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.