Goldman Pays $10 mln to Settle Massachusetts Trading Huddle Probe


New York, NY – Culminating a two-year investigation by the Massachusetts Securities Division, last week Goldman Sachs agreed to pay a $10 mln fine and end the practice of conducting “trading huddles” between the firm’s analysts and traders to generate short-term trading ideas which were shared only with the firm’s best clients.

Background on the Goldman Service

According to the Consent Decree, Goldman Sachs developed a new service called the “Asymmetric Service Initiative,” in the wake of the Global Research Analyst Settlement, to create and commercialize short-term trading ideas with the firm’s best clients.  This was part of a widespread effort by the firm’s research department to develop new revenue opportunities.   

These trading ideas were the product of “trading huddles”, or meetings between Goldman’s research analysts, traders, and sometimes even salespeople.  This group would identify stocks they felt would rise or fall over the near-term due to various market catalysts including upcoming earnings announcements or other short-term developments. In some instances, these trading ideas conflicted with the ratings published in Goldman’s widely disseminated research reports.

After these “trading huddles, Goldman’s analysts would call a discreet number of the firm’s biggest clients and provide them these short-term trading ideas with the purpose of getting these clients to increase their trading with the firm.  Some market participants complained that the limited distribution of these trading ideas was a distinct disadvantage to those customers who did not receive the same information.

Internally, Goldman’s “Asymmetric Service Initiative” was considered to be quite successful in driving increased commission revenues to the firm.  One unnamed business unit leader in Goldman’s research department indicated that the initiative had resulted in a 50% increase in commissions.  Internal documents reported in the consent agreement state that Goldman Sachs produced an additional $199 mln in commissions from the initiative in 2007.

Resolution of the Investigation

The Massachusetts securities regulators called Goldman’s practice “a dishonest and unethical violation” of the state’s securities act.  “We verified that there was a preference of some customers at the expense of others,” said William F. Galvin, the state’s chief financial regulator.

In addition, the Massachusetts regulators concluded that many of Goldman’s short-term trade ideas came just in advance of formal rating changes and “there was a benefit to knowing ahead that things were about to change.”

As part of the settlement, Goldman agreed to halt its “Asymmetric Service Initiative” and to pay a $10 million fine. Goldman Sachs did not acknowledge any wrongdoing in agreeing to the settlement.  A Goldman spokesman said the firm was “pleased to have resolved this matter with the Massachusetts Securities Division.” 

The Massachusetts investigation began in response to a 2009 Wall Street Journal article which reported on the existence of these “trading huddles”.  The Securities and Exchange Commission, and Financial Industry Regulatory Authority also began examining the practice.  FINRA is purportedly close to concluding its investigation of Goldman Sachs’s trading huddles.

The Consequences of this Ruling

In the wake of the Global Research Analyst Settlement, many Wall Street firms have struggled with the fact that their research departments had become “cost centers” as institutional clients have been unwilling to pay them what it cost to produce.  As a result, Goldman’s “Asymmetric Service Initiative” was a logical response to this trend.

However, US securities regulators have consistently tried to eliminate “selective disclosure” of any kind with published sell-side research, as they have tried to protect investors from being disadvantaged by such a practice.  This approach has run in direct contrast with sell-side firms who have started to try and run their research departments like real businesses where clients who pay more get more.

The big question we have is how will this obvious conflict between regulators and broker-dealers impact sell-side research in the future?  Could sell-side firms be prohibited from “tiering” their clients, a practice where they give their most profitable customers the most research resources, while they restrict what they provide to other less profitable clients?  

Another major area which could come under attack from the regulators trying to limit selective disclosure could be the “Alpha Capture” or “Trading Ideas” platforms.  These systems encourage Wall Street firms to provide buy-side clients with proprietary, high conviction trading ideas as brokers are rewarded for these ideas based on their relative performance.

Regardless, we suspect the Goldman “trading huddle” case could have wide spread consequences for a number of registered broker-dealers as they will be forced to reevaluate the practices in their research divisions to see if they are benefitting some of their customers at the expense of others.

Click here to access the Consent Decree.


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