My underlying question would be: Are they a symptom of a systemic flaw (basically a parasite) or does their role in the financial ecosystem somehow justify that kind of profits?

They are 'market makers'. If you're a big {pension, real estate, rrsp}fund and want to make a trade, say a purchase, you need to call your trader directly. The trader will sell you some of their own (if they have it on their books), or will contact other people who they think may have extra supply on your behalf.

They are the 'grease of the economy'. In theory, it makes markets run smoother, which leads to greater efficiencies for everyone, and makes the world a better place.

(in theory)

On that theme - would you say that it is more noble to be a mechanic than programmer, and more noble to be a farmer than a mechanic?

These aren't sarcastic rhetorical questions, I really want to know. From where I'm standing, it seems that Wall Street is deeply corrupt, and Goldman's success comes from their unparalleled ability to turn that to their advantage. Reasonable and more knowledgeable people may disagree, and many do (eg, Warren Buffet). But I'm puzzled by those who get angry at the suggestion that Goldman in particular and Wall Street in general are anything less than paragons of virtue.

Surely this is a legitimate topic for discussion. If these guys screw up we all suffer, and there are a lot of people suffering acutely right now. I'm wrong, fine. I'm willing to be educated. But I don't appreciate being dismissed as a moron.

You do know that Buffet has a $5 billion investment with Goldman Sachs? Of course he would defend them.

What's interesting about Buffet's position is that - aside from the Goldman investment - his stated philosophy and track record are at odds with Wall Street. See, for example, his criticism of hedge funds, and his preference for investing rather than trading. Is his involvement with Goldman a departure from his usual MO?

first he calls derivatives "weapons of mass destruction", next thing you know he's loading up on index options!

I am not against intelligent critique of GS, the government, whatever. In fact, such critique is required to ensure the proper functioning of the system, closing the feedback loop and providing the required checks. What I am against is Pavlovian unintelligent critique, and one sees a lot of that when the topic is Wall Street. And even though a lot of HN'ers are deeply knowledgeable about Finance, the majority is clearly clueless. This is HN, after all, not NucPhyn.

I am no GS'er, nor am I their useful idiot. They are merely maximizing their utility through whatever means necessary. The one difference between me and you guys is that I don't claim that I am a saint who would be uncapable of doing what GS is doing if I were on their shoes. It's easy to be full of virtue when one does not have the chance to do any evil. Business is hard, but the players in the financial market are voluntary participants. If GS has an information edge and rapes everyone else on a regular basis, maybe the prey should leave the market. It's a winner-take-all scenario, whether we like it or not.

Change the regulation, they will find a new way of gaming the system. Increase taxes, and they will find a loophole. The only way of taming these hyper-motivated people is by eliminating all economic freedom, and I oppose that on ideological grounds. So, I am happier to have a market where GS pillages their counterparties than to have the alternative scenarios. No one said that the best of all worlds was ever attainable. It sucks. One could try to change human nature, but we all know how that worked in the past...

Hardly the definition of a well-functioning market. Pretty much all economists agree that monopoly outcomes are a bad thing.

What I find unsettling about this report is the supposed consistency of GS - they came out ahead of the market every single day? Really? The phrase 'too good to be true' springs to mind.

http://en.wikipedia.org/wiki/Pirate_Capital_LLC

speaking of ideology, the premise of Free Market is that government and society at least try to prevent fraud.

I'm myself not sure that GS is fraud, but maybe that's how their business of front-running and "intelligent market-making" will be defined by their former clients and society in few years from now.

Anyone who makes more than 25M per day can take a little heckling, if you ask me.

Well... you're hired!

The above assumes that all attacks are baseless.

The SEC charges appear to be trumped up but GS was a major beneficiary of the AIG bailout. GS should lose money when it's counter-party risk assessment is wrong, as it was in the AIG case.

You might be interested in some remarks from a friend of mine, whose identity I prefer to keep private but who has given me permission to repost. He is a senior VP of derivatives trading at another Wall Street firm, albeit a much smaller one than GS, so weight as you feel appropriate.

