Goldman's stock trading boom turns up heat on Morgan Stanley

By Lauren Tara LaCapra

NEW YORK (Reuters) - Goldman Sachs Group Inc's (GS.N) blockbuster performance in stock trading last quarter has some Wall Street watchers wondering whether it knocked rival Morgan Stanley (MS.N) out of the top spot in equities.

Goldman was head-and-shoulders above Morgan Stanley for many years in stock trading, where the two banks compete aggressively to finance hedge funds' trading positions, win block trading mandates and gain bragging rights for the best technology.

But in recent years Morgan Stanley has gained ground: its 2014 stock-trading revenue surpassed Goldman's for the first time in at least a decade. It also placed No. 1 in a global industry ranking calculated by Coalition, a firm that compiles statistics on the banking industry.

Goldman Sachs and Morgan Stanley are perennial rivals in a range of Wall Street businesses ranging from merger advice to private banking. Goldman tends to excel in businesses like trading and principal investments, while Morgan Stanley has shifted its focus onto wealth management and other businesses that do not risk its own balance sheet.

Thus, Morgan Stanley's recent gains in equities trading has become a point of pride for the bank, which tends to lag Goldman in profit overall. However, the $2.3 billion in stock-trading revenue Goldman reported in its first-quarter results on Thursday looks hard to beat, analysts said.

Goldman's 46 percent year-over-year jump far surpassed the 9 percent rise in comparable revenue at JPMorgan, the 4 percent rise at Citigroup Inc (C.N) and 2 percent decline at Bank of America Corp (BAC.N). Morgan Stanley, which reports earnings on Monday, would have to report a 36 percent gain to match Goldman's results.

'BIG UP MOVE'

Goldman Chief Financial Officer Harvey Schwartz said there was particular strength in stock options and other equity derivatives, which perform well when markets move in surprising directions, as well as some large block trades performed for clients. Europe was a bright spot as the euro currency fell and stock markets rallied on actions by the European Central Bank.

"When you have a big up move in European equity markets like you did with (the stimulus program), obviously that is an opportunity for clients to get involved," he said on a conference call with analysts.

Executives and analysts in the equities market who spoke with Reuters on Thursday said they are curious to see whether Morgan Stanley's crown will fall next week.

Both companies' shares were down less than 1 percent on Thursday, although Goldman's are up about 3 percent so far this year, while Morgan Stanley's are down nearly 4 percent.

While the bank has a strong presence in Japan due to its joint venture with Mitsubishi UFJ Financial Group Inc , it is unclear whether its European equities operation is as strong as Goldman's, particularly in derivatives.

Analysts also cautioned that while Goldman had a good quarter, broader challenges still exist. Heightened competition, increased electronic trading and tighter regulation have been hurting stock trading profits on Wall Street since before the financial crisis.

Structural changes to the business mean that some revenue has "simply disappeared," said George Kuznetsov, the head of research and analytics at Coalition. Global investment banks delivered roughly $87 billion in equities trading revenue at their peak in 2007, he said. That figure has shrunk to about $65 billion a year more recently.

Research by consulting firm Greenwich Associates also shows the biggest investment banks are getting a smaller piece of the pie. In 2007, so-called "bulge bracket" firms touted 78 percent market share in U.S. stock trading. That figures dropped to 64 percent by 2014.

"It's hard to make money because the margins are so slim," said Kevin McPartland, who heads Greenwich Associates' market structure and technology practice. "If you looked at it by itself you might wonder why they're in it at all, but to be a big investment bank you have to be in equities."

(Reporting by Lauren Tara LaCapra; Editing by Dan Wilchins and Christian Plumb)