Derivatives House and Equity Derivatives House: Goldman Sachs
Cementing its place 2024 was another strong year for banks’ markets divisions as traders made hay despite a drop in volatility across asset classes. For building on its impressive growth of recent years to cement its position as an elite dealer, Goldman Sachs is IFR’s Derivatives House and Equity Derivatives House of the Year.
2024 confirmed what senior traders have long known: that the sustained rise in banks’ markets revenues since the outbreak of Covid-19 is the new normal, drawing a line under the previous decade’s downturn in sales and trading.
There is no bank that better illustrates these changing fortunes than Goldman Sachs.
No bank has leveraged the upswing in trading to quite such devastating effect as Goldman has over the past five years. The US bank has registered comfortably the fastest revenue growth among its peers while hitting return targets most can only dream about.
2024 was just the latest example of this newfound vigour. Goldman’s US$26.6bn of markets revenues represented its largest haul since the go-go markets of 2009, including record totals in equities and in its fixed-income and equities financing businesses.
Goldman’s name has remained synonymous with excellence in derivatives trading throughout this time; a firm with an unparalleled appetite for risk that has made it the go-to dealer for many of Wall Street’s largest clients.
“The pandemic and the ensuing volatility increased the aggregate demand for our services and that played to our strengths because we have a global, broad and deep franchise,” said Ashok Varadhan, co-head of global banking and markets. “If you’re the principal liquidity provider of choice and suddenly there’s more demand for reinsurance because there’s an exogenous economic shock, then the benefits of that are going to accrue to you.”
Equities prowess
All Goldman’s business lines – from macro trading to commodities and credit – have thrived at various points in the fast-moving markets of recent years. And in the low volatility environment of 2024, Goldman’s equity derivatives franchise again showcased its wide-ranging strengths to drive equities revenues higher.
Goldman was at the forefront of the main growth areas in these markets, whether it was booming structured products issuance, greater institutional activity in quantitative investment strategies, or arranging landmark corporate equity derivatives deals. Underpinning it all, the bank’s extensive flow trading operations provided a reassuringly consistent presence for clients, while efficiently recycling risk through the system.
“We have a very well-diversified business across products and regions and that really is the strength of our franchise,” said Erdit Hoxha, global co-head of equities. “This breadth and depth allow us to serve the most complicated clients globally. It also allows us to net and warehouse risk far more efficiently and provide best-in-class prices to our core clients.”
The full power of Goldman’s derivatives business kicked into gear on August 5 when Japanese stocks plunged and Wall Street’s unofficial fear gauge, the VIX, rocketed to its highest level since the outbreak of the pandemic in 2020. Against this tumultuous backdrop, Goldman used its global reach to help clients adjust positions outside usual trading hours.
In one notable example, the bank helped US institutional clients crystallise gains on one of Goldman’s defensive QIS hedging strategies on the Nikkei 225 index. The QIS strategy rose about 50% that day as the Nikkei tumbled 12.4%, delivering a considerable windfall to investors.
“We committed capital and risk to facilitate the exit of our clients out of hours,” said Piotr Zurawski, global head of systematic trading strategies. “Investors appreciate the consistency of how we execute this business.”
QIS was an important driver of growth for both the institutional business and the fast-growing retail structured products in the US. Market-wide issuance of SEC-registered notes increased to roughly US$160bn in 2024, about a third higher than the previous two years’ totals, Goldman said.
Goldman was one of the top issuers domestically but it also leveraged its global operations to bring flows from Asian and European investors into products on much-loved US technology stocks like the Magnificent Seven of Microsoft, Meta Platforms, Amazon, Apple, Nvidia, Alphabet and Tesla. Focus on client coverage and investments in technology to allow Goldman to process large volumes of ever-decreasing ticket sizes have been integral to its success, said Pierre Benichou, head of the equity structured products trading team in the Americas.
“There has been tremendous growth across the whole ecosystem of structured products,” he said.
Strategic equity derivatives capped an outstanding year for the business as Goldman expanded across core activities including corporate share buybacks and financing. The bank has also pioneered derivatives becoming an important tool in the M&A process, helping investment firms CriteriaCaixa and Exor increase their stakes in Spain’s Telefonica and Dutch conglomerate Philips, respectively.
“We have been really successful in integrating equity derivatives into our banking franchise, using our unparalleled risk-taking capabilities in trading and our best-in-class coverage franchise in banking to deliver client-centric solutions,” said Alessandro Dusi, global head of equity derivatives within the financing group.
Risk appetite
Goldman’s appetite for risk continues to make it the destination of choice for firms that need to reshuffle exposures across financial markets. Goldman’s daily value-at-risk – which measures how much it could lose over a given period – averaged US$92m in 2024, nearly twice that of JP Morgan.
“I’m proud of the fact that we run higher VaR than our competitors,” Varadhan said. “I want our clients to know that we are willing to put capital at risk to facilitate their trades.”
That approach has helped Goldman capture surges in client activity around the major volatility events of recent years, such as Russia’s invasion of Ukraine in 2022, the collapse of Silicon Valley Bank in 2023 and the Japanese stock rout on August 5.
“Whenever prices are moving in ways that you can’t rationalise, it’s always scary,” said Varadhan. “We experienced some P&L variance around August 5, but our degree of confidence around stepping in and staying the course was much greater. SVB was scarier because you were talking about a crisis of credit.”
A flurry of trading around the US elections helped trading businesses end 2024 on a high after a sedate first half for markets. Many macro desks suffered during that period of low volatility as spreads narrowed.
Client focus
Goldman focused on growing market share and volumes to compensate for a compression in margins. But Varadhan and his senior traders were also quick to deploy resources to activities that typically prosper in calmer markets, such as structured interest rate derivatives.
“Market-making is easier when you have the luxury of storing things for longer – reinsurance businesses are easier to run when there aren’t any storms,” said Varadhan. “We looked at how we could structurally be in strategies that benefit from the environment being more predictable.”
Continuing to grow the financing business has been an important part of that. In 2017, financing made up 26% of Goldman’s US$12.3bn of markets revenues. In 2024, it was 34% – worth US$9.1bn of revenue. Varadhan said there was a strong correlation between financing and market capitalisation, with client demand rising mechanically as stock and bond markets have swelled in recent years.
“Not doing enough financing is why we lost market share in 2014–16 when markets weren’t volatile. We were too reliant on market-making,” said Varadhan. “Financing has really helped buttress us. It benefits from the lack of volatility. It’s also made us more relevant with clients.”
The increased client focus under chief executive David Solomon and president John Waldron – both investment bankers by background – has helped Goldman capitalise on the huge asset growth among its investment management clients in recent years.
“Culturally, there’s a different mindset,” said Varadhan. “That has coincided with aggregate demand from clients going up since the pandemic, market cap increasing and us financing more. Prices aren’t that distinguishable from one bank to the next. Really, it’s about the cumulative bundle that you provide to your clients.”
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