Conference Presentation
The Future of Market Structure - Goldman Sachs 2020 Investor Day
- Three primary catalysts are driving global market structure evolution:
- Increased regulatory complexity: Approximately 13 regulatory regimes affect a single interest rate vanilla swap trade.
- With 500 daily swaps of this type, the firm executes roughly 6,500 regulatory checks per day, excluding complex trades.
- Technological advancements: An exponential increase in data availability and a dramatic improvement in trading speed and execution performance.
- Changing investing landscape: Passive assets have grown by approximately 17% annually since 2013, totaling $10.7 trillion globally (over 35% of total assets).
- Regulatory and operational efficiency initiatives:
- The firm is leveraging scale and technological implementation to navigate complex pre-to-post-trade workflows involving multiple legal entities and clearing houses.
- High-touch client workflows have shifted from manual phone/email processes to instant messaging where natural language processing (e.g., "REC5Y swap") triggers automatic pricing or human review.
- The firm now processes over 1,500 automated RFQs (Request for Quote) daily using this digital workflow.
- Operational risk mitigation is being addressed through strict policies and controls surrounding the increased use of technology.
- Equities business strategy and performance:
- Clients increasingly measure "all-in cost" of execution, moving beyond commissions to analyze post-trade impact and real-time data.
- Systematic equity trading has doubled since 2012 to $3.6 billion, with more than half of this volume now occurring outside the US in synthetic/swap formats.
- The firm's global stock trading platform processes 5 billion transactions daily at speeds approximately 300,000 times faster than a human blink.
- Platform throughput is estimated to be 60 times higher than Amazon's Prime Day processing volumes.
- The strategic operations platform achieved 99.9% straight-through processing (STP) rates on high-stress days, exceeding the initial 99.5% target.
- Market share in execution has more than doubled in Europe over the past few years, with client rankings at all-time highs.
- Strategic focus includes replatforming the entire lifecycle (order entry to settlement) using in-exchange market-making technologies.
- Execution quality is being enhanced through single-stock algos, which generated $175 million in price improvement for clients while delivering $250 billion of liquidity.
- Fixed Income and Credit market developments:
- The firm launched a Bond Pricing Engine (BPE) generating live ticking mids for 32,000 corporate bonds globally, up from 4,000 in 2015.
- The BPE now generates over 6 million pricing updates per trading day, significantly expanding the universe of reliably priced bonds.
- The GS ALGO (GSA) systematically makes markets in over 15,000 corporate bonds, handling inquiries up to $2.5 million in size.
- The algo processes over 10,000 client inquiries daily and accounts for more than 80% of executed trades by ticket count.
- The US investment-grade corporate bond trading desk volume has increased from fewer than 400 trades per day historically to over 2,000 trades per year with the algo.
- The firm is the number one provider in US investment-grade corporate bond electronic trading.
- Portfolio trading capabilities now allow pricing of large, complex bond portfolios in minutes rather than hours, with over $120 billion in trades executed since modernization.
- The firm maintains a market-leading position in bond ETF market-making, supported by proprietary portfolio optimization tools.
- Digital strategy and ecosystem expansion:
- The Marquee platform provides API access to the Bond Pricing Engine and liquidity for bonds, allowing direct integration into client systems.
- A new digital solution called eARN is being deployed in FX and commodities to streamline access to liquidity and algos in fragmented markets.
- The firm is recycling capabilities across businesses; for instance, Marquee infrastructure is being leveraged to underpin internal repo financing builds.
- Strategic partnerships are being formalized to drive market structure change, with a new Global Markets Strategic Partnerships program launched to engage market-structure influencers.
- Talent and workforce transformation:
- The skill set required has shifted from traditional financial engineering (e.g., stochastic calculus) to strong programming and data science capabilities.
- Despite competition from large tech companies, the firm attracts top talent by offering exposure to global markets and cross-functional collaboration with sales, trading, and operations.
- Sales and trading roles are becoming more dynamic as automation handles lower-value tasks, allowing staff to focus on high-value client differentiation.
- Front-to-back engineering integration has placed engineers closer to sales and traders to enable agile R&D and real-time product development.
- Financial outlook and monetization:
- While margins are compressing, the firm anticipates higher barriers to entry will reward wholesale participants with superior skills, positioning them to capture a larger share of available wallet.
- Equity swap commissions have risen 13% over the past four years across the industry.
- Financing revenues derived from swap execution can be three times or more the value of the actual swap commissions.
- Securities lending is identified as a key differentiator, particularly for accessing hard-to-borrow inventory in markets like China and the Middle East (e.g., leading broker for 30% of MSCI inclusion events in Saudi Arabia).
- Expense savings from operational efficiency are projected to be approximately one-third of the savings seen in global markets overall over a three-year period.
- Operational improvements, such as straight-through processing rates and timely confirmations, are now part of client broker scorecards, directly influencing market share.
- Monetization of Marquee and APIs is approached via both implicit value (fortifying existing services) and explicit value (selling solutions and analytics to clients and partners).
- The firm emphasizes a "buy, build, partner, and invest" approach to growth opportunities.
- Future economic drivers identified:
- Equities: Growth is expected to come from global swap formats, financing bundles, and securities lending, creating a virtuous cycle of scale and price improvement.
- Fixed Income: Continued investment in a "one-stop-shop" model for global market access, derivatives, and financing to retain competitive edge.
- Operational Model: Front-to-back alignment of engineers, sales, and trading to deliver agile, client-centric solutions that drive both cost efficiency and service quality.