quant trading @GS

[melanie911]

A New Definition of Slippage?

Last week, we witnessed the creation of an entirely new definition for the concept of"slippage."

If we look at Wikipedia, its definition for "slippage" is the difference between estimated transaction costs and the amount actually paid. How amateurish and naive can Wikipedia be?

No, these days the new definition for "slippage" seems to be defined -- at least by Goldman Sachs -- as "let's trade in front of everyone. We'll get filled and what's left to fill is what anyone else gets. Why? Because we, at Goldman Sachs, are 'risk-averse.'"

Now, I'm not picking on GS for the fun of it. But last week, supposedly GS was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.

What exactly is "quant trading"? Quantitative (or quant, for short) trading encompasses investing techniques employed by sophisticated, technically advanced hedge funds or brokerages.

Quant shops use ultra-fast computers to predict trading patterns inside financial data. A "quant," also known as a "geek," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.

Is quant trading illegal? Ordinarily, no, but the way Goldman Sachs coded the program seems suspicious. And, by the way, it is reported that GS represents 60% of program trading.

In order to trade from your desktop, your computer program sends your offer to buy or sell to the exchange. The computer program that is behind the scenes of your desktop-trading platform uses what is known as a "FIX" protocol. FIX is now generally considered the industry standard.

Seems what the GS program can do is intercept the FIX messages being sent to the exchange from the large institutions, interpret what was is being bought or sold, and then put their trade in ahead of those trades for the same buys or sells. Then the trades coming in afterward may or may not get filled, depending upon how large GS's trades were.

How would this work in the marketplace? Say an institution wanted to sell 10,000 shares of IBM. GS would intercept the message, and sell 10,000 ahead of the institution. Say only 12,000 shares were available to sell. GS would sell its 10,000 and the institution could only sell 2,000.

A new definition for "slippage," right?

What is being investigated is whether GS illegally used security-access codes to acquire the messages prior to "transaction_commit" time points at the NYSE. This may have only resulted in a nanosecond trading advantage but, with ultra-high-speed computers, a nanosecond is a lifetime.

How was GS found out? Because quant trading recently hit an all-time high of 48.6% of all NYSE trading. And since GS represents 60% of all program trades ... hmmm, well, you do the math. The NYSE keeps close tabs on program trading and was startled that nearly half of all trades suddenly came from program trading.

Wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome complete disaster? One might opine that GS makes money the old-fashioned way ... by stealing it.

Who leaked the story? Matt Goldstein at Reuters.

We'll keep an eye on this to see how it unfolds and whether we're looking at a scandal or just another day on Wall Street. But since truth tends to turn out far stranger than fiction, it all makes you wonder why anyone would want to buy stocks.

Thanks, but for my money, I'll just stay on the Chicago Mercantile Exchange (CME) side, where I trade futures -- away from the NYSE!

Barbara Cohen
Contributing Editor
The Tycoon Report

 

[ian23]

Again, very intersesting read. I was wondering what it was all about and haven't had time to check it out myself.

 

[stu432]

No offence, but what you're talking about is rubbish. I know because I used to work in the b2b connectivity team at GS, and as anyone who knows anythings about networks would know, is that no one use's ethernet segments anymore. All connections go through high speed switches (tiny collisions domains), which means those sorts of messages only go to the people they're intended for.

If GS was sniffing traffic like you suggest, that would be highly illeagal for a start (try it on your local cable segment and if you get caught you're done for...), and for seconds the NYSE and the MSP's [Reuters ex-offspring most likely] that provide the connectivity are being insanely incompetent! Now, although that's not that hard to believe giving my experiences in the field, point is that if GS could do it, then EVERYONE would be doing it. FIX is clear text wrapped in TCP packets. Get a sniffer and you can read the transactions passing to you (but only to you, remember switches are in the way).

I think what's more likely is that GS was told to stop its high frequency strats becuase they're sucking up the bandwidth for everyone else, else face their transaction costs going up to a level where there high frequency strats are no longer commercial. Bit of a kick in the teeth when you're GS and pay a premium to buy your office next to the exchanges you do business in.

A New Definition of Slippage?

Last week, we witnessed the creation of an entirely new definition for the concept of"slippage."

If we look at Wikipedia, its definition for "slippage" is the difference between estimated transaction costs and the amount actually paid. How amateurish and naive can Wikipedia be?

No, these days the new definition for "slippage" seems to be defined -- at least by Goldman Sachs -- as "let's trade in front of everyone. We'll get filled and what's left to fill is what anyone else gets. Why? Because we, at Goldman Sachs, are 'risk-averse.'"

Now, I'm not picking on GS for the fun of it. But last week, supposedly GS was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.

What exactly is "quant trading"? Quantitative (or quant, for short) trading encompasses investing techniques employed by sophisticated, technically advanced hedge funds or brokerages.

Quant shops use ultra-fast computers to predict trading patterns inside financial data. A "quant," also known as a "geek," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.

Is quant trading illegal? Ordinarily, no, but the way Goldman Sachs coded the program seems suspicious. And, by the way, it is reported that GS represents 60% of program trading.

