NEW YORK (Reuters) - As Morgan Stanley’s share price went on a headlong descent during the financial crisis in 2008, then-Chief Executive John Mack personally lobbied regulators to stop short-selling temporarily.
He succeeded. But in doing so, he made enemies among powerful hedge fund managers, for whom the practice of selling borrowed shares in a bet they will later fall is a key investment strategy.
Many, such as the famed short-seller Jim Chanos, were also big clients of Morgan Stanley’s prime brokerage and stock trading businesses, and expressed their displeasure by taking their money elsewhere.
Over the past few years, Mack’s successor James Gorman has been trying to repair those frayed relationships, win back clients and make new ones across its equities trading franchise. Ted Pick, Morgan Stanley’s global head of equities and research, has been the point man on that mission.
As part of an overhaul dubbed “Project Velocity”, Pick’s team has over the past 18 months moved servers closer to exchanges and started using new kinds of wires that shave millionths of a second off trading speeds - moves aimed at winning more business from high-speed traders for whom every microsecond matters.
Morgan Stanley has also retained specialty sales staff who help clients pick stocks even as some rivals have cut back on such staff to reduce costs. The bank is also working with Japan’s Mitsubishi UFJ Financial Group (MUFG), its largest shareholder, to win more business from trading clients in Asia.
The results are showing: Morgan Stanley posted on Thursday $1.8 billion of adjusted revenue from stock trading in the second quarter, up more than 40 percent from a year ago.
Stock trading results were strong across Wall Street last quarter, thanks in part to more stock sales from companies and higher trading volumes triggered by fears that the U.S. Federal Reserve would taper its quantitative easing efforts. But Morgan Stanley’s stock-trading revenue, adjusted for special items, was higher than any Wall Street competitor.
“Morgan Stanley does a good job with servicing institutional clients and that’s why they win business,” said Chip Hendon, a portfolio manager at Huntington Asset Advisors, whose firm trades through Morgan Stanley and also owns shares of the bank.
Institutional clients now rank Morgan Stanley as the No. 2 stock trading firm in the United States they like to do business with, behind JPMorgan Chase & Co, according to a survey by the research firm Greenwich Associates. That’s up from a year ago when it was ranked No. 5, behind JPMorgan, Credit Suisse Group AG, Bank of America Corp and Goldman Sachs Group Inc.
Morgan Stanley Chief Financial Officer Ruth Porat said the bank has doubled market share over the past three years by making sure it has services for cash equities trading clients, who want to trade over the phone with people or by using algorithms. She also cited gains in equity derivatives as well as the prime brokerage business.
A source familiar with Morgan Stanley’s equities trading business said the bank also made big gains during the recent market rally in Japan, driven by Prime Minister Shinzo Abe’s unexpected monetary easing program.
Morgan Stanley has two trading joint ventures with MUFG, which owns a 22 percent stake in the bank. The Wall Street firm also lends its expertise in research and trading to MUFG’s corporate clients, something that Gorman has pushed for over the past two years.
Chanos, the short seller, returned to Morgan Stanley’s prime brokerage business in 2010, the same year Gorman took over as CEO, and has been happy with the relationship since then, a source familiar with the matter said.
Another hedge fund manager, who trades with Morgan Stanley but declined to be identified, said that the bank was doing a good job of rebuilding bridges with the industry.
The manager, who launched his fund after the financial crisis and focuses largely on technology stocks, said Morgan Stanley has well-connected specialty salespeople who are crucial to keep hedge funds’ trading revenue.
Being able to pick the brains of salespeople such as Ashton Curtis, head of North American specialty sales, and Tom Wigg, a technology sector specialist, are crucial to stock-picking decisions and worth the tens of thousands of dollars in commissions he gives to Morgan Stanley every year, he said. Many rivals have laid off such specialty sales staff.
“You owe your life to these guys,” he added.
Reporting by Lauren Tara LaCapra; Editing by Paritosh Bansal and Jean Yoon