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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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September 30, 2004

Goldman and Morgan Are Equity Champions

By Peter Chapman

Goldman Sachs and Morgan Stanley will dominate the institutional equities business in the coming years. That's according to a new report by Citigroup Smith Barney. The two firms' equities businesses have the highest growth and are the most profitable among the bulge brackets, the report notes.

"These companies were the earliest and most thoughtful in evolving their equities businesses," states Ruchi Madan, a brokerage analyst at Citi. "When the equities environment improves, we believe these firms will significantly outperform in equities." Madan reviewed eight brokerages, comprising 68 percent of equities revenues in 2003. The others are UBS, Merrill Lynch, Deutsche Bank, Lehman Brothers, J.P. Morgan and Credit Suisse First Boston.

Goldman and Morgan Stanley get the edge in size and diversity of operations. They are leaders in prime brokerage, derivatives, electronic and program trading. They have high levels of internalization.

The two firms have been the most aggressive in restructuring their equities businesses, Madan states. As for the rest, Lehman has been slow to build out its business. Merrill has been the most "indecisive in shifting its model in any particular direction," Madan writes.

The analyst notes that Goldman and Morgan Stanley are at the forefront of the dealerization' of the equities business. Firms are de-emphasizing research and agency executions in favor of capital commitment and risk taking. "Goldman Sachs and Morgan Stanley are the best risk takers versus their peers," Madan writes.