Goldman Aims to Pump Up Units’ Volume

Goldman Sachs Group Inc.’s plan to deliver investment products and research to more than a dozen regional brokerage firms is founded upon the investment bank’s desire to increase order flow to trade-execution firms it has bought over the past two years.

The key driver of the deal is access to the broader retail market, something most of Goldman’s largest competitors already have. On May 2 Goldman linked up 13 regional brokerages in the United States — with 10,500 brokers — to its PrimeAccess specialist trading platform, through which the brokers can receive Goldman research and secondary stock offerings and execute trades on behalf of their customers.

The firms — including Dain Rauscher Inc., Raymond James & Associates Inc., and Wachovia Securities — are not paying a fee for the services. Nor have they agreed to route a minimum percentage of their trades through Goldman.

But Goldman hopes the network will attract trades, which would be processed either by the company or by two of its execution firms: Hull Group, an electronic trading company that focuses on options trading and has a platform for high-volume transactions, and Spear Leeds & Kellogg, a market-maker and specialist firm.

Goldman wants “a distribution channel to the individual investor without the kind of infrastructure that we would need to do this ourselves,” spokeswoman Kathleen Baum said. The brokerage partners “benefit from trade execution, and the volume of order flow gives us efficiencies of scale,” she said.

One observer also suggested that having access to substantial retail distribution would improve Goldman’s position among competitors in public-offering syndicates.

Where other investment banking companies have bought retail brokerages — Morgan Stanley Group Inc. picked up Dean Witter, Discover & Co. in 1997 to become Morgan Stanley Dean Witter & Co., while UBS AG bought PaineWebber Inc. in November — Goldman has avoided any significant involvement in the retail brokerage business until now.

Ms. Baum said the companies Goldman is allying with are “great firms” to which it has already provided products like stock offerings and research, or services like trade execution.

In the field of trade execution, Goldman’s approach is not new. Still, its scale makes it noteworthy — not to mention the fact that Goldman, whose research and public offerings are especially prized, is behind it.

A spokesman for Dain Rauscher, which is owned by Royal Bank of Canada, said that Goldman’s research, which is far more comprehensive than anything a regional brokerage could hope to produce on its own, was a major enticement in the deal.

Tully Tupper, an executive vice president at Scott & Stringfellow, a Richmond, Va., brokerage (owned by BB&T Corp. of Winston-Salem, N.C.), said that using Goldman gives his firm access to its research and the cachet of working with a sizable and reputable partner.

Brokerage firms direct trades to the specialist firm that can offer the best execution. This allows the brokerage to trade the largest blocks of stock in the shortest amount of time and at the lowest cost. Because it is much larger than its specialist competitors, Spear Leeds would typically be able to offer best execution on many trades anyway, Mr. Tupper said.

PrimeAccess has been available in Europe since September, and is used by the British banking company Lloyds TSB, Direkt-Anlage Bank in Germany, and Bank Inter in Spain.

Goldman isn’t alone in looking for these types of alliances.

Lehman Brothers is taking a similar approach by offering its research and products — including both initial and follow-on stock offerings — to retail investors through Fidelity Investments. Lehman works exclusively with Fidelity in that capacity in the United States; it has a similar arrangement in Europe with two online brokers, one Italian and one German.

Analysts say Goldman was smart to form these alliances.

“Goldman knows it can’t ignore the retail base,” said Harry Milling, a bank stock analyst at Morningstar Inc. in Chicago. With this move, “they get access to an enormous amount of potential retail clients, without a full-blown merger.”

Investors have been migrating away from trading online to working with full-service brokers as their advice needs increase, Mr. Milling said. Goldman will benefit from this move, he said.

But most analysts say the key to the deal is the trading volume the allied regional firms will bring to Goldman’s specialists, a business it entered in 1999, when it bought Hull Group. In November it paid $6.5 billion for Spear Leeds, and four months later it bought a third specialist, Benjamin Jacobson & Sons, for about $250 million and folded it into Spear Leeds.

“They’ve made major investments in clearing firms and specialist businesses,” said Raphael Soifer, a financial services consultant in Ridgewood, N.J. “This is a way of getting more volume to flow through them and increasing the revenue these firms will generate.”

Diana P. Yates, an equities analyst at A.G. Edwards & Sons in St. Louis, said that processing retail trades adds volume to Goldman’s market-making firms while giving it “a way to round out the product mix without taking on the risk of buying a retail brokerage firm.”

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