<p>“The review comes after Goldman was criticized for advising El Paso Corp on its planned sale to Kinder Morgan Inc even though Goldman had a multibillion-dollar stake in the acquirer and its top energy banker held a $340,000 personal stake in Kinder Morgan.
“We regret the El Paso Board wasn’t aware of the investment and are reviewing our policies and procedures related to bankers’ investments and how they are disclosed with the goal of strengthening them,” Goldman said in a statement on Friday.
The review was first reported by The Wall Street Journal, which said Goldman investment bankers may be required to disclose personal financial holdings to clients.
The Wall Street divisions of other banks, including Barclays Plc, Bank of America Corp and Citigroup Inc, are also reviewing how they manage conflicts on investment banking deals, the Journal reported, citing unnamed people familiar with the matter.
Representatives for Citigroup, Bank of America and Morgan Stanley declined to comment. A spokesperson for Barclays could not immediately be reached for comment.
Goldman’s multiple positions in the El Paso-Kinder Morgan deal garnered particular attention after a prominent Delaware judge criticized the bank’s handling of the conflicts.
“At this stage, I cannot readily accept the notion that Goldman would not seek to maximize the value of its multibillion-dollar investment in Kinder Morgan at the expense of El Paso, but, at the same time, be so keen on obtaining an investment banking fee in the tens of millions,” Judge Leo Strine wrote. He said he would “reluctantly” allow the deal to move forward.”</p>
<p>Dstark-
The <1 msec is the execution time on a lot of ATS’s and so forth, it represents the time from when the system receives the order until the outcome hits the outgoing portal (obviously, there is latency, especially over the public net, the time from when you send it until you receive the output it going to be a lot longer). As far as I know, ARCA and BATS are in that range, not sure about CME (they prob are in the several msec range, commodities trading is generally not as time crazy as equities and equities options). When people do so called flash trading, it is predicated on these kinds of execution speeds, they do things like send an order and send a cxl for it a couple of msec after it. If exec time were not as fast as that, wouldn’t make sense (doing that on an order on the NYSE book, for example, would just be an irritant, since it would be unlikely to get executed).</p>
<p>It isn’t so much exchanges can’t trade them, it is that exchanges are generally set up to trade relatively simple markets, whether financial or physical, they the bulk of their trading is in swaps/futures, and options, and maybe covered options. When you are talking more complex strategies, like flies, strangles, straddles, condors (hedged or not) it introduces complexity that people trading on exchanges are not likely to want to get involved with (they could, obviously), plus IME most exchange systems handling of strategies is pretty lame, kind of a bag on their mainline systems. When these deals are done otc, there is also a lot more then price, they also negotiate on greek values associated with the trade (commonly, delta) as part of the package. They are very customized, and though they can be put on the exchange systems, I suspect things like the delta values are going to keep people from wanting to step in front of such things.Not to mention that strike prices tend to be fixed on exchanges, and OTC action often happens at strikes not exchange supported (for example, crude products like WTI have strikes in 50c increments commonly). </p>
<p>Size isn’t the problem, past a certain size the trade is considered a block trade (what that value is no one knows yet) and doesn’t have to be put up for crossing.</p>
<p>Ok thanks musicprnt…I was wondering where you got the 1 mls from. There is travel time and there is latency can occur in the colos.</p>
<p>Right now…it takes about 13.3 mls to go from Chicago to NJ using the fast spread line. </p>
<p>I guess microwave technonlogy is going to cut that to 8 to 10 mls. But microwave technology doesn’t have the bandwidth the spreadline has.</p>
<p>And then there is more technology coming in the future that will be faster than microwave.</p>
<p>The arms race accelerates.</p>
<p>I think flash trading is over…I don’t know of any exchange that supports flash trading. I think Edgx was the last exchange to give it up. The orders that are partially filled have to be rerouted now…which the exchanges don’t want because they have to give up the commissions. Have you heard otherwise? </p>
<p>I don’t know that much about commodities…but silver futures are still traded primarily with the open outcry system…and the quotes can be 200 mls stale. As you know…that is a killer for hft firms.</p>
<p>I can see the problem with listing all these derivatives on an exchange…
The bandwidth issues are going to be incredible. And…really…how liquid are these derivatives going to be?</p>
<p>There are plenty of listed option classes and option strikes that aren’t liquid and they are very simple products.</p>
<p>But if these derivatives are not listed…how is systemic risk going to be handled?
