Morning Coffee: How Morgan Stanley won the trading war while Goldman Sachs was fat and happy. Plot thickens at Deutsche Bank
How did Morgan Stanley emerge as top equities trading house while Goldman Sachs lost its mojo? In an incredibly comprehensive article looking at the history of trading since the financial crisis (and beyond), Bloomberg puts it down to cunning on behalf of Morgan Stanley CEO James Gorman, and before that, Vikram Pandit.
Until 2014, Goldman Sachs' equities revenues were greater than Morgan Stanley's. Goldman was, "fat and happy," according to Bloomberg. - Back in 2008, it generated a massive $13bn in equities trading revenues (last year it generated $6.6bn). It was floating on a fuzzy feeling from the past. What Goldman seemingly didn't see in its food coma was the need to invest in automated trading. Its electronic trading unit was located in New Jersey, sequestered away from the rest of its trading business. Worse, says Bloomberg, many at Goldman were devoted to SecDB, its risk and pricing system where it wanted trading algorithms to reside. But SecDB, which dates back to 1992, wasn't designed to work with the sorts of super-low latency trades that were becoming de rigueur in the new high-speed world.
While Goldman Sachs was warm and fuzzy and hindered by what sounds a lot like internal politics, Morgan Stanley was busy and productive. The other U.S. bank was perfectly positioned to develop an expertise in algorithmic trading. In 1994, Vikram Pandit – later the CEO of Citi – was in charge of equity trading at Morgan Stanley. A mathematician, Pandit started an 'Equity Trading Lab' (ETL) to create an electronic trading operation for the bank's early quant clients. That unit subsequently employed people like David Shaw, who went on to fund hedge fund D.E Shaw, and Peter Muller, whose in-house quant fund PDT Partners was spun out after the financial crisis.
After the financial crisis, Bloomberg says Gorman spied an opportunity to develop this expertise further. U.S. banks that had a following with quants were damaged. European banks were raising capital. Morgan Stanley went after hedge funds as clients for its prime brokerage business. It moved its servers closer to exchanges. It updated its low-latency trading system, Speedway. In 2012, it launched Project Velocity to further overhaul the system.
By 2014, Morgan Stanley was beating Goldman in equities trading. Last year, Morgan Stanley's revenues were close to $8bn - 20% higher than Goldman's.
Needless to say, GS is now trying to catch-up. In 2014, it hired Raj Mahajan, the former CEO of a high-speed trading company, whom Bloomberg describes as "obsessed with speed." However, Goldman now has a whole new force to reckon with in the form of J.P. Morgan, which was also late to the game, but has been copying Morgan Stanley's strategy of going after prime brokerage clients and developing high speed trading under Frank Troise, an electronic trading specialist, and Jason Sippel, the former head of prime broking who's now co-head of equities. Under these two, J.P. Morgan has managed to double its equities trading market share to over 10% in around 10 years. Goldman is losing weight fast, but if it wants to make headway in the new electronic trading landscape, it is going to be tough.
Separately, Garth Ritchie, the top markets chief and global co-head of investment banking at Deutsche Bank, is thinking about leaving the firm as soon as this year, according to the Wall Street Journal.
Ritchie has had "multiple conversations" with Deutsche Bank's chairman, Paul Achleitner, about leaving the bank, but no decisions have been made.
Obviously someone leaked these presumably private conversations to the press, but who? Was it Achleitner himself? Was it a rival aspiring to ascend to Ritchie’s position? Whoever did it, one thing is certain: Deutsche is a highly political place.
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— Darren Rovell (@darrenrovell) April 4, 2018
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