A decade ago, Goldman Sachs Group Inc. not only lost its crown as Wall Street’s top equities shop, it then hosted a Morgan Stanley boss who described how great it felt to wear it.

Colm Kelleher, known to delight in needling rivals, talked up his firm’s new lead at a Goldman conference: “I have to say, that gives us a little bit of pleasure.”

Flash forward, Goldman has not only reclaimed the title, it’s now poised to post its biggest lead over Morgan Stanley in years. And its traders are savoring the moment.

“This wasn’t a group that had pep in their step,” Goldman President John Waldron said in an interview. “Becoming No. 1 in equities became a rallying cry. We certainly fed that, just reminding people that Goldman Sachs is not supposed to be No. 2 and No. 3 in these businesses.”

While the storied investment bank has had struggles with its efforts to branch out, the firm’s core business has gained ground in key areas. Nowhere is that more apparent than in the equities franchise, which accounts for almost a quarter of the company’s revenue.

Analysts estimate the bank will report $11.1 billion from equities for 2023, the only jump in revenue from that business among the three top firms. That would put it about $1 billion ahead of Morgan Stanley’s predicted haul when the companies disclose results next week.

The $66 billion global stock-trading business is dominated by three titans, including JPMorgan Chase & Co. While the trio obsess about beating one another, they’ve built up their combined market share to almost 50% of the total earned by the top 30 banks, according to BCG Expand, the research arm of Boston Consulting Group.

Among them, Goldman is the “most improved sales-and-trading franchise since 2019,” said Amrit Shahani, a BCG Expand partner.

Back when Morgan Stanley seized the lead, Kelleher credited the feat to Ted Pick, who became the firm’s CEO this month. The rivalry will undoubtedly continue.

The Octopus
Goldman’s modern equities franchise took shape in the middle of the 20th century under its celebrated leader Gus Levy. He pioneered the art of buying and selling large chunks of stock using an investment bank’s own balance sheet. His desire to ensure Goldman had a hand in every transaction earned him the nickname “The Octopus.”

For decades, Goldman remained at the center of trades by asset managers and hedge funds, partly because of its role helping companies sell shares. But while expanding its trading universe, especially in rates and commodities, the firm was slower to adapt to changes sweeping across the stock market.

Unsurprisingly, executives who credited their success to dealmaking savvy and smart risk-taking struggled to get fired up about operational efficiencies that could shave microseconds off execution times.

That left an opening for competitors who were quicker to embrace the low-margin business of electronic market-making and wooed firms — such as quantitative hedge funds — that became powerhouses after the 2008 financial crisis.

It also didn’t help that Goldman got linked to another sea creature — a “vampire squid” — after its navigation of the housing market’s implosion fueled the perception that the bank’s success derived from outsmarting its own clients.

“There was a lot of mistrust,” Waldron said. “I think the mistrust was born out of a lingering concern that we would compete with them.”

The skepticism among the emerging class of trading firms hardened in 2014 when Gary Cohn, then Goldman’s president, wrote an opinion piece warning that the dramatic acceleration of computer-driven markets risked dysfunction.

Some clients eschewed Goldman for the likes of Morgan Stanley. And when Goldman reached out, they resisted. That was despite Goldman showcasing a technology overhaul and spending billions to catch up with the investments that Morgan Stanley had already made.

“What I found surprising was that they weren’t hugging us on the first day,” Waldron said of the universe of quant firms. “Most times when we offer to do something for clients they say yes right away, but with the systematic clients it was more of a heavy lift.”

Financing Fervor
Banks typically break up their stock-trading business into two key components. There’s the business of intermediation, where they sit in the middle, buying and selling shares or their derivatives. And then there’s prime brokerage, where they can lend securities or offer leverage to market participants eager to multiply their returns when bets go right.

Goldman has seen improvement in both areas.

Its franchise benefited across the board as the pandemic set off waves of trading in recent years, first as prices whipsawed, and then as investors reacted to central bank maneuvers to fight inflation.

But another, more deliberate change has helped boost Goldman’s fortunes. The bank aggressively courted scores of big buy-side firms after recognizing that it wasn’t just underperforming with quants.

Each year, money-management giants such as Citadel, Millennium Management and BlackRock Inc. pay billions of dollars in combined fees to sell-side banks. Yet Goldman wasn’t even in the top-three institutions in reaping that business.

“Those of us that were there at the time have to collectively own that we were not punching at our appropriate weight class,” said Ashok Varadhan, who has helped lead Goldman’s trading business since 2014. He declined to discuss the firm’s progress with specific clients.

Crop
Goldman executives pursued a strategy of improving the bank’s standing with its top 100 clients. Their mission was to cozy up to the biggest firms by providing a widening array of improved services. Those clients could, in turn, reward Goldman’s desks with increased business and higher prime balances.

That is paying off, according to Waldron. “We have built a reputation as being much more of a financing house.”

Waldron credits a group of senior executives in driving the revival. They include Marc Nachmann, who ran the trading business for three years; Kevin Kelly and Cyril Goddeeris, who have shepherded the financing business; and Jack Sebastian, who’s been key in driving the sales force.

It helped that some competitors, such as Deutsche Bank AG, shrank away from stock trading, and that troubled Credit Suisse collapsed into the arms of larger Swiss rival UBS Group AG last year. That left clients with a choice: concentrate even more business with the two leaders in equities financing — JPMorgan and Morgan Stanley — or keep more options open by dealing with Goldman.

Goldman has had the biggest jump in market share gains among its US banking peers relative to the last full year before the pandemic.

People across Wall Street have “Type-A personalities who want to win. That’s the way that they’ve governed themselves their whole life,” Varadhan said. So it would be disingenuous not to say “there’s been tremendous pride in reestablishing ourselves as the No. 1 equities house.”

This article was provided by Bloomberg News.