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Goldman Sachs Electronic Trading Liquidity Strategy

Prepared by Goldman Sachs Electronic Trading. In evaluating this material, you should know that it could have been previously provided to other clients and/or internal Goldman Sachs personnel, who could have already acted on it. The views or ideas expressed here are those of the desk and/or author only and are not an “official view� of Goldman Sachs; others at Goldman Sachs may have opinions or may express views that are contrary to those herein. This material is not independent advice and is not a product of Global Investment Research.

Key Topics As the European landscape evolves, we continue to enhance our product offering to provide you with comprehensive trading solutions. Some key topics covered in the presentation include:  The Liquidity Landscape,  GSET Liquidity Access, and  How GSET sources its liquidity


Liquidity Landscape

European Equities Volume Breakdown (Q4 2011) STOXX 50

Public Dark Order Books

European Equities Volume Breakdown across Exchanges and MTFs, Q4, 20111

Dark Order Books 3%

BATS 11% UBS MTF 18%

Chi-X Europe 21%

Turquoise 12%

Instinet BlockMatch 4%


Smartpool 4%

Nomura NX 4%

Liquidnet 2%

Lit Order Books BATS 5% Lit Order Books 97%

Turquoise 6%

Xetra 16%

Chi-X Europe 23%

Stockholm 2% SIX Swiss 9%

For a broader universe of stocks, such as the STOXX 600, fragmentation increases across the market place. 1 Data

for Q4 2011. Source: Thomson Reuters. Excludes OTC volume and sources <1%.

2 Excludes

Broker Crossing Networks as this data is not publically available.

Mercado Continuo 7%

LSE 13%

ENX Paris 9%

ENX Amsterdam ENX 4% Brussels 1%

Italy Johannesbu 3% rg 2%


GSET Liquidity Access

GSET Liquidity Access Goldman Sachs Electronic Trading (GSET) aims to intelligently access the fragmented liquidity landscape, in-line with each order’s underlying objective. Algorithmic Orders

DMA Orders


Our liquidity strategy connects GSET‟s algorithms to SIGMA, other non-displayed liquidity plus all major public venues

Other NonDisplayed Liquidity Sources

Chi-Delta TQ Mid Point BATS Dark Smartpool SIGMA X MTFTM Liquidnet

Public Venues

London (LSE & IOB) Frankfurt Xetra Paris Amsterdam Brussels Lisbon Milan Madrid

Stockholm Oslo Copenhagen Helsinki Vienna

Dublin Johannesburg Athens Istanbul



The current public dark crossing landscape

Non-displayed Liquidity Sources

Opportunity for Price Improvement vs. Lit EBBO

Book Type

Trading Fee at Mid

Trading Fee at Aggressive Touch

Mid and Touch

0.25 bps

0.25 bps



0.1 bps

Not offered



Nomura NX


2 bps

Not offered

Periodic Auction




0.3 bps

Not offered



TQ Mid Point


0.3 bps

Not offered





0.15 bps

Not offered





0.5 bps

Not offered





1 bps

Not offered

Continuous Matching



Order Priority Quantity, Time priority

Mid, PBBO Touch


SIGMA at a glance GSET Algorithms â&#x20AC;&#x201C; SIGMA % Cross Rate

SIGMA % Cross Rate by Index 40%


35% 30 30% 25

25% 20%


15% 15 10% 10




SIGMA % Cross Rate by Country 100% 90%

















Belgium Netherlands

0% Jan '11

Feb '11

Mar '11

Apr '11

May '11

Jun '11

Jul '11

Aug '11

Sep '11

Oct '11

Nov '11

Dec '11


SIGMA Facts Key Statistics:  Biggest Value Day1: $ 1.8 Billion (March 15, 2011)  Largest day cross rate2: 35.1%  Average daily cross rate2: 28.5%  Average daily unique names crossed: 785

Protecting your interests:  We do not allow external clients to quote directly into SIGMA, the only client access is via our Algos or SOR. ― “This unilateral access – solely through Goldman‟s algos/router – means that high-frequency traders, who prefer direct, low-latency connections and use their own algorithms, probably find it both difficult and unattractive to play in SIGMA Europe..” (Rosenblatt Securities, Let There Be Light, March 2011)  We do not consume inbound or outbound IOIs

Data for 2011. 1 Double counted. 2 For eligible flow, e.g. excluding auctions.


Rationale behind SIGMA X MTF? What in the landscape has prompted the launch of an MTF?  Regulation is trending towards regulated venues. MTFs are now firmly embedded in the European trading landscape, and Goldman Sachs is keen to ensure that we remain at the forefront of providing execution services to our clients.  As our clients demand greater transparency, SIGMA X MTF will be operated under a separate governance structure. Surveillance and market operations will be conducted by an independent team of NYSE‟s regulated market staff.  SIGMATM (our Broker Crossing Network) has recently been averaging over $1.09BN a day1, making it one of Europe‟s largest Broker Crossing Networks. By creating a separate MTF, we plan to bring you alternative liquidity. We believe that access to high quality liquidity will continue to be a key differentiator for execution quality.  Innovation in the dark trading landscape may allow for enhancement of execution performance and reduction of slippage.

1 Double

counted, 5 day average.


What are the benefits of SIGMA X MTF? SIGMA X MTF allows you to access superior liquidity, while providing opportunities for improved execution quality within a safe trading environment.  Superior Liquidity – SIGMA X MTF provides you with deeper liquidity on the basis of non-discretionary crossing with flow from external Participants and the Goldman Sachs International franchise.  Improved Execution Quality via Enhanced Functionality: – Bid, Mid-point & Offer Books: Opportunity to capture the full spread without market impact. SIGMA X MTF is the first non-displayed venue to offer trading on 3 crossing points. – Prioritised Crossing: Orders are prioritised on a quantity, time basis. – Minimum Executable Quantity (MXQ): Clients can set an MAQ in order to protect their order flow.

