Goldman can do a better job of describing their trading business.

I think Goldman Sachs can more accurately describe their trading and market-making business model.  This is different than other parts of their business where they act as business advisors (for example in mergers and acquisitions).

Goldman executives place too much emphasis on their “risk management business”.  They help their clients manage the client’s risk as well as put on more risk when the client wants to make a directional bet.   But risk management is only a critical skill in a trading operation but it is not how they make their money.  Goldman like other traders and market makers make their money by taking a directional bet on a commodity or security and being right more often than they are wrong.

 As a market maker they offer liquidity and transparency and in exchange they see more deal flow and get a better feel for the market than if they were not a market maker.  Their trading counterparties do not expect and do not receive advice from Goldman about if the client should go long or short.

In mergers and acquisitions advisory work Goldman Sachs has an absolute duty to act in the best interest of their clients and to share far more information that Goldman’s trading operation shares.

But Goldman’s trading business is a whole different animal than its M&A advisory business.  When Goldman’s trading arm is selling oil they are trying to sell it at the highest possible price (and their counterparties are trying to buy it at the lowest possible price).  There are multiple buyers and sellers which add to the liquidity (ease in transacting) and transparency (ability to see where prices are currently at).

So the language of putting the client’s interest first does not work in the trading business.  The service that is provided is to offer competitive prices to either buy or sell a commodity or security.  The firm promises that it is easy to transact with, will honor the deal and that it will perform on what it promises to buy or sell.

Trading will not work if any market maker has to tell the world that it wants to go long or go short.  They telegraph that anyway because when they want to go short, they tend to show prices that they will sell that are very competitive but prices to buy that are less competitive.  So it is not that hard for their counterparties to figure out if Goldman is trying to buy or trying to sell and their counterparties get the advantage of this information.

Posted via email from John's posterous