Morgan Stanley May Revamp Proprietary Trading Group

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

Morgan Stanley, the world’s top merger adviser, may turn its remaining proprietary-trading group into an electronic client-trading unit, according to two people with knowledge of the matter.

A final decision hasn’t been made about the group, known as Equity Trading Lab, or ETL, said one of the people, who declined to be named because the talks aren’t public. New York-based Morgan Stanley said last month that it plans to break off its largest proprietary-trading group, Process Driven Trading, or PDT, as an independent advisory firm by the end of 2012. Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among Wall Street firms breaking off or winding down such trading units to comply with the Volcker rule, a provision of the Dodd-Frank financial law that prohibits banks from betting capital for their own accounts. Morgan Stanley Chief Executive Officer James P. Gorman, 52, said last week that phasing out remaining prop-trading businesses was one of management’s objectives.

“We should not be a firm that is betting our shareholders’ capital for our own benefit,” Gorman said at a conference in November. “We should be working with our shareholders’ capital for our clients’ benefit.”

The ETL group, which has fewer than 30 employees, generated about $100 million in revenue annually in recent years, three people familiar with the unit said. Daniel Ewig, Peter Bolland and Peter Fanelli help run the unit, according to three people who asked not to be identified.

The unit was started by Rohit D’Souza, Michael Botlo and Sudeep Gupta around 2000, when the equity-trading division was headed by current Citigroup Inc. CEO Vikram Pandit. Those three left for Merrill Lynch & Co. in 2004.

Smaller Than PDT

The group is smaller than the 60-person PDT, which is led by Peter Muller, a so-called quant manager who uses mathematical models to trade securities. PDT produced a quarter of Morgan Stanley’s earnings in some years during the late 1990s and early 2000s, according to the book “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It,” by Scott Patterson.

Gorman said in February 2010 that Morgan Stanley, the sixth-largest U.S. lender by assets, had only two prop businesses remaining, both statistical arbitrage units in the equity division.

The Financial Stability Oversight Council, a group of regulators charged with preventing a repeat of the 2008 financial crisis, released a study Jan. 18 recommending a “robust implementation” of the Volcker rule that includes requiring banks “to sell or wind down all impermissible proprietary trading desks.”

‘Right Balance’

Executives from companies including JPMorgan, Citigroup Inc., General Electric Co.’s GE Capital unit and Credit Suisse Group AG have met with Federal Reserve or U.S. Treasury Department officials since November to discuss implementation of the Volcker rule.

The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, said in a statement Jan. 18 that “regulators will need to strike the right balance” to ensure that market-making and hedging activities aren’t hurt by the Volcker rule ban on proprietary trading.

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, a person with direct knowledge of the matter said last month. The pair has secured a $300 million investment from Brummer & Partners, the largest Scandinavian hedge fund, the person said.

Goldman Sachs’s Group

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 Flamand, 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.

Morgan Stanley shares fell 56 cents, or 1.8 percent, to $30.08 at 4 p.m. in New York Stock Exchange composite trading. The shares are up 11 percent this year after falling 8.1 percent in 2010.