The unit, which develops and manages software that allows Goldman Sachs clients to trade financial products electronically, could reach agreement with new investors within a month, said one of the people, who declined to be identified because the talks are private. Dow Jones Newswires reported on the unit’s planned spin-out earlier yesterday.
Goldman Sachs intends to maintain a significant investment in the business, which relocated to the bank’s New Jersey building from its Manhattan headquarters in the past few months, according to one of the people. Investors are likely to include other brokers with global businesses across asset classes, the other person said.
“Commissions are currency on the Street these days,” Scott Harrison, global head of product at Liquidnet Holdings Inc. in New York, said in a phone interview. He is a former chief executive officer of Burbank, California-based UNX LLC, a technology company that has an execution-management system. “You have to pay commissions to multiple brokers to get services,” he said. “Clients need access to many brokers on one system.”
Goldman Sachs acquired the software that formed the basis for REDI Technologies when it purchased New York Stock Exchange specialist Spear, Leeds & Kellogg LP in 2000 and has expanded it to handle trades in asset classes such as currencies and interest rates. Goldman Sachs expects the independent business to meet client demand for execution management systems that give them easier access to multiple brokers and aren’t seen as single-dealer platforms, one of the people said.
Tabb Group LLC, a New York-based research firm, said in a June report that single-dealer execution-management systems, which once functioned for clients as a “direct highway of order flow and a portal to services,” have become less relevant to the brokers that sponsored them. Their return on investment is “questionable,” the report said.
The REDI platform is used by Goldman Sachs’s hedge fund clients, asset managers and brokers that employ the firm’s electronic-trading services. While orders can be sent to some brokers through the REDI system, it’s used primarily to ship orders to Goldman Sachs, one of the people said.
Rishi Nangalia, an executive in the Goldman Sachs Electronic Trading unit, will have a senior role in the business, according to one of the people.
Goldman Sachs’s plans come about a year after London-based Barclays Plc sold the RealTick trading platform, which lets customers access services from multiple brokers, to New York- based ConvergEx Inc. Barclays said in December 2010 that it planned to use the system within its investment banking unit and offer the platform to customers. The bank got RealTick when it acquired part of Lehman Brothers Holdings Inc. in 2008.
Citigroup Inc., JPMorgan Chase & Co., Knight Capital Group Inc. and other securities firms bought execution-management systems starting in the mid-2000s to give mutual funds and other clients access to exchanges and algorithms, or trading strategies that allow them to process larger orders in small pieces over a preset period, along with other transaction services. Some platforms were open to the algorithms of multiple brokers or technology providers while others focused on those from a single firm.
“Single-broker EMSs offer branding, constant presence and a single portal to services,” Tabb’s report said. “Routing to other brokers may also be an option, but as a reluctant service rather than an advertised benefit.”
Investment Technology Group Inc. and Instinet Inc., a subsidiary of Tokyo-based Nomura Holdings Inc., offer execution platforms to customers. Both firms are execution-only brokers that don’t trade with their own money. Bloomberg LP, the parent of Bloomberg News, offers similar systems.
Goldman Sachs and brokers providing mainly execution services had the most success in finding users among asset managers that considered them one of their top five brokers, the Tabb report said. Trading platforms from Morgan Stanley, JPMorgan and Bank of America Corp. are less utilized, Tabb said.
“Our hope is to deliver a product to our clients that’s open, that delivers them products and services from multiple brokers, assets and markets across the globe,” Nangalia, who runs REDI Technologies, said in an undated online video about the business. “We are not limited to the services that are offered by one firm nor by the size of a small technology vendor.”