? Well, why take the free money from Goldman and from the zillions in program traders who scalp each other for nickels per trade. Who would possibly want to do that. Not like being an SLP provides one with a plethora of implicit and explicit additional benefits.
No, all rhetoric aside, investors would be stupid not to buy into the Goldman hype - pretty soon it will be the only investment bank standing if LB's grand plan has its way. And there is nothing on the horizon to indicate otherwise. As for Goldman employees who are set to make a record $1 million in average comp this year - we all feel bad for them, knowing how hard they work scouring the web for pieces of rogue code or kibitzing on various websites checking on minute by minute updates of whether anyone has the temerity to write something negative about the mothership.
Sо why stop at $175 - go for a cool round number, like $1,000 or $1,000,000/share. At the current rate of dollar devaluation the latter has a very high probability of being achieved, nevermind that the investee would likely be happy to facilitate said devaluation as much as it can... And if oil were to somehow hit the same price/barrel, so much the batter. LB et al will be happy to show up at next year's investor meeting and discuss how Goldman managed to generate an ROI of infinity +1. Zero Hedge, with its 1 share of GS will be proudly there, clapping and cheering in a roofied daze, pre-vaseline administration, clutching the Goldman Sachs Ethics Manual, which has long ago replaced the Bible, Koran, Torra, the Bhagavad-Gita, and the Sermont on the Mount, among others, as our bedside soul cleansing material. Of course, if in the meantime the green shoots turn out to be green swans and the economy crumbles, one can bet that Goldman will be there, generating a cool 20% ROE.
Sphere: Related Content
Still out in the boonies, so a few more days without extended analysis. In the meantime, some more amusement on GoldmanGate: Cryptogon has created a piece of html code that Google queries latch on to when searching for "Goldman Sachs Code Torrent", allowing the sysadmin to track which IPs and firms are querrying this keyword. Interesting results. From the website:
I have not seen as much activity from Goldman Sachs as I thought I would on my little honey pot. This is all so far. Then again, this hasn’t even been up 24 hours yet:
Other interesting visits: Citadel Investment Group 64.22.160.1 2009-07-07 11:53:59 /?p=9712 Referrer: Direct hit Hostname: cit1.citadelgroup.com
InfoNgen is the first Discovery Engine for business, finance and information professionals that knows what’s critical to you. Extracts relevant and timely information buried on the web, within emails, in desktop documents or on network drives. Identifies trends and connections between topics, companies or products that might not otherwise be apparent. And delivers results in real time.
63.87.234.186 2009-07-07 05:12:58 /?p=9712 Referrer: Direct hit Hostname: host186.infongen.com — Batterymarch is a global equity specialist, investing in approximately 50 countries for clients around the world. Our unique quantitative strategies combine the power of technology with the wisdom of experienced fundamental investors.
128.190.125.2 2009-07-07 17:59:55 /?p=9712 Referrer: Direct hit Hostname: wks125-2.belvoir.army.mil — Clough Capital
74.201.46.1 2009-07-07 17:38:18 /?p=9712 Referrer: Direct hit Hostname: host1.cloughcapital.com — Microsoft
131.107.0.101 2009-07-07 17:09:44 /?p=9712 Referrer: From your blog Hostname: tide531.microsoft.com — The Benefit Company
66.184.209.18 2009-07-07 16:20:15 /?p=9712 Referrer: Direct hit Hostname: 66.184.209.18 — At ECBridge™, we know that information is the lifeblood of today’s business. Our experienced, international team helps clients plan, implement and manage innovative e-business solutions. We can help your firm gain competitive advantage, by extending the reach of your company’s information.
207.111.251.165 2009-07-07 16:12:14 /?p=9712 Referrer: Direct hit Hostname: mail.ecbridge.com — New York City Police Department
206.212.185.216 2009-07-07 12:49:12 /?p=9712 Referrer: From your blog Hostname: 206.212.185.216 — City of Houston
204.235.227.149 2009-07-07 12:05:43 /?p=9712Referrer: From your blog Hostname: 204.235.227.149 — Note: U.S. Department of Homeland
Security is obsessed with this post, and with Cryptogon, today. There are at least a couple of DHS employees who read Cryptogon as a matter of routine, but the activity over the last 24 hours shows 10 visits, 43 page views from five different hosts/IPs:
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”
The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.”
The proprietary code lets the firm do “sophisticated, high-speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.
Not even going to attempt to elucidate in how many different ways the first sentence above is just...plain wrong. At least it is refreshing that none other than Goldman's own de facto attorney admits that the firm has created a piece of code that permits "market manipulation." When Goldman is the perpetrator, the manipulation is conveyed via "fair ways." And when the manipulator is someone else, the ways become "unfair."
Of course, Goldman will be happy to know that according to PACER, Aleynikov has just posted bail and is freely roaming the grounds of SDNY, EDNY and District of New Jersey, however the "PTS Office shall be permitted, to the extent possible, to monitor the deft's use of computer's or other electronic devices at his home or place of business to ensure that the deft does not access the data that is the subject of this criminal action." Something tells me monitoring Sergio's (former) place of business will yield a lot more clues in the prosecution's gathering of data for criminal action.
Maybe I am too drunk but... what the hell is going on here? When will Kevin Mitnick appear stage left and hold the world ransom for one hundred million dollars after announcing he has hijacked every SPY ETF ever put in circulation.
P.S. Any reference of the "Serge" individual referenced above to the now (in)famous Sergey Aleynikov is, of course, purely intentional.
