CNBC and others are reporting that not only is Goldman Sachs still engaged in massive levels of proprietary trading, but that some of that trading appears to be little more than computerized front-running designed to cream off some profit from its customers’ trades. Now it seems one of those computer programs (called “algorithms”) has run amok in the markets and caused a mini “flash crash” across a number of equity options contracts.
Goldman says over and over that they “facilitate customer order flow.” That was one of their claims for why they couldn’t stop trading commodities. It was also one of the many reasons they claimed the Volcker rule would destroy (their) market making, etc.
Humans front running an actual order is illegal. Computers front running an actual order is illegal as well, at least as Better Markets has repeatedly argued to the regulators, who appear to make a nonsensical distinction between humans and computers when it comes to abusive and/or illegal practices.
A grey area may be front running an anticipated order, which is unethical and not something Wall Street wants its clients to read on the front page of the papers. But, given that its wrong, takes advantage of privileged access to information, takes advantage of clients, counter parties and investors, as well as being terrible for the markets and market confidence, we believe that this type of predatory conduct is also illegal and the regulators at the SEC and CFTC should stop it.
What makes this type of routine predatory market conduct all the more unacceptable is Goldman Sachs’ claim that it is just doing God’s Work by “helping” their customers, when they are really only helping themselves to their customers’ money. And, never forget Goldman CEO Lloyd Blankfein’s Senate testimony where he carefully distinguished between clients, counterparties and customers. While they might have a duty of some type to clients, they have no duty but to maximize their own profits and self-interest over their counterparties. The ambiguous term “customers” is often used to confuse the issues and allow the big banks to make all sorts of claims that are inpplicable to one or the other, while leading people to think they are acting in their clients interests when Wall Street sees them just as a counterparty .
Blankfein has also publicly declared that the firm no longer engages in pure proprietary trading. This story, like so many others, makes that pretty hard to believe right now and doesn’t’ seem supported by the facts.
The Volcker Rule, part of the Dodd-Frank financial reform law, is supposed to prohibit proprietary trading by banks like Goldman Sachs. But, the rule is currently in limbo as regulators attempt to grapple with the hordes of Wall Street’s lobbyists delaying, distorting and possibly ultimately eviscerating the rule.
The regulators also have authority to go after computerized front running through their anti-disruptive trading powers. But they have so far been inexplicably reluctant to go after them, including the worst offenders. Until they do so, main street will continue to be ripped off by large, untamed Wall Street banks with the technology and resources to make our financial markets one enormous rigged game.