Are markets changing?

I was curious the other day to read that Goldman Sachs returned a June quarter profit of USD$2.7 billion (Some reports say USD$3.4 billion):

Goldman said trading income nearly doubled from a year ago to $10.78 billion while its equity underwriting business produced record revenue of $736 million. Goldman's traders thrived in an environment of wide price swings, robust demand and fewer rivals.

Now that's fine and good, for traders to be making profits in random markets.

But we have to remember that Goldman Sachs is not just your ordinary bank with a back-room trading setup.

No - Goldman has an advantage over other traders, in that it has a unique software operation:

The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.

So they get in first ... well before the rest of the banks, and most certainly well before Janet and Nigel on their home computer get a whiff of a trade setting up!

Goldman May Lose Millions From Ex-Worker?s Code Theft (Update3) - Bloomberg.com

July 7 (Bloomberg) -- Goldman Sachs Group Inc. may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft -- the largest breach at Goldman Sachs -- poses a risk to U.S. markets (and) that New York-based Goldman Sachs may be harmed if the software is disseminated.

“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, according to a recording of the hearing made public yesterday.

Since this story broke on July 7th 2009, very little has been said about it. Goldman may have bought insurance that would protect their good name when any of the brown stuff hits the spinning thing:

Congress Has 43,457,362 Reasons to Help Goldman Sachs - ABC News

So ... what has the above got to do with the subject: "Are markets changing?"

Read on my friend!

"Congress Has 43,457,362 Reasons to Help Goldman Sachs

...The embattled Goldman Sachs investment banking firm and its employees have spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington...

The bailout legislation, proposed by Treasury Secretary Henry Paulson, reportedly led financier Warren Buffett to put $5 billion into Goldman Sachs because he felt the government would act to solve the financial crisis.


In a statement, Buffet expressed confidence in Goldman Sachs. "It has an unrivaled global franchise," he said, "a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Though he did tell the Wall Street Journal that if the government fails to act that his investment in Goldman would "get killed, and so will all our other investments."
http://abcnews.go.com/Blotter/Blotter/story?id=5891663&page=1



That said imo the more things "change" the more they stay the same.

23% annualised return on capital of the US treasury. not bad for the taxpayer at all is it.

What has Goldman Sachs to do with the nature of trading?

Ingot54 said:

...Goldman Sachs returned a June quarter profit of USD$2.7 billion ...

Goldman said trading income nearly doubled from a year ago to $10.78 billion ...

The Financial Institution has ... a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades ... capable of quickly obtaining and processing information regarding rapid developments in these markets.

Goldman Sachs Group Inc. may lose ... if software ... gets into the wrong hands ... Aleynikov’s alleged theft ... poses a risk to U.S. markets ... if the software is disseminated. “ ... there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways ...”

Click to expand...

Now I'm not big on conspiracy theories, but ... I am not so naive as to believe that this is all part of the school picnic either.

Why has GS felt the need to support certain congressmen to the tune of USD$43.5 million over the years? In whose interest is it that these people continue to get elected? Why has this issue gone to ground since the story first broke? Why have financial journalists NOT gone for this story like a terrier after a rat?

Am I the only one to think that there is something going on with the world of trading that "someone" is not telling Nigel and Janet, as they sit around their home computer, scratching their heads in bewilderment?

Since the turn of the century, Mathematicians and Physics masters have participated in a race to develop an algorithm that will fully automate trading. You know the story ... throw enough money at something and you can achieve anything.

GS were reported to have developed such an algorithm in 2005. Indeed, "The Economist" reported in April 27th 2006 - Goldman Sachs | On top of the world | Economist.com - that GS made USD$33 billion - $82 million each day - through its sophisticated automated trading robots.

In case you think GS limit their "trading" activity strictly to Wall Street ... think again. This is world-wide - if you have a stock exchange ... GS is there.

If you are reading this far, then to grasp the essence of what this thread is really about, you MUST READ IN FULL the article at this link:

http://www.themistrading.com/articl...ic_Equity_Trading_on_Wall_Street_12-17-08.pdf

Is this something we need to be concerned about?

