Goldman Sachs Group Inc. (GS) recently started trading corporate bonds on a new electronic platform designed to bring investors together to trade at specific times, as the New York securities firm looks to respond to a growing threat from rival trading venues that could woo customers away.
Goldman last week launched "GSessions," a platform it developed over the past year to trade corporate bonds in large volumes, company officials said.
Goldman is seeking to attract hedge funds, mutual funds, pension funds and other large investors to use the platform by charging lower fees for electronic trades than what Wall Street dealers collect on most bond trades.
The initiative comes as other financial firms, including money management giant BlackRock Inc. (BLK), are preparing to roll out electronic trading networks that aim to link up buyers and sellers of corporate bonds.
Some of the new venues would allow investors to trade directly with each other, reducing trading costs and bypassing Wall Street dealers that have long acted as middlemen in corporate bond trades.
Bond trading has long been a lucrative business for Wall Street banks, but uncertain markets and upcoming regulations like the Volcker Rule--which would limit bank risk-taking--are leading banks to hold smaller inventories of corporate bonds. As a result, dealers are now less able to step up to buy or sell corporate bonds whenever their customers need to trade.
The new electronic trading venues, meanwhile, are threatening to further diminish Wall Street banks' bond-trading revenues.
Goldman has so far held four five-minute trading sessions on the its new platform, for bonds of AT&T Inc. (T), Ally Financial Inc., Newmont Mining Corp. (NEM, NMC.T) and Goldman itself, according to company officials.
About 200 Goldman customers could participate, and 33 of them conducted a total of 39 trades over the four sessions, trading bonds with a total face value of $150 million. The firm plans to organize a pair of trading sessions twice a week, and may increase the frequency over time depending on customer demand.
Goldman's electronic platform is in part an effort to retain customers, though the firm still is expected to conduct the bulk of its bond trading via its regular channels, such as over the phone.
In GSessions, Goldman still faces every customer that wants to trade, but the fees it collects will in some cases be half of what it gets for similar bond trades done over the phone.
Unlike stocks, which mostly trade on centralized exchanges, corporate bonds trade "over the counter," or directly between pairs of firms at varying times. Dealers typically collect what is known as the bid-ask spread on a bond, or the gap between what buyers are willing to pay and the price at which sellers are willing to part with the bond.
Goldman will provide a narrower bid-ask spread for bonds traded on its platform, and is hoping more customers will warm to the idea of congregating to buy and sell specific securities, which would lead to higher volumes over time.
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