“The Morgan Stanley Fade” – Clients Who Felt Cheated By Bank’s Block Trading Business Seize Opportunity For Revenge

As the SEC sharpens its knives for the slaughter of Morgan Stanley’s lucrative block-trading business, the bank is finding – much, we imagine, to its deep chagrin – that many of its colleagues and counterparties are aiding in the investigation, even regaling regulators with a flurry of “I told you so’s”.

We have already seen several of Morgan Stanley’s counterparty/rivals snitch on the company by helping the Feds to build their case. But as it turns out, these acts of vengeance aren’t limited to just Credit Suisse, which lost billions of dollars thanks to Morgan’s decision to break ranks during the Archegos collapse (we were among the first to highlight those block trades back in March of last year).

Many of the biggest buy-side firms have long kvetched about Morgan Stanley’s block-trading business. Many eyed the bank’s ability to quickly unload large block’s of (heavily discounted) shares, suspicious of what they believed might be the bank’s skilled front-running by lining up buyers ahead of time, before an order to sell has even been placed.

Now, according to Bloomberg, as the federal block-trading probe advances with Morgan Stanley as its primary target, bankers are reportedly joking among themselves about the “Morgan Stanley fade” – a practice that results from the bank leaking news of potential sales before they happen, allowing other firms to front-run the trade accordingly, ultimately moving the market to the banker’s advantage.

The group of malcontents includes some of the biggest PE firms in the country, including Blackstone, KKR and Carlyle Group.

Yet now, all across Wall Street the knives are out for Morgan Stanley. Since word emerged last month that the equities powerhouse is being examined as part of U.S. probes into whether banks tipped off hedge funds to stock sales big enough to move markets, the industry has been buzzing about the “Morgan Stanley fade.”

Competitors, who couldn’t figure out how Morgan Stanley was bidding for block trades at such tight discounts, are now swapping “I told you so’s.” Authorities examining Morgan Stanley’s business haven’t accused it of wrongdoing.

But before the investigation was made public, MS and many of its rivals saw nothing wrong with this type of behavior. Senior bankers are constantly pitching deals, and so offering select clients a tasty ‘hint’ about a potential block sale didn’t seem like the illegal sharing of material non-public information, but rather a necessary aspect of marketing potential deals. All of thi

Unfortunately for them, the boundaries of what’s deemed acceptable are changing rapidly.

Yet now, all across Wall Street the knives are out for Morgan Stanley. Since word emerged last month that the equities powerhouse is being examined as part of U.S. probes into whether banks tipped off hedge funds to stock sales big enough to move markets, the industry has been buzzing about the “Morgan Stanley fade.”

Competitors, who couldn’t figure out how Morgan Stanley was bidding for block trades at such tight discounts, are now swapping “I told you so’s.” Authorities examining Morgan Stanley’s business haven’t accused it of wrongdoing.

Firms like KKR have even adopted strategies to guard against the Morgan “fade” – including working with a single broker to try and minimize the odds of unfavorable leaks allowing rivals to front-run the trade.

One longtime PE executive, speaking with Bloomberg, said he felt helpless to combat a trend, which he noticed over time, of prices moving unfavorably against him just before block trades were executed. However, given Morgan Stanley’s massive clout in the market, he worried that the bank would punish him for speaking out.

Another executive pointed to one particularly messy block trade as an example of the bank’s uncanny ability to will prices to move in their favor just as trades were about to be executed.

Some market participants point to a particularly messy block trade on Monday Aug. 9, when a group of investors tapped Morgan Stanley to unload shares of ZoomInfo Technologies Inc. The group had selected Morgan Stanley for another ZoomInfo trade days earlier with satisfactory results.

The Friday before the second sale, the stock sank 3.1%, the third-worst performance in the Dow Jones Internet Service Index. Then early on Monday morning, the shares tumbled another 3.2% before the offering was announced.

Banks are supposed to handle block trades discreetly so that prices don’t fall. The reality, according to market participants, is that declines can happen, potentially because of the way banks track interest among prospective buyers.

The SEC initially launched its block-trading probe in 2018, and the DoJ later joined in after the disastrous collapse of Archegos Capital Management, which involved several massive block trades that hammered valuations in the firm’s portfolio stocks as a group of Wall Street brokers – led by Goldman and Morgan Stanley – aggressively offloaded the shares. MS and Goldman avoided major losses on their positions in the Archegos portfolio stocks (which Archegos had bet on via what’s known as a total return swap, leaving the prime brokers in possession of the shares, and thus on the hook for losses in the event of a blowup) by reportedly breaking an agreement on a half dozen prime brokers to try and manage the sales of Archegos’s portfolio. But their decision to break ranks had devastating consequences for their far-slower rivals, as banks like Nomura and Credit Suisse were ultimately saddled with billions in losses.

Like the old saying goes, “revenge is a dish best served cold”. Now, after years of biding their time, Morgan’s clients and counterparties are seizing the opportunity for some good ol’ fashioned payback.

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