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Morgan Stanley’s Downfall in Trading Revenue Continues

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Institutional Securities segment

Morgan Stanley’s (MS) Institutional Securities segment reported pretax revenue of $1.2 billion in 4Q17 compared to $1.3 billion in 4Q16. Its net revenue for 4Q17 fell $0.1 billion from $4.6 billion in 4Q16 to $4.5 billion in 4Q17.

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Trading revenue

The segment’s net revenue fell to $2.7 billion in 4Q17 from $3.2 billion from 3Q17. The reasons for this fall were as follows:

  • Equity sales and trading revenue fell from $2 billion in 4Q16 to $1.9 billion in 4Q17. This fall was mainly due to volatility, a shift in investments from equity to other asset classes, decreased revenues in execution services, and an overall fall in revenue.
  • Fixed income trading revenue was $808 million in 4Q17 compared to $1.5 billion in 4Q16. The segment’s results in 4Q16 reflected stronger market conditions after the US election. Lower revenues in this quarter were the result of lower rates and foreign exchange. However, an increase in credit products helped mitigate this downfall.
  • The segment saw losses of $43 million in 4Q17 compared to $234 million in 3Q17 due to lower funding and liquidity costs and lower losses due to hedging activity.

Lower volatility and challenging market conditions continue to affect the trading activities of all major banks, including Goldman Sachs (GS), JPMorgan Chase (JPM), and Citigroup (C). MS forms 2.3% of the iShares U.S. Financial Services ETF (IYG).

Investment Banking segment

Revenue for the Investment Banking segment rose $0.1 billion to $1.4 billion mainly due to the following:

  • Equity underwriting revenue of $416 million in 4Q17 was $191 million higher than it was in 4Q16 due to increased revenues from IPOs (initial public offering) and follow-on offerings.
  • Fixed income underwriting fell $78 million to $499 million in 4Q17 compared to 4Q16 on higher non-investment-grade loan fees.
  • Advisory revenue, on the other hand, fell $106 million compared to 3Q16 to $522 million in 4Q17 due to lower completed M&A (mergers and acquisitions) activities.

Investment Revenue segment

Revenue from the Investment Revenue segment rose drastically from $3 million in 4Q16 to $213 million in 4Q17 due to increased institutional securities business.

At 95% confidence, the segment’s value at risk (or VAR) was $38 million in 4Q17 compared to $43 million in 3Q17 and $39 million in 4Q16.

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