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Can Strained Broker-Dealer Relationships Be Repaired?

A scathing op-ed in The New York Times by a former Goldman Sachs trader reveals the potential conflict between sell-side firms and their clients. It also rekindles an age-old debate: Can you trust your broker-dealer?

It was the Op-Ed Heard 'Round the World.

In late March, a trader from Goldman Sach's London office announced his resignation in the pages of The New York Times — and a media storm erupted. In the space of 1,277 words, Greg Smith either shed new light on the client-broker relationship or confirmed all of your worst suspicions about how your broker sees you and how Goldman Sachs fills its coffers.

As Goldman's former executive director and head of U.S. equity derivatives in Europe, the Middle East and Africa, Smith did not accuse the firm of anything illegal. But he did reveal the contempt with which some Goldman managers may view their clients: "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as 'muppets,'" he wrote. "I don't know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day."

While the op-ed earned Smith a book deal reportedly worth $1.5 million, his words clearly wounded the Wall Street giant. A spokesperson for Goldman Sachs, which is notoriously media-averse, declined to comment for this article, but Goldman quickly reacted to Smith's op-ed, defending itself on the firm's corporate website based on the results of an in-house survey about how its employees view their clients: "Across the firm at all levels, 89 percent of you said that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today's commentary was, that number was similarly high."

A Breach of Trust

While the outside world shook its head, the investment community was far from scandalized. Garret Nenner, managing director of global markets for Momentum Trading Partners, a high-touch brokerage that specializes in equities and options execution, tells Advanced Trading that the op-ed rang true. "I know that Goldman Sachs pointed out that 'This is not what we do or how we do business,' and from my seat I can't prove it, but [Goldman] does have that bit of disbelief and distrust," he says.

[In a rare interview, embattled Goldman Sachs CEO Lloyd Blankfein defends his firm after the latest public relations nightmare.]

Nenner notes that the Goldman incident recalls the Bankers Trust scandal in the 1990s, which revealed a similar disregard for clients. Despite advances in technology and regulations, he adds, there's still a lack of transparency.

"I fear that regulation is replacing trust: 'The investing public believes firms have to follow these rules, and the firms say they are following them, so I can trust what they are telling me,'" Nenner says. But, he stresses, "I don't think that regulation can replace trust. When you're working with a counterparty, there is a relationship, and that relationship has to be proven time and time again."

Arun Kaul, managing principal and chief investment officer for Olympian Capital Management in Ft. Lauderdale, says he has heard brokers boast of their less-than-reputable tactics. "There's always been knowledge that some of the broker-dealers don't have the investor's best interest at heart," he asserts. "I've had some individuals in my office say that they take advantage of client flow for proprietary trading."

Kaul adds that it doesn't help that many investment firms own brokerages and exchanges and that the buy side cannot see all sides of a trade. Further, he notes, no one really knows what's inside the algos that the brokerages and dark pools are using to trade these large orders.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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