Morgan Stanley Bonds On a Roll -- WSJ

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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.

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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.

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

Corrections & Amplifications Colm Kelleher is Morgan Stanley's president. An earlier version of this article incorrectly said he is chief operating officer. (June 19, 2017)

(END) Dow Jones Newswires

June 20, 2017 02:47 ET (06:47 GMT)