Goldman Sachs is aware of its weakness. After a miserable first quarter in its fixed income trading business, following on from a miserable 2016, it's been assessing the issue and is trying to deal with it.
This was the message from Goldman president David Solomon and Goldman CFO Marty Chavez at Deutsche Bank's global financial services conference yesterday. The two men implied that things are changing in Goldman's fixed income trading business and that there are new areas of focus for the bank as a whole.
The first thing Goldman wants is a new set of trading clients. - The old ones aren't working any more.
Goldman already blamed its recent fixed income trading miss on low volatility and a focus on institutional instead of corporate clients.
Corporate clients (companies) are good news in all markets. They are more likely to trade continuously as they hedge against exchange rate changes that will influence the cost of raw materials, for example. Institutional clients (hedge funds and asset managers) are fussy and more likely to sit on the sidelines. They prefer to trade volatile markets driven by a theme. It's these markets that Goldman specializes in. - As Solomon said previously of Goldman's poor first quarter: "Our business is levered to times when clients have a lot of conviction and one of the things that happened in the first quarter was that conviction ebbed.”
Unfortunately, these conviction markets beloved of Goldman's clients aren't much in evidence right now. Goldman isn't the only one suffering from their absence. - As Marianne Lake, CFO of J.P. Morgan, said yesterday: "Low rates, a more cautious outlook on rates, low volatility have led to low client flows and a generally quiet, subdued and challenging trading environment." However, Goldman may be suffering more than the rest: as Bloomberg's Gadfly column noted in April, 22% of Goldman's trading business comes from hedge funds, compared to just 16% at Citigroup. If anyone's going to sit on the sidelines in markets like these, it's wary hedge funds.
Solomon suggested yesterday that Goldman's over-exposure to hedge fund clients is being rectified: "I think it's well known we've had very, very good market share with hedge funds...it's obvious we have to adjust. And so that's why bigger focus on asset managers, bigger focus on corporates," he told conference attendees.
Goldman isn't the only one chasing corporate accounts. Deutsche is doing the same under its latest strategy unveiled in March. Goldman is at a disadvantage: unlike Deutsche and other banks with an established corporate client base, it doesn't have a big commercial lending business.
This new focus on corporates and institutional asset managers might be one reason Goldman's already parted company with many of its established fixed income salespeople, several of whom were focused on hedge fund clients and are off to UBS. It also implies the firm will be interested in a different kind of salesperson in future: hedge fund salespeople are out, corporate salespeople and salespeople working with pension investors are in.
Of course, Goldman's hedge fund clients will start trading again if volatility and conviction return to the markets. An unexpected win for Jeremy Corbyn in the UK's general election on June 8th would be bad for the pockets of individual bankers and for Goldman as a whole as taxes rise, but it could be just what Goldman's fixed income trading business needs.
The other people on Goldman's shopping list are the quants, the data analysts and the technologists beloved of every bank out there. Chavez - a quant himself - said the firm's competitive advantage comes from the, "strength that we have traditionally in data, in deterioration analysis of that data and in engineering consistent, front, middle and back office experience our clients." Solomon said Goldman has, "upside opportunity," in quantitative equities trading and that it plans to continue investing in this "space" in future.