Are Banks Hypocritical? How Goldman Sachs Really Makes Money

Oct 28 / Cayden Chang

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When a financial institution sells you a product, have you ever asked yourself: Did they buy the same product themselves? More importantly, how exactly are they making money from this deal?


It is a fair question, and one worth asking. Big investment banks like Goldman Sachs often position themselves as advisors and facilitators, but at the same time, they are also active participants in the very markets they serve.


Let’s break down how Goldman Sachs and other major market makers actually generate profits.

1. Bid-Ask Spread

At the most basic level, market makers earn money through the difference between what they are willing to buy an asset for (the bid) and what they are willing to sell it for (the ask).


Example: If Goldman buys Apple stock at $150.00 and sells at $150.05, that five-cent difference may sound small. But with billions of dollars’ worth of transactions happening daily, those small spreads add up to enormous profits.

2. Inventory Trading (Principal Risk-Taking)

Goldman also keeps securities in inventory. If prices move in their favor, they book a profit on the appreciation before reselling. Of course, this comes with risk, but they actively hedge using derivatives and options.


Example: They buy bonds from a client. If bond prices rise before they offload the position, Goldman pockets the gain.

3. Order Flow and Internalization

Because of their deep liquidity, clients like hedge funds and pension funds often route orders to Goldman. Sometimes Goldman doesn’t even send those orders to a public exchange. Instead, they match buyers and sellers internally and keep the spread for themselves.

This practice, known as “internalization,” allows them to capture even more profits behind the scenes.

4. Derivatives Market Making

Goldman is also a giant in the derivatives market. They provide customized hedging solutions to clients, charging a premium for the complexity.

They profit from understanding risk and volatility better than most of their clients can. When you have the scale, technology, and expertise they do, that premium becomes a steady stream of revenue.

5. Client Facilitation and Hedging Services

Institutional clients often trade in sizes too large for the open market. For example, a pension fund might want to sell $1 billion worth of stock. Goldman will step in, take the other side of the trade, and charge a spread while hedging their own exposure.

They earn on both execution and the risk premium they charge for providing that liquidity.

6. Financing and Prime Brokerage

Being a market maker also ties neatly into financing. Goldman provides margin loans, securities lending, and repo services to clients. On top of trading spreads, they collect interest and fees from financing and securities lending.

7. Technology and Scale Advantage

Goldman invests heavily in technology. Their electronic trading platforms and high-frequency capabilities allow them to capture micro-spreads that human traders cannot.

Faster execution and larger scale mean more trades and more profits.

So, Are Banks Hypocritical?

It depends on how you look at it. On one hand, banks like Goldman Sachs are simply doing their job as market makers, providing liquidity and facilitating trades. On the other hand, they profit handsomely from products they may not personally believe in, or from trades where their incentives may not fully align with those of their clients.

This is why, as investors, we must always ask: How does the other side of the deal make money? If a financial institution is selling you something, they have already calculated their advantage. It is our duty to understand the risks before committing our hard-earned money.

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