"Goldman explores market-maker deal
by Erica Copulsky
ecopulsky@thedailydeal.com
Could Goldman Sachs Group Inc. be on the hunt for a market maker to expand its Nasdaq trading presence? Some people familiar with the firm seem to think so.
In recent months, Goldman Sachs held talks with Spear, Leeds & Kellogg LP about acquiring its SLK Capital Markets wholesale business, one of the Nasdaq's largest market makers, say sources familiar with the situation.
Goldman bankers conducted due diligence at the Jersey City, N.J.- based Nasdaq trading operations of the big stock-specialist and trade-clearing firm, previously known as Troster Singer Corp., but no formal bid was made, the sources said.
Goldman would not be the first Wall Street stalwart to test a major market maker. In June, Merrill Lynch agreed to buy Nasdaq's third-largest market maker, Herzog Heine Geduld Inc., for $900 million in stock, adding approximately 7,000 stocks to its 800-stock market-making menu.
Goldman also approached Herzog, but never made a formal bid, people familiar with the matter said.
Press officials for both firms declined comment.
How far Goldman's talks with Spear Leeds progressed remains unclear. But they offer a glimpse into what observers say may be Goldman's strategy for making its trade-execution business integral to its full-service product menu.
Last year Goldman, paralleling other big Street firms, took an ownership stake in Archipelago Holdings llc, an electronic communication network, or ECN, that allows investors to trade directly.
But by looking at Spear, Goldman signals that even as technology revolutionizes trading, it believes human intermediaries are necessary. To that end, Goldman last year purchased Hull Trading Co., a stock and option dealer.
Goldman hopes, as its competitors do, to capture a bigger share of the explosive equity trading volume in both over-the-counter and listed stocks.
While market making is a narrow-margin business, those with the biggest share can make a lot. So-called "wholesalers," such as Spear Leeds and Herzog, handle large orders that other brokers refer to them, while full-service brokerages primarily execute their own customers' orders.
Buying an OTC market maker would give a full-service securities firm such as Goldman more of a window on the execution business, says Raphael Soifer of Soifer Consulting, and would improve efficiency.
"In any narrow-margin commoditized business, it's the low-cost producer who wins," Soifer says. "If a securities firm is going to be a low-cost producer of OTC execution, it might make more sense to bring that business in-house."
One problem, however, is a shortage of independent market makers. With Merrill taking Herzog out of the running, the largest wholesalers are Knight Trading Group Inc., Charles Schwab Corp.'s Schwab Capital Markets, Herzog and Spear Leeds' SLK Capital Markets.
Knight is the only publicly-traded independent market maker.
Knight Chief Executive Kenneth Pasternak has said previously that his firm wasn't seeking a buyer, but wouldn't rule out any offers. Pasternak declined to comment.
Market observers, however, believe that some firms are available at the right price. Soifer adds: "Given the pressures brought on by narrowing margins, the cost of technology and the increasing presence of ECNs, consolidation in the Nasdaq specialty-trading business seems likely."" |