In order to trade from your desktop, your computer program sends your offer to buy or sell to the exchange. The computer program that is behind the scenes of your desktop-trading platform uses what is known as a "FIX" protocol. FIX is now generally considered the industry standard.

Seems what the GS program can do is intercept the FIX messages being sent to the exchange from the large institutions, interpret what was is being bought or sold, and then put their trade in ahead of those trades for the same buys or sells. Then the trades coming in afterward may or may not get filled, depending upon how large GS's trades were.

How would this work in the marketplace? Say an institution wanted to sell 10,000 shares of IBM. GS would intercept the message, and sell 10,000 ahead of the institution. Say only 12,000 shares were available to sell. GS would sell its 10,000 and the institution could only sell 2,000.

A new definition for "slippage," right?

What is being investigated is whether GS illegally used security-access codes to acquire the messages prior to "transaction_commit" time points at the NYSE. This may have only resulted in a nanosecond trading advantage but, with ultra-high-speed computers, a nanosecond is a lifetime.

How was GS found out? Because quant trading recently hit an all-time high of 48.6% of all NYSE trading. And since GS represents 60% of all program trades ... hmmm, well, you do the math. The NYSE keeps close tabs on program trading and was startled that nearly half of all trades suddenly came from program trading.

Wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome complete disaster? One might opine that GS makes money the old-fashioned way ... by stealing it.

Who leaked the story? Matt Goldstein at Reuters.

We'll keep an eye on this to see how it unfolds and whether we're looking at a scandal or just another day on Wall Street. But since truth tends to turn out far stranger than fiction, it all makes you wonder why anyone would want to buy stocks.

Thanks, but for my money, I'll just stay on the Chicago Mercantile Exchange (CME) side, where I trade futures -- away from the NYSE!

Barbara Cohen
Contributing Editor
The Tycoon Report

 

[A Dashing Blade]

If we look at Wikipedia, its definition for . . .

Great start . . . I'm really impressed

But last week, supposedly GS was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.

Source?

A "quant," also known as a "geek," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.

Nope, that's a quant programmer in my book.

. . . but the way Goldman Sachs coded the program seems suspicious.

To whom?

And, by the way, it is reported that GS represents 60% of program trading.

By whom?

Seems what the GS program can do is intercept the FIX messages being sent to the exchange from the large institutions, interpret what was is being bought or sold, and then put their trade in ahead of those trades for the same buys or sells. Then the trades coming in afterward may or may not get filled, depending upon how large GS's trades were.

Any danger of a source for this fact-free bullsh1t?

What is being investigated . . .

Investigated by whom?

This may have only resulted in a nanosecond trading advantage but, with ultra-high-speed computers, a nanosecond is a lifetime.

Nope, a millisecond (1/1000 sec) is a long time (not a lifetime but still a long timer). A nanosecond (1/1000,000,000) is still a very very very short time in IT.

Wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome complete disaster?

Nope, GS, along with a couple of others was TOLD to accept Tarp funds so as not to tarnish the rep of thaose banks that HAD to accept Tarp funds. I do accept however, that without the Tarp, the whole thing would have gone tits up.


I love debunking a bad conspiracy theory first thing in the morning . . . it smells of . . . . victory.

 

[melanie911]

i agree with both replies. i had similar questions when reading that stuff but imo THE question is not about security or nanoseconds.

do you really have an advantage in enter the market just before third-part orders?

why i have to buy MSFT if BAC and/or C are buy'n ?
and if bank america is buy'n MSFT while CITIGROUP is selling?

do you have time to evaluate that conditions and still enter the market before their orders?

 

[N Rothschild]

Dashing blade, GS is about 60% of automated trading on NYSE. i can post the NYSE data to prove this if you dont believe me.

 

[A Dashing Blade]

. . .
do you really have an advantage in enter the market just before third-part orders?
. . .

Of course, it's called "front-running", it's pretty much endemic on the fx desks of the large IB's

 

[A Dashing Blade]

Dashing blade, GS is about 60% of automated trading on NYSE. i can post the NYSE data to prove this if you dont believe me.

Glad you responded to 1 of my 9 points

 

[N Rothschild]

Glad you responded to 1 of my 9 points

i was merely replying to the only point that can be proven as fact. the rest are open to debate..

 

[A Dashing Blade]

Wasn't denying, just asking for data source.

Trivial to find this stuff out, start at Zero Hedge's blog . . .

 

[96pills]

they should bring an end to black boxes, you can't have a black box selling vegetables in a street market, so why have it on a financial exchange.

 

[N Rothschild]

never used tesco's automated checkout?

 

[melanie911]

Of course, it's called "front-running", it's pretty much endemic on the fx desks of the large IB's

but only if next order move the market in your favor, right?

so this is a profitable strategy only when you intercept big orders?

 

[A Dashing Blade]

but only if next order move the market in your favor, right?

so this is a profitable strategy only when you intercept big orders?

obviously

 

[melanie911]

obviously

y but moving GOOG what order size you need to intercept...No one still insert orders so huge. Fragmentation. You can try this strategy on medium and small cap stock. How much you can earn??

it seems to me a Jurassic strategy.