During the past four decades regulators made various changes to introduce greater competition into the stock market, with the idea that a more competitive market would be more hospitable to individual investors. Before 1975, the commissions that big Wall Street firms charged to trade shares were fixed, and they were fixed at a high level. That made trading a relatively easy, lucrative business. Then the commissions were deregulated, opening the door to upstarts, like discount brokerage firms. In 1998, the Securities and Exchange Commission allowed the use of "alternative trading systems," which competed directly with established exchanges like the New York Stock Exchange and Nasdaq. In 2005 the SEC basically endorsed automated trading. Anyone with a computer would be able to start a trading platform. All these changes were supposed to level the playing field between the big guys and the little guys.
But it turns out that all orders to buy and sell stock aren't created equal. In recent years, the SEC's rule changes have enabled "dark pools," or private markets where big investors can trade their shares without tipping off outsiders, to become a big chunk of the market. (Like most brokerage firms, Goldman owns a dark pool.) According to the Wall Street Journal, such markets accounted for fully one in three U.S. stock trades in December. The arrangement makes a certain amount of sense for big investors because in a market where other traders constantly try to capitalize on big investors' positions, anonymity can let the big guys execute their trades more efficiently. But critics worry that the rise of these walled-off trading systems makes prices less transparent and accurate for everybody else. In November 2009, the SEC proposed rules on dark pool trading, but the agency has yet to make any final decisions.
Wall Street firms also have the advantage of faster computer systems able to keep track of a market accelerating ever faster. These systems are better than anything any individual could hope to access. Traders now engage in something called high-frequency trading, which uses automated computer programs to process all sorts of information faster than any mere human ever could. High-frequency traders argue that they increase liquidity, but critics say that they create a two-tiered system in which those with access to this technology can steal returns from those without—usually individual investors. A variation on high-frequency trading is "flash trading," which allows privileged traders to see buy and sell orders before they are transmitted to the broader market, which is patently unfair. Many people believe the "flash crash" last spring, in which the market basically seized up, confirmed some of the dangers of this newly automated world. (In 2009, the SEC moved to ban flash trading, and in early 2010 it asked for comments on market-structure rules, but the agency has yet to take action on either proposal.)
Do you even need to ask whether Goldman is a major player in high-frequency trading?
I could continue, but let's end on a happy note. There actually is a silver lining in some of this, which is that distinctions between big investors and little investors aren't always real. You can't compete because you're a little guy. But your pension fund or your mutual fund is a big guy—a big guy made up of lots of little guys—and therefore might benefit from a venture-capital investment you can't access on your own, or from dark pools.
Conceivably we will one day look back at the Goldman-Facebook deal and smirk with schadenfreude. Goldman's big investors aren't getting Facebook on the cheap. According to the New York Times, the deal values Facebook at $50 billion, nearly twice the $27 billion that Google was worth after its first day as a public company. Goldman's clients are also paying up for the privilege—Goldman will collect a 4 percent up-front fee and 5 percent of any profits, according to the Times. In other words, even Goldman's wealthiest clients aren't guaranteed a killing. Only Goldman is. Which is yet another reason that it's good to be Goldman Sachs.
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