Not ... not if you are a position trader, or possibly as short as End-of-Day trading, but anything shorter than that ... then I would say you are trading "dirty data".

It could be argued that this is just "natural market forces" at work. You could say that GS is just another legitimate market participant. I don't disagree ... not agree. But let me leave you in NO doubt - YOU ... and I ... are NOT in the same league as GS and the likes of the now-defunct Bear Stearns, Lehman Bros and the Deutsche Bank.

So... back to the question which is the subject of this thread ... "Are markets changing?"

There is no doubt now that markers ARE changing. The artificially high volumes created by the exchange of ownership of a parcel of shares which are bought and sold maybe three times in less than half of one second, is a reality.

If you are using TA or simply your own eyesight - to form an opinion as to the rise of fall of the chart of your favourite equity or currency or commodity, then you can probably throw the short-term TA right out the window. What you are looking at has as much to do with supply and demand, or indeed support and resistance, as the Little Red Hen has to do with Star Wars.

Short term traders - scalpers if you like - are operating in an artificial market, run by algorithms which have about as much respect for TA as a Mack truck has for the chicken crossing the road! You can not fight these things on their terms.

Have these trading bots cost you any money ... given they operate in the lower fractions of cents (mostly)?

Think about the last time you were stopped out of a position at your Stop Loss Order, only to have the market reverse at that point, and rally in the oppositie direction.

More soon ...

I think your missing the beuaty of ta its not just support and resistance, its pattern recognition so even in changing markets if the old patterns fail the high failure rate will create new reliable patterns and set ups.

I believe these algos do us a favour in providing the liquidity we need as a mass to exit our positions at any price point.

nothing scarier then a widerbid/ask spread because volume has dried up.

Some history ...

Ingot54 said:

Am I the only one to think that there is something going on with the world of trading that "someone" is not telling Nigel and Janet, as they sit around their home computer, scratching their heads in bewilderment?

Have these trading bots cost you any money ... given they operate in the lower fractions of cents (mostly)?

Think about the last time you were stopped out of a position at your Stop Loss Order, only to have the market reverse at that point, and rally in the oppositie direction.

Click to expand...

When I began electronic trading in 2004, CMC Markets were operating in Australia, as were Deal-4-Free. IG Markets were just getting their boot in the door in OZ (and have since then mainly blown all of the opposition out of the water with their "clean" approach).

CMC had many complaints that CFD traders were the victims of "Stop Loss Cascades". I think I recall one happy trader who had his position restored, but he was only one. Unknown others may never have realised this was an electronic "blip" contrived by unscrupulous scum, designed to manipulate them (sucessfully) out of their holding.

Let me recall for you, one particular "blip" to which I am referring generally ... and specifically!

I remember one particular day, that Macquarie Airports Ltd (listed as MAP on the ASX) experienced a "spike down" in trading.

On Tuesday 15th Feb 2005, MAP traded 4.05 million shares. The price opened and closed for the day at $3.41.

The price had gradually risen throughout January 2005, and now, after peaking at $3.58 on 3rd February, it was in a gentle decline.

On Wednesday 16th February 2005, the price opened at $3.40 - gapping down by one cent ... quite normal and acceptable. But inexplicably at around lunch time, the price suddenly spiked low to $2.95, and within seconds, had recovered almost all of its losses.

In those brief seconds, untold shares changed hands ... Stop Loss orders were triggered, forcing the price down to its nadir on the day. Within an electronic nanosecond, contingent "buy" orders were triggered, rocketing the price right back up to within 2 cents of the "sell" trigger.

The days' volume - more than 4 times the average - 17 million shares approximately - and MAP went on to close the day at $3.30 ... down only 3%. It amounted to a 13% sell-off and a 15% recovery all in the space of seconds.

On Tuesday 31st May 2005, MAP again reached a peak of $3.65, and heavy selling on huge volume of 29.5 million, saw many shares again change hands. The volume on Monday 30th May ... just 6.9 million shares.

