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Goldman's Earnings Surprise: Big Gain in Stock Trading

Tuesday, 18 Oct 2011 | 9:56 AM ET
The Goldman Sachs booth on the floor of the New York Stock Exchange
Getty Images
The Goldman Sachs booth on the floor of the New York Stock Exchange

The most surprising news in Goldman's earnings was not the size of the loss—which was far larger than analysts expected—but the fact that the firm saw a year-over-year gain in equities trading.

Most of Goldman's competitors saw big declines in revenue from equities trading in the third quarter. JPMorgan Chase's equities trading revenues declined 15 percent. Citigroup's declined a shocking 73 percent.

But Goldman managed to earn 18 percent more from trading equities for clients.

How'd they do that?

In a word: fees.

The big Wall Street firms have had to dramatically cut back their trading desks, in preparation for the Volcker Rule, which bans firms from most trading on their own account.

With the prop trading desks gone, the Wall Street firms mostly trade for something called "client execution," which means trading around positions taken by customers. This means that they no longer operate as outsized hedge funds but as market makers who try to profit while providing liquidity for clients.

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Goldman says the gain in its equities trading revenue was "primarily due to significantly higher commissions and fees, reflecting higher transaction volumes."

To put it differently, it seems that Goldman's market making was better executed than its competitors.

JPMorgan and Citigroup must have had to take large losses as market makers, since they would also have profited from higher fees from high transaction volume. Goldman seems to have avoided suffering trading losses, which made its market making more profitable.

In a line item Goldman calls "equities client execution," the firm says revenues increased 45 percent from last quarter.

In short, Goldman is still better at trading than any other firm on Wall Street.

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