Home \ News \ Goldman's Sack of Tricks

Goldman's Sack of Tricks

Written by Andrew Kerr Thursday, 10 September 2009 02:20

(0 votes, average 0 out of 5)

 

It is no secret that there has been a lot of suspicion surrounding Goldman Sachs recently. Whether it is how the company managed to report record profit in July, after taking a $10 billion loan from the taxpayer last year (since paid off), or the company's controversial high frequency trading program. A Rolling Stone article from July blamed Goldman for every market bubble since the Great Depression, referring to the company as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. However, is the company evil? Or is it just working in a flawed system?

 

The New York Times did an article on high-frequency trading at Goldman in July. The fear is that the company's high frequency trading may be manipulating the market. However, the more controversial aspect of high frequency trading is flash trading, which essentially gives a few traders access to orders before they are executed (for a fee of course). Since the article, Goldman issued a letter to clients stating that high-frequency trading accounts for less than 1% of the company's total revenues and that it does not frontrun clients with flash trading, although the company does not make the same promise about non-clients.

 

Regardless of the levels of high frequency trading used at large banks like Goldman, however immoral the practice may seem, I am struggling to come up with a reason that the bank should not be using these tactics. If Goldman wants to make a large investment in technology they should be rewarded within the confines of the legal system.

 

Ill-informed law makers are the key problem here (as usual). Goldman Sachs has a responsibility to its shareholders to generate the maximum value possible within the law. If Goldman did not take part in these practices then management would not be acting in the best interest of shareholders. It is up to the law-makers to regulate activities that are deemed 'immoral'.

 

Capitalism by nature is not a 'moral' system. Morals are an invention of man and are not built into capitalism, but must be enforced by laws. If capitalism were followed to the letter, survival of the fittest would consume our lives, murder and theft would be legal because these are simply the acts of stronger or more cunning humans. Strong regulation of the markets is a necessity for any sort of moral code to be enforced.

 

I will however admit, that Goldman has on multiple occasions, acted on the fringes of legality. During the 2008 oil price spike Goldman would openly suggest to anyone that would listen that oil could hit $200 a barrel. Was it really a surprise when it became apparent that commodity trading generated a significant percentage of Goldman's revenue over the following months? Goldman's size gives it the power to move markets with just a few words. Does Goldman have a responsibility to keep it's mouth shut to avoid the so-called 'dumb-money' from blindly jumping on the wagon? I don't know. What I do know is that it is best to avoid taking on the beast at its own game. Invest for the long term and many of the big boy's advantages fade away.

 


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