Goldman Revamps Electronic Stock Trading To Catch Rival
Raj Mahajan achieved a rare feat when he rejoined Goldman Sachs Group Inc (GS.N) last year with the coveted title of partner, the Wall Street bank’s highest rank. Then he got to work on fixing the pipes.
That plumbing has to do with the technology Goldman uses to route stock orders to exchanges and private trading pools. The bank has long been one of the top two stock brokerages in terms of revenue and customer rankings. But in recent years Goldman’s status slipped in electronic trading because its technology did not keep up with client demands for ever-faster trades.
Goldman hired the tech-savvy Mahajan to revamp the business in March 2015. Since then, he has hired dozens of technologists and support staff to elevate Goldman’s position in a fast-growing slice of the market and win back business from its chief competitor, Morgan Stanley (MS.N).
“When we look at how Goldman wants to be positioned for the future, simply put, we want to deliver the best execution quality to our clients, which is tantamount to saying we need the best technology,” Mahajan said in an interview.
The 43-year-old was promoted to co-head of global execution services last month. He began his career at Goldman Sachs in 1996 as a commodities analyst, but left the bank in 2000 to launch a trading technology firm with R. Martin Chavez, who is now Goldman’s chief information officer.
Their startup, Kiodex, was bought in 2004 by financial software maker Sungard, where Mahajan became president of global trading. He later became chief executive officer of high-frequency firm Allston Trading before rejoining Goldman as partner, a rank held by around 1.5 percent of Goldman employees.
Mahajan said the idea of fixing the cracks in Goldman’s pipes to make trades move faster and more efficiently to find the best liquidity is what motivated him to return.
“I thought that played right into my skills,” he said.
Within the next few months, Goldman’s clients will have access to a new system it acquired when it bought Stockholm-based Pantor Engineering in October. Goldman retained Pantor’s team of about 20 engineers, and hired several managers in Europe and the United States to tweak and integrate the system into its own.
Later this year, Goldman plans to begin letting its clients use the bank’s proprietary algorithms within that new system, Mahajan said. That will allow institutional investors who do not have their own algorithms to tap into quantitative trading strategies.
The work Mahajan has been doing is important for Goldman, whose electronic stock-trading business appeared to be on shaky ground in the years leading up to his hire.
The bank’s former head of electronic stock trading, Greg Tusar, announced his departure in February 2013 to join electronic trading firm Getco. Six months later, Goldman suffered a high-profile technical trading error, which later resulted in a regulatory fine.
Goldman’s revenue from stock trading became choppy for a range of reasons including the sale of two businesses, fluctuations in the value of its own debt, and markets that flipped from sluggish to volatile in short periods of time.
But analysts and traders at other Wall Street firms have criticized Goldman’s technology for failing to synch up with quantitative hedge funds and institutional investors that are increasingly adopting algorithmic trading strategies, which now make up around 10 percent of U.S. stock volume.
Meanwhile, Morgan Stanley was investing heavily in electronic trading, and experiencing the opposite results.
Sources inside Goldman say that after Tusar’s departure, the bank focused more on other types of business, like derivatives, financing hedge fund trades, and buying big chunks of stock from mutual funds, to keep revenue aloft.
One camp of traders within the stock-trading business felt the bank should remain focused on more traditional businesses, which came with fatter margins. Another argued that Goldman had to invest in new electronic-trading technology and staff to be relevant and competitive. The latter group, led by Chavez, eventually won out.
Now, Goldman is working to integrate all of its offerings to create a one-stop shop for clients who want to trade, borrow or hedge stocks. Its investment in the electronic business is notable because Goldman and other banks are cutting costs and being very selective about where to put money to work.
“At a time when people are pulling back or potentially retrenching, we are stepping on the gas,” Mahajan said.