Goldman Sachs is considering how to roll out electronic trading technology to its fixed income business – one of its biggest revenue generators – as it prepares for new regulation.
Goldman’s fixed income, currency and commodities unit, or FICC, has historically been one of the largest profit centres for the bank. But new rules and difficult markets have eaten into its profit margins, causing net revenue at the division to slump by a third in 2011 to $9.02-billion, the lowest level since 2008.
Now Goldman could be one of the first banks to fully introduce electronic trading for its FICC business, marking an important departure for the unit, which has traditionally prided itself on “high touch,” or traditional trading, undertaken by desk-based brokers on behalf of the bank’s clients.
Wall Street’s biggest firms are grappling with how they should respond to new rules governing banks and markets, with many thought to be torn between pushing back against change, or winning first-mover points through early adaptation. Goldman is expected to be among those hit hardest by these new rules, which ban banks from proprietary trading and also seek to make markets more transparent by moving more products on to exchanges.
“Goldman is always good at reading the tea leaves,” said the chief executive officer of a smaller investment bank in New York which does work with Goldman Sachs. “They may not like what the tea leaves say, but they realize it’s always good to be prepared.”
Like many other banks, Goldman already has a suite of electronic trading offerings for clients wishing to trade stocks. But such “low-touch trading” has yet to experience the same growth in FICC businesses, where securities are generally less liquid and more difficult to exchange electronically.
Rates and currencies, where technology is more advanced, are thought to be the prime contenders for electronic trading.
“Banks and brokers need to incorporate a greater use of computerization and technology in fixed income, similar to what the equities segments had to deal with [more than 10]years ago,” said David Hendler, banking analyst at CreditSights. Doing so would also help Goldman lower costs, he said.
“Goldman Sachs and others are waiting for the final Volcker and derivatives rule making under Dodd-Frank before they can redesign and begin implementing more electronic platforms,” he added.
Wall Street banks are grappling to reshape the structure of big over-the-counter trading markets, which have traditionally been among their biggest money makers. JPMorgan said last month that it makes $12,000 in revenue on average from each interest rate swap traded.
Goldman Sachs has not published equivalent figures. Spokesman Michael DuVally declined to comment.