Thus was born the Electronic Stop Loss Cascade and although many complaints were lodged, only a handful of clients had their positions restored. Many - like the Janet's and Nigel's in our story, never got any recompense, and if they had no access to intraday charting, would have been none-the-wiser that they had been robbed of their holding in MAP.

Fast Forward to the present day ...

One thing to keep in mind tho is eg Marty Schwartz going on about program trading in the 80's in Market Wizards.

Well, he is still around making money in spite of his fears that thing might have changed.

Or take the fact that GS isn't alone, pioneers in high frequency trading were Simons and his Rennaissance hedge fund, Griffin with his hedge fund Citadel, etc.

The more engage in the same activities the more it all cancels itself out, doesn't it.

At the end of the day I don't believe a chart from today - which just shows how price acts - looks any different than a chart from 10 years ago.

Just take the guy who nicked GS's algo...

He had that under his control for one month ???

How many others have that by now ???

He was going to take that with him to his new employers.

And who are they ?

Ex-employees of Griffins fund Citadel.

GS has sued the guy who nicked it's code.

Citadel has sued it's ex-employees for nicking Citadels codes.

Just one big merry circus.

It's really important to understand I believe that the moment more than one person is privy to some info the mere notion of keeping anything secret is plain impossible.

How many programmers or other employees of funds etc engaging in high frequency trading know exactly how the strategy works ?

Also, high frequency trading is not by any means rocket science or any more fail safe or profitable than any other strategy is, is it.

If GS were so successful they wouldn't need Buffets billions or the government to bail them out, they'd own the world, which clearly they don't, right ?


"Goldman Sachs leads hedge fund stragglers

William Hutchings
07 Jan 2008

Goldman Sachs’ flagship Global Alpha fund recorded the biggest loss of almost any hedge fund last year as the industry struggled to match the double-digit returns of 2006.

The Global Alpha fund, which started last year with $10bn (€6.8bn), made an estimated loss of 39%, according to an investor in hedge funds, who has seen its initial results for December."

Continued...

Not proof of having greater competence than any other player in the markets right ?

It ain't rocket science:

"High Frequency Trading

The drastically reduced cost of electronic trading has made a huge variety of new and different trading strategies feasible. Led by Jim Simons' Medallion Fund, the high frequency hedge fund category is now the most profitable on Wall Street. One industry watcher predicts this type of trading will reach 50% of total stock exchange volume by 2010.

In high frequency trading, you analyse trends in tick-by-tick data and make buy / sell decisions out of it."

Richard Olsen - founder of Oanda - has written a book on the subject:

Amazon.com: An Introduction to High-Frequency Finance (9780122796715): Michel M. Dacorogna, Ramazan Gençay, Ulrich A. Müller, Richard B. Olsen, Olivier V. Pictet: Books

Also let's not forget that stuff like front running and market manipulation on a scale far surpassing what goes on today has been a fact in markets ever since Livermore wrote his classic Reminiscences of a Stock Operator without letting that stop him or many others making a fortune.

Has it become impossible to make money trading today ?

It hasn't, has it.

Salient read by Linda Raschke, spot on imo:

"Discretion is back in...

But, let's not call it discretion!

I was reading a daily hedge fund news letter, and here is a direct quote:


"CHARLOTTESVILLE, VA (HedgeWorld.com)-Since 2005 and especially since last year, quantitative fund performance has not been as good as it used to be. Now that many have come to realize that mathematical models are not flawless ("Duh" - my own injection), a new trend in asset management is emerging: integrating the human touch of a fundamental approach into the blind computer-driven process..."


So...let's see......we come up with computer driven models to take the emotions out of trading (the human element), in the hopes that we can arb a statistically positive expectation. Firms hire dozens of PHds to dissect the same time series data and any edge is quickly arbed out. Not to mention that the future does not unfold in the same way as the past which is what the models are based on.

