Goldman Sachs Traders Are Regaining Their Edge in Stocks

A decade ago, Goldman Sachs Group Inc. witnessed a loss of its position as Wall Street's premier equities firm, conceding the throne to Morgan Stanley. The shift in dominance was even celebrated by Colm Kelleher, known for his penchant for teasing rivals, who expressed delight in the moment at a Goldman conference. However, in a remarkable turnaround, Goldman has not only reclaimed its top position in equities but is also set to record its most significant lead over Morgan Stanley in years.

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The transformation in Goldman's fortunes is particularly evident in its core business areas, with a notable surge in its equities franchise, constituting nearly a quarter of the firm's revenue. Analysts project that the bank will report $11.1 billion from equities for 2023, representing the only revenue increase in this domain among the top three firms. This places Goldman approximately $1 billion ahead of Morgan Stanley's anticipated earnings when both companies disclose their results.

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The global stock-trading business, valued at $66 billion, is dominated by three major players, including JPMorgan Chase & Co. While these titans continually vie for supremacy, collectively amassing almost 50% of the total market share earned by the top 30 banks, Goldman stands out as the "most improved sales-and-trading franchise since 2019," according to Amrit Shahani, a partner at BCG Expand, the research arm of Boston Consulting Group.

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Goldman's modern equities franchise traces its roots back to the mid-20th century under the leadership of Gus Levy, a celebrated figure in the industry. However, despite being a central player in trades conducted by asset managers and hedge funds, Goldman faced challenges adapting to the evolving landscape of the stock market. While expanding its trading activities in rates and commodities, the firm was slower to embrace the low-margin business of electronic market-making, creating an opening for competitors.

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Goldman's reputation was further tested as it became associated with the term "vampire squid" due to its perceived role in navigating the housing market's collapse. This fueled mistrust, particularly among emerging trading firms, who hesitated to engage with Goldman even after the bank showcased technological upgrades and significant investments to align with industry trends.

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The turning point for Goldman came with a deliberate effort to court major buy-side firms, acknowledging its underperformance with quantitative hedge funds. By improving relations with its top 100 clients and offering enhanced services, Goldman successfully increased its market share gains. Executives, including President John Waldron, emphasized that Goldman's renewed standing as a financing house contributed significantly to this revival.

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Key figures driving this transformation included Marc Nachmann, Kevin Kelly, Cyril Goddeeris, and Jack Sebastian, who played crucial roles in the trading and financing business, as well as driving the sales force. The strategic retreat of some competitors, such as Deutsche Bank AG, and the challenges faced by Credit Suisse, which eventually merged with UBS Group AG, further strengthened Goldman's position in the equities financing arena.

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The successful execution of these strategies has translated into tangible market share gains for Goldman, with the bank witnessing the most significant jump among its U.S. banking peers relative to the period before the pandemic. This accomplishment has instilled a sense of pride and accomplishment within the firm, with executives emphasizing their commitment to regaining the status of the No. 1 equities house on Wall Street.