MS is on auto pilot the machines have everything under control Now, It Is Man vs. Machine As Morgan Stanley Beefs Up Bond Business, Firm Is Bringing in More Computers By AARON LUCCHETTI And BRETT PHILBIN In a move to repair its flagging bond-trading business, Morgan Stanley MS +0.67% is scrambling to replace some of its well-paid bond traders with computers. It's man vs. machine at Morgan Stanley as the banking giant plans to replace some of its highly paid bond traders with computer. Aaron Lucchetti explains on Mean Street. (Photo: Reuters) The New York company is hiring programmers and technology specialists to help it trade bonds electronically and handle client orders in the hope of exploiting an expected shift in the way bonds and other fixed income products are traded. While the effort represents only a part of what the firm is doing to boost low returns in the business, the shift already has reduced the ranks of interest-rate and foreign-exchange traders on some desks by 10% to 20%. Morgan Stanley's head of interest-rate trading, Glenn Hadden, has told colleagues in recent months and that the trading floor of the future will surround a few traders with the hum of powerful machines. The unit, which has at least 200 staff according to industry estimates, has cut about 10% of staff on some trading desks. Morgan Stanley declines to discuss employment levels, but there according to these estimates the company employs more than 1,000 traders. Through a spokesman, Mr. Hadden declined to comment. Morgan Stanley's fixed-income trading revenue was $2.04 billion in the first half of 2012, down 60% from 2010, increasing pressure on Chairman and Chief Executive James Gorman to guide the company to steadier financial footing. Morgan Stanley's shift reflects rules passed as part of the Dodd-Frank overhaul of financial regulation. A Morgan Stanley spokeswoman referred to comments Mr. Gorman made at an employee meeting in July at which he said the company viewed the fixed-income business as "very critical" and "attractive," and that it is working on building higher returns there. Highlighting computer trading is Morgan Stanley's latest effort to bolster a business that analysts say it has repeatedly misjudged over the years, even as rivals such as Goldman Sachs Group Inc., Deutsche Bank AG DBK.XE +4.82% and J.P. Morgan Chase JPM +0.65% & Co. earned billions of dollars in profits. Banks have long viewed electronic trading as a mixed blessing because it has hurt the fees, or "spreads," that can be charged on each trade. The change at Morgan Stanleyâan effort to use its strength in stock trading to its advantage in markets like interest-rate derivativesâreflects rules passed as a part of the Dodd-Frank financial reform act that are slated to take effect in the coming years, as well as growing customer demand. The new regulations are expected to push large swaths of derivatives trading onto electronic platforms. Morgan Stanley is planning to use parts of its established electronic stock-trading platform on new fixed-income derivatives products that are expected to go electronic in coming months when new rules are completed. The company is also hoping to benefit from regulations that will push more derivatives trading onto exchanges and clearinghouses. "They've moved into electronic trading better than their peers," said Robert Kapito, president of money-management giant BlackRock. Firms with lower bond ratings like Morgan Stanley could benefit from these regulations because they would reduce some of the customers' preferences for higher-rated companies. [image] With shares trading at about half of book valueâa measure of net worthâ Morgan Stanley is facing investor calls to either scale back its fixed-income business or overhaul it to better compete against larger rivals. Investor questions about Morgan Stanley, the smallest of the five big U.S. financial companies that have large trading operations, have been amplified by a credit downgrade in June that saddled the company with a lower bond rating, higher borrowing costs and fears that its customers will flee for higher-rated peers such as Goldman. "There's consensus among investors that Morgan Stanley needs to more radically restructure" the bond-trading division, said Michael Mayo, an analyst at CLSA. "They need to turn the lights off on some of these businesses." Since the financial crisis, regulators have imposed new rules that make trading certain bonds more expensive and less profitable. That has forced Morgan Stanley and other firms to cut back on mortgages, sales of securities backed by bundles of consumer loans and other bonds. Morgan Stanley officials have said the firm will scale back the riskier parts of the bond business, while pushing ahead in areas such as currencies and interest rates. Those operations consume less capital and fit with the company's underwriting and wealth-management businesses. Morgan Stanley should "significantly reduce" its bond-trading unit and "consider liquidating" it altogether, analyst Ed Najarian of ISI Group wrote last month. Morgan Stanley's foreign currency desk has already cut about 20% of traders who dealt in more basic products, but it has kept most of its sales staff and experts in derivatives. Morgan Stanley has been caught on the wrong foot in previous bond-business shake-ups. The company reduced its fixed-income trading staff during the financial crisis,effectively sidelining the company for a 2009 market rally. Morgan Stanley then added hundreds of traders just as the recovery peaked in 2010, leaving the company bloated as markets turned electronic. Cutbacks could help Mr. Gorman improve the company's return on equity, which reflects profits as a proportion of shareholders' investment in the firm. In the second quarter, Morgan Stanley's return on equity was 3.7%, compared with 5.4% at Goldman. Before the financial crisis, Morgan Stanley often churned out returns of 20% or more. Since Mr. Gorman took the top job in 2010, Morgan Stanley's share price has tumbled by 51% to $14.56 Wednesday evening, outstripping a 19% decline to $154.94 in the KBW Capital Markets index. The electronic-trading push comes as the company is already tightening its belt. Morgan Stanley has said it will reduce its workforce by more than 4,000 jobs off its 2011-end head count of 61,899. More than three-quarters of those cuts have already occurred.