Goldman's Trading Record Is Less Than Meets The Eye

Goldman Sachs did not have a losing day last quarter in its trading operation. I have read many conspiracy theories around the blogosphere about how Goldman achieved this feat. Most either say Goldman knows where the market is going because they get to see all the customer's orders or that they manipulate the market. The truth is a lot less impressive.

A lot of what Goldman classifies as trading is just customer order facilitation. For instance, if a customer wants to buy a large number of options they can't go directly to the exchange, so they go to the Goldman derivatives trading desk. Goldman then sells them the options and hedges out the risk. Goldman makes a small spread on the trade and that counts as trading revenue.

Goldman is also a bond dealer and that is a license to print money. The corporate bond market is a dealer market. A buyer and seller cannot come together as there is no corporate bond market so they have to go through a dealer. It is inexplicable why in this day and age of technology there is no corporate bond market that bypasses the middle man but that is the case.

With a steady stream of income from these and other customer trade facilitation businesses the company gets a huge head start every day on trading revenue. I am certain that the pure prop desks have a much lumpier record.

3 comments:

Onlooker said...

Well said Tsachy. I'm very much NOT a Wall Street type nor in the finance industry at all. But I know just enough to realize that all this "trading" that they've been credited for being so successful at over the last year is no what most people think of when they hear this; as you've outlined here.

But it's a lot more fun to hate them thinking that they have a 100% record of slinging stock trades around and moving the market where they want it to go, etc.

And it's also interesting that I haven't seen anything from GS to disabuse the public of the notion that they are stock trading monsters who never lose. Me thinks they may be reveling in that image, although that may change soon enough.

Interesting open to the market this morning, with gold up near it's all time high and stocks taking a big hit. It is a scary market, and I'm largely in cash now with a good chunk of miner positions (happily today), as I've said before.

PJ said...

True enough, but their biggest order book has been the Federal Reserves $1.5 trn MBS buying program, and they've been able to front-run that big time.

They had their best quarter ever in Q1 because that was when they sold at peak prices to the Fed securities they bought in Q2/Q3 last year at much lower prices.

They may still be booking profits in Q2, since many Fed purchases are still closing, but by Q3 I bet their performance is quite a bit weaker.

Onlooker said...

No doubt PJ. They've definitely been the recipient of large amounts of money from the MBS business and bonds in general; largely thanks to Uncle Sam and the Fed.

But the public (and all too many blogs) still run with the impression that it's all being done in the stock market, which is far from the truth.