Adding to growing concerns related to high-speed trading,
The Goldman Sachs Group, Inc.
) revealed in its latest quarterly filing that the company is
facing investigations regarding the practice. The company stands
among several other defendants including high-frequency trading
firms, securities exchanges and broker-dealers in a putative class
action filed on Apr 18, 2014 in the U.S. District Court for the
Southern District of New York.
The class action has been brought on behalf of public investors who
traded in the U.S stock market on a registered public stock
exchange or on a U.S. based alternative trading platform since Apr
The class action alleges that the securities exchanges together
with the brokerage firms and the high-frequency trading firms
resorted to inappropriate methods while carrying out business
transactions. Further, they are accused of sharing non-public
information with certain market players who capitalized on such
information, causing manipulation in stock prices. Precisely, the
defendants are alleged to have violated the federal securities laws
related to market manipulation and insider trading.
Such fraudulent activities amounted to market rigging.
Consequently, the plaintiffs traded at artificial manipulative
prices instead of true and actual prices.
The defendants include exchanges like NYSE and NASDAQ, while
Credit Suisse Group AG (
) were among other alleged companies.
High Frequency Trading: What's the Buzz?
With the advent of technology, trading has become much faster and
easier. As a result, electronic trading is currently dominating the
With speed and algorithms, the high speed traders buy and sell
securities within fraction of seconds, some times measured in
microseconds, or millionths of a second. The main objective is to
gain profit from the smallest price changes. This trading are not
meant for the general public, rather these are carried on by
high-frequency trading firms that use supercomputers specially
designed for similar transactions. These firms get direct access to
exchanges through their brokers' accounts - referred to as "naked
However, in 2010, high-frequency trading was held responsible for
wiping out hundreds of billions of dollars of market value in a
Following the release of
Flash Boys: A Wall Street Revolt
by Michael Lewis, that focused on the role of high frequency
trading firms rigging the US stock market, the U.S. Federal Bureau
of Investigation (FBI) and the U.S Justice Department (DOJ)
announced investigations into high frequency trades for possible
violations of the law. Also New York Attorney General Eric
Schneiderman and the SEC and are undertaking similar investigation.
Where Goldman Stands
The class action mentioned that Goldman's brokerage division traded
on behalf of the plaintiffs during the aforementioned period on
stock exchanges and alternate trading venues. It also hinted at
Goldman's own trading operations engaged in high frequency trading
that once garnered about 10% of the company's total revenue.
Further, the class action mentioned that during the said period
Goldman realized profits from defendants like NASDAQ and NYSE owing
to transactions through its own trading venues including Sigma
X. Sigma X at present stands as one of the largest dark pools
in the market.
Dark pools are private platforms wherein the secrecy of investors
is guarded well in comparison to public exchanges. Notably, many
dark pools offer access to their trade data to outsiders including
high frequency trading firms. With increasing competition in the
dark pool industry, the technical faults and issues have heightened
the associated risks and raised concerns over the relationship that
the high frequency firms and the dark pools share.
According to a report in
The Wall Street Journal
last month, Goldman was contemplating the closure of Sigma X.
However, there has been no official revelation to date.
Undoubtedly, any negative outcome of the investigations will force
Goldman to stop such trading practices, which may result in lower
trading revenues. In fact, it could be high enough to mar the total
revenue. However, nothing can be certainly said until the extent of
Goldman's involvement in high-frequency trading is
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