Now, let's bring back the human touch we tried to get rid of in the first place - this human touch now allows an individual to "override" the computer driven signals. (Of course, this individual will always know in advance which signals will work and which will not). So...what exactly is the point?

There is definately an industry bias against terms like "traders", "technical analysis", "discretion"....but for good reason as well. Too many technicians have been negligent on focussing on risk concepts and instead overemphasize "calling" the market. Who wants to allocate large sums of money to a group who can't quantify risk? How is one supposed to know what type of leverage to use?

Definately a Catch-22. But, it still made me laugh to see that the "trend" is now using human judgement integrated with computer driven models....Let's just call a trader a trader...."


Discretion is back in... - Linda Raschke Blog

I'm all in favour of any hanky panky that's a clear manipulation or illegal or a unproportionate distortion of the market place being dug up and curtailed.

That is what we need regulators and competition for, as the market itself left to it's own devices clearly cannot control itself.

But I'm also saying we don't need to fear that trading for a living is going to come to an end any time soon, my simple trend trading works as well as it always has.

But it's good that you're putting out posts like this, because it just reinforces the need for constant vigilance.

Ingot54 said:

When I began electronic trading in 2004, CMC Markets were operating in Australia, as were Deal-4-Free. IG Markets were just getting their boot in the door in OZ (and have since then mainly blown all of the opposition out of the water with their "clean" approach).

CMC had many complaints that CFD traders were the victims of "Stop Loss Cascades".

Click to expand...

But that's not real trading as it's not taking place on real markets.

Those firms are the exact same bucket shops you had back in Livermore's day.

"Trading" with them you are not trading on markets price as when you're trading futures on a regulated exchange where everybody trades off of the exact same price, with CFD etc firms you're trading on the price the bucket shop chooses.

Elefteros said:

I think your missing the beuaty of ta its not just support and resistance, its pattern recognition so even in changing markets if the old patterns fail the high failure rate will create new reliable patterns and set ups.

I believe these algos do us a favour in providing the liquidity we need as a mass to exit our positions at any price point.

nothing scarier then a widerbid/ask spread because volume has dried up.

Click to expand...

With all due respect ... I have been around awhile.

You may need to consider whether you have any opportunity to participate in their electronically-created volume, given that it is initiated and terminated in less than3 nano-seconds.

Did you enter your buy/sell order at that moment?
At that level?

You are very good with the trigger finger if you did, or very good at guessing the level at which these volumes are/would be created.

It is clear you did not read the document I listed earlier as ESSENTIAL READING for participants in this thread:

http://www.themistrading.com/articl...ic_Equity_Trading_on_Wall_Street_12-17-08.pdf

Please also read the example I have just posted about MAP above.

It is there to demonstrate that the manipulators of the market have become ultra-sophisticated now, and do so with the blessings of the governments wherever they operate (and that is everywhere there is a market).

In the pursuit of profits, little people are in the way ... but remain necessary fodder for the sharks. Institutions too are mugged by these algorithms - institutions which one day you hope to get your pension or your super-annuation from.

While people fail to grasp the truth of algorithmic trading (or even become remotely interested in finding out what it is and how it really works) it will remain impossible for many who trade short-term to make anything from the markets.

Elefteros, I am not flaming you in any way mate, but while you gloss over this by assuming "they" are providing useful volume and liquidity for you, "they" are not in this for your benefit nor mine. "They" are removing $80 million plus from the markets every day ... what is that doing to liquidity?

And they are doing it in a way that you and I have no possible hope of trading toe-to-toe on the same terms.

Please re-think this after reading the article(s) in the afore-going posts.

if you don't like the trade don't put the stop/order in. If you have ANY order in the market it can trade. tough sh1t sunshine.

i am coming at this not from day trading point of view, but if there is a bid/offer and you want to trade; hit the bid/lift the offer. That's how I understand a market to work. don't mess around trying to be smart by bidding as you know the "algos" will be in there before you. Lift it in your size and everyone is happy. you get size done and your counterparty gets a fill on the offer side. happy days.

gooseman said:

i am coming at this not from day trading point of view, but if there is a bid/offer and you want to trade; hit the bid/lift the offer. That's how I understand a market to work. don't mess around trying to be smart by bidding as you know the "algos" will be in there before you. Lift it in your size and everyone is happy. you get size done and your counterparty gets a fill on the offer side. happy days.

