Morgan Stanley's Powerful Rivals

Trading is a big business. Like, a really, really big business that brings in billions for the largest Wall Street banks.?

There are a few ways to win at it. Have amazing traders, for one thing. Or an edge in technology to trade assets?at the speed of light, keep up with quant giants and amass huge volumes of trades?across global finance. Or?you can lead with your balance sheet, lending money to big hedge fund clients so they want to trade with you.

Morgan Stanley has long been the largest shop in equities trading. It has what’s called a “huge prime brokerage,” the business that services hedge funds and helps people start new ones. They also have one of the biggest wealth managers in the world (in the amount of assets managed), which places stock trades through Morgan Stanley’s own trading desk, making the bank a behemoth among both individual investors and large institutional asset managers. Ted Pick, the bank’s new CEO, had spent years?overseeing the trading businesses.

But recently, Goldman Sachs?has made a big?push to get back to the top spot?in equities trading. And now that all the numbers are out, we know that Goldman last year brought in more than its rival.?More than $1 billion more.?

My colleague Sridhar Natarajan recently spoke to Goldman’s John Waldron?about this dynamic.?“Becoming No. 1 in equities became a rallying cry.?We certainly fed that, just reminding people that Goldman Sachs is not supposed to be No. 2 and No. 3 in these businesses,”?the bank president said.?

JPMorgan, Goldman, Citigroup, Bank of America and Morgan Stanley have a huge opportunity to get bigger in the world of making markets in stocks, bonds and commodities such as oil,?nickel and aluminum. But they face regulations that are stricter than they used to be, and that could require the trading businesses to tie up more capital, making them more costly to run.

At the same time, European giants like Deutsche Bank and Credit Suisse don’t pose the same competition they once did.?Deutsche Bank once rivaled Goldman and Morgan Stanley in equities and prime brokerage, but Deutsche sold off its stock trading business in 2019.?

But the story isn’t just that Goldman surged this year—there are also new players in town. Those powerful upstarts are taking note of the changing dynamics.?

One shocking new?rival: Jane Street.

The electronic trading firm expected to bring in roughly as much as Morgan Stanley in total trading revenue?in the fourth quarter of 2023, Bloomberg recently reported. That’s a stunning feat for a firm much of the world has never heard of. The haul Jane Street has been bringing in amounts to roughly 7% of the more than $140 billion in combined trading revenue?at the Wall Street giants, according to Robin Wigglesworth of the Financial Times.?

Not to be outdone, Citadel Securities, which arguably has a bigger brand name, had a record year of revenue in 2022, and it’s aiming to compete heavily in businesses that Goldman, Morgan Stanley and Citigroup have traditionally dominated. Citadel has?been on a notable hiring spree—often taking talent from the biggest banks.?

“Ten, 15 years ago, we would think about about these firms as high-frequency traders,”?Kevin McParland, head of market structure and technology research at Coalition Greenwich, told me. “We’d think about them as having very little balance sheet, very high turnover, they wouldn’t hold positions. That’s not the case anymore.”

He added: “We’d think of these businesses as black box, prop trading—and they now have?businesses that are facing clients directly. And that’s really what changed the game.”

Citadel Securities and Jane Street were really able to take off in the wake of the 2008 financial crisis, when Dodd-Frank reforms began to hamstring risk-taking activities at the biggest banks. The tipping point, McParland said, was when Citadel Securities, started?by Ken Griffin, began to make markets in highly bespoke interest rate swaps after the financial crisis. With that, its ability to trade in fixed income and currency markets accelerated.?

There’s an argument to be made that more activities may move to these nonbanks with more regulations coming toward Wall Street’s giants. And Citadel has very clearly had its eyes on the biggest, and most liquid market in the world: Treasuries.

To find this newsletter online, you can do that here. And to sign up for Bw Daily, for which I write every Friday, you can do that here. Tips and opinions are welcome at [email protected].