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March 1, 2013

One Touch

Big Brokers Merging 'High-Touch' Sales Traders with 'Low-Touch' Electronic Counterparts

By Peter Chapman and John D'Antona Jr.

If the changes taking place at Goldman Sachs these days are any indication, the business of handling institutional orders is entering a new, highly controversial phase.

The firm is in the process of combining two of its broker-dealers--Goldman, Sachs & Co. and Goldman Sachs Execution & Clearing--into one, thereby, breaking down the wall between the two legal entities that handle cash and electronic trading, respectively.

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The purpose is to make it possible to offer the buyside a single point of coverage for both their high touch and low touch coverage needs.

According to a Goldman insider, the aim is to achieve technological and operational efficiencies and to offer clients the ability to have one point of contact for both their electronic and block trading needs.

For Goldman's buyside clients, however, working with a single individual instead of two is entirely optional. Buyside traders can continue to work with a cash desk sales trader and an electronic desk sales executive if they wish, Goldman tells Traders Magazine. Goldman expects to complete the merger sometime in the second quarter.

Mixing Oil and Water

Craig Jensen, Armstrong Shaw

For some in the industry-both on the buyside and sellside-the idea of merging electronic with manual trading is heresy. The two don't mix. They are like oil and water. Electronic trading is technical and anonymous. Cash trading is all about the relationship and open sharing of order information about positions. The expertise of the two types of professionals can't be blended, say various market participants. The information inherent in an electronic order is intended to be kept secret and is not to be shared.

But brokers' commissions have fallen from $17.3 billion in 2009 to $12.7 billion in 2012, according to research consultancy Tabb Group. In that environment, something has to give, traders admit. Which means a single trader may start to take responsibility for some or all of a client's automated and manual trading needs.

"Consolidation is here," said Craig Jensen, a principal and head trader at Armstrong Shaw Associates, a New Canaan, Conn.-based asset manager with $2.5 billion in equities. "It's been here, and it's ongoing. From when electronic trading first took off, it's been a natural progression to where, in the end, there's going to be overlap with cash trading."