Why Goldman Sachs Is Sharing Its Proprietary Intellectual Capital With Clients

Competitive advantage in this economy is ephemeral and sustainable advantage is delusional. Value lies not so much in proprietary systems which competitors and wannabes can replicate by studying your performance, but in the strength of relationships with clients and potential clients.

The finance business is changing, as many predicted it would. Historically a service to productive enterprises, finance over the past two decades has come to dominate the global economy, thanks, in part, to its boosting - and early use - of technology. But in a world where all is cyclical, that cycle may have run its course.

Finance was the first industry to monetize information and benefited handsomely. But with tech becoming a core feature of every business, that monopoly has ended. Abuse of the power that information gave it didn't help either, but was probably just the last impetus needed for a process already in train.

The result is that smart companies have to find new ways to make themselves essential to clients. Sharing the ties that bind through access to data - and, more importantly - the ways that data can be utilized to mutual advantage is one way of doing this. It enables Goldman and others to create their own tech-dependent ecosystems from which extricating oneself is messy and expensive. Just like Google, Apple and Amazon.

It will be particularly timely if the current market melt-down leaves clients even more desperate for guidance. It's a smart move in an age that values intelligence. Of all kinds. JL

Justin Baer reports in the Wall Street Journal:

Goldman will offer clients access to more of its in-house tools, such as high-powered databases that analyze markets and manage risk. Goldman is betting that its clients will use the individual applications to develop strategies and then execute their trades with the firm.
In a major shift for Goldman Sachs Group Inc. the firm is preparing to give away some of the “secret sauce” behind its trading ideas.
Goldman will soon offer clients access to more of its in-house tools, such as high-powered databases that analyze markets and manage risk, according to the firm’s executives. Those proprietary systems have long been key elements enabling Goldman to sidestep market turmoil and ring up outsize profits in better conditions.
Given direct access to these tools, Goldman clients could use the technology to build their own trading systems and potentially make purchases independent of the firm.
But the firm’s executives believe the upside outweighs those concerns. Goldman is betting that its clients, such as hedge funds and other money managers, will use the individual applications, or apps, to develop strategies and then execute their trades with the firm.
By deepening ties with those clients, Goldman hopes it will pick up other business from them as well.
The development has been a centerpiece of a new technology strategy developed by R. Martin Chavez, the firm’s chief information officer.
Goldman, like other big banks, is facing a raft of new regulations and an unyielding shift toward electronic markets. Both promised to crimp profits, and the firm felt it needed to adapt.
Historically, Goldman clients could contact the firm and ask it to create customized investment strategies using its proprietary research and analytical tools. Now Goldman is rolling out the apps, that let clients access those analytics from their own desktops via a Web-based platform, the people said.
The new Web-based platform is in many ways an attempt by Goldman to bolster its technology bona fides.

In recent years, Goldman caught flak in the tech community for helping to prosecute one of its programmers for allegedly stealing trading code. That protective stance appeared to present a contrast to tech giants like Google GOOG -5.31 % Inc. and Facebook FB -4.97 % Inc., which have opened their software to outside developers and racked up profits.
“Everyone looked to the West Coast, and saw how Silicon Valley” was sharing information and making use of their analytic capabilities, said Mr. Chavez in an interview.
Goldman plans to let clients customize the new apps and integrate them into their own systems, he said.
Most details of Goldman’s strategy haven’t been previously reported. Some of the apps have been available in pilot programs, but they will be rolled out more broadly over time.
Some outsiders and Goldman alumni question whether the firm will win enough client business to justify sharing more of its analytics with clients. Others, including some rivals, are skeptical Goldman will give clients complete access to its in-house tools. Some analysts and Goldman clients say the move conceptually makes sense.
“This is the business of the future,” said Richard Prager, head of global trading at BlackRock Inc., BLK -3.09 % the world’s biggest money manager, with almost $5 trillion in assets. “Wall Street firms have got to reinvent themselves.”
The first apps in development are designed to serve money managers, pensions, hedge funds and other clients of the firm’s equities and fixed-income trading businesses, according to people familiar with the matter. The apps are an extension of an internal software platform, called Marquee, that Mr. Chavez conceived years ago.
Goldman also aims to create Marquee-based applications for customers of its other divisions, including investment banking, the people said.
One of the first apps, called Simon, provides tools that allow smaller brokers to create and analyze equity-linked derivatives for their retail clients. Goldman officials have said 20 firms signed up for a pilot program that began in early 2014. That program helped more than double the firm’s sales of U.S. equity-linked notes last year, people familiar with the matter said.
A second app, Strategy Studio, aims to help money managers devise quantitative investments based on their views on broad economic themes. Reuters previously reported the launch of a Marquee-based product to help clients execute block trades.
Goldman’s analytics, headlined by a risk-management database called SecDb that will be more widely available to clients, have long been admired across Wall Street for helping make it the industry’s most-profitable securities firm. Forged in the wake of Goldman’s struggles with bond-trading losses in the 1990s, and made possible by steady advancements in computer power, SecDb allowed Goldman to look across its trading and lending activities to unearth hidden risks.
The modern-day SecDb calculates 23 billion prices across 2.8 million positions and 500,000 market scenarios, Goldman President Gary Cohn said at a June investor conference. He called the database “a significant competitive advantage.”
Mr. Chavez, who was promoted from co-head of equities to chief information officer in 2013, was behind the idea to share the firm’s tools more broadly with clients. He says the plan won the support of firm’s senior executives.