John At The Center

If everybody on Wall Street knew that Goldman was short volatility, it’s pretty obvious what was going on. Goldman was selling a lot of volatility to clients, it thought that the price of volatility was more likely to go down rather than up, and so it happily sat on its short-vol position over most of the quarter, looking to make money as the price went down. Instead, the price went up, and it lost an estimated $250 million on those trades.That’s prop trading. Yes, the equity derivatives desk was indeed meeting client needs, but it was also taking a proprietary directional position on where it thought volatility was headed. Viniar, on the conference call, was essentially saying to regulators, “you can’t prove this is prop trading, we’re just going to say that it was all on behalf of clients, and there’s nothing you can do to stop us.” I suspect he’s right.

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