Macaskill on markets: Pick faces a potential block in Morgan Stanley succession race

Morgan Stanley chief executive and chairman James Gorman announced in late May that he will step down within the next 12 months to be succeeded by one of three candidates.

The announcement came just weeks after Morgan Stanley disclosed in a regulatory filing on May 2 that it is attempting to resolve an investigation by the Securities and Exchange Commission and other US authorities into its equity block trading practices.

The concurrent push to settle potential regulatory charges and pick a new CEO could prove awkward for Ted Pick, one of the candidates for the succession.

Pick is co-president of Morgan Stanley and head of its institutional securities group. He is widely viewed as being in a two-way competition with his co-president Andy Saperstein, head of wealth management, in the race to succeed Gorman.

Dan Simkowitz, head of investment management, is the third ostensible candidate, but his name may have been put in the public domain by the bank to diminish the perception that Pick and Saperstein are now in a fight to the death that will inevitably lead to the departure of the losing candidate – even if history suggests that this is indeed the case.

Pick made his name at Morgan Stanley with two signature achievements, first turning the bank into the global market leader for equities revenues and later managing a successful integration with a fixed income division that had struggled for years with intermittent trading losses and a perennial inability to compete with rivals such as JPMorgan and Goldman Sachs.

It is Pick’s background as the former head of Morgan Stanley’s equities division that makes the block trading investigation a potential hurdle to his ascent to the top spot at the bank.

Block trades of large share stakes became one of the areas in which Morgan Stanley excelled as it established its equities revenue leadership position, helped by strong relationships with clients such as US technology firms that have executives with large ownership stakes.

There is no indication that the SEC has damning evidence that singles out Morgan Stanley as an abuser of the flow of information between sellers and buyers of block trades, and regulatory supervision of the practice in the US features some grey areas, as Euromoney has pointed out.

But there are signs that Morgan Stanley’s two main competitors for equity market leadership – Goldman and JPMorgan – sense potential weakness at their rival and a chance to exploit any finding that makes their own handling of customer information flow seem superior.

There have been reports that Goldman contacted regulators in Hong Kong some years ago about suspicious price movements ahead of some Morgan Stanley block trades, for example.

And more recently, JPMorgan’s co-head of investment and corporate banking, Vis Raghavan, used the bank’s investor day presentation on May 22 as an opportunity to have a bit of fun.

Raghavan described how JPMorgan has been seeking to extend its long roster of number one market share positions into fresh areas such as equity capital markets and commented: “We were selective and prudent in both Spacs and in block trades, and we take a deliberative approach to growth and will not chase lower quality business”.

Bankers in glass houses should not throw stones, of course. There is an obvious irony in Goldman reporting a competitor for potential market abuses in Asia, where it was itself a key player in the epic 1MDB scandal.

And JPMorgan has not been immune from regulatory sanctions through the years.

The extent to which any block trading sanction for Morgan Stanley becomes an issue for Pick’s CEO succession candidacy may depend on how many other banks are pulled into a supervisory investigation.

If any abuses of block trading market practices, such as mis-managing the flow of information to hedge fund buyers of equity stakes, quickly come to be seen as an industry-wide issue then the personal repercussions for Pick could be limited.

There is now a well-established playbook for unexceptional abuses where multiple banks make payments to settle regulatory sanctions, with minimal reputational impact for individual firms.

Fines of over $2 billion that were applied in the US to a host of banks for failing to monitor WhatsApp messages fall into this category.

Another example came on May 24, when Morgan Stanley was one of five banks provisionally found by the UK’s Competition and Markets Authority (CMA) to have unlawfully shared sensitive information about pricing and trading of gilts in online chatrooms.

The bank disputed this finding, saying: “Morgan Stanley has cooperated fully with the CMA during this investigation and will continue to constructively engage in the process. However, we disagree with the CMA’s provisional allegations and intend to contest them.”

This had no great impact on Morgan Stanley’s share price on the day, which edged down only slightly more than a reference index of bank stocks.

But an equity block trading investigation that attracts headlines and client litigation could become a bigger reputational challenge.

Pick took part in a European financials conference hosted by Morgan Stanley in March in which he highlighted the strengths of the firm’s different business lines and offered what could almost be taken as an early pitch for the CEO succession.

He hailed how his group had been able to overcome what he described as “historical tribalism” between its three divisions of equities, fixed income and investment bankers.

Pick gave a name check to Gorman’s description of the way that the firm’s leading wealth and asset management franchise provides “ballast” to Morgan Stanley, while framing his own institutional securities business in a more proactive manner.

“The ballast has $4.5 trillion of assets under management in wealth and the better part of $1.5 trillion in asset management. The engine is the integrated investment bank,” Pick said.

He then gave the other part of the firm that he hopes to take over a bit more credit.

“Actually, the ballast is showing real engine qualities,” he said, before warming to his theme. “The engine starts feeling more ballast-y, and the ballast starts having an element of engine, such that in some years, it will be a 50/50 revenue split,” he added.

Pick will be keenly aware that the last year of Gorman’s reign is not turning out to be a great one for key parts of the firm’s investment banking franchise, especially for advisory and deal-making revenue.

That shouldn’t necessarily be a deal-breaker for his own CEO candidacy, given that Gorman and the Morgan Stanley board both understand the cyclical nature of many banking business lines.

But an aside that Pick made when discussing Morgan Stanley’s strength in Europe relative to competitors highlights a potential challenge he may face if the US equity block trading investigation becomes an embarrassment.

Pick described Morgan Stanley’s European proposition as resting on its role as “a global investment bank that has reliable sales and trading capability onshore, proper regulatory hygiene and the investment banking intellectual capital to get in the boardroom.”

Any charges of improper regulatory hygiene in his own division on his New York home turf could come to haunt Pick.