Wednesday, May 20, 2009

Is Program Trading Enabling a Conspiracy?

I love conspiracy theories. The latest one to catch my fancy is that the US government is using Goldman Sachs and its massive capacity for program trading to prop up the stock market. Essentially, Goldman Sachs is using taxpayers' bailout money to fuel buy-sell program trading to support (what should be) an ailing stock market. Fact: Goldman Sachs currently trades almost half of the program trading volume on the NYSE. Fact: 25% of the volume on NYSE is from program trading. Fact: Goldman Sachs proprietary trading (nearly 1bn shares a day)and agency brokerage volume is FIVE TIMES its customer facilitation volume. Fact: Timothy Geithner, Stephen Friedman and Hank Paulson all worked for Goldman Sachs.
The mysterious Tyler Durden said in his Zero Hedge blog last month: "The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this."
See? A great conspiracy theory if I ever heard one.

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