Exclusive: Goldman offers top clients automated block trading
NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) has quietly offered some top clients a tool that allows them to plug into its trading system and buy or sell large blocks of stock electronically.
The technology is part of a broader platform called Marquee, details of which not been previously reported, but were confirmed to Reuters by Goldman executives. It is the latest attempt by a Wall Street bank to automate block trading, a small sliver of the equities business that is still handled mostly by humans rather than specialized computer programs.
Block trades involve at least 10,000 shares or $200,000 worth of stock and are often used to get clients out of a pinch. When clients really want to buy shares or must offload shares, they are willing to pay a little more to guarantee liquidity and hands-on service. Prices are set based on the bank's inventory and market conditions - the more Goldman wants to reduce its exposure to a stock, the cheaper it is for a client to buy. The more the firm wants the stock, the costlier it becomes for the client.
The idea of automating block trading isn't new, but some previous attempts have faltered. The pressure to make it work has increased as banks look for ways to boost profits in the low-margin equities business. Several other banks, including Barclays Plc (BARC.L), Citigroup Inc (C.N) and Bank of America Corp (BAC.N), are trying to migrate block trading to electronic platforms.
"Everyone brings a different twist to the way they're trying to solve a common problem, which is: How do you continue to bring high-touch service in an industry that's facing downward commissions revenue?" said Adam Sussman, director of research at TABB Group, a market research and advisory firm. "The industry as a whole has to cover more clients with fewer people."
Banks have been forced to take a fresh look at their equities businesses after years of weak trading volumes and shrinking commissions. Brokerages took in an estimated $12.8 billion in equity commissions last year, down 23 percent from 2007, according to TABB. The firm expects commissions to rise this year on higher volumes, but remain well below the pre-financial crisis levels.
Goldman's $8.2 billion in overall equities trading revenue last year was down 27 percent from fiscal 2007. Its $3.1 billion in equity commissions were down 33 percent from fiscal 2007.
From dark pools and high-frequency trading to E*Trade accounts, technology has replaced many things humans once did. While robot-like machines now rule many aspects of equities trading they have not displaced humans in block trading because some clients still prefer talking to a person before making a huge trade.
Marquee's block-trading algorithm takes seconds to execute the trade, compared with the minutes or hours it can take human traders. It is also cheaper for the client and, over the long run, Goldman executives hope it will be cheaper for the bank as well.
"Clients said they had a sense of urgency and that it's really expensive to trade these blocks," said one Goldman executive involved in the system's development.
Goldman executives insisted the new tool was not created to cut jobs, and that getting human traders' cooperation is key to Marquee's success. But they acknowledged that, if it does take off, traders' jobs could be at risk in the long-term if they cannot transition into roles that increase Goldman's returns.
TRADERS VERSUS ROBOTS
Earlier attempts automate block trading flopped. Traders who worried that they would lose their jobs to machines routinely undercut their robot competitors on pricing. Plus, technology was not up to snuff.
In 2004, Bank of America Securities launched a platform called Premier Block Trading, or PBT, to build market share in equities trading. But PBT's pricing algorithm was easy for clients to game because it gave blanket quotes a few cents above or below prevailing market prices, according to several people familiar with its history.
The traders at Bank of America took advantage the system's shortcomings, pricing trades more cheaply than PBT to keep client business, said the sources, who asked not to be identified.
Bank of America closed down PBT within a couple of years, after suffering big losses on its development and rollout.
A Bank of America spokeswoman declined to comment on the old block-trading program, but said the bank launched a platform called Instinct Natural earlier this year that matches buyers and sellers for block trades. Henry Mulholland, head of Americas equities at Bank of America, said the bank will be adding the capability to use its own balance sheet to facilitate block trades electronically as well.
Meanwhile, this year NYSE Euronext NYX.N said it was shuttering its New York Block Exchange venture after failing to attract enough business.
Goldman executives declined to specify client discounts for using Marquee. They said it's too early to tell how much money Marquee will save the bank because the system has many functions and the rollout to clients is still in early stages.
Inside Goldman, Marquee is also used for risk management and profit-and-loss analysis for the bank's equities business. Early developers of Marquee in the 1990s first called the software "Marty," after Martin Chavez, who oversaw its development and is now global co-chief operating officer of equities. The name changed as its functions expanded and it became used more widely used inside the bank.
Custom versions of Marquee's block-trading tool were rolled out to a small group of preferred clients in a 2012 beta test, and it was launched more widely this year. The tool covers roughly 1,000 stocks, as well as commonly traded ETFs. About 1 million client trades have been processed through Marquee so far.
If it is successful, Goldman is considering expanding the platform into other markets, such as fixed income.