Former Goldman Trading Strategist: Of Course Goldman Traders Use Knowledge Of Client Trades To Make Money

Courtesy of John Carney at Clusterstock

Tonight on the PBS newshour, business and economics correspondent Paul Solman takes a look at Goldman Sachs and how they’ve made a profit over the past several years. Solman explores whether Goldman Sachs is an investment bank "doing God’s work," as CEO Lloyd Blankfein claims, or actually a hedge fund. Solman looks at the issue and practice of front-running at the investment bank, and risk management.

Perhaps the most interesting segment comes when former Reagan administration budget guru David Stockman and former Goldman trading strategist explain how Goldman Sachs makes so much money trading. Here’s snippet of the transcript:

Narrator: But consider HOW they’re making those bucks, says Nomi Prins. On knowledge that, as when she was there, comes in with every trade a client asks Goldman to make.

Nomi Prins: And just by evidence from the profits they make and where they make them, what divisions they make them in, they’re not sitting on that knowledge. They are trading on that knowledge.

Paul Solomon: So they know somebody is going to buy a commodity or currency so they either buy that commodity or currency first or a commodity and currency very much like it.

Nomi Prins: Any information that you get, particularly if it’s going to move the markets a lot, is going to filter into the trading positions you take.

Narrator: But isn’t this "front running" — trading ahead of your clients (to profit from the price changes that will come from the clients’ trades) for your OWN firm’s benefit? And isn’t that, strictly speaking, illegal?

David Stockman: The long and ancient secret of Wall Street is they’ve always been front running their clients! In other words when you’re in the customer trading business and then you’re in the proprietary business, which trade are you making first? I don’t know and if it’s in milliseconds how’s anybody going to figure it out? So I don’t know if you ought to get all exercised on that or not but the fact they make all this money in proprietary trading is clearly part and parcel of being a massive player and dealer in the markets for both customer trades and house trades.