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February 2, 2006

Goldman's Liquidity Push

By Peter Chapman

Also in this article

  • Goldman's Liquidity Push

Goldman Sachs entered into agreements with "several" trading houses to probe their private order books for trading opportunities with a newly launched alternative trading system.

The move is an attempt by Goldman to increase its sources of liquidity at a time when the supply of publicly displayed liquidity has diminished. Access to the private liquidity pools is available to both Goldman's traders and its customers.

"We are building bridges to various pools of non-displayed liquidity," noted Greg Tusar, Goldman's head of electronic trading.

The broker-dealer's execution and clearing division recently launched an ATS called Sigma X that monitors the blotters of crossing networks, so-called electronic market makers and other broker-dealers.

If Goldman's technology detects in one of these systems the contra side to an order being handled by Goldman's order routing software, it will try to effect a trade.

The new technology addresses what Goldman sees as two problems in the search for liquidity: a dearth of bids and offers on display in the public market centers and fragmentation of non-displayed liquidity.

Non-displayed liquidity ranges from orders hidden in ECN reserve files and floor broker handhelds to those resting on the blotters of major money managers.

This hidden liquidity dwarfs that which is publicly displayed, according to Goldman research. The supply of public liquidity has declined this century with the advent of penny ticks and the resultant fear by traders of over exposing themselves.

One industry observer commended Goldman, saying its new ATS will likely help those looking for small- and mid-cap executions. Larry Tabb, founder and chief executive of the Tabb Group, said Sigma is "accessing liquidity from a number of sources. "They're not just routing out orders or consolidating internal liquidity or using crossing techniques. Sigma will be a pipeline to various broker-dealers."

Goldman claims it has signed up "several partners-more than two"-and has access to a considerable amount of non-displayed liquidity. "Those ATSs have access to a lot of latent liquidity sitting on buyside blotters," Tusar explains.

The big broker however will divulge the name of only two of its new suppliers: Automated Trading Desk, an electronic market making firm, and Goldman's own liquidity.

Goldman says it is unable to reveal more names, citing client confidentiality agreements. "The users of ATSs are worried about information leakage," Tusar says. Goldman does say its new suppliers fall into three groups: crossing networks, electronic market makers and other broker-dealers.

The four major independent' crossing networks are Investment Technology Group's POSIT, Pipeline Trading, NYFIX Millennium and Liquidnet.

(Liquidnet recently signed deals with six order aggregators,' allowing them to funnel their streaming liquidity' into its H2O crossing system. See Traders Magazine, December 2005.)

Of the so-called electronic market makers,' the three best known are ATD, Getco and Traderbot.

Sigma X works in conjunction with Goldman's three-year-old smart order routing technology known as Sigma.' The software seeks the best venue on which to trade on behalf of Goldman's customers and traders.