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Tuesday, April 28, 2009


something to think about

i don't want to descend into tinfoilhattery, so i'm going to circumscribe this to mere observation.

zero hedge has been banging the drum hard on equity market manipulation. i think everyone understands that, while credit markets run the world, equity markets are the public relations department. tyler durden has made some clear missteps in his zeal to expose what he perceives (debunked here).

but this is also clearly a case where the opportunity for impropriety is in place, thanks to massive government intervention into the investment and commercial banks, and potentially meeting motive. if durden is wrong, it isn't because it's not possible.

indeed the commentary of one of his readers following this post opens the potential avenue.

Why is this not explained by reference to Goldman’s role as a Supplemental Liquidity Provider in the NYSE pilot program? From the Federal Register: November 5, 2008 (Volume 73, Number 215)] [Notices] [Page 65904-65912] []:

“SLPs may only enter orders electronically from off the Floor of the Exchange and may only enter such orders directly into Exchange systems and facilities designated for this purpose. All SLP orders must only be for the proprietary account of the SLP member organization. Thus, an SLP will not handle orders from public customers or otherwise act on an agency basis. They will have a 5% average quoting requirement per assigned security. Additionally, if an SLP posts displayed or non-displayed liquidity in its assigned securities that results in an execution, the Exchange will pay the SLP a financial rebate.”

Yeah, I think you ought to look at Rule 107B - Supplemental Liquidity Providers - of the NYSE Rules on Dealings and Settlements, adopted October 29, 2008. The program's description reads a lot like the trading activity described in this blog these past few weeks: a group of securities assigned to Goldman, the provider (Goldman) to use program trading and the providers own accounts rather than client accounts, etc. And, the purpose is to generate liquidity. Isn't this exactly what Zero Hedge has been describing? But, if so, it is not a conspiracy - it is an announced program being run on a 6-month pilot basis.

it's been earlier noted at zero hedge that goldman's prop desk own-account trading is accounting for a mind-boggling share of the activity in a field cleared of many former competitors. (more from felix salmon on that point.) goldman was the rollout desk for the program and went live on or around november 18. the market put in its low on november 20.

the supplemental liquidity provider pilot expires at the end of this month. from ceoworld:

An NYSE staff committee will assign each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue. The pilot will start with a focus on highly active issues, and gradually expand its coverage.

UPDATE: zero hedge on the SLP designation.

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While I agree the motive for manipulation is there (to try to attract more private recapitalization money for the banks), it would seem odd that global stock markets are still rallying along with US markets if the US markets are being manipulated. The only way that would make sense is if foreign markets take the lead from the US and don't have much of a "mind of their own", which doesn't exactly fit theory, but I suppose in crisis times anything is possible...

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this is why, hbl, theorizing on the potential of any such program is problematic at best. how exactly do global equity markets interact? can anyone say? i certainly can't.

all i know is that SLPs exist, and that goldman is one of them (and almost certainly the largest of them). they are being paid to keep liquidity in selected large-cap names using their prop accounts.

that may or may not account for the massive increase in goldman's prop trading -- i suspect it probably does account for at least some of it.

does that translate into big price support in thin markets -- even price manipulation? maybe.

does that further translate into a global equity rerisking? beats me.

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it is interesting to note from the december 2008 trading volume figures:

U.S. cash products average daily volume (“ADV ”) increased 30% to 3.3 billion shares[2].

NYSE-listed matched volume (Tape A) increased 21% to 2.2 billion shares.

Tape A matched market share was 43.4%, compared to 42.7% in October. The increase in share was driven in part by the introduction of the NYSE’s new market model in November which established a new category of liquidity provider, the Supplemental Liquidity Provider and replaced Specialists with Designated Market Makers.

NYSE Arca- and Alternext US-listed matched volume (Tape B) increased 148% to 519 million shares.

Nasdaq-listed matched volume (Tape C) increased 4% to 292 million shares.

Exchange-traded funds matched volume (included in the trading volume numbers above) increased 112% to 491 million shares.

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i added a link to felix salmon in the body of the post -- in it, GS says outright that their massive prop desk trading increase is a function of their SLP activity.

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