Accessing Liquidity: SIGMA and SIGMA X Presentation to Bright Trading September 17, 2008 Denise Fiacco, Jack Mahoney, Justin Lerner.

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Presentation transcript:

Accessing Liquidity: SIGMA and SIGMA X Presentation to Bright Trading September 17, 2008 Denise Fiacco, Jack Mahoney, Justin Lerner

Then and Now: Listed Shares 1. Jan 08. Single-counted share volume, internal matches only, all Tape hours. For some venues the estimates are rough approximations. Shapes not in proportion to actual market share. NYSE NSE PHLX CHX BSE INET 84% 3% Liquidnet Broker-dealers Posit 4% 7% 2% 2001 Crossing networks Regional 11% Pipeline Liquidnet SIGMA X Broker-dealers Posit >25% <3% MatchPoint ~3% ARCA NYSE Group 53% 13% NYSE Hybrid <40% Nasdaq Single Book ~5% 2% Other exchanges BATS 6% ECN’s Then and Now: Listed Shares

Market Landscape: Fragmentation ** Reflects TABB group reported volumes for June Complex US Liquidity Landscape

Simplified ECN Landscape ** Reflects TABB group reported volumes for June Simplified, Consolidated ECN Landscape

Complex, Fractured Dark Pool Landscape ** Reflects Rosenblatt Securities reported volumes for July 2008.

Dark Pool Competition The Actual Numbers … ** Reflects Rosenblatt Securities reported volumes for July 2008.

The SIGMA Smart Router SIGMA creates a “game plan” for every order it receives The original parent order is decomposed into child orders according to: 1.NBBO 2.Internal ranking table 3.Depth of book feed (real time from all major pools of liquidity) Orders sent to pure electronic exchanges are routed with an IOC (Immediate or Cancel) time-in-force Orders sent to partially electronic exchanges (Hybrid NYSE) are routed with a DAY time-in-force Prior to routing to public markets, SIGMA will search for liquidity in SIGMA X This is an iterative process: SIGMA creates a new game plan for the balance of the order Subsequent game plans depends on whether the order receives a fill or an out from a particular venue (no fill at all from particular destination, they are removed from the game plan at that quote, but if quote moves we may go again irrespective of whether we were filled at prior quote) Posting destination(s) fully customizable Smart Routing: SIGMA SIGMA SIGMA Smart routed orders SIGMA X Customer ATSXLPsPublic

OTC Breakdown Listed Breakdown SIGMA Listed vs. OTC Executed Volumes

REDIPlus Orders to SIGMA X REDIPlus Portfolio Trader Waves to SIGMA X REDIPlus X-Posted Tickets FIX Orders to SIGMA X R SIGMA X Algo Orders SIGMA Smart Routed Orders SIGMA X Posted Orders Customers ATS Liquidity Providers Dark Pools Public Markets GSET Flow Diagram R R

SIGMA X Directed SIGMA Routed GSCO Liquidity Providers SIGMA X: Executed Flow Composition Customer Pool: 90%Liquidity Providers:10% AlgorithmicDMA Customer ATS

Market CapitalizationSector SIGMA X: Execution Breakdown by Market Capitalization/Sector Small 11% Mid 33%Large 56% Volumes in various sectors track the market closely, overweighed in IT, underweighted in Financials.

SIGMA X: Order Types and Parameters Order Types: Limit, PEGbid, PEGmid, PEGask, Ping (limit IOC) All peg orders float with the NBBO on the side specified. For example, a buy order pegged to the bid floats with the national best bid All possible spread capture/price improvement goes to the liquidity provider

SIGMA X: Customer ATS Execution Analysis Large 56% Limit and PEGmid most common. PEGbid/ask used much less frequently. ~16% of executions are limit buyers interacting with limit sellers. PEGmid buyers interacting with limit sellers comprise 31% of executions, while PEGmid sellers interacting with limit buyers comprise an additional 31% of executions. An additional 18% is PEGmid buyers interacting with PEGmid sellers. ~34% of PEGmid executions occur at a more favorable price (34% (16.8/50)) of PEGmid buyers execute on the bid, and 34% of PEGmid sellers execute on the offer). * Sample period is from January 2, 2008 – April 4, 2008

