Nancy King, global head of commodities trading at Morgan Stanley, has spent the last few years remodelling what used to be one of the most profitable units on Wall Street, by downsizing and focusing on smaller, smart trades for customers instead of the big, risky bets it used to make on its own account.
The shift in strategy, which has cut the size of Morgan Stanley’s commodities business by roughly two thirds, was largely forced on the bank by post-financial crisis regulations that banned banks from using their own money on potentially risky speculation, and increased capital requirements.
The bank is “sticking their toe back into the market,” said Robert Pease, senior counsel at law firm Bracewell and a former commodity and energy market regulator.
Morgan Stanley’s former crown jewel — built up from the 1990s into a swaggering unit specialising in big bets — has been hemmed in by regulations that have eaten into profits.
Long-dated derivatives pegged to energy prices that once delivered fat margins now fall under onerous capital requirements.
The Federal Reserve no longer wants banks transporting natural gas or stockpiling sheets of aluminium.
And the Volcker Rule, part of the 2010 Dodd-Frank Act designed to prevent another crisis, prohibits lenders from proprietary trading, precluding speculative bets on oil and other volatile commodities.
As a result, Morgan Stanley sold big chunks of the business that ran afoul of such rules, losing roughly two-thirds of commodities staff in the process. Its exposure to physical commodities has dropped to $179mn, down from $9.7bn in 2011.
Before the financial crisis, the business was one of Morgan Stanley’s most lucrative operations, generating annual revenue of as much as $3bn with about 400 employees. It now produces around $1bn in revenue with 150 employees.
Commodities trading is no longer a unit unto itself. King and her business now report to Sam Kellie-Smith, who heads fixed-income trading.
Previously, the business answered to the head of the larger institutional division that included trading and investment banking.
King, a 30-year veteran of Morgan Stanley who started in 1986 as an oil trader, was named the sole global head of commodities in June after global co-head Peter Sherk resigned. She declined to speak publicly to Reuters about her plans.
With the backing of Kellie-Smith, King is urging staff across the bank to generate more commodities revenue from customers — as opposed to making its own bets — according to people familiar with the strategy.
Earlier this year, the commodities group moved from its suburban campus in Purchase, New York, to Morgan Stanley’s Times Square headquarters in New York City, some 30 miles (48 km) south.
Some commodities traders are now seated near fixed-income staff to improve the flow of information.
The metals team sits near the foreign exchange desk, for example, as the two have an overlapping client base. That way, salespeople can offer gold hedges to a client, alongside currencies, to protect against inflation.
Metals traders can now also use risk management tools and technology from the fixed income desk to help with pricing, and make better use of its electronic trading business.
The commodities group is also holding ‘teach-ins’ with colleagues in other parts of the firm, such as investment banking and capital markets, to encourage them to pitch commodity-related products to clients.
The aim is to win business from existing Morgan Stanley investor clients who have not typically included commodities in their portfolios, as well as new corporate clients the bank may have dismissed earlier as the opportunity was seen as too small.