(September 11) – “Goldman Sachs Group Inc., in a bid to build its market-making capabilities, is taking the final steps to buy Spear Leeds & Kellogg LP for about $7 billion in cash and stock, according to people close to the matter,” write Charles Gasparino and Grep Ip in today’s Wall Street Journal.
“While a deal wasn’t final as of Sunday afternoon, people with knowledge of the matter say talks are in an advanced stage and the two parties were expected to agree on final terms late Sunday. The transaction is expected to be announced Monday.”
“Spokesmen for Spear Leeds didn’t return telephone calls for comment. A spokeswoman for Goldman said it is the firm’s policy not to comment on market rumors.”
“The deal would give Goldman a commanding presence in the business of executing stock orders on exchange floors, on the Nasdaq Stock Market, and in the options market. Goldman would also have a strong foothold in clearing trades for other brokers.”
“Perhaps even more important, the transaction, once complete, highlights how big Wall Street firms, such as Goldman, are hedging their bets on how the structure of the securities market evolves.”
“Goldman was a member of the so-called MGM coalition, along with Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co., which had called for a central electronic market to replace Nasdaq market makers and New York Stock Exchange specialists, such as Spear Leeds.”
“The MGM group has since dropped its calls for radical change, and Nasdaq and the NYSE have taken steps to beef up their electronic capabilities. Still, by buying Spear Leeds, Goldman acquires the single biggest player in the traditional stock and options markets it had tried so hard to change. At the moment, Spear Leeds is the Big Board’s largest specialist by number of stocks traded, one of the biggest options market makers by contracts traded on the country’s five options exchanges, and Nasdaq’s fourth-largest market maker.”
“At 4 p.m. Friday in New York Stock Exchange composite trading, Goldman’s stock was down $3.69 to $125 after The Wall Street Journal reported on its online edition, WSJ.com, and on Dow Jones Newswires that the two were in talks, leaving its market value at $56 billion. Goldman is expected to craft the deal, by far its largest since going public last year, so that it is accretive to earnings.”
“The purchase helps deliver, though not fully, Goldman’s long-coveted exposure to the small or ‘retail’ investor, especially in Nasdaq trading, who has generally been eschewed by Goldman in favor of serving “institutional” investors, such as pension and mutual funds. Retail investors have become a growing force in the stock market as more of them trade stocks, particularly Nasdaq technology stocks, via the Internet. Amy Butte, a securities analyst for Bear, Stearns & Co., says that nearly 30% of all trades these days are completed by retail investors. Recognizing this trend, rival Merrill Lynch snapped up Herzog, Heine Geduld in June for $914 million. ‘This is a deal Goldman needs to do to stay at the top,’ says Ms. Butte. ‘It’s just another indication that market-making is critical to Wall Street firms.’ “
“Spear Leeds is the fourth-largest market-maker of Nasdaq stocks, behind Knight Trading Group Inc., the combined Merrill and Herzog market-making units, and the capital-markets unit of Charles Schwab Corp. Though Spear handles far fewer Nasdaq trades for small retail investors than those firms, it does offer Goldman a deeper reach into institutional investors, and a presence among hedge funds and highly active day-trading firms which it previously lacked. Furthermore, Spear has been contemplating re-entering the retail Nasdaq business, and it is probably better able to do so than Goldman would be alone.”