– Unique Internalisation Efficiencies: Internalised trades will be netted internally by the relevant Participant rather than being submitted to the CCP for clearing and settlement.  Safe Trading Environment: – Separate governance structure: Within Goldman Sachs, SIGMA X MTF is operated separately. – Surveillance: Surveillance and market operations are conducted by NYSE Euronext‟s team of regulated market staff. – Clearing is via a Central Counterparty model. – Entirely dark: No risk of pre-trade signalling.


Goldman Sachs: Liquidity Strategy

Goldman Sachs lit destinations Primary market Turquoise


Chi-X Goldman Sachs Electronic Trading GSET Algorithms CLIENT SOR SIGMA


Goldman Sachs non-displayed destinations SIGMA X MTF SmartPool


TQ Mid Point Chi-Delta EMCF

BATS Dark Liquidnet

SIX x-clear


Sourcing Liquidity

What is unique about how GSET sources lit liquidity? Passive Venue Selection – when deciding where to place our passive orders we consider several factors including:  SOR Aggressive Effectiveness: As MTFs gain lit market share, the likelihood of a passive order getting filled on an MTF has increased. Our SOR Aggressive Effectiveness metric measures the tendency of liquidity demanders to prefer taking liquidity from the different MTFs and the Primary market.  Touch Queue Length: When choosing a venue for passive placement, the fill rate is a function of the queue length at the touch. In addition to venue efficacy, we also account for the size of the child order and the venue‟s queue size at the target posting price.  Expected Liquidity Demand: How much liquidity do we expect to be demanded from the market during the period we expect to rest our order passively  Size of order we want to get filled passively

We have shown this placement logic results in better VWAP performance, better touch performance and higher passive fill rates. Touch Queue Length (22d average) 180 160


140 120 100 80 60 40 20 0






What is unique about how GSET sources liquidity? In addition to our enhanced passive placement logic, our SOR:  Dynamically adapts to real-time data and market events  Uses 10 levels of depth per market to source liquidity  Accesses non-displayed liquidity sources prior to public venues to allow for reduced market impact  Over hits selected venues to tap into hidden and reserve liquidity  SOR limit orders can capture marketable (immediately executable) liquidity and post passively across available venues ― This maximises fill rate and reduces the opportunity cost that would occur if only posting to the Primary exchange ― Once a portion of an order is filled at a specific venue, the SOR rebalances the remainder of the order across venues, rewarding the recently filled venue with a larger split  The SOR splits passive iceberg orders at the limit across available venues in order to maximise fill rate and reduce the opportunity cost of only posting to the Primary exchange ― This is designed to accelerate execution times, produce higher fill rates and reduce the risk of not filling

GSET algorithms leverage the Smart Order Router when making order placement decisions.


Protecting your flow Ensuring that your trades are handled in order to minimise market impact is a top priority. GSET has implemented several practices in order to protect your order flow:  Minimum Executable Quantity (MXQ) ― Applied by our algorithms, our MXQ is an increasing function of the average trade size and the child order size as a percentage of ADV ― It is capped – the lower bound is the 10 percentile of STOXX 600 dark MTFs trade sizes, the upper bound is the 50 percentile of STOXX 600 dark MTFs trade sizes  Spike Protection prevents algorithms from adverse selection by protecting pegged dark orders against price spikes ― We compare the current mid-price to a rolling time-weighted average of the primary mid price (TWAM) ― If the current mid is more than the rolling TWAM by a defined multiplier of the stock price average volatility during a certain timeframe, the mid is considered to have spiked ― In cases of an abnormal jump in the stock price, the algorithm will not trade in order to avoid adverse selection ― However, the algorithm will continue to trade in trending market, as that is considered a normal market condition  We do not allow MTFs to onward route your orders

 We do not use hybrid order types on MTFs (thereby not allowing our non-displayed orders to interact with lit orders)  Additionally, GSET passes back execution venue information in order to provide you with full transparency



SIGMA X MTF: Operational Information Key Facts:  Trading hours: Primary market hours, excluding opening and closing auctions.  Trading period: Continuous trading.  Minimum Executable Quantity (MXQ): MXQs may be set, and will be adhered to for the first fill.  Stock Universe: All the constituents of the major European indices.1  Available Order Types: Pegged orders, with or without a limit price.  Time-in-Force: Day or IOC.  Reference price market: Primary market.  Available price points: Bid, offer and mid-point.  Trade reporting: Reported to NYSE‟s XDP feed under MIC code SGMX.

1 Indices include ATX 20, BEL 20, SMI Expanded, DAX, OMXC20, IBEX 35, IBEX Medium, OMXH25, FTSE, ISEQ 20, FTSE MIB, FTSE Italia Mid-Cap Index, AEX, OBX25, PSI 20, CAC, OMXS30


Questions to ask your broker  Are people quoting directly into your pool? E.g. Do you allow “clients” to directly place limit/market orders into your dark pool?  Do you allow MTFs to onward route your orders?  Do you use hybrid order types on MTFs (lit orders trading with dark)?  Do you interact with XLPs (External liquidity providers) using IOIs or IOCs? i.e. Does your dark pool provide IOIs? Does your SOR receive IOIs? Do you „blind ping‟ electronic market makers?  How do you prevent pinging?  Do you impose a minimum fill quantity?  Does your dark pool provide any price improvement?  Do you provide the name of the liquidity source in tag 30?  Can we opt out of specific venues and SOR strategies?  Do you treat dark liquidity sources equally based solely on historic/dynamic fill rates or are other factors considered?


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