Poor Goldman Sachs
Poor Goldman Sachs, they had two trading days last calendar quarter when they LOST money!
When you learn that in 46 of the other 63 days they made over $100 million each day, it is clear that they aren’t taking unnecessary risks. In fact, very few risks at all.
The art form is called hedging, or arbitrage. During the quarter 78% of their profits came from the proprietary trading desk, where it is actively practiced.
These days hedging is made easier by the availability of highly liquid, easily tradable Exchange Traded Funds (ETFs). On Friday over 1.8 billion shares of them were traded, out of a total of 3.5 billion shares between the NYSE and NASDAQ.
That’s right, over half of the trading volume was in ETFs. I wonder who’s doing it. I didn’t trade any 18 million shares (just 1%) on Friday. Did you?
That ETF volume was at an average of $40 a share, worth $73 billion. And this is in the heart of the summer vacation season, when activity is pretty quiet.
Now, if Goldman Sachs made another $100 million on Friday, their vig on just the trading value in ETFs was only 14 basis points, 1/7th of one percent. Pretty small.
But they don’t do all the trading in ETFs, they have the company of Morgan Stanley, Mother Merrill, Citi, and others.
Hedging these days is made much easier for us common folk by the availability of ETFs that are engineered so that long positions are the same as being short an index, or whatever the ETF is tracking. No margin account is needed, nor any pledge of capital or impairment of borrowing capacity. Just an ordinary cash account at the broker.
Further, many of the short, or inverse ETFs also have a built-in leverage that magnifies the price moves by either two or three. Again, they’re available without any of the usual broker or bank borrowing encumbrances.
These are popular vehicles for risk management. ProShares, the largest provider of leveraged and inverse ETFs, saw $9 billion of trading in their products, just on Friday. With all that activity, perhaps something can be learned by checking out whether there is more enthusiasm for leveraged short ETFs or for leveraged longs.
Here are the upside and downside forecasts of the prop desks and block desks for both sets of ETFs. Any items above the diagonal dotted line have larger downside prospects than upside.
