We might be witnessing the first casualty of the Flash Boys backlash. Goldman Sachs is said to be considering closing its dark pool Sigma X. The question in my mind is why. There are a number of potential reasons, but here's what I think is most likely (in order of likelihood):
- They're responding to customer complaints. - Now that the cat's out of the bag, I imagine their phones are ringing off the hook with pissed off clients whose orders have been used to enrich freq traders. Whether you think it's front running or not, the guy running the pension fund in Topeka probably does.
- Their tech is way behind the competition. - This is something that came up in the book. If you believe Sergey Aleynikov (via Michael Lewis), Goldman's IT infrastructure is a real slapdick affair. Aleynikov likened it to constantly patching code with open source Band Aids. Rather than investing in an infrastructure likely to be squeezed by collapsing margins, Goldman might just be tapping out.
- They're sheltering from the coming storm. - They're no dummies, and they can see the writing on the wall. Investigations are already being opened into dark pools and high frequency trading. If they have just been running an HFT rape room (whether knowing it or not), it makes sense to get out in front of it and say, "Look at us. We figured out it was crooked and shut it down."
Maybe it's a combination of all three. Or maybe none of them. What's interesting about it is that this might be the first domino. What other bank is going to look at this and say, "Well, Goldman couldn't make a horse race of it, but I'll bet we can!".
Or maybe, just maybe, they're going all-in on IEX. Gary Cohn even mentioned the upstart exchange in an internal memo a couple weeks ago:
In an internal document sent to employees the same day the piece was published advising them on how to address questions about it, Goldman highlighted its relationship with an upstart trading venue called IEX Group Inc. In the message, Goldman said "While we think that a regulatory response may be needed to address these market structure issues, it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes in our U.S. dark pool, Sigma X."
So what do you guys think? Are dark pools going away? Is IEX the exchange of the future? The times they are a-changin'.
They've probably been considering it for some time, especially as revenues from the venture (and industry wide) have cooled off. GS likes to do things first and better than everyone else, so they probably timed the start of the Sigma X unwinding around the release of Flash Boys. Cohn's letter was just a marketing tool to tell the rest of the street that they're trying to be the most reasonable/responsible out there by switching any internal dark pool investments to IEX. As revenue dries up in custom dark pools across the banks, I'm sure more will follow suit.
I'd be inclined to say the last option. Shut down dark pools - all in IEX - watch HFT become a scapegoat/strawman and when the market implodes from end of QE, in the next year or two see how it all comes together.
Just another example of how flash traders are running mom and pop little guys out of business.
LOL.
I didn't know that my mom was a little guy.
Just LOL
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@"Edmundo Braverman", I'm not sure I follow the logic of your suggestions here:
Just so I have this right: GS receives inbound customer complaints about being "front-run" by HFT, so they decide to shut down their dark pool, a product specifically aimed at avoiding being "front-run" by HFT? Wouldn't we expect the opposite: customers, upset by the idea of "enriching HFT", wanting to move their order flow into dark pools?
So, in this scenario, GS, hindered by their sloppy HFT infrastructure, decides to shut down its dark pool and keep the HFT platforms?
In the wake of those first two suggestions, this one surely seems the most sensible, but I'm pretty unmoved by the idea that GS is trying to preempt regulatory change for PR purposes.
I'm much more inclined to accept a simpler explanation: there have been suggestions that dark pool volumes may have plateaued, there is increased regulatory scrutiny and reporting requirements from FINRA, the profitability of equity markets trading may be fairly limited relative to other products GS offers, they have an existing relationship with IEX, etc., so they decide to move in a different strategic direction.
You do realize that IEX is, itself, a dark pool? If dark pools go away, so to does IEX.
Suffice it to say, if your idea of "times a-changin'" is having order flow move from Goldman's dark pool to IEX's dark pool, we have different ideas of the word "a-changing'".
You need to read the book.
It is unlikely, I imagine, that a pop culture book about HFT will so affect me that I renounce the distinction between "dark pool" and "HFT". I cannot understand how Lewis' book - which champions a dark pool, viz., IEX as a combatant against HFT - would lead Goldman to shutter its dark pool. The logical conclusion of his criticism of HFT is that more order flow should be directed to dark pools, since they avoid the "front-running" of HFT, not that dark pools ought to be shut down.
As I see the likelihood of me reading Lewis' book anytime soon, I hope that you will enlighten me: what am I missing here?
The one thing that confuses me the most: why can't GS and other banks just shut out the HFT clients from their dark pools?
Sure it would decrease liquidity but isn't that better than completely shutting down sigma x?
Whatever the case, this is terrible publicity and news for electronic trading groups..
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