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Photo: Reuters
Photo: Reuters

Goldman Sachs adds polish to trading

  • The trading desk at Goldman Sachs is getting more efficient with capital

When it comes to Wall Street trading, Goldman Sachs Group is doing more with less.

Another big quarter for trading desks across Wall Street was good at Goldman Sachs, too, with trading revenue up 29% from a year earlier. Often though, investors discount this kind of outperformance. Not only can trading results vary greatly quarter to quarter, but successful trades can be built on a surge in risky assets and balance-sheet consumption that depresses a bank’s ultimate return on equity.

This doesn’t appear to be what is happening right now at Goldman. The firm has been trending toward more efficient production of markets revenue, and it made a big leap this quarter. Net earnings from markets were up 130% from a year earlier, even though the business had only 3% more equity capital allocated to it. Compared with the second quarter, capital allocated to the business actually fell slightly. This helped improve the annualized return on equity for global markets to nearly 20%, up more than 11 percentage points from a year earlier.

Helping drive this is a shift of revenue within trading from financing—lending to clients to boost their returns—to intermediation, or pairing up buyers and sellers, which uses less capital. This is also the fruit of investment in technology to quickly execute trades.

In the third quarter, fixed-income intermediation revenue rose 65% year over year, but financing revenue fell 9%. Equities trading moved in the same direction. Trading “was really done with an eye toward high velocity turn on the balance sheet," Stephen Scherr, chief financial officer, told analysts on Wednesday.

A less-exposed trading business can also help the bank’s stress-test results, which in turn can free up more capital for future buybacks or acquisitions. Mr. Scherr said the bank was “in a good position" with its submission for the Federal Reserve’s special ongoing exam.

More durable earnings and better stress-test results are also big reasons why Goldman, and Morgan Stanley, are pushing further into investment management and consumer financial services. Goldman’s stock is still priced at a discount under 10 times forward earnings, according to FactSet, compared with S&P 500 banks overall at 12 times. More quarters like this could help narrow that.

This story has been published from a wire agency feed without modifications to the text

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