It got worse. Traditional Goldman clients such as multistrategy hedge funds started moving toward computer-driven strategies. Asset managers such as Fidelity Investments became even more sensitive about the quality of their trade execution with Wall Street firms. And regulators didn’t react to Lewis’s book and other efforts to sway public opinion. It took years for Goldman to realize it had been wrong on quants.
When it finally awoke—in 2014—it acted swiftly. The first step was hiring Raj Mahajan as a partner, a dramatic move in and of itself. Mahajan had begun his career in 1996 at Goldman’s commodities business and later founded a tech company with Marty Chavez, now the firm’s chief financial officer. Mahajan subsequently became CEO of high-speed company Allston Trading LLC, known as a member of a small cabal of HFT executives who knew their way around the increasingly complex corners of U.S. equity markets.
It’s clear that Mahajan, who finds a few minutes to talk between client meetings, is obsessed with speed. As he attempts to distill the complexities of market structure into simple analogies, over and again he cites milliseconds and microseconds, unfathomably tiny units of time. Once at Goldman, he went about making some of the very decisions the company had resisted—such as creating a parallel system outside SecDB that connects to it only when necessary.
Mahajan determined that SecDB’s data constraints meant it couldn’t capture the number of orders to buy or sell shares above or below the price on offer, what’s known as market depth. Without that, he says, “it was hard for us to be able to make a quick pricing decision on stocks we were trading algorithmically.”
He first tackled the plumbing—the wiring that connects dozens of systems, including those that keep track of inventory, compliance, and post-trade processing internally as well as the outside world of exchanges or broker-dealers. Each trade must be scrutinized in accordance with a lengthy checklist, so Mahajan had programmers write new code to speed up the process. “It’s a computer science and physics problem in how to perform a certain amount of work in a shorter amount of time,” he says.
As the number of exchanges and other trading systems has multiplied, it’s become increasingly important to discover which one offers the best price at any given moment. Mahajan had to make his systems fast enough to consume market data every 20 milliseconds to 50 milliseconds—less than half the time it takes for a human eye to blink—and make almost-instantaneous decisions about where to route orders.
As a last step in his makeover, Mahajan ordered a wholesale rewrite of the algorithms that decide how to break up an order. Clients now have a choice of using those instructions or Goldman’s plumbing to transmit orders to exchanges. “The guiding principle,” he says, “is that we wanted to be the No. 1 electronic intermediary in the business regardless of whether you are a large asset manager or a quantitative hedge fund.”
Mahajan says Goldman has created a system that verifies a trade, locates the best price, and moves quickly to process the order before someone else snatches it. It has a success rate of better than 99 percent. The bank is now one of the top three providers of fast access to European markets, Blankfein said in a March letter to shareholders touting the company’s efforts. The platform also works for futures, commodities, and Treasuries.
Goldman’s aspirations are modest for a company that teems with ambition. Knowing it’s difficult to get big-name quants to switch all their business at once, the bank aims to attract smaller shops or those active investors who are just starting quant strategies. The company reevaluates the rationale behind the project every six months. So far, Mahajan says, “everyone’s heard the arguments, it’s been debated, and it’s been unanimous: Keep your foot on the gas.”
While Goldman Sachs and Morgan Stanley tussled for supremacy, another threat emerged: Jamie Dimon. His bank, JPMorgan Chase & Co., emerged from the financial crisis as the most complete of banking franchises, helped by a pair of takeovers and a reputation for being a safe harbor amid the storm. As the fallout receded, it ended up having leading businesses in almost every major category of finance, including retail and commercial banking, asset management, and Wall Street advisory services. What’s more, it was sitting on almost $1 trillion in deposits to fund it all, more than its two rivals combined.