AHEAD OF THE PACK: FRONT-RUNNING

July 3, 2009

Tuesday, June 30, 2009

NYSE Halts Transparency, Feels Goldman Program Trading Disclosure Is Unnecessary

Posted by Tyler Durden at 1:26 PM

In a move set to infuriate and send many Zero Hedge readers over the top, the NYSE has taken action to make sure that nobody will henceforth be able to keep track of the complete dominance that Goldman Sachs exerts over the New York Stock Exchange. This basically ends our weekly Program Trading updates disclosed every Thursday indicating that Goldman has singlehandedly captured all of NYSE's program trading.In an information memorandum released on June 24 (09-31), the NYSE Regulation team has announced the Decommissioning of the Daily Program Trading Report (DPTR).From the memo:

The New York Stock Exchange LLC (“NYSE”) will be decommissioning the requirement to report program trading activity via the Daily Program Trading Report (“DPTR”), which was previously approved by the Securities and Exchange Commission (the “Commission”).1 The last trade date for which member organizations will be required to file the DPTR with the Exchange will be July 10, 2009 and therefore the last required date to submit the DPTR will be July 14, 2009.In the 2007 rule filing, the Exchange proposed to eliminate DPTR. The 2007 filing noted that there was some duplication between the DPTR data and the audit trail information that member organizations provide to the Exchange via account-type indicators at the time that they submit program trades to the Exchange... [A]fter consulting with the SEC, the Exchange announced that it would delay implementation of the two redefined account type indicators, and pending such implementation, member organizations would be required to continue filing the DPTR with the Exchange. The current delayed implementation date of the redefined J and K account type indicators is June 30, 2009. Accordingly, the Exchange still requires member organizations to submit DPTR.The Exchange has filed with the SEC to implement the decommissioning of the DPTR requirement following the July 10, 2009 trade date. Accordingly, the last required submission of the DPTR will be on July 14, 2009, which is the second business day after the last trade date for which the DPTR is required.In addition, in connection with the decommissioning of the DPTR, the Exchange will not be implementing the proposed redefined program trading account type indicators (J and K) and will continue to use the existing J and K audit trail account types. Upon further analysis and based on industry input, the Exchange has determined that these redefined account type indicators do not enhance the regulatory audit trail because the proposed redefined J and K could subsume some of the other, more granular account type indicators that the Exchange currently receives. Accordingly, the Exchange has determined not to redefine the J and K account types in the manner previously proposed, and is instead leaving the J and K account-type definitions unchanged.The Exchange further notes that it will use the existing account type indicator data – which captures program trade information for those orders sent to and executed on the Exchange – to report to the Commission on a weekly basis the program trading statistics for portions of program trades executed on the Exchange. Accordingly, beginning on July 23, 2009, the Exchange will provide the Commission with its weekly statistics on program trading based on account type indicator data rather than DPTR data. Similarly, at the same time, the weekly statistics regarding program trades that the Exchange provides to media outlets will also be derived from account type indicator data rather than the DPTR.

Basically this is the beginning of the end of unmodified data transparency. Going forward the NYSE will provide whatever data it feels comfortable, after sufficient internal "audits," and media outlets such as Zero Hedge, which had presented its millions of readers the only data point about Goldman's complete encroachment of not only NYSE but Program Trading, will be henceforth unreliable and likely will present no useful information at all.

This is a travesty, as well as a complete obliteration and a mockery of the move for transparency that the Administration, Regulators and Exchanges have been posturing they support. We advise all readers to contact the provided staff on the memorandum and voice your incredulity with this brazen move to completely obfuscate Goldman's behind-the-scenes take over the world's biggest stock exchange.

Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 orAleksandra Radakovic, Vice President, NYSE Regulation at (212) 656-4144

Wednesday, July 1, 2009

Is Goldman Legally Frontrunning Its Clients?

Posted by Tyler Durden at 11:25 AM

Everyone who is anyone on Wall Street has at some point used the Goldman 360 portal whether for research, news, keeping a track of prime brokerage portfolio or, disturbingly, for trading, via the REDI Plus 9.0 platform (now loaded with enhanced algo trading features to make life for you, dear soon to be frontran Goldman client, so much easier). A second widely accepted Wall Street concept is that a disclaimer is the last thing that anyone reads, if ever. Yet after taking a close look at the Goldman disclaimer for the 360 portal, which is an umbrella waiver or all downstream websites, including REDI, one discovers the following gem:

Monitoring by GS: Your use of the products and services on this Web site may be monitored by GS, and that the resultant information may be used by GS for its internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory organization.

Second: by using Goldman 360 a client voluntarily allows Goldman to provide keystroke by keystroke data of everything the client does, even if that includes launching trades via REDI, to Goldman for the internal business purposes.

