Search

 

 

 

 

 

« Greg Palast’s Vultures’ Picnic and Why we Occupy: My Review | Main | !0 Reasons To Hate Bank of America »
Friday
Nov182011

Another MF Global / Goldman Puzzle Piece: Rule 606: Order Flow

As we await the results of a probe into MF Global and its missing clients’ funds that will no doubt be conducted with the same tactical zeal with which authorities across the country arrested over 4000 Occupy Wall Street protestors it’s interesting to note another component of the MF Global - Goldman Relationship. Beyond the past-leadership of Goldman Sachs by former MF Global head, Jon Corzine, and fact he was brought to the helm by former Goldman buddy, Christopher Flowers, there was also a nice little execution business-sharing going on between the firms. An examination of those transactions, each less than $200,000 , could be illuminating.

Under Rule 606 (formerly SEC Rule 11Ac1-6), as part of its strategy to rely on the companies it is supposed to be regulating to reveal whatever part of their hand they want to, the SEC requires a quarterly report  from brokerage firms on  their order-routing services. Specifically, the report covers ‘non-directed’ orders, or ones that customers haven’t specifically requested go through a particular vendor for execution.  The report has four sections: one each for securities listed on the New York Stock Exchange, The Nasdaq Stock Market, the American Stock Exchange and 'Other' exchange-listed options, and indicates the venues most often selected.

So, according to MFG's third quarter non-directed routing report, guess what vendor showed up prominently? Yep - Goldman Sachs Execution and Clearing LP.

Of course, not all information must be disclosed, and, as MFG notes in its report “statistics capture only a portion of MFG order flow” and “do not create a reliable basis on which to assess whether MFG or any other trading venue has satisfied its duty of best execution. “ But sill.

On the NYSE (the body taken public by former Goldman Sachs co-President, John Thain), the order flow of non-directed customer orders less than $200,000 (or 69.1% of total orders) mostly went through Goldman Sachs Execution and Clearing LP. (SGMA) The entity executed 46.4% of total non-directed orders including 58.4% of limit and 37% of ‘other’ orders.  The rest of the NYSE orders went through the Nasdaq, Knight Direct and NYSE ARCA.

On the Amex, non-directed orders of $200,000 or less comprised 23.24% of all orders, of which 31% went through Goldman, including 29.5% limit and 32.2% ‘other’ orders.

Of the orders that went thought the Nasdaq, 94.8% were under $200,000. Of those, 70.4% limit and 40.3% other, went directly through the Nasdaq. Goldman executed 12.1% of the limit, and 8.1% of the other orders.

The reports, as per the SEC being useless, don’t include the trade volume represented by these percentages, yet, for the most part, when MF Global didn’t execute directly its non-directed client orders through an exchange, it used Goldman. There may be some interesting – and co-mingled – 'missing' transactions that slipped in there. Just saying.

References (1)

References allow you to track sources for this article, as well as articles that were written in response to this article.

Reader Comments (2)

Interesting and excellent points!

Perhaps also of interest, it appears MF Global was seriously invest in gold futures, and possibly that's why Paulson suddenly dumped their gold investments.

Gold futures and Italian debt.....

November 18, 2011 | Unregistered Commentersgt_doom

True. Yet, there's not even the pretense of transparency for trade level detail like that.

November 18, 2011 | Registered CommenterNomi Prins
Member Account Required
You must have a member account on this website in order to post comments. Log in to your account to enable posting.