Goldman Sachs Electronic Trading Announces the Launch of Its Enhanced Shortfall Model, Including ETF Specific Version

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July 20, 2009 9:11am ETF BASIC NEWS

goldmansachsGoldman Sachs Electronic Trading (GSET) announced today the release of several significant enhancements to the Goldman Sachs Shortfall Model (GSSM). The GSSM generates expected shortfall numbers, which are estimates for the average change in stock price a trader may create by executing an order. Two major enhancements to the GSSM


include:

  • improvements to the US equities model
  • calibration of that new model specifically for US exchange traded funds (ETFs).

The key enhancement to the US equities model is the removal of market capitalization buckets. Stocks within the GSSM are no longer classified into small, mid, and large-cap categories, which can be extremely fluid in times of increased volatility. Instead, the model has been enriched with a more flexible functional form that captures liquidity differences across the market capitalization spectrum and allows the model to better predict trading costs.

The addition of an ETF-specific version of the enhanced shortfall model allows for better transaction cost prediction when trading ETFs. While the old model included ETFs as part of the estimation universe for equities, ETF model coefficients are now estimated separately based on a large sample of executed orders for ETFs only.

“While we continuously monitor the predictive ability of our shortfall model, the significant volatility and dramatically changing US equity landscape of the past year underscores the value of these changes, which we researched over an extensive period of time,” said Ingrid Tierens, Managing Director and head of equity execution strategies, GSET. “With this new model, clients benefit from an enhanced ability to predict shortfall estimates, not only for single-stock and portfolio trades, but also for ETFs, which have seen significant growth over the past few years.”

The GSSM is based on Goldman Sachs’ own executed orders data, rather than publicly available tick data, and is re-estimated frequently to reflect recent market conditions and uses factor inputs that are updated on a daily basis. Both customers of GSET, utilizing its electronic tools and services, and Goldman Sachs traders utilize the GSSM.

Goldman Sachs customers can access the GSSM in a variety of ways. The model is utilized for pre-trade analytics as well as daily, monthly, and quarterly post-trade reports. The GSSM is fully integrated in two GSET algorithms, OptimIS and Port X. The GSET Strategies team also utilizes the model in equity execution and portfolio optimization analyses. Clients trading electronically will be able to access the model in REDIPlus version 9.1 (to be released in September, 2009), or via web-based reports. In addition, the model is fully integrated with Axioma Portfolio OptimizerTM, a third-party optimization and portfolio construction tool.

About Goldman Sachs Electronic Trading

Goldman Sachs Execution & Clearing, L.P, through its GSET offering, provides clients with the necessary tools to manage their trades from start to finish, from pre-trade analytics to post-trade analysis. Clients access our products via REDIPlus®, our top-ranked EMS platform, or via FIX. Customers can seek liquidity using our suite of multi-asset algorithms, route to optimal destinations using our SIGMA smart router, and take advantage of non-displayed liquidity through our SIGMA and SIGMA X non-displayed liquidity suite. Along with providing clients access to global equity markets, we also offer FX, Futures, and Options across North America, Europe, and Asia.

The Goldman Sachs Group, Inc. is a leading global financial services firm providing investment banking, securities and investment management services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world

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