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"....Apparently, what Goldman's computers can do is incredibly sophisticated pattern recognition that can tell when somebody is trying to sneak in a big order. Not only that, they've apparently backward engineered the software to recognize what the market looks like before many types of big (within the context of about a few seconds to up to 15 minutes of trading) price moves.
Once you know that big orders are coming, and if you have Goldman's powerful big computers, making guaranteed easy money is a snap. While it may take a second or two for the multitude of smaller orders to hit the market, Goldman has already been in the market and gone, buying up most or all of the 10 million share order. When the buy order from the retail customer finally does hit the market, guess who's there to fill it? There's Goldman, selling the shares it just picked up maybe a second or two earlier at a lower price for a tidy little profit, the sum of which apparently went a long way towards making Goldman's $3.44 billion of earnings last quarter.
Many think that these trading mechanism's are inherently unfair, since, by their very nature, they disadvantage smaller traders in favor of the trading power financed by Goldman's wealth. Therefore, are the exchanges and ECNs working to stop Goldman and the others trading in this manner, so as to restore a level playing field?
Yeah, right. As the speakeasies said during Prohibition, may I take your hat and coat, Mr Capone?
[Goldman] trading losses occurred on two days during the months of April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days during the quarter, or 89 percent of the time.
Just two days of losses in the entire quarter?
There are a lot of very good traders in the world, but nobody has that sort of record on any sort of consistent basis unless they've managed to rig the game.
You can be "the smartest guys in the room" but nearly-perfect records at the poker table are almost always an indication that someone has managed to figure out a way to peek at the other side's hole cards.
Oh, and they're gambling (or cheating?) with your money too - not their own:
Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.
Is this an example of "heads we win, tails you lose, and we're peeking at your hole cards"?
Inquiring minds want to know.
. . . This is what happened. The ability to lend is tied to the stock of a bank. The more the value of a bank depreciate via common stock, the less the bank can lend – that’s the rule. Now when the credit froze and the market went south, the Fed applied the prime rate tool to unfreeze it and drove the rate to zero. But the depreciated value of the banking industry was another problem to be dealt with. So either you go through the lengthy process of changing temporarily the rule or you bypass it by “bailing out” pros like Goldman Sachs. That company was quietly asked to use the Fed funds to resuscitate the market with a special attention to the banking sector.
Originally posted by silent thunder
But these jackels manning the green-felt table these days have proven that the system is broken because it is fundamentally manipulated and it has lost its FAIRNESS: something that hallowed saint of capitalism Adam Smith actually singled out as an essential value of the system.
Originally posted by dolphinfan
The way to address this/these issues is through regulation and tax policy. I hate taxes but would not be adverse to a very high tax on this kind of activity to the extent that we continue to allow it to occur.