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Morgan Stanley Said to Discuss Separating Prop-Trading

Morgan Stanley CEO James Gorman
James Gorman, chief executive officer of Morgan Stanley. Photographer: Jin Lee/Bloomberg

Morgan Stanley, the sixth-largest U.S. bank by assets, is in talks to spin its largest proprietary-trading unit into a separate company, according to two people briefed on the discussions.

The unit, known as Process Driven Trading, or PDT, has been in talks with the bank for more than a year and an agreement hasn’t been reached, said the people, who declined to be named because the matter is private. The New York Times reported the discussions yesterday.

Morgan Stanley Chief Executive Officer James Gorman said earlier this week that the firm had exited all but one of its major proprietary businesses, groups that make bets with the firm’s own money. Gorman said Morgan Stanley would be dropping that unit as well. The Volcker rule, passed as part of the Dodd-Frank bill in July, bans banks from risking capital by wagering for their own accounts.

“We should not be a firm that is betting our shareholders’ capital for our own benefit,” Gorman said at the Securities Industry and Financial Markets Association conference in New York on Nov. 8. “We should be working with our shareholders’ capital for our clients’ benefit.”

Mark Lake, a spokesman for Morgan Stanley, said he couldn’t comment.

Peter Muller

PDT is led by Peter Muller, a so-called quant manager who uses mathematical models to trade securities. PDT was responsible for 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.

Morgan Stanley has discussed retaining a stake in the new company, the people said.

PDT rebounded in 2008, returning 25 percent when the Standard & Poor’s 500 Index had its worst drop in seven decades, according to the 2010 book. Muller has said some of the figures in the book are inaccurate.

Morgan Stanley scaled back its proprietary-trading operations 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.

‘Illiquid Ways’

Gorman said Morgan Stanley hadn’t been “outstanding in our proprietary activities over time.” He said the firm had too much capital tied up in “illiquid ways” in its proprietary desks before the financial crisis.

Goldman Sachs Group Inc. already shut down an equity proprietary-trading group, Goldman Sachs Principal Strategies, to comply with the Volcker rule. New York-based Goldman Sachs has lost two quant managers from its asset-management unit this year. Robert Litterman left the firm in January and Robert C. Jones is leaving at the end of this year.

Muller bested 104 players earlier this year to win the annual Wall Street Poker Night, which raised $1.5 million for Math for America, a charitable organization dedicated to making the math skills of public school students better by improving instruction.

Muller, who is married with two children, is also a pianist who has two folk/rock albums and plays monthly at Café Vivaldi in New York’s Greenwich Village. He also constructs crossword puzzles, having written at least 10 for the New York Times.

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