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Morgan Stanley to Spin off Prop Trading Unit

Morgan Stanley will spin off its proprietary trading business into an independent firm in 2012, joining a host of Wall Street banks scrambling to comply with new rules that bar making market bets with their own capital.

Morgan Stanley
Oliver P. Quillia for cnbc.com
Morgan Stanley

The unit, known internally as process driven trading, will be named PDT Advisers and will be run by Morgan Stanley's proprietary trading chief, Peter Muller.

Analysts said while Morgan Stanley will lose the proprietary trading units' lucrative returns, the arrangement of PDT Advisers' spin off will minimize the impact.

"This won't be a parent-child relationship anymore, but it might be a sibling relationship," said Brad Hintz, analyst at Sanford C. Bernstein.

Hintz said the new firm is likely to continue a close business relationship with the former parent.

"Morgan Stanley's a loser in this deal, but not a 100 percent loser," he said.

A bank spokesman was not immediately available for comment on the plans for the proprietary trading unit.

PDT Advisers will include 60 employees from Morgan Stanley's global proprietary trading business. During a two-year transition period, it will continue to manage Morgan Stanley's proprietary trading and will expand its business to include third-party investors.

Volker Rule

PDT Advisers' spin off is part of a continuing push by U.S. banks to comply with the Volcker Rule, a provision of the financial reform legislation passed last July that bars proprietary trading or trades that banks make backed by their own capital.

The rule is named for former Federal Reserve Chairman Paul Volcker, a key adviser to President Barack Obama, who suggested banks be barred from such trading, which has been a boon for some banks. Volcker, however, feared banks could be at risk of failure if large market bets soured.

At Goldman Sachs , for example, proprietary trading accounted for as much as 10 percent of the company's $45 billion in 2009 revenue.

Banks have scrambled to adapt to the rule in recent months, with employees in proprietary trading units leaving in droves to work for private equity groups and hedge funds, or have been reassigned to other asset management divisions.

In October, nine traders from Goldman Sachs jumped to private equity firm Kohlberg Kravis & Roberts.

Another Goldman trader, Morgan Sze, left the company in December to raise a $1 billion Asia-focused hedge fund.

Other banks, like Citigroup , are shifting teams of proprietary traders to asset management divisions that manage clients' money, rather than betting with the bank's own capital.


Morgan Stanley's move is the second major divestiture by the bank because of the Volcker Rule. In October, the New York-based investment bank announced plans to sell hedge fund FrontPoint back to its portfolio managers.

The FrontPoint sale came just four years after the bank paid $400 million to acquire the firm, co-founded by Morgan Stanley's former chief financial officer, Phil Duff.

Morgan Stanley shares were down less than 1 percent on the New York Stock Exchange Monday.