- Morgan Stanley has had a huge year in credit trading, reaping nearly $1 billion from its investment-grade desk — tops in the industry.
- Despite ranking fourth in underwriting IG debt, the firm is a perennial top competitor when it comes to trading it.
- In addition to a deep bench of traders and salespeople, Ed Bayliss, who has been at the firm since 2008 and runs all of investment grade, index products, and portfolio trading, is said to be shrewd at risk management and strong at developing talent.
- Also helping its cause: Morgan Stanley has one of Wall Street’s top operations in algorithmic and bond portfolio trading, which has accelerated in 2020.
- Morgan Stanley reports third-quarter results on Thursday.
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Morgan Stanley’s investment-grade credit trading desk has reaped nearly $1 billion in revenue so far in 2020, well outpacing Wall Street rivals amid a record-breaking year for corporate bond issuance and a surge in algorithmic and portfolio trading, according to sources familiar with the matter.
It’s been a booming year for trading at Wall Street banks, especially within their fixed-income divisions. Heightened volatility and wider spreads have spurred trading and increased client activity, as has the rush of corporate borrowing amid the Covid-19 pandemic.
While many trading desks have benefited, Morgan Stanley has led the way in investment-grade trading, with other top high-grade credit competitors behind by at least 20%, the sources said.
In the US, the investment-grade desk at Morgan Stanley has accounted for more than $700 million, the sources said. That team is coheaded by Chris May and Saju Georgekutty and overseen by Ed Bayliss, who runs all of investment grade, index products, and portfolio trading.
A Morgan Stanley spokesman declined to comment.
New debt issuance tends to go hand-in-hand with increased business on trading desks, and US companies have issued record amounts of bonds this year — nearly $1.5 trillion through the first three quarters of 2020, according to Dealogic.
Morgan Stanley has a strong investment-grade debt underwriting business, though it trails the industry’s top-3 players. The firm’s nearly $170 billion in global deal volume as a bookrunner is still a distant fourth on the league table behind JPMorgan Chase, Bank of America, and Citigroup, each of which has more than $200 billion to its name.
But despite that disadvantage, the team led by Bayliss has been a perennial contender for top honors in IG trading since the bank overhauled its fixed-income trading business in 2015.
That year Morgan Stanley lopped 25% off the broader fixed-income unit’s headcount, cut back on risk, and remolded the business with consistent results in mind, rather than the lumpy performance that resulted from taking bigger swings. It aimed to produce at least $1.25 billion each quarter, prizing speed and routinely turning over its trading book and avoiding large, illiquid positions.
In the second quarter of 2020 —a bumper period for most Wall Street fixed-income operations — Morgan Stanley’s overall fixed-income, commodities, and currency-trading business brought in more than $3 billion in revenues, 168% more than it did in 2019.
The investment-grade team, which industry insiders say has strong traders across sectors and a deep sales force, has been a key feature in that success.
Bayliss, who started his career with Citi in the early 1990s and has been with Morgan Stanley since 2008, is considered a shrewd risk manager and gifted at developing young traders, industry sources said. While making large bets isn’t the firm’s style, sources familiar with the desk say they’ll turn the dial up on risk strategically.
“It’s intelligent risk. And they have smart hedges so they don’t get beat up so bad,” one industry insider said.
For instance, heading into the market shocks in March, the IG desk had very light balance sheet exposure, according to people familiar with the matter, and then scaled up to capitalize on what amounted to a fire-sale on corporate debt as well as frenzied trading activity among clients.
Also helping the firm’s cause: Morgan Stanley has one of Wall Street’s top operations in algorithmic and bond portfolio trading, allowing the firm to price and sell large bundles of bonds in fell swoop. It’s a burgeoning corner of the credit trading industry that has accelerated amid the volatility of the coronavirus panic.
Morgan Stanley was one of the first movers in portfolio trading, setting up a dedicated team within its credit division in March 2018. It’s evolved into a critical component of their bond-trading business, and volumes have increased 20% so far this year, according to a source familiar with the matter. Algorithmic credit trading volumes were up 50%, the people said.
After the blockbuster trading results in the second quarter, Wall Street banks including Morgan Stanley were quick to caution that such levels weren’t likely to persist.
But in September, Morgan Stanley CFO Jonathan Pruzan said at a conference that trading had remained strong, thanks in part to continued strength in both equity and debt underwriting.
“There was no real slowdown in August, and we’ve seen very, very constructive markets across all of the different components of the sales and trading and investment banking business,” Pruzan said, according to a transcript from financial data provider Sentieo.
We’ll have more clarity on just how well the fixed-income trading franchise performed when Morgan Stanley reports third-quarter earnings results Thursday.
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