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Goldman Sachs Group has been raising eyebrows for both its record trading profits and the risk it took on to earn that money.
But a look at Goldman's daily trading record for the months of April, May and June, show that the Wall Street bank may not have been acting very risky at all. Not when Goldman was able to hit a home run nearly three out of every four days that it traded.
Goldman recorded at least $100 million in trading revenue on 46 separate trading days in the second quarter, or 71% of the time. That is a record for Goldman, up from a previous high of 34 days in the first quarter.
With that kind of track record, Goldman would have been crazy not to swing for the fences. It also helps to explain why the firm was willing to trade with a record amount of its capital at risk. Goldman's so-called value-at-risk, an estimate of how much it could lose in any given day, rose to an average of $245 million in the second quarter from $184 million a year earlier.
Consider that Barry Bonds, the home run king of the San Francisco Giants, was hitting homers 16% of his times at bat, or a homer every six at bats, during his best year in 2001. In his career, Bonds averaged a homer roughly every 12 at bats.
Goldman also was able to rap out the doubles. The company earned at least $50 million a day 89% of the time in the second quarter, according to Goldman's recent Securities & Exchange Commission filing.
But like Bonds, who was accused of using illegal steroids to juice his hitting, does Goldman's second-quarter trading profit also need an asterisk next to them in the record books?
Goldman has become a big player in the controversial world of high-frequency trading, in which computers use complex formulas to conduct rapid-fire trades in markets around the world. Certain types of this lightening quick trading is drawing criticism for giving firms unfair advantage by allow them sneak peaks at market activity.
But in a letter sent to clients this week and reported by Bloomberg, Goldman said it doesn't use such “flash” trading, which allows for the sneak peaks. The SEC is considering banning flash trades. Goldman added that high-frequency trading accounted for less than 1% of its total revenue in the first half of the year.
Still, just as steroid suspicions continue to dog many of baseball’s biggest hitters, Goldman probably will have to keep fielding questions about how it could pull off record profits amid a financial crisis and deep recession. That is the price you pay when you are the only team hitting, while the rest of the league is still in a slump.
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Why can’t journalists be smart and link the story of the stolen codes for their high speed trading platform with the revenues generated from high speed trading? GS said that those codes would allow the holder to unfairly manipulate the market. So what exactly was Goldman doing with their platform? With questions starting to swirl around revenue titans in the midst of economic calamity, why is this overlooked? People overlooked Enron for far too long, as well. Until it was too late, that is…
I see Goldman Sucks and other financial institutions that got TARP money as nothing but vampires sucking and rigging the system by taking advantage of their vantage points.
If flash trading is 1% of total revenues, what percent of trading revenues are accounted for by flash trading? Seems this reporter needs to do more work–a “big player” in high frequency trading would need to be bigger than 1% of total revenues. Context helps.
Like the good capitalist that I am, I do not resent Goldman’s profits per se, and Goldman employees should not be demonzed for merely being successful. However, the fact that they are the “only team hitting” does raise legitimate suspicions that they have achieved this success by somehow rigging the system to their advantage. The proliferation of Goldman alumni in both the Fed and the Treasury Departments of adminstrations of both parties reinforces this perception. Given this confluence of data points, I think it is incumbent on them to demonstrate that they earned these profits by their own insight and at their own risk (and that of their shareholders) rather than at the public’s risk, EVEN IF THAT DISCLOSURE COMES AT THE EXPENSE OF POTENTIALLY DISCLOSING SOME PROPRIETARY INFORMATION ABOUT THEIR BUSINESS PRACTICES. If the taxpayers are somehow covering their losses (or potential losses), directly or indirectly (think AIG credit default swaps), then they should be compensating us commensurately for shoudering that risk. Someone in the press needs to latch on to this and refuse to let it drop, so we can learn the truth (good luck with that, huh).
Thank you Federal Reserve for printing free money to hand out to these clowns.
Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal's Michael Corkery is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.
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