Carbon trading omen: Goldman Sachs’ legalized cheating

July 24, 2009

If Congress enacts carbon trading through a cap-and-trade scheme, look for Goldman Sachs to figure out how to game the market at our expense.

Today’s New York Times features a front-page, above-the-fold article about how Goldman Sachs and other trading firms are allowed a 30-millisecond peek at incoming stock market orders before the rest of the the public, allowing Goldman to buy or sell ahead of the incoming trades.

When I was an SEC lawyer, we called this “trading ahead” or “frontrunning” and it was illegal. But apparently, Goldman Sachs and some other traders with powerful computers have obtained special permission to engage in so-called “high-frequency trading” — which can only be considered a euphemism for frontrunning.

This is outrageous in so far as it gives Goldman and the other frontrunners an unfair advantage in the market — no wonder Goldman Sachs is set to have record profits this year.

So what’s this got to do with carbon trading?

Energy and Environment Daily reported today:

Diverging views about how to regulate trillion-dollar carbon trading markets that would grow under a cap-and-trade law have emerged as a major hurdle for Democrats trying to pass a climate bill this year.

Some prominent senators on energy issues say the House-passed climate bill would not prevent a repeat of alleged speculation or manipulation in oil markets in recent years…

The discussions about how to regulate carbon allowance and derivative markets are unfolding at a time when lawmakers want to show they are not enabling Wall Street banks to launch another complex financial trading system that could spin out of control.

“The last kind of headline that members of Congress will want is billions in bonuses for Wall Street because of the way they have manipulated the cap-and-trade market,” said Norm Ornstein, a congressional expert with the American Enterprise Institute. “That is not something they can tolerate.”

Add all this to the recent report by Rolling Stone‘s Matt Taibbi that Goldman secretly received permission from the Commodity Future Trading Commission to take greater positions in the futures market than other traders — thereby helping to cause last year’s oil bubble and $4-gasoline — and you’ve got a recipe for ill-gotten profits from carbon trading for Goldman and disaster for the rest of us.

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