Wary Quants Help Goldman Stock Traders Leap Above Morgan Stanley

(Bloomberg) -- Morgan Stanley had stellar results in a key unit last quarter, but they weren’t high enough for the firm to keep a coveted title.

The company, which has built itself into Wall Street’s stock-trading leader in recent years, ceded that trophy to rival Goldman Sachs Group Inc. in the second quarter. Morgan Stanley’s post-crisis record $2.62 billion in equities-trading revenue for the three months were shy of the $2.94 billion that Goldman Sachs notched in the same period.

Blame it on the quants.

A key force behind Morgan Stanley’s success in equities has been the success of its prime-brokerage business, especially the ties cultivated with quantitative hedge funds. But those funds have been slower to embrace risk again after jumping ship during the historic market rout in March.

“We have seen select clients re-lever -- balances have ticked up over the course of the quarter,” but that hasn’t played out at the same pace with the quant investor base, Morgan Stanley Chief Financial Officer Jon Pruzan said in an interview Thursday. Prime-brokerage balances are up about 30% from the lows in March, but still well off their highs, he said.

The systematic-trading funds that lean on alternative data and computing edge also rely on leveraged positions to help magnify gains. That, in turn, results in higher financing balances with their sell-side trading partners.

Goldman’s equities-financing business was the only business line within its trading operation that saw a year-over-year decline in revenue. Luckily for the firm, it relies less on prime brokerage than Morgan Stanley does for stock-trading revenue.

JPMorgan Chase & Co., Goldman Sachs and Morgan Stanley have expanded their advantage in equities over other U.S. banks, with Citigroup Inc. pulling in just $770 million from that business last quarter.

The trio has also benefited from the demise of Deutsche Bank AG’s equities business. The German firm had a strong quant client base, and its decision to disband that unit has driven more business to the top three U.S. banks.

©2020 Bloomberg L.P.