Morgan Stanley Will Break Off Process Driven Trading Group by End of 2012

Morgan Stanley plans to break off its largest proprietary-trading group, Process Driven Trading, to create an independent advisory firm by the end of 2012.

The bank, the sixth-largest U.S. lender by assets, will have the option to acquire a preferred stake in the new company, to be known as PDT Advisors, New York-based Morgan Stanley said today in a statement. The company said it expects the unit’s full staff of about 60 employees to join the new firm.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among Wall Street firms breaking off or winding down proprietary trading units to comply with a provision of the U.S.’s Dodd- Frank financial rules that prohibits banks from betting capital for their own accounts. PDT is led by Peter Muller, a so-called quant manager who uses mathematical models to trade securities.

“PDT has generated an enviable track record within Morgan Stanley since its inception in 1993,” Chief Executive Officer James P. Gorman, 52, said in the statement. “We are delighted to continue our partnership with PDT as it looks to expand its business by taking on third-party investors.”

Under the plan announced today, PDT employees will acquire certain assets from Morgan Stanley, according to the statement. Before it becomes independent, the unit will continue to trade with Morgan Stanley’s capital.

“All prop trading is going to be much more constrained, so for the very best prop traders in the world, the very best seats to sit in will no longer be at a major brokerage firm,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “So we’re seeing a migration.”

PDT’s Positive Returns

PDT produced a quarter of Morgan Stanley’s earnings in some years during the late 1990s and early 2000s before losing as much as $500 million in less than a month in the third quarter of 2007, according to “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It,” by Scott Patterson.

PDT has posted positive returns every year since its inception, including 2007, according to two people close to the firm.

“Morgan Stanley will still have some piece of this, though it will be limited,” Hintz said. “It isn’t as good as having them in their trading operation, but it’s still not a total loss.”

Ariel Roskis and Daniele Benatoff, traders for Goldman Sachs’s principal strategies desk in London, are preparing to start their own hedge fund in the second quarter, said a person with direct knowledge of the matter. The pair has secured a $300 million investment from Brummer & Partners, the largest Scandinavian hedge fund, the person said.

Goldman Sachs

Goldman Sachs already shut down an equity proprietary- trading group, Goldman Sachs Principal Strategies, to comply with the Volcker rule. New York-based Goldman Sachs lost two quant managers, Robert Litterman and Robert C. Jones, from its asset-management unit last year. Pierre-Henri Flammand, the former head of Goldman Sachs’s Principal Strategies group, retired last year to start his own hedge fund.

Morgan Stanley scaled back proprietary-trading after posting its first quarterly loss as a public company in 2007. The firm reported $9.4 billion of writedowns tied to mortgage holdings in the fourth quarter of that year, driven from bets made by a prop-trading desk in its fixed-income unit.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.