Goldman Spreads the Special Sauce

The bank's risk-management system can bring in more business in public than in private.

Goldman Sachs' risk-management system -- known as SecDB -- was widely credited with helping the firm sidestep the worst of the bloodbath in markets during the financial crisis. That's the positive.

Bent, Not Broken

Goldman Sachs's earnings took a beating in the financial crisis, but it fared better than some rivals

Source: Bloomberg

On the negative side, SecDB was widely credited with helping Goldman sidestep the worst of the bloodbath in markets during the financial crisis.  

Why the negative? Well, sidestepping those losses obviously did some serious long-term damage to Goldman's reputation, providing critics with a blank canvas to paint a portrait of a firm that pushes garbage securities on clients while shorting them for its own accounts. 

Now from the Wall Street Journal comes some more details about the bank's project to allow clients access to the "secret sauce" of SecDB to use in their own investment recipes. 

This, obviously, is great fodder for the critics and conspiracy theorists, if the always lively comment section of the Journal is any indication. Surely, it's reasoned, SecDB must be antiquated and worthless if the firm is giving it away.

That seems unlikely. Rather, it's more likely that in a post-Volcker Rule world where Wall Street firms have fewer risky positions to monitor, the technology is simply more valuable to Goldman when it's placed in the hands of clients rather than hoarded in-house. 

Top Chef

Goldman Sachs is betting its "secret sauce" is more valuable in the hands of clients rather than hoarded in-house

Source: Bloomberg

Clients or potential clients who may be wary, rightly or wrongly, of getting their faces ripped off by some lacrosse-playing traders who've got Goldman's huge database at their disposal may be more eager to do business with the firm if they can simply access the technology themselves. 

And while the rest of the financial world has made up some ground in risk-management technology since the financial crisis, it's hard to imagine smaller players replicating SecDB easily. 

As a Goldman presentation (see slides 11 and 12) at a financial conference last year described SecDB: 23 billion prices calculated daily across 2.8 million positions and 500,000 market scenarios, with hundreds of stress tests run regularly.

Giving away technology that taps into it "for free," rather than charging for it, is not as crazy or unprecedented as it sounds when you consider that Wall Street firms for decades gave away research to clients free in hopes that the ideas presented would drum up business for their trading desks.    

In Goldman's case, this seems to be exactly the motivation behind offering applications that tap into SecDB. First, it envisions clients using its Strategy Studio and Marquee applications to construct portfolios, access its market data and research, execute trades on its platform and track performance afterward. 1

Dipping a toe into Goldman's technology ecosystem could very well make clients more comfortable with some of the more exotic structured products it offers. It's likely no coincidence that its proprietary "Cross Asset Risk Premia Basket Series 11" is the example given in the screen shots from last year's presentation. 

Goldman may be giving away the secret sauce for free. But it knows you'll need to buy something to put it on. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Bloomberg LP, the parent of Bloomberg News, also sells market data and analytics software.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at

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