The spin off of Goldman Sachs Group's REDIPlus Execution Management System (EMS) to a separate company, called REDI Holdings, Inc., signifies a shift in the economic realities of the brokerage marketplace. As a result, even the largest firms are retreating from developing, maintaining and operating their own multi-asset EMSs.
The spin off of REDIPlus is yet another sign that broker dealers have been pulling back from the trading platform business. A handful of firms have sold OMS or EMS platforms, including Citigroup and Barclays. With scarce real-estate space on the desktop, buy-side firms have increasingly expressed a preference for broker-neutral systems as opposed to single-dealer systems. In April, ConvergEx, an agency broker and technology arm of BNY Mellon, completed the sale of its Eze Castle Software and RealTick trading platforms to private equity firm TPG.
However, Josh Schubkegel, Chief Technology Officer at REDI said, “It’s not just a way for banks and partners to minimize their costs. As an independent technology company we’re going to have the resources and the sole focus to grow this thing and bring step changes to the industry, that both buy-side and sell-side can leverage,” he added.
REDI will offer the EMS as an application service provider (ASP) model, hosting all of the service components, order-routing, market data on its own infrastructure. “All that gets installed on the client side is the front end and the desktop client software,” said the CTO.
The move to spinoff REDI into a separate financial technology company was anticipated by the marketplace. Plans to spin off the software group into a separate subsidiary were first reported in February 2012, when word leaked out that Goldman would invite rival banks to take stakes.
“It took time to get the right partners and each partner brought something to the table. They brought revenues, counterparties, clients, distribution and technology,” said Rishi Nangalia, who previously co-managed the Goldman Sachs Electronic Trading Business Development group, and will serve as the company’s CEO. The new company is headquartered in New York City with support from five regional offices in Boston, San Francisco, Chicago, London and Hong Kong.
Yesterday, Goldman's sale of a majority equity stake in REDI Holdings Inc. was completed to a consortium of five investors, including BofA Merrill Lynch, Barclays, BNP Paribas, Citadel Securities and private equity firm Lightyear Capital. Goldman will retain a significant minority stake in the company, alongside the other investors. Financial details of the transaction were not disclosed.
Under the new management structure, Goldman’s proprietary trading platform, REDIPlus Execution Management System (EMS) will be housed in REDI, an independent financial technology company. The core product, technology, sales and support teams will continue to manage and invest in the platform under the new ownership structure.
The company said the consortium of investors would provide the benefits of an expanded broker network, broad asset class capabilities, expansive global coverage and industry leading customer service.
Hedge funds and institutional clients used REDIPlus to send Goldman order flow, and access its algorithms, to execute securities and derivative 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. It built the platform and expanded into multiple asset classes, multi-currencies, into multi-prime brokerage and multiple geographies.
The move will position REDI to leverage the expertise of its partners and expand its functionality into other parts of the trade lifecycle, and into complementary businesses and services, officials said. While REDIPlus has focused on trade execution side of electronic trading, it could add on the order management piece used by portfolio managers before they send orders to the trading desk.
The investment in REDI will be held through Goldman’s a private equity portfolio that maintains minority stakes in scores of market-related exchange, trading an technology firms. “The new independent REDI is a strategic initiative for Goldman Sachs and the firm is committed to its future success as a separate, multi-dealer platform,” stated Darren Cohen, global co-head of Principal Strategic Investments at Goldman Sachs in yesterday’s announcement.
The spinoff, which may reflect cost pressures firms face from lower volumes and regulatory demands to set aside capital, could also be a sign that developing multi-asset EMSs is too costly for brokers. In addition, having more brokerages involved in the ownership and development of REDI may help it gain even more traction in the market.