So today's non-story that's been somehow turned into a story relates to a letter that Goldman Sachs sent to clients of its "Fundamental Strategies Group," which was published by Andrew Ross Sorkin on the NY Times' Dealbook.
We may from time to time discuss with you Trading Ideas generated by our Fundamental Strategies Group. As part of our commitment to managing conflicts of interest appropriately, this message is to explain how the Fundamental Strategies Group interacts with other parts of our organisation and how that impacts on the Trading Ideas.
The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.
You should not consider Trading Ideas as objective or independent research or as investment advice. When we discuss Trading Ideas with you, we will not be acting as your advisor (including, without limitation, in relation to investment, accounting, tax or legal matters) and the provision of Trading Ideas to you will not give rise to any fiduciary or equitable duties on our part. We will not be soliciting any action based on Trading Ideas and it is your responsibility to seek appropriate advice.
Any opinions that we express when we discuss Trading Ideas with you will be our present opinions only and we will not have any obligation to update you in the event of a change of circumstances or a change of our opinions. We prepare Trading Ideas based upon information that we believe to be reliable but we make no representation or warranty that such information is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation, if it is not.
If you have any concerns about any of these matters, please do not hesitate to contact us.
Clusterstock had it right initially, with a post titled "Goldman Sends A Really Boring Email to Investors," but as a commenter on that site points out, they quickly realized that they would get more clicks by changing the title to "Goldman to Clients: We May Be Frontrunning you." The URL for the entry shows the initial non-sensationalized title.
Unfortunately, the folks at the influential ZeroHedge also chose to mis-inform their readers, not only with the headline "Goldman Admits to Frontrunning Clients Through Its Prop Desk," but by suggesting that the letter at hand is a smoking gun for the completely unrelated story they (ZH) published back in July, 2009 about GS's disclaimer for the REDI electronic execution platform. Believe me - as soon as someone provides evidence that GS is taking client orders that it sees entered in the REDI platform and actually frontrunning them, I'll be up in arms, but today's letter is about an entirely different group at the firm, and has nothing to do with frontrunning.
This letter is a good thing - it removes any ambiguity and lays it out quite clearly for trading clients that they will not be the only ones getting a given trading call, that they probably wont be the first or the last client to get the call, that they may not get another call if and when the firm's opinions change, and that, most importantly, the firm may have positions in the relevant securities before the client gets the call. This is essential for EVERY client to realize, and it applies to every firm - not just Goldman Sachs.
It's also important to realize that this letter refers to the "Fundamental Strategies Group." This is a group making trading calls - and is distinct from their equity research department. I am fairly certain that GS is not saying that its equity research calls are given to its prop desk before being released to the public, but even if they are - so what - if you don't like the research, don't use it. If this letter does apply to GS's equity research, all it should do is lessen the validity of the research. If people still want to ramp stocks on GS's calls even though they know that GS is talking up its own positions ("talking their book," in the lingo), well, shame on the suckers. If you don't like the trading calls, don't use them. The point is, these trading calls are calls that GS thinks will make money, and you can be damn certain that they have either acted on them already or at least thought about acting on them, and that they've probably told better clients than you about the trades already. Rather than rant and rave about it, all one has to do is not do business with this group at Goldman Sachs. Of course, that's unlikely to happen, because people are greedy, and I'm guessing that these trading calls from GS are still money makers - be it simply because of the "follow GS" phenomenon, or because their insights are actually more insightful.
Put simply, who should be mad about this? No one. Either you're one of the clients who is getting trading calls, which you KNOW may be biased (biased in the sense that GS wants you to buy stocks that they are already long), and they are working, in which case you're still happy; or you're one of the clients who is getting biased trading calls and they are not working - in which case you stop listening to GS's trading calls. If the trading calls don't make you money - DON'T LISTEN TO THEM! Then there is the entire group of people who are NOT getting GS's (biased) trading calls in a timely manner, yet are still furious at the possibility that the trading calls are biased. It's patently absurd, like saying "Damn you, GS, I can't believe you're giving out biased trading calls talking your own book, but you're not giving them to me!"
Now, frontrunning is something else entirely. Frontrunning is when a client gives an order to GS, and GS, instead of executing the client's order, goes and executes the same order in its proprietary account first, usually with the intention of moving the price of the underlying asset and then trading it back to the client at a price advantageous to the firm. It's outright illegal, and it's a big deal. However, it's completely unrelated to what the letter released today is talking about.
Goldman Sachs' letter today acknowledges something that should be standard knowledge for anyone talking to any sell-side firm: a firm may be, and probably is, talking its own book when it gives you a trading call. These firms are in the business of making money on their trades - they put on a trade, and then try to convince others why it's a good idea. It's not a smoking gun, and it's not frontrunning. As a customer, you may actually be suspicious if a firm like GS is hyping a trade to you but they have no prop position - after all - if it's such a good trade, why don't they have it on themselves? One of the favorite questions my boss used to ask sell side analysts and traders when we were on the buy side was "What do you own in your personal account?" Those were usually the highest conviction ideas.