Beware of the Slippage Factor!
It seems that last week, Goldman Sachs was credited with the creation of an entirely new definition for the concept of "slippage".
Who leaked the story? Apparently Matt Goldstein at Reuters did.
The accepted definition for “slippage” is the difference between the ordered price and the amount it eventually costs. Considering what I’m about to share with you this couldn’t be more vague?
Apparently Goldman Sachs has invented a new definition for the concept of "slippage". At Goldman Sachs it’s called being 'risk averse’. Most would call it “let's trade in front of everyone else. Get filled first and what's left to fill is what anyone else gets”. Why? Because Goldman Sachs is 'risk-averse'” of course.
Now, let’s not just pick on GS for the fun of it. But last week, GS supposedly was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.
What exactly is "quant trading"? Well Quantitative (or quant, for short) trading encompasses investing techniques employed by sophisticated, technically advanced hedge funds and so called prime brokerages.
Quant use ultra-fast computers to predict the most recent trading patterns from large amounts of live financial data. A "quant," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.
So is quant trading illegal? Generally, NO. But the way Goldman Sachs coded the program seems suspicious at the least. It has been reported that GS represents around 60% of program trading.
When you trade from your desktop, your computer program sends your offer to buy or sell to the exchange through your broker. 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.
Apparently the GS program can intercept the FIX messages being sent to the exchange from large institutions, interpret what was is being bought or sold, and then put GS’s trade in ahead of those trades for the same securities. The institutional trade coming in afterwards may or may not get filled, depending upon how large GS's trades were. This no doubt will also affect how your order is filled.
Could this really work in a modern marketplace? Let’s say you wanted to sell 10,000 shares of IBM. GS’s quant program would supposedly intercept the message, and sell 10,000 ahead of you. If there were buyers for only 12,000 IBM shares at that price, GS would sell its 10,000 and you could only sell 2,000 leaving you with 8,000 shares still to be sold.
Ccreative Slippage
What is now being investigated is whether GS illegally used security-access codes to acquire the messages prior to "transaction_commit" timepoints at the NYSE. Although we are talking about a nanosecond trading advantage for ultra-high-speed computers, a nanosecond is a lifetime and profits can be made without much risk. It’s that new buzzword Rick Aversion again.
So how was GS found out? Well quant trading recently hit an all-time high of 48.6% of all NYSE trading. And since GS represents 60% of all program trades ...well, you do the math. The NYSE of course keeps close tabs on program trading and was surprised to find out that nearly half of all trades suddenly came from program trading.
Now wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome disaster? One might even be tempted to conclude that GS makes money the old-fashioned way ... by stealing it.
Let’s 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.
No wonder so many Hedge Funds are now staying with the Chicago Mercantile Exchange (CME) trading commodity futures.
Who leaked the story? Apparently Matt Goldstein at Reuters did.
The accepted definition for “slippage” is the difference between the ordered price and the amount it eventually costs. Considering what I’m about to share with you this couldn’t be more vague?
Apparently Goldman Sachs has invented a new definition for the concept of "slippage". At Goldman Sachs it’s called being 'risk averse’. Most would call it “let's trade in front of everyone else. Get filled first and what's left to fill is what anyone else gets”. Why? Because Goldman Sachs is 'risk-averse'” of course.
Now, let’s not just pick on GS for the fun of it. But last week, GS supposedly was very quietly told that it could no longer do computerized quant trades at the New York Stock Exchange.
What exactly is "quant trading"? Well Quantitative (or quant, for short) trading encompasses investing techniques employed by sophisticated, technically advanced hedge funds and so called prime brokerages.
Quant use ultra-fast computers to predict the most recent trading patterns from large amounts of live financial data. A "quant," now refers to programmers who code quantitative-analysis algorithms for insider computer trading.
So is quant trading illegal? Generally, NO. But the way Goldman Sachs coded the program seems suspicious at the least. It has been reported that GS represents around 60% of program trading.
When you trade from your desktop, your computer program sends your offer to buy or sell to the exchange through your broker. 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.
Apparently the GS program can intercept the FIX messages being sent to the exchange from large institutions, interpret what was is being bought or sold, and then put GS’s trade in ahead of those trades for the same securities. The institutional trade coming in afterwards may or may not get filled, depending upon how large GS's trades were. This no doubt will also affect how your order is filled.
Could this really work in a modern marketplace? Let’s say you wanted to sell 10,000 shares of IBM. GS’s quant program would supposedly intercept the message, and sell 10,000 ahead of you. If there were buyers for only 12,000 IBM shares at that price, GS would sell its 10,000 and you could only sell 2,000 leaving you with 8,000 shares still to be sold.
Ccreative Slippage
What is now being investigated is whether GS illegally used security-access codes to acquire the messages prior to "transaction_commit" timepoints at the NYSE. Although we are talking about a nanosecond trading advantage for ultra-high-speed computers, a nanosecond is a lifetime and profits can be made without much risk. It’s that new buzzword Rick Aversion again.
So how was GS found out? Well quant trading recently hit an all-time high of 48.6% of all NYSE trading. And since GS represents 60% of all program trades ...well, you do the math. The NYSE of course keeps close tabs on program trading and was surprised to find out that nearly half of all trades suddenly came from program trading.
Now wasn't it Goldman Sachs that received $12 billion in bailout money to help it overcome disaster? One might even be tempted to conclude that GS makes money the old-fashioned way ... by stealing it.
Let’s 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.
No wonder so many Hedge Funds are now staying with the Chicago Mercantile Exchange (CME) trading commodity futures.
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