When Joseph Squeri agreed to a guest lecture appearance at Princeton University, he probably didn’t expect the standing-room only crowd he received on Thursday.
He couldn’t get into specifics, he said, because, “Goldman lawyers picked apart my presentation.”
But what Squeri could talk about, including how much Goldman now relies on computer-based trading versus eight years ago, is interesting.
The market of today has become a “technical game”, Squeri says. Whoever has the best technology, wins.
“Macro [is] driving trends now, rather than fundamental research…Doesn’t matter if it’s a good company or not.”
Asked about the firm’s use of technology, Squeri would only say that Goldman Sachs’ does high-frequency trade and that they use circuit breaker controls to prevent run-a ways caused by mistakes in the algorithm.
These algorithms are “signal gatherers” that are activated when a stock price hits a wall on either end.
He also gave us a breakdown of how Goldman’s trading has changed over the past eight years.
2010: > 80% Portfolio Trading, DMA, Algorithm Trading
< 20% Single stock full service
2002: ~ 65% Single stock full service
Like the above evidence suggests, there’s been an overwhelming change in market structure, and in reference to a technical glitch that sent markets into a tumbling frenzy on May 6th, Squeri said simply, “It was just a matter of time.”
“The crash exposed major faults in the system when there is a lack of liquidity”, one of the risks of a market that responds in milliseconds, facilitated by computers and complex algorithms.
The system has flaws, but the continual pursuit by firms like Goldman Sachs’ to trade faster than competitors has changed the landscape of buying and selling over the years, and it’s not a bad thing.
Despite the crash, Squeri remains in-favour of technologies that increase the speed of transactions, arguing that the “market is more efficient through electronic trading.”
When asked what this all means for the future of the market, Squeri answered:
“There will be a point when you can’t go [trade] any faster.”
“Combined with sufficient regulatory controls there should be a restored investor confidence and finally an economic recovery”.
Here are the regulatory controls Squeri thinks will restore confidence and prevent another “flash crash:”
Recently implemented market controls:
– Circuit breaker rules can halt trading
– Additional trade-bust rules
– Additional short-sell rules
– Consolidated audit trail
– Large trader reporting
– Additional transparency rules
– Market maker quoting rules