Online Trading Sparks Interest Of White-Shoe Broker Goldman
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
Online stock trading, gathering steam among individual investors, is attracting interest from an
unlikely source: white-shoe securities firm Goldman, Sachs & Co.
Goldman, Wall Street's last major private partnership, which caters to big institutional
clients, in the past two weeks has created an exploratory committee to examine its future use
of the Internet, including how it could jump into online trading, according to people close to
the situation. Among the issues being considered by the committee: Whether Goldman
should buy an online brokerage firm or set up a joint venture with an online trading concern.
"Everything is on the table," said one person familiar with
the discussions. A Goldman spokesman declined to
comment about the firm's online trading plans. It isn't clear
how Goldman will proceed, of course. Over the years,
the firm has created committees to study various issues, often without any tangible results.
But Goldman's inquiry into the Internet and the online trading business is "a top priority" at
the firm, said another person familiar with the matter. The committee, examining the firm's
options, could offer some broad proposals to Goldman's senior management in the next
several weeks, these people say.
Few expect Goldman to purchase an online trading system anytime soon. What's more
likely, at least initially, is that the company will develop relationships that would marry the
firm's strength in underwriting securities deals and its relationships with institutional and
high-net worth individuals with an online broker's ability to distribute stocks to investors,
according to people close to the firm.
"I suspect what you have here is Goldman saying, 'Look, we're not quite sure where [the
Internet] is going to take anybody, but let's be friends. Let's have an association so we will
have the ability to work on things in the future if they unfold in a way that suits both our
interests,' " said Roy Smith, a finance professor at New York University and a former
Goldman partner.
Currently, Goldman has only limited involvement with the Internet, through minority-stake
investments in electronic-communication networks. It is unclear which direction the firm will
go, and some people at the firm prefer to go slow, in case the Internet trading boom fizzles
out.
Whatever direction the firm ultimately takes, the latest move by Goldman underscores the
growing fascination among major Wall Street firms with online trading. On Friday, Merrill
Lynch & Co., as expected, announced its plans to buy the online-brokerage technology unit of
securities firm D.E. Shaw & Co. Merrill, after several delays, has said it will offer online
trading to some customers in a couple of weeks.
The attraction is simple. As profit margins erode in mature investment-banking businesses,
online trading offers the promise of huge growth. An increasing number of investors find it far
simpler -- and cheaper -- to buy stock directly over the Internet. So far, the biggest Wall
Street firms with a major online presence are Morgan Stanley Dean Witter & Co. through its
Discover unit, Donaldson, Lufkin & Jenrette Securities Corp. through its DLJdirect unit, and
Charles Schwab Corp., the nation's largest online broker.
The explosion of online trading in the past two years has caught many of Wall Street's most
powerful firms flat-footed. The problem is most acute for firms with armies of brokers
catering to individual investors such as Merrill. These firms face a potential revolt from their
brokers; they know online trading will take away a chunk of their business.
No such conflict exists at Goldman, a fact that executives at the firm are keenly aware of,
according to people close to the firm. "Goldman has never been in the retail business,"
catering to the average investor, said one person close to the firm. "But the playing field has
been leveled" by online trading, he added.
Goldman, known for catering to well-heeled individuals, has a stable of some 400 brokers --
called "relationship managers" -- who guide individuals with more than $5 million to invest.
The firm also began offering mutual funds in 1990, and through last year, the firm had
accumulated about $48 billion in mutual-fund assets from both small investors as well as
larger institutional investors, a company spokesman said. But any move into Internet trading
isn't likely to cannibalize these businesses, people close to the firm say. And Goldman
officials believe they can better compete with Wall Street powerhouses Merrill and Morgan
Stanley by embracing online trading in some way.
The interest comes as Goldman considers selling stock as a public company. Given the
recent boom in online trading, having an Internet presence is likely to be craved by Goldman's
prospective shareholders. And such a move would broaden Goldman's business line into the
biggest potential growth arena.
-- Rebecca Buckman contributed to this article.
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