Market Makers Shouldn’t Participate In Their Own Markets

There was a bit of questioning of the Risk Management Manager that when added to that of the CFO led to some very interesting insights into Goldman Sachs. The market making staff has the ability to hold or sell items that are taken opposite those of  the customers at a time and place that maximizes the profits for Goldman Sachs.

Goldman Sachs as a firm has internal views into almost every market there is. Seeing both sides of trades as well as the demand for creation of new products. The Manager would not say that internal talk among different groups wasn’t used in the determination on how to handle products that Goldman itself held. He squirmed out of taking any position.

The clear implication that you can take from these different data points is that Goldman Sachs has the ability to hold any product that they like and sell those that they don’t. They are not a neutral market making entity. They don’t see selling products that they don’t like to their own clients as a conflict of interest. Customers of Goldman Sachs need to ask themselves why the firm is selling any product. Because, if the item up for sale was worth holding, Goldman itself would hold it and not sell to the customer.

Goldman Sach’s ability to take positions and to be a market maker should be stripped. There should be a requirement that they can’t profit by taking positions as a market maker. There is no way to separate the conflict of interest otherwise.

One comment on “Market Makers Shouldn’t Participate In Their Own Markets

  • Greg Jones says:

    If the market maker also has an important roll in putting together a new product it should especually have a clear seperation of probation of taking short or long positing in the securaty they 1) Helped to create, 2) Trying to liquidate or sell from their portfolio.

    Problem is there at this point in time is no law regulating this activity so in the mind of business there is nothing wrong in selling junk to clients. In this case Goldman (other brokerage house) helped creat this junk from thin air, have inside information that gives them an unfair knowledge or advantage so they can game the outcome.

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