Tuesday, July 14, 2009
Spinning Gold out of Straw
Goldman Sachs' second quarter earnings jumped by 65% led by staggeringly good results in its trading of fixed income, currencies and commodities. The bank made excellent use of the cheap money available from the Fed, and spun the straw into golden profits. I have no issue with this, that is what inventive money makers do. But the general public is outraged that taxpayers' money should be spun into huge bonuses for greedy bankers. This is the tip of the iceberg. If the general public knew what the banks were up to with their high frequency trading they would flip. According to Tabb Group high frequency traders now control almost 75% of US equity market activity. Tabb says they generate over $20bn in profits, and clearly Goldman's gets the lion's share of this. Although these firms represent only 2% of the 20,000 US trading firms they do three-quarters of the business in US stock markets on a daily business. This is a staggering figure and shows just what a house of straw the listed markets really are. This is where the bulge bracket banks are really spinning the gold. The head of JP Morgan's algorithmic product desk Carl Carries wrote in the Journal of Trading that high frequency traders 'feast upon the signals of others' and that dark pools are the place to be to avoid detection. Few retail and even institutional investors have access to dark pools, although their brokers may. And it is unlikely that they are getting good fills. It is more likely that anyone who is not a high frequency trader who is dipping his or her toes into the stock market is getting stung. I wonder if Tim Geithner is looking into this?