Gold­man re­vamps elec­tronic stock trad­ing to catch ri­val

The Pak Banker - - COMPANIES/BOSS -

Raj Ma­ha­jan achieved a rare when he re­joined Gold­man Sachs Group Inc 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.

"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 high­fre­quency 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 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 busi- nesses, 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.

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