By Liz Hoffman
When Morgan Stanley trading chief Ted Pick dialed into a
conference call in April with about 300 of his top reports, a
little chest-thumping was in order.
The firm's bond-trading division, long the runt of Wall Street,
had just reported its best quarter in years, accumulating more
revenue than rival Goldman Sachs Group Inc. for only the second
time since the financial crisis.
But Mr. Pick struck a cautious note. The business was showing
"green shoots," but there was no rush, he told his troops,
advocating what he called "defensive offense."
His wariness is understandable. A decade of failed reboots and
trading blowups has left Morgan Stanley's fixed-income desk well
behind rivals like Goldman and J.P. Morgan Chase & Co. Other
turnarounds have shown promise only to crumble.
This one is marked by four quarters of fixed-income revenue
above $1 billion, Morgan Stanley's longest streak since 2010. Its
market share among the five big U.S. firms has doubled since Mr.
Pick was elevated in late 2015 to oversee both stock and debt
trading.
As the second quarter winds down, Mr. Pick and Morgan Stanley
are looking to extend their luck in a tougher environment. Trading
revenue across Wall Street is expected to weaken from a year ago,
when the U.K. Brexit vote spurred client activity.
Morgan Stanley is being careful not to overpromise. Mr. Pick has
been telling associates in recent weeks that the division is
operating with "omentum" -- that is, momentum with an "m" so small
it is invisible.
"We are modest in our aspirations, but we have proven this dog
can hunt, " Chief Executive James Gorman said at a conference
Wednesday.
A Morgan Stanley lifer with a contrarian streak, Mr. Pick spent
seven years running the bank's stock-trading arm, where he helped
rebuild relationships frayed by the firm's near-collapse during the
financial crisis. On his watch, it surpassed Goldman as Wall
Street's biggest by revenue.
Currently overseeing 6,000 employees who generate about
one-third of the firm's revenue, the 48-year-old New York City
native has emerged as a leading contender to succeed Mr. Gorman,
who has hinted he would like to remain at least a few more
years.
In his rise up the ranks, Mr. Pick won over senior executives
for resisting the urge to sugarcoat bad news. As a young equities
trader, he became an expert in the firm's own stock. In the depths
of the financial crisis, he would regularly ride the elevator up to
the 40th floor at 4 p.m. and update John Mack, then CEO, about how
shares were trading.
Mr. Mack liked to tease Mr. Pick about his penchant for
profanity, once playing a trick by having the firm's compliance
department tell Mr. Pick his emails had been flagged for excessive
use of expletives, according to people familiar with the
episode.
He is a newcomer to fixed income, a more varied and fickle
business than stock-trading. Ranging from government bonds to
complex derivatives contracts, it is one of the biggest fee pots on
Wall Street and has been reshaped more than any other business by
postcrisis regulations.
It has also been a persistent problem child at Morgan Stanley.
In 2007, the firm sought emergency financing after a $9 billion
losing bet on subprime mortgages. In 2011, it stumbled on
Treasurys. Four years later, the culprit was distressed bonds.
The firm churned through five fixed-income chiefs in seven
years. Some investors urged Mr. Gorman to get out of the business
altogether, especially as the CEO's big push into wealth management
-- its multiyear purchase of Smith Barney -- began to show signs of
working.
By late 2015, the fixed-income division hit what Colm Kelleher,
Morgan Stanley's chief operating officer, called "a WTF moment."
Morgan Stanley hadn't found its groove, and globally across banks,
fixed-income trading fees were in a tailspin.
The firm did a top-to-bottom review of the unit. For an extra
set of eyes, it hired consulting firm McKinsey & Co. The
consensus: the division was far too big and soaked up too much of
Morgan Stanley's capital, a precious resource since the crisis.
In late 2015, the firm promoted Mr. Pick to oversee the combined
sales and trading operation. He brought along Sam Kellie-Smith, a
British options trader who had been his deputy in equities, to run
the fixed-income group.
The pair swiftly fired 25% of the unit's traders, cutting deep
in European credit trading, where activity had slowed, and
foreign-exchange, where electronic trading had gutted fees. They
preserved more staffing in interest rates and U.S. credit, and
combined equities and fixed-income sales teams to squeeze more
business out of hedge fund clients.
Tighter risk-management also improved returns. Risk-weighted
assets in the unit have fallen since late 2015 by about 30%.
Executives have also reduced "slippage" on bond trades, which
refers to price moves between when an order is placed and when it
is executed.
The firm did get some outside help too, specifically "when the
markets started to kick up a little bit" and some European rivals
pulled back from debt trading, Mr. Gorman said. "I'm not going to
get excited until it really happens over a couple-of-year
period."
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
June 19, 2017 08:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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