Will Goldman Shed Darkness by Shutting Dark Pool? - Analyst Blog

The Goldman Sachs Group, Inc. GS is contemplating the closure of its dark pool trading segment – Sigma X, according to a report in The Wall Street Journal. However, there has been no official revelation.  

Before analyzing the facts that may have prompted Goldman to consider the closure, let us take a look at the concept of dark-pool trading.

Basics of Dark Pool Trading

Dark pool trading, also known as ‘off exchange trading', is stock trading in private platforms wherein the secrecy of investors (who are largely institutional investors) is guarded well in comparison to public exchanges. The crux of dark-pool trading is that there is less transparency in trading, minimizing the market impact. Further, price and volumes of trade are predetermined and are only revealed after the trade. Owing to this, such investors reap the advantage of efficient price movement and lower transaction costs.  

Notably, dark pool trading is under constant vigilance by regulators as it allows a section of investors and traders to gain at the cost of a general investor.

Goldman's Sigma X Falling from Heights?

Goldman added Sigma X in its operations in 2006 and currently stands as one of the largest dark pools in the market. Other major players in this space include Barclays PLC BCS, Morgan Stanley MS and UBS AG UBS.

However, the dark-pool market is largely scattered. Further, the industry is combating troubled times with increasing competition. Further, technical faults and issues have heightened the associated risks.

Notably, Sigma X was hit by a pricing error in 2011 that caused many of its clients to incur losses. Goldman is evaluating the optimality of running Sigma X, given the current headwinds across the dark pool trading industry.

Bottom Line

Goldman seems to be in the process of streamlining its operations to drive earnings. According to market rumors, the company is also in talks with IMC Financial Markets to vend its floor trading business that operates in the New York Stock Exchange (NYSE).

A still low interest rate of environment and stringent regulatory landscape has limited the revenue growth of many financial institutions like Goldman. So in addition to resorting to alternative source of revenues, these firms are shedding non profitable and risky businesses to enhance operational efficiency and profitability.

Goldman currently holds a Zacks Rank #3 (Hold).