Now it’s clear, and we got proof, even though we sort of knew already : Goldman Sachs is above the law. On August 20th, this prestigious business bank is stung with a giant computer bug : their program sends out false orders in great quantities on the american options market and on certain quoted index funds. Which de-stabilizes these markets, and just goes to show how big the glitch was.
The same kind of mishap happened last summer to a lesser-known financial business provider, Knight Capital. The same way, a whole bunch of false electronic orders were sent in cascades on the market. They lost about $476 Million, which put them out of business, and they were brought back by a competitor.
For Goldman Sachs, the potential losses amount to hundreds of millions of dollars... not enough to sink the bank, of course, but enough to give it some trouble with its standing. So, then, why not try to get an arrangement with the market control mechanism to cancel those orders? And what’s worse, they succeeded! The regulating organism accepts to erase those orders and, in the process, considerably reduces the firm’s losses. But there were tens of brokers who had positioned themselves on the other side of those trades, and were hoping to win big, who will not reap those gains, sadly. Even worse, once Goldman Sachs’ orders were cancelled, the brokers’ orders became irrational, so to speak, and they’ll even lose some money!
We’re surely not in a free market, here; rather, the strongest wins. The fact that « The Firm » has been and is involved in many manipulation scandals in the commodities and energy sectors should have played a role against it, but it was not the case... which goes to show the magnitude of its power and, more generally, the power those « Too Big to Fail » banks have acquired.
Was there any negotiation, in terms of strength ratio, between the investment bank and the regulator? We could well imagine a « scratch my back and I’ll scratch yours » kind of swap scenario, like ‘You go ahead with leaning on the price of gold and we’ll help you’, or, I’m just thinking, ‘With the help of your algorythms, the stock market index always finishes in positive territory in the last minutes of trading... I owe you one’. The number of consecutive sessions pushed to the upside is much greater than a few years back. No one is talking about stock market manipulation... is it that the regulating organisms finds their interest in it? I’d bet they do and, furthermore, they profit from it, since it brings new investors in.
Case in point : complaints of market manipulations rarely come from the regulators, the ones in charge of orderly market conduct, but rather from cheated investors or operators. With regards to aluminum, a collective suit has been brought against Goldman Sachs AND the London Market Exchange, on the first of August, in which they’re accused of artificially inflating its price.
After all, the stock market bourses are businesses like other ones; they have all been privatized during the financial liberalization of the 80-90’s... which wasn’t such a good idea, really. We are now seeing the result of this liberalization as suspicions abound concerning an agreement between the markets and the largest banks. And let’s bet that the central bank isn’t far behind... It’s not a matter of falling into a « conspiracy theory » trap, but rather a matter of analysing the facts. And these facts show that we have reasons to worry about the orderly conduct of markets.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.