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February 24, 2006

Brokerages' Trading Results Show Huge Gains in '05

By Peter Chapman

Four of Wall Street's top equities' divisions raked it in last year.

Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns collectively took in $14 billion from their equities operations in 2005. That's a 22 percent rise over the prior year. Derivatives and foreign operations accounted for much of the gains.

"Our equity derivatives business had an absolutely great year," Sam Molinaro, Bear Stearns' chief financial officer told analysts.

Bear's institutional equities revenues rose 32 percent to $1.4 billion last year. Derivatives led the way. The firm also reported strong results from cash equities, both U.S. and foreign, and risk arbitrage.

As a rule, the big brokers don't break out the contributions from their various product lines. Nor do they break out profits attributable to their equities divisions.

At Lehman Brothers, revenues in equity capital markets division jumped 26.5 percent to $2.5 billion last year. Much of that money was made overseas. Analysts at CIBC estimate Lehman took in 70 percent of that money from outside the U.S.

Analysts at Morgan Stanley predict growth in derivatives at Lehman will outpace that of cash equities by three-to-one.

Goldman Sachs, the largest equities house, maintained a comfortable lead last year, grossing $5.7 billion. That's a jump of 21 percent or nearly $1 billion from the previous year.

As with Lehman, much of the gains came overseas. The firm cited "improved results in derivatives and shares, particularly in Europe and Asia."

Equities, which includes the old Spear, Leeds business, accounted for about one-third of Goldman's total revenues last year.

Goldman is shifting its resources and capital away from cash equities and toward derivatives, program and proprietary trading. That's according to Credit Suisse analyst Susan Roth Katzke.

Goldman is gearing its trading operations to cope with average commission rates of 1.5 cents, Katzke reports. Goldman expects 80 percent of all shares to be traded via electronic direct market access in the near future, up from 35 percent today.

As for Morgan Stanley, its equities group managed to overcome management turmoil and high trader turnover in 2005 to take in $4.8 billion. That's up 18 percent from 2004. The firm attributed its success to robust derivatives and prime brokerage businesses.

Morgan Stanley, Goldman Sachs and Bear Stearns are the largest prime brokerages. Their clients, hedge funds, have been a major source of order flow in recent years.