By Lauren Tara LaCapra
NEW YORK, June 13 (Reuters) - Goldman Sachs Group Inc has quietly offered some top clients a tool that allows them toplug into its trading system and buy or sell large blocks ofstock electronically.
The technology is part of a broader platform called Marquee,details of which not been previously reported, but wereconfirmed to Reuters by Goldman executives. It is the latestattempt by a Wall Street bank to automate block trading, a smallsliver of the equities business that is still handled mostly byhumans rather than specialized computer programs.
Block trades involve at least 10,000 shares or $200,000worth 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 andhands-on service. Prices are set based on the bank's inventoryand market conditions - the more Goldman wants to reduce itsexposure to a stock, the cheaper it is for a client to buy. Themore the firm wants the stock, the costlier it becomes for theclient.
The idea of automating block trading isn't new, but someprevious attempts have faltered. The pressure to make it workhas increased as banks look for ways to boost profits in thelow-margin equities business. Several other banks, includingBarclays Plc, Citigroup Inc and Bank of AmericaCorp, are trying to migrate block trading to electronicplatforms.
"Everyone brings a different twist to the way they're tryingto solve a common problem, which is: How do you continue tobring high-touch service in an industry that's facing downwardcommissions revenue?" said Adam Sussman, director of research atTABB Group, a market research and advisory firm. "The industryas a whole has to cover more clients with fewer people."
Banks have been forced to take a fresh look at theirequities businesses after years of weak trading volumes andshrinking commissions. Brokerages took in an estimated $12.8billion in equity commissions last year, down 23 percent from2007, according to TABB. The firm expects commissions to risethis year on higher volumes, but remain well below thepre-financial crisis levels.
Goldman's $8.2 billion in overall equities trading revenuelast year was down 27 percent from fiscal 2007. Its $3.1 billionin equity commissions were down 33 percent from fiscal 2007.
From dark pools and high-frequency trading to E*Tradeaccounts, technology has replaced many things humans once did.While robot-like machines now rule many aspects of equitiestrading they have not displaced humans in block trading becausesome clients still prefer talking to a person before making ahuge trade.
Marquee's block-trading algorithm takes seconds to executethe trade, compared with the minutes or hours it can take humantraders. It is also cheaper for the client and, over the longrun, Goldman executives hope it will be cheaper for the bank aswell.
"Clients said they had a sense of urgency and that it'sreally expensive to trade these blocks," said one Goldmanexecutive involved in the system's development.
Goldman executives insisted the new tool was not created tocut jobs, and that getting human traders' cooperation is key toMarquee's success. But they acknowledged that, if it does takeoff, traders' jobs could be at risk in the long-term if theycannot transition into roles that increase Goldman's returns.
TRADERS VERSUS ROBOTS
Earlier attempts automate block trading flopped. Traders whoworried that they would lose their jobs to machines routinelyundercut their robot competitors on pricing. Plus, technologywas not up to snuff.
In 2004, Bank of America Securities launched a platformcalled Premier Block Trading, or PBT, to build market share inequities trading. But PBT's pricing algorithm was easy forclients to game because it gave blanket quotes a few cents aboveor below prevailing market prices, according to several peoplefamiliar with its history.
The traders at Bank of America took advantage the system'sshortcomings, pricing trades more cheaply than PBT to keepclient business, said the sources, who asked not to beidentified.
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 platformcalled Instinct Natural earlier this year that matches buyersand sellers for block trades. Henry Mulholland, head of Americasequities at Bank of America, said the bank will be adding thecapability to use its own balance sheet to facilitate blocktrades electronically as well.
Meanwhile, this year NYSE Euronext said it wasshuttering its New York Block Exchange venture after failing toattract enough business.
Goldman executives declined to specify client discounts forusing Marquee. They said it's too early to tell how much moneyMarquee will save the bank because the system has many functionsand the rollout to clients is still in early stages.
Inside Goldman, Marquee is also used for risk management andprofit-and-loss analysis for the bank's equities business. Earlydevelopers of Marquee in the 1990s first called the software"Marty," after Martin Chavez, who oversaw its development and isnow global co-chief operating officer of equities. The namechanged as its functions expanded and it became used more widelyused inside the bank.
Custom versions of Marquee's block-trading tool were rolledout to a small group of preferred clients in a 2012 beta test,and it was launched more widely this year. The tool coversroughly 1,000 stocks, as well as commonly traded ETFs. About 1million client trades have been processed through Marquee sofar.
If it is successful, Goldman is considering expanding theplatform into other markets, such as fixed income. (Reporting by Lauren Tara LaCapra; editing by Paritosh Bansal,Martin Howell and Alden Bentley)
Barclays (BARC)
