Goldman cuts 5% of trading desk

By Reuters
Posted March 18 at 10:11 a.m.

Goldman Sachs Group laid off 5 percent of its trading desk staff on Tuesday as part of its annual review process, sources familiar with the matter said on Thursday.

There were layoffs in other divisions as well and more are expected in coming weeks, with the goal of trimming the worst-performing 5 percent of Goldman’s entire staff, the sources said on condition of anonymity.

The sources did not have an estimate on how many Goldman employees were or will be affected by these cuts. At year-end, Goldman had 35,700 employees, suggesting that 1,785 will be let go in total, not factoring in new hires.

Goldman Sachs declined to comment.

The layoffs in the trading division this week come at a sensitive time. Trading revenue at Goldman and other big banks has been weaker than expected, due to soft volumes and a pullback in client activity.

The layoffs “might be a sign that poor revenues are forcing cost reductions in order to protect profits,” said one of the sources. The source said there were “limited job cuts on the trading floor” this week, but “I think more might be coming.”

Citigroup analyst Keith Horowitz cut his first-quarter earnings estimate for Goldman by 29 percent in a report on Thursday, citing weak revenue expectations.

“While we continue to favor the stock, may see (near-term) weakness given pressure on 1Q estimates,” Horowitz said.

His estimate cuts were not specific to Goldman. Horowitz slashed his first-quarter earnings estimate for Morgan Stanley by 72 percent and for Bank of America by 34 percent.

Overall, Horowitz expects fixed income trading revenue across the industry to decline by 20 percent to 25 percent and equities trading revenue to fall 10 percent, compared with the first quarter of 2010.

He expects JPMorgan Chase’s trading desk to outperform rivals, which would be a repeat of what occurred during the fourth quarter of 2010.

Barclays analyst Roger Freeman also said in a report on Monday that broker revenue had declined from the fourth quarter, “driven by slower market volumes and somewhat more challenging market conditions.”

Analysts at Keefe, Bruyette and Woods warned earlier in the week that the nuclear disaster in Japan could impact trading desks as well.

It wasn’t immediately clear whether firms other than Goldman had laid off employees or were planning staffing cuts.

Goldman’s layoffs were not related to the dismantling of proprietary trading operations in recent months, as required by the financial reform bill.

The company’s whittling away of poor performers involves an elaborate peer review process. Employees are reviewed by supervisors, co-workers and employees they supervise “in a 360-degree review process,” according to the company’s annual report.

Poor performers are known internally as being on the “Z-List,” according to the sources. Those employees typically get an early signal about their status with a disappointing bonus in January.

Many poor performers tend to quit ahead of layoffs and seek other jobs, the sources said. The rest are eventually let go.

The company’s review process is legendary on Wall Street, according to Steven Gerbel, founder of Chicago Capital Management, a hedge fund that has used Goldman as a brokerage for several years. He likens it to the “Six Sigma” quality control process first established by Motorola.

Goldman shares fell 60 cents to $155.15 in after-hours trading.

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