MARY JO WHITE, COMMISSIONER OF THE SECURITIES AND EXCHANGE COMMISSION (SEC) sat down to breakfast at 6 am on October 19, 2016. It was her custom to eat early and quickly, allowing her chauffeured limo to beat the traffic downtown to the office. However, this morning a story in The Wall Street Journal stopped her in her tracks. There was the headline:
“How one Goldman Sachs trader made more than $100 Million. The gains from big trades are a Throwback to an Earlier Era.”1
White quickly perused the article. A Goldman trader named Tom Malafronte had apparently made large gains on junk bonds he purchased and sold in 1Q 2016. In some cases Malafronte sold the bonds within days of having purchased them. Others were held on Goldman’s books for weeks. Further down, White came across this quote:
“Tom is a tremendous risk taker,” said Jeff Bahl, who headed Goldman’s high-yield trading desk and worked with Mr. Malafronte. “In any opaque market, such as high-yield, the value of a skilled risk taker will always be there.”2
The article concluded by noting that on certain days Malafronte accounted for one-third of total trades in certain bond issues.3
White frowned as she put the paper down. This looked like a very questionable case of “market-making.” In fact, it looked more like proprietary trading, a practice now ...