Goldman will settle the civil suit. The SEC has them bang to rights on Rule 10b-5 violations, and anyone familiar with securities regulations knows this. They will claim that they are going to settle because it's in their shareholders' interests.

They've been trying to spin this by saying that they're market-makers. The WSJ had an editorial on Wednesday arguing this (probably assisted in the writing by GS), the execs said as much in Washington, and a friend of mine who works there, probably repeating an internal memo, made the same argument. It goes like this - if you buy GE stock and it goes down, you can't sue the NYSE or the broker.

The reason it's crap is that there is a huge difference, both conceptually and from a regulatory standpoint, between origination/new issues/primary market on the one hand, and secondary market trading on the other. GS are arguing as though the former is part of the latter. It isn't.

http://www.sec.gov/Archives/edgar/data/886982/00009501231004...

(net revenues are in millions)

What is it about this particular time that has allowed them to do so well? (and where can I get me summa that!) I guess we won't know since we don't work there...

Seriously - the stock market is risk based. If you aren't taking risks then you're not going to be in those areas that make the most money. Sure, you want to make more than you lose, but if you never lose any money then you aren't taking enough risks to really strike it big by finding something nobody else thought would produce good returns.

I don't just vote on whether I agree or disagree, I vote on whether I want more comments like that on HN, and I don't want more people quoting the linked articles without adding anything. If I want to read the linked article, I know where to find it.

paranoia

Front running your client's trades is completely illegal. Front running on an exchange is not even possible unless you hack the exchange computers (also illegal). The first person to place an order at a given price on a given exchange wins.

The only sort of front running which is legal is guessing ahead of time what a third party might do and placing orders before they actually do it. I.e., you might guess that Apple plans to buy Yahoo and buy Yahoo shares in anticipation of this event. Do you have evidence GS has done this?

For good measure read also Hellen’s article [2].

[1] http://www.youtube.com/watch?v=V5G7zBWMpIs&feature=playe...

[2] http://www.huffingtonpost.com/ellen-brown/stock-market-colla...

In the old days, market makers could potentially front run by physically ignoring the proper market ordering (i.e., in a physical trading pit), perhaps when the broker ahead of them in the queue is distracted with another trade. This is completely impossible in an electronic exchange. There is no "front run this trade" message in either FIX or OUCH (the wire protocols used for trading).

http://en.wikipedia.org/wiki/Regulation_NMS

The only time this rule fails to apply is under extremely high latency scenarios. For example, last thurs when nasdaq left the machines on but NYSE switched to human matching, RegNMS was suspended.

http://www.google.com/search?q=goldman+sachs+front+running

[1] I'm undecided about whether I think front running is fair, but flash orders are a separate issue.

I'm undecided about whether I think front running is fair

This is a red flag that no one here should be asking you for moral advice.

Flash trading: Joe wants to buy shares at price 10 or better and places an order on NYSE. The best ask on ARCA is 9.99, but the best ask on NYSE is 10. NYSE gives me the option of filling Joe's order at price 9.99 (rather than routing the trade to ARCA), saving Joe the cost of routing.

Flash trading and front running are just not the same thing. Flash trading only happens to traders who chose for their orders to be flashed. All flash trading does is moves the trade from ARCA to NYSE.

You see shares costing 9.80, so you buy it up quickly, and sell it to Joe for 10, making a profit of 0.20 per share while driving up prices for Joe.

That is front running.

A flash trade gives Goldman the opportunity to fill Joe's order at the NBBO price before it is routed to another exchange. It does absolutely nothing else. The person receiving the flash is even prohibited from making offers on that security on other exchanges for a few milliseconds after receiving the flash.

This gives Goldman an advantage over other high frequency traders since it gives Goldman a higher fill rate, which is definitely unfair.

If Joe wanted to fill the order himself on a darkpool, he would not have asked the exchange to flash his order.

Go to the wikipedia page for front-running. The first sentence says that it's illegal. The first sentence. And indeed it is. Thus, it's quite a claim to say that GS make money from it.

Marltod, where did you get all this from?