Goldman results show progress in wooing quant clients

In an exclusive interview with Business Insider, Goldman Sachs CEO David Solomon said the firm is making inroads with quant clients that it began to woo years ago.

“If you go back to 2015 and you look at the top quant players, we weren't doing much business with them,” Solomon said. “The picture is very different today, where we are actively engaged with virtually all of them.”

Goldman said on Tuesday that its second-quarter equities trading revenue of $2 billion ranked as the second-best performance over the last four years.

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Goldman Sachs is finally making progress with hard-to-impress trading clients like quantitative hedge funds that have snapped up a bigger share of activity in global stock markets.

That's the message to come from a recent Business Insider interview with CEO David Solomon, and helps explain why Goldman was able to boost equity trading revenues in the second quarter even as rivals faltered.

The investment bank said on Tuesday it raked in $2 billion from trading equities in the quarter, up 6% from a year earlier, to mark the second-best quarterly performance in four years. Goldman also flagged in its earnings presentation that it continues to invest in low-touch execution to better serve systematic clients.

The bank publicly attributed the earnings result to broad-based strength across geographies and product types. But a person with knowledge of the results said on Tuesday it would be fair to attribute the trading strength, in part, to inroads Goldman has made with hedge fund managers known as quants.

Devin Ryan, an analyst at JMP Securities, said the second-quarter equity trading results were “a little bit better than what we were looking for.” Goldman showed strength in market-making and recovery in the prime brokerage business that caters to quants and other types of hedge funds, while commissions and fees were roughly in line with the market, he said.

Solomon, in an interview with Business Insider last month, also called attention to other work the firm is doing with the largest quant funds. The bank began a push in 2015 to improve its so-called low latency offering for quant funds after losing market share first to Morgan Stanley and then to JPMorgan in the years since the financial crisis.

Large quants like Renaissance Technologies and Two Sigma are known for trading in and out of markets quickly and for requiring the most up-to-date technology from the banks they use to place orders. They worry a lot about operational risks such as computer outages or broken links between tech systems and move slowly and deliberately in changing providers.

“If you go back to 2015 and you look at the top quant players, we weren't doing much business with them,” Solomon said in the interview. “The picture is very different today, where we are actively engaged with virtually all of them.”

That's partly because of the investments the bank has made in upgrading its technology, he said. Under the direction of Raj Mahajan, hired in late 2015 and now co-head of securities division engineering, Goldman has been investing in technology to reduce the time it takes between when a client suggests a trade and when that trade is booked.

It's also due to an effort that he and Goldman President John Waldron have made to visit those clients and explain what the bank has in mind. Solomon acknowledged that while he's happy with the firm's progress, he'd like to have more market share.

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“John Waldron and I have personally met with people that are running a bunch of these firms,” Solomon said. “One of the things we're making sure they understand is our focus on client service, and our desire to really deliver better platforms, better technology, in a more seamless way.”

In 2015, Goldman ranked second in equities, according to data compiled by research firm Coalition. The next year, JPMorgan had moved into a second place tie. By 2017, JPMorgan had moved into a first-place tie with Morgan Stanley, a pecking order that persisted last year. Goldman continued to trail Morgan Stanley and JPMorgan, though Coalition indicated in a recent report that it saw Goldman making progress.

JPMorgan on Tuesday reported $1.7 billion in revenue from equities trading in the second quarter, a 12% decline, which it said was largely driven by lower client activity in derivatives and a tough comparison to the prior year. The bank did say its prime brokerage balances had reached a record.

Morgan Stanley is scheduled to report earnings on Thursday.

Despite Goldman's progress, Solomon preached patience.

“I'd love to say that you can just make this stuff happen,” he said, “but it doesn't happen overnight.”