Morgan Stanley’s co-head of securities sales and trading, Neal Shear, explains why the firm reorganised the structure of its institutional securities, and the effect his role heading the trading division will have on risk taking. Kathryn Tully reports.

Neal Shear is three weeks into a new challenge: to replicate the enviable success of Morgan Stanley’s global fixed income trading business for its clients and on its own account, under his stewardship. But this time, he has to pull it off in equities too.

Until March 22, Mr Shear and Jerker Johansson, who are co-heads of institutional sales and trading, divided responsibility for the institutional securities business between them. Mr Shear headed up the global fixed income effort, while Mr Johansson took care of global equities.

Now, under a reorganisation spearheaded by president Zoe Cruz, all of the equities and fixed income work will be reorganised into two new broad groups – a trading division under Mr Shear, and a clients and services group under Mr Johansson.

Realignment

It means all employees in equities and fixed income will also align themselves either with the risk-taking group or the client services group.

Mr Shear and Mr Johansson will take joint responsibility for all product businesses, although investment banking, which is run by Walid Chammah, will continue to report separately to Ms Cruz. “The rationale behind the strategy is to get a sharper focus on clients as they look across asset classes and better understand client profitability,” says Mr Shear.

“On the trading side, it’s really to coalesce our risk around a single strategy. To look for synergies between equity and fixed income risk, between macro and micro risk, and make sure we’re making the most out of our resources.”

Electronic investment

That involves making the most out of people and of operating systems. “We have made a significant investment in our electronic platforms and as an institution, I think we believe that that’s the smart way to go,” he says.

“Now we need to leverage that further. I’m a big fan of electronic trading and I think that allows the creative sales force to work on client problems and solutions that are value added and add margin.”

As part of the reorganisation, Mr Shear will sit on a newly created institutional securities group operating committee chaired by Ms Cruz, along with Mr Johansson, Mr Chammah, the regional heads of Europe and Asia and Eileen Murray, head of global operations and technology. Members of the committee will be compensated in accordance with the performance of the institutional securities business as a whole, rather than with any particular product, region or function.

That is significant because, as head of fixed income, Mr Shear’s overall compensation last year was the second highest of anyone at the bank after John Mack. There is a lot at stake in making this transition work.

It is also an extremely big project. Aside from cramming in a holiday in the intervening time, he has already been travelling all over in an effort to assess how the transition can be made.

“I’ve been focusing my energy on looking at the two businesses for the last few weeks and I’ll continue to do that for the next several months,” he says.

He says businesses will be brought together, where it makes sense to bring them together, and avoid duplication of effort. “We don’t want to do things that are awkward, but we do want to do things where there are synergies and where there are complementary skill sets. My goal is to gain efficiencies and hopefully add to the equity risk profile in the same way we have done successfully in the fixed income space,” he adds.

Breaking records

Risk-taking in fixed income is certainly going from strength to strength. The bank has just reported a record breaking first quarter in fixed income, with fixed income sales and trading revenue at $3.5bn, up 57% over the last quarter of 2006. That was significantly better than the results of other fixed income trading juggernauts such as Goldman Sachs, which recorded a 48% increase over the same period, and way better than Lehman Brothers or Bear Stearns, which saw a 1% and a 3% increase respectively.

Residential mortgages did particularly well and accounted for a lot of these gains as the bank’s prop traders took advantage as sub-prime originators struggled, or in some cases, went bankrupt altogether, and the spreads widened across the sub-prime market.

“My guess is that you’ve already seen the brunt of the impact in the first quarter. There will be a few more banks reporting in the next few weeks so it will be interesting to see how they fare, but I don’t think we’ll see any additional surprises. We positioned ourselves appropriately for the widening of spreads in the sub prime market and we haven’t made any secret of that,” says Mr Shear.

“But we made more money in a variety of areas, outside mortgages. Credit and interest rate products also performed very well. Commodities also performed extremely well, even though we were coming off an amazing run last year,” he adds.

Commodities success

Commodities has been one jewel in the crown of Morgan Stanley’s fixed income franchise for 20 years and, along with Goldman, it is the envy of pretty much every other bank on Wall Street. In the past couple of years in particular, many competitors have tried to replicate the success of Morgan Stanley and Goldman in this area by ramping up efforts in commodities, sometimes taking large prop positions, but no other bank has come close to making this market a sustainable money spinner as the two top houses have.

Morgan Stanley has more than 200 sales and trading staff employed in its global commodities business, working on flow trading, prop trading as well as physical supply of commodities such as oil. It was one of the first banks to move into emissions trading and last October, the bank said it would invest about $3bn over the next five years in carbon credit trading and other emission credits projects in order to expand its carbon and emissions platform.

Since he is the former head of that business, involved with it since its inception, perhaps the fact that Mr Shear recognises its crucial importance is unsurprising. However, he believes this gives him a unique insight into how to develop one cohesive trading and risk strategy across equities and fixed income.

“What better way to do it than take someone who doesn’t come from a fixed income or equities background, so there can be no presumptions?” he asks.

He says the task ahead is all about changing the dial gradually to give equities personnel more risk. “We have some great risk takers in equities, but we need to make sure they’re comfortable with increased risk and make sure we’re comfortable with it, and over time, provide them with more risk capital. That never happens overnight, it’s something that happens step by step. It’s work in progress and it will take a lot of executing.”

In terms of products, Mr Shear is also keen to renew Morgan Stanley’s focus on equity derivatives. “That doesn’t mean we’re not going to continue to invest in our strengths such as credit derivatives, but we need to redouble our efforts in equity derivatives and I think that the money we spend there will generate great returns,” he says.

New positions

The project is a global initiative and the bank takes its regional profit and loss from sales and trading very seriously – so much so that new regional heads for sales and trading have also been created. Phil Newcomb and Rich Portogallo will be regional heads in the US, Colin Bryce in Europe and Danny Hegglin and Jialin Liu in Asia. These are areas where the bank is still expanding.

“We are building out our emerging markets platforms, the global mortgage product, whether that’s in Asia or Europe. In December, the bank purchased the Moscow-based bank, CityMortgage, which originates, securitises and services residential mortgages, as part of that initiative,” says Mr Shear. “We also want to expand our principal investing in those markets.”

Just three weeks into the reorganisation, it’s too early to assess how well he can put his plans into action, but he’s unfazed by the task. “You just have to approach these things without any presumptions and with a clear head.”

CAREER HISTORY

2005 Appointed co-head of institutional sales and trading.

2005 Global head of the fixed income division, foreign exchange and commodities.

1987 Became head of global commodities including precious metals, energy, power, and natural gas

1988 Promoted to managing director

1984 Became vice-president

1982 Joined Morgan Stanley to start the firm’s commodities business.

1979 Trader at J Aron & Company

1978 Trader at Citicorp

1978 MBA, Cornell University

1976 BSc in accounting, University of Maryland

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