The third thing everyone on Wall Street agrees on is that "internal business purposes" usually (and in Goldman's case, almost exclusively) means proprietary trading.

Are Goldman 360 clients (in)voluntarily signing off a release to be front ran by Goldman on any portal-based trade? Could Goldman please clarify just what "internal business purposes" means in the context of this overarching disclaimer, and also whether Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk? Lucas Van Pragg: the floor is yours.

Update: several readers have presented some other Goldman Sachs and Spear, Leeds and Kellogg form documents that contain an even more cryptic warning in section 4(f) in Use Of Services:

You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation.

NOT FOR YOUR BENEFIT? I mean, come on, how more clearer does it need to get.

Thursday, July 2, 2009

Goldman Sachs Responds To Zero Hedge

Posted by Tyler Durden at 12:02 PM

It seems quite a few individuals noticed our post attempting to justify some very peculiar language in not just a certain Goldman Sachs Internet disclaimer, but also the strange wording prominently featured in critical GS-client agreements. One happened to be Goldman Sachs itself. We take this opportunity to present the response by Goldman Sachs' spokesman Ed Canaday:

Dear Mr Durbin:

This is in response to your recent blog about our web site disclaimer. It is quite usual for websites to have disclaimers that refer to the monitoring of site usage. Most web sites, including yours we noticed, track usage by their visitors. This is primarily used for marketing and to help inform decision about enhancing content.Your suggestion that we monitor our web site to facilitate front-running is untrue and offensive.

Sincerely

Ed Canaday
Vice President
Goldman, Sachs & Co.
____________________
Ed Canaday
Office: xxx-xxx-xxxx
Cell: xxx-xxx-xxxx

We are happy to have caught the attention of Mr. Canaday. We believe this is the start of a great ongoing dialog.

In that vein, Marla has replied to Mr. Canaday and Goldman Sachs, attempting to elaborate on some of the point that Ed did not touch upon. I present it below and am looking forward for Goldman's forthcoming reponse:

Dear Mr. Canady:

Thanks for your quick reply.

For your future reference, the correct spelling for "Tyler" is "Tyler Durden." (A re-viewing of "Fight Club" might be in order, but I know Goldman VPs probably rarely have time for such luxuries).

Obviously, we want to make sure we have our facts correct so I am pleased to see your email. Perhaps you can lay to rest some questions we have for the record:

1. Indeed, data use disclaimers are a common feature on most websites. Still, I think you will agree that where usage patterns are so directly linked with potential investment activity and customer intentions it is a bit unusual not to have a more explicit description of the kind of use Goldman intends here. This is particularly so where customer attitudes are concerned, and appearances are important. "Internal business purposes" is a bit vague in this respect, don't you find? This seems unlike Goldman, usually a firm known for very careful attention to detail. Why is a more specific description of such purposes not included? I would think that easier than explaining the matter repeatedly to random bloggers (and customers).

2. I notice that you have not taken the opportunity to address similar disclaimer language in the form contracts used by Goldman and Spear, Leeds and Kellogg. Was this omission intentional or an oversight? (For your reference you can find the language we are curious about here:

http://www.zerohedge.com/node/12083).

"You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit). We may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body and in compliance with applicable law and regulation."Not to be a stickler, but the drafting here seems quite careless.Note the differing terms between the website disclaimer "...the resultant information may be used by GS for its internal business purposes OR in accordance with the rules of any applicable regulatory or self-regulatory organization...." (emphasis added) and the form disclaimer "...we may use the resulting information for internal business purposes or in accordance with the rules of any applicable regulatory or self-regulatory body AND in compliance with applicable law and regulation...." (emphasis added).As a reformed legal professional myself, this seems a bit sloppy to me. Can you comment on the language and in particular why a more explicit definition of "internal business purposes" is not included?

3. I also notice that you do not specifically address our question:"...has Goldman has ever actually used 360 submitted information in the decision making process of its prop trading desk?" Could you give us a response there? Perhaps you might augment that to include the decision making process of any Goldman investment decisions rather than just the prop desk and all information Goldman collects about 360 users.And lastly, while we have your attention, we were hoping you could make a statement for Zero Hedge and its readers on the long discussed topic on our pages regarding Goldman Sachs' effective monopolization of Principal Program Trading in the New York Stock Exchange. In other venues you have attributed this domination solely to Goldman's selection as the one and only SLP currently used by the NYSE. Would you care to elaborate how that fits in with the NYSE's upcoming changes to their DPTR (http://www.zerohedge.com/node/11769)specifically as pertaining to J and K account type indicators.

Was Goldman in any way consulted in the making of this decision by the NYSE? Did Goldman have any direct communication with the SEC on this issue?Thanks for your help with these matters. As an aside, if there is a contact at Goldman we can routinely direct these questions to that might be helpful for both of us going forward. I look forward to hearing from you.

Best Regards,"Marla Singer"