Goldman and trading

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There are a few basic things a securities market has to get right: liquidity, transparency, speed and effective marketmakers. In the case of GSTrUE – the market Goldman Sachs has developed which is open only to institutional investors – there is also the onerous responsibility of counting to 499. This is the cap on the number of shareholders an issuer can have and not register with the Securities and Exchange Commission.

For Goldman, the main aim is to capture underwriting fees from a client offering shares through its platform. Even if it has to split those fees with others, they are probably worth tens of millions of dollars a pop. It should also make a decent turn on marketmaking.

Will the market fly? So far, there has been one offering, Oaktree Capital Management. Apollo, the private equity group is expected to be next. Oaktree’s stock performance has hardly been dazzling, down about 8 per cent from its issue price.

That might not worry a hedge fund or private equity issuer, who figures some valuation discount is a price worth paying for the ability to list its shares quickly and semi-privately. In fact, Apollo still seems to want a full listing. It is using Goldman’s market as a short-cut to get ahead of the pack – whether because it believes other IPOs will hoover up investor demand or markets will get tougher.

Meanwhile, investors in companies only listed on GSTrUE risk being stuck with an illiquid stock and only one marketmaker – as Goldman Sachs is, in the case of Oaktree.

It seems likely others will reinvent the wheel. A platform run by a third party – Nasdaq or a transfer agent – with all the broker-dealers pitching in as marketmakers would avoid a lot of duplication, not to mention costs. Goldman is good, but even it cannot have a monopoly on counting.

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