Double Blind

This post can also be titled “Why frequent trading is bad for your financial health”.

When reading Goldman Sachs’ quarterly report, the chart on page 123 struck out at me:

This is the amount of money that Goldman has been able to put to its own books through providing liquidity.

It effectively amounts to a tax on trading – Goldman is using algorithms that leverage the information that flows through its firm, and is able to extract that to the maximum. There is no way that an individual day trader can possibly match this distribution, even when a trader has 1,000 times less capital to work with than Goldman.

Mathematically, it is probably better to just walk to a casino and play 99.5%-return video poker than to trade against Goldman. The only other competition is Morgan Stanley, and this is all that is left in the winner-take-all game of being the primary liquidity maker in the US capital market.

This capital is effectively earned from hedge funds, mutual funds and pensions that are trying to out-wit each other with investment decisions. Indirectly, if you are part of a pension plan (and most employed Canadians are by virtue of their participation in the Canada Pension Plan), you are paying this tax.

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