SIGMA X: What We Do To Prevent Gaming Real-time monitoring and alerts (work in progress): We monitor all orders that are directed to SIGMA X and are alerted to large-sized orders, high participation rates, excessive price moves and abnormal spreads. Advanced monitoring tools: graphical interface that allows us to view a particular execution along with all relevant quote/trade data. Regular monitoring of historical performance: automated tools and reports to monitor the performance of clients that provide liquidity. Internal checks and balances on DMA and algorithmic flow: ability to set default SIGMA X anti-gaming measures (MXQ, opt-out of certain flows, etc.) at both client and order level.

SIGMA X: What You Can Do To Prevent Gaming Prevent ‘fishing’: use an MXQ (minimum execution quantity) on orders directed to SIGMA X to avoid small fills. This quantity is the minimum size you are willing to cross and can be set as a default per user or on an order-by-order basis. Reduce impact: be sure to specify a bottom/top when using a peg order type to avoid excessive price impact. Keep in mind that dark executions do hit the tape. Call us: if you have any questions or concerns about a particular order or execution, call your representative.

SIGMA X: Executed Volume Trend Average execution size = 600 shares 1B shares ADV intractable flow 21% of GSET algorithmic executions occur in SIGMA X SIGMA X latency = less than 1 ms 4,000 unique symbols executed per day

2008 Global Electronic Trading Disclaimer This message is not the product of the Global Investment Research Department or Fixed Income Research. It is not a research report and is not intended as such. Non-Reliance and Risk Disclosure: This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of our clients. It does not constitute a recommendation or take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on any advice or recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Certain transactions - including those involving futures, options, equity swaps, and other derivatives as well as non-investment-grade securities, foreign-denominated securities and securities, such as ADRs, whose value is influenced by foreign currencies- give rise to substantial risk and may not be available to or suitable for all investors. This material is not for distribution to private customers, as that term is defined under the rules of the Financial Services Authority in the United Kingdom; and any investments, including derivatives, mentioned in this material will not be made available by us to any such private customer. The material is based on information that we consider reliable, but we do not represent that it is accurate, complete or up to date, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material and only represent the views of the author and not those of Goldman Sachs, unless otherwise expressly noted. Legal Entities Disseminating this Material: This material is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN ) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman, Sachs & Co. and/or Goldman Sachs Execution & Clearing, L.P. (all other materials); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: W); in Europe by Goldman Sachs International (unless stated otherwise); in France by Goldman Sachs Paris Inc. et Cie and/or Goldman Sachs International; in Germany by Goldman Sachs International and/or Goldman, Sachs & Co. oHG; in Brazil by Goldman Sachs do Brasil Banco Múltiplo S.A.; and in the United States of America by Goldman Sachs Execution & Clearing, L.P. (or when expressly noted as such, by Goldman, Sachs & Co.) (both of which are members NASD, NYSE and SIPC). Goldman Sachs International, which is authorized and regulated by the Financial Services Authority, has approved this material in connection with its distribution in the United Kingdom and the European Union. Unless governing law permits otherwise, you must contact a Goldman Sachs entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. Reproduction and Re-Distribution: No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without our prior written consent. Conflicts with Agreements: If there is any conflict between this material and the Intermediate Customer Agreement, Professional Client Agreement, Client Access Agreement or the Electronic Access and Trading Agreement (each, an “Agreement”), the relevant Agreement will govern. System Response and Access Times; Algorithmic Models: System response and access times for direct market access and algorithmic trading may vary due to market conditions, system performance and other factors. Goldman Sachs’ algorithmic models derive pricing and trading estimates based on historical volume patterns, real- time market data and parameters selected by the algorithmic user. The ability of Goldman Sachs’ algorithmic models to achieve the performance described in these materials can be impacted by significant changes in market conditions such as increased volatility, price dislocations, material market events or news or trading halts. In addition, systems or communications failures may impact Goldman Sachs’ ability to access the markets and, consequently, the performance of the algorithmic models. Factors such as order quantity, liquidity, spread size and the parameters selected by the algorithmic user may impact the performance results.