The moon illusion is an astronomical mystery that has fascinated sky watchers since ancient times. It attempts to explain why the moon looks larger as it sits on the horizon. A popular explanation is called the “apparent distance theory”: smaller objects, like trees and clouds, make the moon look larger. As it rises in the sky, the relative atmosphere makes it appear as a blip. Something similar may be said for Morgan Stanley’s trading earnings.
Morgan Stanley’s (MS) stock is up by over 2% since last Friday partly because trading revenue grew at a faster clip than the bank’s peers. Equity trading at Morgan Stanley rose 4% to $1.8 billion, more than both Bank of America (BAC) and Goldman Sachs (GS), and it beat Wall Street’s estimates. Stock and bond trading revenue increased 3.8% for the first nine months of the year, the biggest gain among the top six Wall Street banks, according to Bloomberg.
Relatively speaking, that’s encouraging. The bank’s institutional securities division, which houses its trading business, is still Morgan Stanley’s biggest moneymaker.
But overall trading is still shrinking at Morgan Stanley as a share of its revenue mix. Fixed income and equity trading at the bank accounted for about 30% of the bank’s total revenue this year. It was 37% in 2009 and 48% in 2005.
Part of the decreased share has to do with the bleed in Wall Street’s trading business in general. Trading commissions are coming down. Average commissions per trade have fallen 65% over the 10 years ending in in the first quarter this year, according to ITG, about 25 percentage points of that drop took place in just the past two years. More trades are being done in dark pools and regional exchanges. Large brokers are finding ways to sidestep traditional trading routes.
Morgan Stanley’s trading has also shrunk because its other businesses are growing. That, perhaps, is what investors should be excited about. Much like the moon in an evening sky, as the sun sets on trading, it will continue to shrink.