February 08, 2012

Goldman Sachs is planning to spin off the REDI Technologies electronic trading software group into a separate subsidiary and has invited rival banks to take stakes in the unit, as reported by Dow Jones Newswires in The Wall Street Journal.

The software group was already moved from the firm’s lower Manhattan headquarters to Jersey as the firm plans for the spinoff, which Dow Jones said could happen next month.

While the financial terms are still in negotiation, Goldman intends to keep a “significant” stake in REDI through its Principal Strategic Investments Group, a private equity portfolio that maintains minority stakes in 62 market-related exchange, trading an technology firms.

The software group designs the software and desktop – known as REDIPlus —an execution management system (EMS) —used by Goldman’s hedge fund and institutional clients to execute securities and derivatives trades across multiple venues including exchanges and dark liquidity pools.

Goldman obtained the REDI unit as part of its $7 billion acquisition of electronic market making firm Spear Leeds & Kellogg L.P. in 2000. Many of the bulge bracket firms followed in Goldman’s footsteps, acquiring their own front end trading platforms. As Dow Jones noted, by 2005, Citi bought Lava Trading, J.P. Morgan bought Neovest and Lehman Brothers bought Townsend Analytics (RealTick). Morgan Stanley developed its own front-end system, Passport.

But the REDI spin off is a sign that hedge funds and buy-side institutions are showing a preference for multi-broker platforms, as opposed to EMSs owned by a single dealer. In the past year or two, major brokers have sold off their front-end software businesses. Citi sold off Lava Trading’s Color Palette front end trading software to Flextrade, while Barclays’ Capital sold RealTick (inherited from Lehman Brothers) to ConvergEx Group in 2011.

The changing economics of operating these software businesses is also a factor in the Goldman spinoff of REDI, the article suggests, as the banks may no longer have the capital to invest in maintaining and upgrading software. Hedge funds and investment managers have reduced the number of EMSs on the desktop, preferring to use multi-broker platforms.

Meanwhile, independent providers, like FlexTrade, Bloomberg and ConvergEx, continue to gain traction against the single-dealer platforms, as Advanced Trading reported in “EMS Growing Pains”.

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...