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Morgan Stanley has disputed the suggestion that improvements in its equities business have been driven by controversial high-frequency trading, after questions were raised by a rival about why it has been so successful.

In the book Flash Boys by Michael Lewis, the bond salesman-turned-author, Goldman Sachs executives are said to have asked “Why was Morgan Stanley growing so fast?”

Flash Boys suggests that Morgan Stanley eked out an advantage over Goldman by building infrastructure to serve high-frequency traders, known as Speedway, which “was now making Morgan Stanley $500m a year, and ... it was growing”.

“It couldn’t be that we’re better than them?" said one Morgan Stanley executive.

One person familiar with the matter said the $500m figure was too high and crucially Speedway did not serve high-frequency traders – such business at Morgan Stanley was minuscule – and that it was not “a straight road into the bank’s dark pool” [private exchange]. In fact, it had nothing to do with dark pools, said this person.

Among the big Wall Street banks, Goldman, which co-operated with the author, comes across positively, setting out its stall as the bank that would not embrace the murky world of high-frequency trading, because of concerns about “some future calamity”.

The book has divided Wall Street, and has been called an “unjust vilification of an entire industry” by William O’Brien, the president of exchange operator BATS, and lauded as a probe into “a growing cancer” by Charles Schwab, head of the eponymous discount brokerage.

The Amazon bestseller has not been received enthusiastically by Morgan Stanley where the suggestion that the improvement is down to its willingness to serve a cohort of controversial clients that Goldman has deliberately avoided has not gone down well.

Morgan Stanley has made great strides in closing the gap on Goldman in its equities division. It was ahead at times last year and ended the year with revenues of $6.5bn compared with $7bn at Goldman. Five years earlier Goldman was making $6bn more than Morgan Stanley.

The improvement in equities has provided a confidence boost at Morgan Stanley over the past few years during times when the company looked to be struggling to recover from the crisis and trailing Goldman badly in other areas, especially fixed income trading.

Part of the improvement at Morgan Stanley has, indeed, nothing to do with its electronic trading capabilities, such as rebuilding its prime brokerage serving hedge funds.

But other advantages have come through heavy investment in technology to allow “low latency” or high speed trading. Though it does not market itself specifically as a service for high-frequency traders, Morgan Stanley executives have time after time – according to clients – vaunted their infrastructure to funds “for whom speed is of the utmost necessity”.

“At some point in time the chickens are going to come home to roost on the HFT game,” said one Goldman insider. “It’s a smart move for anyone to become more diversified in their approach to the market.”

Copyright The Financial Times Limited 2017. All rights reserved.
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