Goldman Might Close Its Dark Pool

Goldman Mulls Closing Dark Pool, WSJ

Michael Lewis’s new book, ‘Flash Boys’ would have a real impact on the market if Goldman really closes its dark pool. Credit Suisse and Goldman Sachs, among banks, have the largest dark pools.

Goldman Sachs Group Inc. GS -1.26% is considering shutting down one of the world’s largest private stock-trading venues, according to people familiar with the matter.

In conversations with market participants over the past several months, Goldman executives have broached the subject of closing its so-called dark-pool trading operation, known as Sigma X, the people said.

Goldman executives are weighing whether the revenue that the firm generates from operating Sigma X is worth the risks that have been highlighted by a series of trading glitches and growing criticism of dark pools, the people said.

No decision is imminent, and Goldman could keep the business, according to the people.

A move to shutter one of the biggest dark pools could compel other big banks to take similar steps, potentially changing the way buy and sell orders from big investors course through the markets each day.

Dark pools are trading venues where investors are granted a greater degree of anonymity than in the public markets. About 14% of stock trading took place in dark pools in January, most of it routed through entities run by big banks, according to Rosenblatt Securities, which advises institutional investors. Goldman’s consistently ranks among the top five dark pools in the market, according to Rosenblatt.

The dark-pool business has hit a rough patch lately. Competition has increased in the already fragmented market as new dark pools have emerged. A recent spate of technological glitches in the stock market, meanwhile, underscores the risks that come with operating private trading platforms.

Last month, Goldman acknowledged that Sigma X suffered a pricing malfunction in 2011 that resulted in customers not receiving correct payments for transactions. The errors were related to market volatility between Aug. 1 and Aug. 9, 2011, according to a copy of a letter to an institutional investor reviewed by The Wall Street Journal. Goldman sent checks to customers to reimburse them for losses, according to institutions that received the letters.

Another headwind for dark pools came last week with the publication of a book by Michael Lewis on high-frequency trading that fanned the debate over whether dark pools give certain investors unfair advantages. Regulators last month began ramping up scrutiny of brokers and dark pools, and since Mr. Lewis’s book came out, states have vowed to look into the matter as well.

The Financial Industry Regulatory Authority, meanwhile, has opened an inquiry into the way brokers route customer orders and how they use their own dark pools in executing trades. Finra sent a letter to brokers last month asking for detailed answers on its order-routing practices, according to brokers who received the letter.

Stock trading is a big business for Goldman, bringing in $7.17 billion in 2013 excluding accounting charges. Goldman doesn’t break out revenue from operating Sigma X. Among the largest dark pools are those operated by Barclays PLC, Morgan Stanley and UBS AG, according to Rosenblatt.

Goldman has operated Sigma X since 2006. But recently it has become an advocate of market changes. Gary Cohn, Goldman’s president and chief operating officer, published an opinion piece in the Journal on March 20 that called for improvements to reduce the risk of technology failures and level the playing field for investors.

In an internal document sent to employees the same day the piece was published advising them on how to address questions about it, Goldman highlighted its relationship with an upstart trading venue called IEX Group Inc. In the message, Goldman said “While we think that a regulatory response may be needed to address these market structure issues, it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes in our U.S. dark pool, Sigma X.”

Less than two weeks later, Mr. Lewis’s book, “Flash Boys,” was published. The book presents IEX as heroes taking on an industry in which markets are rigged to benefit exchanges, brokers and high-frequency traders at the expense of ordinary investors. The IEX platform uses a speed bump to level the playing field between fleet-footed and ordinary investors.

Goldman’s debate over Sigma X could be part of a broader effort to pare back on businesses Goldman doesn’t consider core to its position as a brokerage firm for institutional investors, according to the people familiar with Goldman’s discussions.

The firm also appears to be trimming its electronic-trading businesses. The bank is in advanced discussions to sell a market-making business based on the floor of the New York Stock Exchange to IMC Financial Markets, a Dutch high-frequency-trading firm, for as much as $30 million, according to people familiar with the discussions.

Update: they revealed they have no plans to close the dark pool