Because the way it is done now is …well it is not too safe.</p>
<p>Dstark-
In many of the commodities markets the trading is happening electronically, the open outcry pits are either dead or way shrunken, and even their trading is heading towards the actual deals happening on the systems. </p>
<p>I am not sure about HFT and how exchanges are handling it these days, I know that ATS’s still allow it, but it wouldn’t surprise me if exchanges are banning it. </p>
<p>Yeah, these are in effect custom products and are pretty illiquid because of it. In terms of risk, I think personally that the biggest risk isn’t that these weren’t traded on an exchange, but rather that they were not put through a clearing house. The way they have been traditionally traded the trades were cleared bilaterally through FCM’s, and there was basically no kind of risk assurance with these. When trades are put through clearinghouses, for example, there are all kinds of requirements, firms need to have margin accounts and escrow against losses and the like, plus in a clearinghouse the risk is spread among the members if one should fail. Plus there should be reporting transparency like they have for mutual funds and such, reporting positions and the like to regulators to be aware of risk and such. Regulators tend to believe that exchanges ameliorate risk by the nature of prices being published and better price discovery, but that is based in experience with liquid instruments like equities. As long as their is oversight from clearing houses and regulators, I don’t think exchange trading would help all that much, I suspect muich of what gets put on exchanges under the rules will submit to clearing as they happened.</p>
<p>I don’t have an issue with your last paragraph musicprnt…except…you knew there had to be an except…I think price discovery is very important for customers. Risk won’t be cut much…but the more accurate pricing information customers have …the better the customers will do. The financial firms will do worse…but that doesn’t bother me. :)</p>
<p>This has bugged me. </p>
<p>5 firms dominate the off exchange derivative market…and we are talkng trillions of dollars in notational value. I think these firms do 90% of the business.</p>
<p>How do all these firms make money when only 5 firms do 90% of the business? These banks likely have quite a bit of trades with each other. They
can’t all be winners. I guess the 90% is double counted…but still…</p>
<p>How do these firms mark the open positions?</p>
<p>Can BofA mark options at a 30 volatility when they are long…and Citi mark the same options at a 20 volatiltiy when they are short?</p>
<p>Are there any standards that all these firms have to uphold? Does every firm mark these poroducta wherever they want? </p>
<p>Looking at GS- AIG…AIG was selling cds to GS and marking those products at prices that led to paper profits and paying themselves bonuses. GS was on the other side…I really doubt GS was marking these products at losses. Wasn’t GS marking their CDS at different prices…booking profits and paying bonuses on these profits too?</p>
<p>"But what makes FHLT 2006-E potentially fraudulent, and why the SEC is likely to sue Goldman, is that it appears the firm knew that even compared to the incredibly low standards it stated it was using to select loans for the deal, the mortgages Goldman actually sold to investors were a good deal worse. For instance, the deal’s prospectus that Goldman assembled and distributed to investors, and filed with the SEC, said that there was only one home loan out of 5,012 in the Fremont trust, or 0.01%, in which a borrower had taken out more than their house was worth. But an audit conducted for the FHFA suit found that at least 1,179 loans in FHLT 2006-E, or 23.5%, were already underwater at the time Goldman was pitching the deal to investors. The suit alleges that Goldman also hid the number of loans in the Fremont trust that were made to real estate investors, which are generally considered riskier than a loan to someone who intends to live in a house themselves. Goldman’s pitch claimed that just under 14% of the loans in FHLT 2006-E were made to investors. In fact, that number was over 24%.
“We found that major financial institutions had information of the defective nature of the loans they were packaging and selling that they never disclosed to investors,” says Phil Angelides, who was the head of the Financial Crisis Inquiry Commission. “It was seminal to the cause of the financial crisis.”</p>
<p>The fines don’t seem to be a problem if you don’t have to make restitution.</p>
<p>I remember discussing this stuff on the bear boards many years ago. Seems like it was pretty common knowledge. The article does state that investors were eager to buy this stuff and I’m guessing that they knew at least something of what they were getting and bought it anyways. Perhaps they were playing with OPM.</p>