Click to expand...

a market maker advising everyone to pay up, unusual... :whistling

gooseman said:

23% annualised return on capital of the US treasury. not bad for the taxpayer at all is it.

Click to expand...

It's sh1t... The govt sold the liquidity/lender of last resort option to the banks for virtually nothing. The American taxpayer got taken for one good ride, IMHO.

arabianights said:

a market maker advising everyone to pay up, unusual... :whistling

Click to expand...

not at all. i am saying there is a bid and offer for a reason. market maker or not

BSD said:

But that's not real trading as it's not taking place on real markets.

Those firms are the exact same bucket shops you had back in Livermore's day.

"Trading" with them you are not trading on markets price as when you're trading futures on a regulated exchange where everybody trades off of the exact same price, with CFD etc firms you're trading on the price the bucket shop chooses.

Click to expand...

The example I gave re Macquarie Airports Ltd WAS REAL LIVE trading.
The bucket shops, as market makers, followed the live market prices, but the actual prices on the market makers platforms were actually FAR worse than the ASX prices.

The ASX has been trading electronically since October 1987, and Stop Loss orders have been available for many years - I used them when trading with Commsec in 2004.

GS are actually trading live on the Stock Exchanges of the world.

Bucket shops would soon put a stop to electronic manipulation of their toys.

Just note the restriction on Fapturbo by GO markets P/L. As soon as it became seen to be a profitable bot, they widened the spreads to knock it out.

I have trading friends who tried to (excitedly) get me into Fapturbo months ago when it first hit the rounds. Now they is no longer trading it because of the wider spreads meted to traders who use it. Check this link:

TopStocks > Forex Trading > GO Markets Restricting FaPTurbo EA

No - we have live bot trading in Australia on the ASX. It is "allowed" under regulation 13 of the ASX Rules of Conduct. But those rules are NOT enforced, as it is very easy to show the trades are "legitimate" settlings. GS are doing the exact same thing in the markets ... I am unsure as to what regulations, if any, exist to cover the activity.

Bucket Shops, or Over the Counter Market Makers, would never allow such a draining of their capital in this way.

My point is that GS are taking liquidity out of the markets - wherever markets exist - unopposed, and unregulated - as far as we know.

While the practice continues, short-term traders will be dead meat.

Am I wasting my time on this issue on this forum?

Martinghoul said:

It's sh1t... The govt sold the liquidity/lender of last resort option to the banks for virtually nothing. The American taxpayer got taken for one good ride, IMHO.

Click to expand...

i'm not talking about the rationale of the deal simply the pay off. GS should never have seen the TARP money in the first place.

After all, if a computer code is valuable enough for someone to steal, and critical enough for a Wall Street firm to go to federal authorities to protect, one would think that regulators would want to know why it is so important.

Yet regulators largely have stood by and allowed this secretive corner of the quantitative trading world to grow ever bigger, without mustering up much of a protest.

Computer-driven trading, where complex buy and sell orders are completed in fractions of a second, now account for 73 percent of all daily stock trades in the United States, according to the Tabb Group, a financial services research firm. Tabb also estimates that the 300 securities firms and hedge funds that specialize in rapid-fire algorithmic trading raked in some $21 billion in profits last year.

Still, there’s little doubt there’s a lot of money to be made from automated trading that relies on complex mathematical formulas to predict momentary price moves in stocks and commodities.

The big fear is that with high frequency trading dominating daily trading activity, it could spark another 1987-style market crash. The doomsayers say that could occur if all these automated trading programs — which operate with almost no adult supervision — begin reacting to the same downward price trends in a stock or commodity. Or high frequency trading firms could worsen a sell-off by refusing to execute trades to protect their own capital, a move that would make it difficult for other investors to quickly exit a falling stock.

