Morgan Stanley is renewing efforts to regain the crown of equity trading

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Morgan Stanley has stepped up efforts to regain its traditional dominance in equity trading, a position it ceded to longtime rival Goldman Sachs following the 2021 implosion of Archegos Capital Management.

Under new chief executive Ted Pick, who previously ran the bank’s equity trading business, Morgan Stanley narrowed the gap to Goldman to its smallest since 2022.

In the latest quarter, Morgan Stanley’s equity trading revenue rose nearly 20 percent from a year ago to $3 billion, well above analysts’ expectations. That compared with a 7% increase to $3.2 billion at Goldman and a 21% increase to just $3 billion at JPMorgan Chase.

“They’re doing everything they can to get (market) share back,” a Goldman executive said of Morgan Stanley. Morgan Stanley declined to comment.

Equity traders have had tremendous results in the last quarter in Europe and the US. BNP Paribas, Barclays and Société Générale all reported double-digit percentage gains in share trading as early elections in France and Britain boosted activity.

While European banks posted higher percentage gains than Morgan Stanley – 58% at BNP and 24% at Barclays and SocGen – the value of business at the trio was substantially lower.

Banks including Barclays and BNP Paribas have identified the share trading business as an area for growth.

But the top equity trading banks remain the three largest US investment banks: Goldman, Morgan Stanley and JPMorgan.

Morgan Stanley since the beginning of the year has become increasingly willing to make loans through its prime brokerage business, which serves hedge funds and other similar clients, according to the bank’s clients and rivals.

One hedge fund executive said “there has been a night and day difference” since Pick started as chief executive in January.

A Morgan Stanley executive said the bank was particularly focused on winning new quant hedge funds, such as AQR or Two Sigma, as well as equity hedge funds that buy and bet against stocks.

The bank has begun to attract quantitative hedge funds, which trade the market using computers and mathematical models, and has invested heavily in technology to support its operations.

But Morgan Stanley became more cautious and restrictive about the type and size of business it would do with clients in the wake of the Archegos scandal, when the collapse of Bill Hwang’s family office cost the bank $1 billion in losses from the credit granted to the company. .

The crash prompted an overhaul of the bank’s client book and risk management governance, according to people familiar with the matter, and has allowed Goldman to consistently outpace Morgan Stanley in equity trading since then.

Since the start of 2022, Goldman has posted higher equity trading revenue than Morgan Stanley in eight out of 10 quarters. During that period, Goldman reported $29 billion in equity trading revenue — $2.4 billion more than Morgan Stanley.

The U.S. government’s investigation into Morgan Stanley’s stock block trading team and a focus on its fast-growing wealth management business also contributed to its relative decline, according to insiders, competitors and investors.

“All of these things, combined with a generally more aggressive Goldman post-Covid, you’ve certainly seen a drop in market share (in stocks) at Morgan Stanley,” said Christian Bolu, senior US capital markets analyst at Autonomous Research.

“I thought with Ted Pick coming in that would change. And it feels, perhaps most surprisingly, at only two quarters, it feels like it’s changing,” said Bolu.

Unlike Morgan Stanley, Goldman avoided a loss on Archegos.

That freed up its traders to do more business, while clients shied away from doing more business with the loss-making banks’ prime brokerage divisions for fear of a potential pullout. Some banks, such as Credit Suisse and Nomura, have withdrawn or exited their prime brokerage business.

“Goldman got lucky (with Archegos), but it helped them,” said the Morgan Stanley executive.

Still, the chief executive of a major investment firm said Morgan Stanley had shown caution in its attempts to win more business.

“I think their market leadership (in premium services) and the fact that Archegos has kicked their pants off has made them less aggressive in pursuing marginal business,” he said. “We don’t see (this) significant change.”