Goldman’s Automation of Debt Sales Could Mean Lower Fees

The average fee for underwriting investment-grade U.S. debt has already fallen in recent years.

Goldman Sachs wants to be a technology company, and it's taking steps to be more like one even in some traditionally human-intensive businesses.

As Bloomberg's Dakin Campbell reported Tuesday, Goldman is seeking to automate aspects of underwriting initial public offerings and new corporate-debt sales, among other types of banking. This ostensibly isn't aimed at cutting jobs but rather allowing junior staff members to focus on more valuable tasks than, say, assembling spreadsheets or sending around legal documents and term sheets. While the types of automation Goldman is considering seem incremental, the effort signals a broader significant shift taking place. Let's consider just one area Goldman is reviewing — new corporate-bond sales.

This has been a controversial area for some time, especially back in 2013, when obtaining allocations of new debt issuances almost guaranteed investors a near-term profit. That year, after Verizon Communications Inc. sold its then record-setting $49 billion bond sale, investors complained that they were deprived of the chance to purchase some of the notes, which gained $2.54 billion in market value the day after the sale.

At the time, even the Securities and Exchange Commission got involved, looking into whether big banks unfairly prioritized their larger clients over smaller ones when deciding how to distribute new bonds. Not much came of that.

Goldman Sachs wants to be a technology company, and it’s taking steps to be more like one even in some traditionally human-intensive businesses.

As Bloomberg’s Dakin Campbell reported Tuesday, Goldman is seeking to automate aspects of underwriting initial public offerings and new corporate-debt sales, among other types of banking. This ostensibly isn’t aimed at cutting jobs but rather allowing junior staff members to focus on more valuable tasks than, say, assembling spreadsheets or sending around legal documents and term sheets. While the types of automation Goldman is considering seem incremental, the effort signals a broader significant shift taking place. Let’s consider just one area Goldman is reviewing — new corporate-bond sales.

This has been a controversial area for some time, especially back in 2013, when obtaining allocations of new debt issuances almost guaranteed investors a near-term profit. That year, after Verizon Communications Inc. sold its then record-setting $49 billion bond sale, investors complained that they were deprived of the chance to purchase some of the notes, which gained $2.54 billion in market value the day after the sale.

At the time, even the Securities and Exchange Commission got involved, looking into whether big banks unfairly prioritized their larger clients over smaller ones when deciding how to distribute new bonds. Not much came of that.

There’s less focus on the unfairness of new bond sales now, in large part because they haven’t been as much of a gold mine for investors. But perhaps it’s also because a number of firms, including Goldman, are trying to figure out how to automate parts of these transactions to make them more predictable. 

Ipreo, for example, recently enabled a group of investors to access an online system on which they could receive documents for new bond sales from underwriters and submit orders. While this effort has been concentrated in Europe, Ipreo plans to expand the system to other countries, including the U.S. Earlier this year, Overbond Ltd., a Canadian company, announced that it was starting a service to allow companies to sell bonds digitally.

The fact that Goldman is interested in this type of streamlining is telling. It shows there’s an economic interest for big investment banks to standardize lucrative processes, even if that means that eventually they’ll be less lucrative. And that is the implication. Typically, as banks use computers for classically human actions, they also end up shedding light on traditionally opaque businesses, leading to greater efficiency and lower fees.

As Kevin McPartland, head of market structure and technology research at Greenwich Associates, said in a phone interview, “The more electronic any process gets, the knock-on effect is more data, which leads to more transparency.”

As it is, some of these traditionally lucrative fields are becoming less profitable. For example, the average fees to underwrite U.S. investment-grade bond sales have fallen to 0.44% of the issuance this year from 0.54% in 2010. The rate on high-yield debt issuances has dropped to 1.28% from 1.7% in the period, according to data compiled by Bloomberg.

Now, the focus for many banks is attracting the greatest volume of deals to offset the lower fees. A bank with more streamlined, automated systems is better positioned to attract a greater amount of business, even without hiring more people. 

Goldman’s efforts, and similar ones at other firms, will most likely expedite a shift to a more standardized approach to underwriting corporate bond sales and thus lower fees further. And they promise to eventually illuminate the mechanics of once-opaque parts of financial markets. 



Bloomberg News

 

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