Some say there’s already evidence high frequency trading may be playing havoc with the markets. James Angel, a professor at Georgetown University’s McDonough School of Business, says the big end-of-the-day price swings in the major stock indexes that were quite common last fall were probably exacerbated by high frequency trading.

<=========================================================================================>


The prosecutor in the Goldman software-code theft said that the program could be used to “manipulate markets in unfair ways.” He was talking about it falling into the wrong hands. But what’s to prevent Wall Street from doing that?

gooseman said:

i'm not talking about the rationale of the deal simply the pay off. GS should never have seen the TARP money in the first place.

Click to expand...

Even the payoff is sh1t, given the nature of what's being paid for, IMHO... Have you seen the terms of the CIT deal? That's what the govt should get out of the banks...

If you're screwed and have to go to your local Don for a loan, you'd better get ready to pay or say goodbye to your kneecaps.

i believe "they got their faces ripped off" was one expert's analysis of CIT deal

Missing the point again!

gooseman said:

i am coming at this not from day trading point of view, but if there is a bid/offer and you want to trade; hit the bid/lift the offer. That's how I understand a market to work. don't mess around trying to be smart by bidding as you know the "algos" will be in there before you. Lift it in your size and everyone is happy. you get size done and your counterparty gets a fill on the offer side. happy days.

Click to expand...

Gooseman ... this is not about hitting any bid or accepting any offers.

Please read the article at the link provided before commenting!!!

http://www.themistrading.com/articl...ic_Equity_Trading_on_Wall_Street_12-17-08.pdf

It's only 5 .pdf pages - not too difficult to get an understanding of where I am coming from.

You would have understood that the algorithm is creating both the BID and the OFFER at their leisure ... without human intervention. In doing so they are skimming the cream all day long, and when you hit the bid, you don't know that it has been inflated a tiny bit to create a manipulated market.

Same with the offer - you do not see it.

I have evidence of bot trading on the ASX - I can show you lists of trades where parcels of between one and say 23 shares have been hitting the market all day, having the effect of walking the market up or down as the bot is set to do.

The ASX initially denied this, but when many of us from two Australian forums repeatedly asked them for explanations, they finally admitted they are allowing the practice of algorithmic trading, under specific regulations.

Those regulations are flaunted openly, because the practice is only allowed under a one-off set of conditions. yet we now see it going on all day, every day. It is too big for them to reign in now. Further, there are links between the regulator, ASIC and the ASX board - easy to see, and publicly lauded.

You can win if you can spot it in the queue, and work out which way they are influencing the market to run. They can buy in the morning, and sell in the afternoon, or vice versa.

This is not a whinge ... I am simply pointing out to any who have the intelligence to realise that trading is changing.

If traders want to keep their heads in the sand, then that is none of my business, but there are some on the forum who really do wish to get to the bottom of issues, and to understand how they are taken advantage of. Like me, I suspect that normal traders would wish to avoid placing themselves at risk of loss.

In my opening post, I mentioned that GS were worried ... with good reason!

July 7 (Bloomberg) -- Goldman Sachs Group Inc. may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft -- the largest breach at Goldman Sachs -- poses a risk to U.S. markets (and) that New York-based Goldman Sachs may be harmed if the software is disseminated.

“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, according to a recording of the hearing made public yesterday.


If you read the bits highlighted in red, you would have to think: "Why would GS think ANYONE would manipulate the markets, if they themselves were not already doing so ... and with the blessings of those in their pay - links also provided for that belief.

The key word here, is M-A-N-I-P-U-L-A-T-I-O-N.

If there is no manipulation, then no one is harmed., and no one gains an unfair advantage.

Not content to use the rife "Insider Information" to make their millions, GS seem to have gone about creating their own market, which only they have the keys to, via their algorithmic trading bot.

This thing can simultaneously trade every stock, on every market in the world, if they wish to do that. Regardless of whether it is commodity or currency, the fish-markets or stocks - all are vulnerable.