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April 16, 2007

Equities Continue on Rampage

Revenues Way Up at Trading Houses in 2006

By Peter Chapman

Also in this article

Equities trading revenues in 2006 grew sharply for the second year in a row at the top firms. The 11 major investment banks took in about $53 billion, an increase of 37.5 percent over the previous year. The group dominates trading of cash equities and equities derivatives globally and reaps the lion's share of the revenues.

The story in 2006 was similar to that of 2005: Growth came from most categories except domestic cash equities. Derivatives, prime brokerage, international and proprietary trading drove results.

Below are summaries of press releases, earnings statements and executive statements from a selection of the bulge firms.

>> Morgan Stanley

Morgan Stanley boosted revenues 32 percent to $6.3 billion last year. The increase came across the board, although the firm highlights derivatives and overseas cash equities. The bank now takes in about 40 percent of its institutional-both fixed income and equities-revenues from overseas. Growth is strongest outside the U.S. Morgan noted its commission revenues increased but were impacted by "intense" competition, particularly in the U.S., as well as the shift to electronic trading. Proprietary trading contributed to growth, while prime brokerage recorded its third consecutive record year. Morgan Stanley is one of the largest prime brokers.

>> Goldman Sachs

Goldman Sachs is still the largest equities trading house. It took in a whopping $8.5 billion last year, up 50 percent. Commissions only grew by 18 percent, though, representing $3.5 billion of the total. Trading gains accounted for $5 billion, an increase of 85 percent. Growth in commissions has been sluggish at Goldman throughout the 21st century, as money managers demand lower rates and the bank pares back its account list. Most customer flow at Goldman is processed electronically. But most sales and trading revenues come from the "high-touch" handling of complex trades.

>> Deutsche Bank

Deutsche Bank saw relatively modest equities growth of 22 percent last year, bringing in about $5 billion. The increase of about $1 billion largely reflected gains in proprietary trading, derivatives and emerging markets. As for cash equities, the firm notes it is not looking to grow market share at the expense of profits. That profitability may not be so great, though. Deutsche also notes: "Margin compression remained significant in more mature flow' businesses, such as cash equities."

>> Lehman Brothers

Lehman Brothers had a good year, taking in nearly $4 billion, up 44 percent from 2005. The big bank said gains came across the board, including cash equities. "Our cash business remained strong in 2006," the company said in a filing with the Securities and Exchange Commission, "due to solid client-flow, higher IPO and secondary market volumes." Lehman told analysts in the fourth quarter it experienced its second-highest level ever in execution services, or electronic trading. It noted that derivatives and prime brokerage are becoming "important components" of overall growth.

>> UBS

UBS' revenues charged ahead by about 30 percent last year to $7.4 billion. Equity derivatives, prime brokerage and proprietary trading were the primary drivers. Cash equities also grew, but mostly outside the U.S. Inside the U.S., during the fourth quarter, UBS experienced "lower individual client trading income" on the cash equities front.

>> Credit Suisse