disgraceful algo trading this morning, page-4

Fron Nightstalke ron PDN thread yesterday:

Algo trading = algorithmic trading

Posted by someone else on a different forum:

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There's a reason the average pay of Goldman Sachs' 24,000 employees - from secretaries and assistants to CEOs - was a mind-boggling $520,000 last year1.

The company is a profit-making machine!

This year, Goldman Sachs will rake in between $30 and $35 billion in revenue.

That's enough to hand all 300 million men, women and children in America a crisp $100 bill - and still have a billion or two to spare...

But here's what most investors don't understand...

Goldman Sachs didn't become the financial powerhouse it is by collecting fees and commissions from investors like you and me...

Nor did the bulk of its profits come from underwriting such high profile public offerings as MasterCard and Bank of China.

No sir...

Private, 'Behind-the-Scenes' Trading

The lion's share of Goldman Sachs' profit - nearly two-thirds of it - comes from its own private account trading.

In fact, the company is on track to generate roughly $22 billion in revenue this year by successfully doing what every trader strives to do: Buy an investment at one price - and sell it for a better price hours or days later.

(Goldman Sachs') primary source of profit has shifted from banking to trading, and the firm is intentionally quite vague about how, and precisely where, those trades are made or, equally relevant, from whom the profits are coming.

The Economist, April 27, 2006


And Goldman Sachs isn't the only one racking up huge gains from 'behind-the-scenes' trading...

Lehman Brothers, Deutsche Bank, and Bear Stearns also recently reported that private trading accounted for more than 50% of their profits.

Now here's the billion-dollar question:

How are these trading firms able to generate such obscene profits so easily, so predictably... so matter-of-factly - while even the best fund managers seem to struggle to make a profit in this market?

Despite what you may think, there's no secret team of stock-picking whiz kids.

There's no Buffett-like guru at the helm.

In fact, the men and women behind these huge profits aren't stock experts at all.

'Mechanized' Trading

Instead, they're the country's top mathematicians, computer scientists and software engineers who have developed highly sophisticated computerized algorithmic trading systems, which quite literally can 'see' into the market's future.

These super computers leave nothing to chance.

No hunches or guesswork.

Human logic and emotion are completely removed from the process.

They take millions of pieces of market data that have occurred minutes, hours and days prior... analyze them... and then 'predict' - with extraordinary accuracy - where the price of a stock, ETF or commodity will go next.

It's a technique called 'quantitative algorithmic analysis'... which, simply put, is a process that states: 'if A, B and C occur, then D is the likely result'.

Meteorologists have been using this technique for decades to predict the future movements of hurricanes and storms. They take data collected from the storm, combined with inch-by-inch, minute-by minute movement history and other weather variables, then feed it into the latest super computers loaded with sophisticated algorithmic software...

Within seconds, the computer spits out the storm's most likely path, the speed at which it's likely to move... and the strength it's most likely to reach. That's how weather forecasters can know with such a high degree of certainty where a storm's heading - and how so many lives can be saved through warnings and evacuations.

But in the financial world, this technology doesn't save lives...

It makes people with access to it fantastically rich.

It's almost like having an automatic money machine... just turn on the switch and let the profits fill up the room.

$30 Billion in Profits -
As Effortlessly as 'Flipping a Switch'

In fact, when the top five trading firms 'flipped the switch' last year, they were able to quietly extract upwards of $30 billion in trading profits from the markets with stealth-like precision...

That's over $82 million in profits... every day of the year!

Of course, you or I don't have direct access to Goldman Sachs, Lehman Brothers or any other trading firms' proprietary systems. They're reserved for their own trading... and maybe a handful of billion-dollar clients...

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