While Florida voted, Morgan Stanley won the Facebook primary.
A unit of Thomson Reuters broke word that the big bank will helm a team of other big banks for what in May could be the biggest IPO, raising perhaps $10 billion.
We don’t care who underwrites the deal. But thinking about Facebook and its banking soldiers of fortune, the giant and the mighty in massive conformity, we thought of the markets.
In the data we track, Morgan Stanley is king of index program-trading executions. For large clients of ours, its volumes surpass those of small exchanges. At the Nasdaq, Morgan Stanley is the top liquidity provider, trumping fraternal behemoths BofA Merrill and Barclays and high-frequency clearing maestro Wedbush. Last June, Global Custodian’s annual ranking of prime brokers – banks bundling securities services for the buyside – slotted Morgan Stanley a close second to Goldman Sachs.
We wrote in September how the same names show up everywhere. The ones running books of derivatives, making markets in Treasuries, trading bonds electronically and correlating seas of equity executions are the same.
Lost in the long shadows of the large was word that technology research boutique Kaufman Brothers closed its doors this week. Ticonderoga Securities shut down earlier is month. Formerly Reynders Gray & Co. on the floor of the NYSE, the firm offered differentiated research, direct-access trading and agency executions. WJB Capital, another boutique, shuttered around January 4 after failing to raise capital and seeing its financing costs rise as high as 25%.
Even mid-tiers are hitting headwinds. Memphis-based Morgan Keegan & Co owned by Regions Financial Bank will be acquired by Florida’s Raymond James.
Morgan Stanley and its monolithic kin by right win monumental deals. No argument. But it’s not underwriting we’re thinking about. It’s the way stocks trade. We know when dark-pool volume jumps at Morgan Stanley, or if behavior there departs from other program behaviors. But with ever fewer small brokers offering unique trade executions, markets lose vibrancy.
Many small brokers can’t meet trade-execution rules, so must route orders to big firms. Others receive payments for order flow, which mammoth brokers consolidate. Think of an elevator. People of different shapes, sizes, speeds and energy board it. Then all travel at the same speed – that of the elevator.
That’s what happens in markets. If investors want to buy your shares through a small broker providing research, and those orders route to Morgan Stanley for execution, they’re likely internalized or amalgamated into algorithmic schemes serving unintended ends. Thus, your price reflects program-trading rather than rational investment.
We’re glad Facebook and Morgan Stanley are around. But there’s irony that in a social world, markets are sterile machines. It’s curiously antisocial.