Come on, you know it was not coming out of GS pockets. It was a heads I win tales you lose situation.
Evidently there is some amount of time between when a stock transaction is booked and when it clears - like a purchase made with a check. They were essentially writing bad checks by selling stock they didn't own. If the price of the stock went down, they would actually go out and buy the stock at the new lower price. If the stock went up they would say, sorry that stock transaction "failed" - darnedest thing, just happens sometimes.
"Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled."
We want to fail them means we are going to issue a failure to deliver because it turns out that the stock we thought was available is not. If you fail on a trade, you don't cancel the trade, a trade is binding, it means you require the customer to buy the stock back to cover the short sale since the stock wasn't actually available. Since in this case the Goldman rep had told the client they could get the stock even though the client thought the stock was likely to be available, issuing a fail to deliver and requiring the client to buy the stock back would lead to egg on the face for whoever the client spoke to at Goldman. The other option for Goldman of course was to buy the stock to lend the customer and hedge out their risk maybe with a put option or to keep looking somewhere else for stock to borrow.
And moreover, creating an apparent supply of the stock which didn't exist before would exert downward pressure on the stock (by supply-and-demand), hurting the holders of the company's shares. So he made the profit scenario more likely for himself.
Evidently there is some amount of time between when a stock transaction is booked and when it clears - like a purchase made with a check. They were essentially writing bad checks by selling stock they didn't own. If the price of the stock went down, they would actually go out and buy the stock at the new lower price. If the stock went up they would say, sorry that stock transaction "failed" - darnedest thing, just happens sometimes.
"Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled."