London, 22 July 2010

Morgan Stanley reduced the amount of risk-taking in its trading book last quarter, but only marginally, and boosted risk in commodities to its highest level since the financial crisis struck in summer 2008, according to the firm's earnings release.

Morgan's relatively high appetite for trading risk sets up an intriguing contrast with Goldman Sachs , the other leading commodity bank, which cut risk aggressively across most asset classes, including commodities, in the three months April-June.

Morgan Stanley cut firm-wide value-at-risk (VaR) to an average of $139 million per day, down just 2.8 percent from the first quarter's $143 million, and slightly up from $132 million in the same period a year earlier. In contrast, Goldman cut firm-wide VaR more than 15 percent in April-June compared with the previous quarter.

Morgan Stanley boosted the VaR allocated to commodity risk slightly from $27 million to $29 million, while Goldman slashed its own commodity exposure from $49 million to $32 million.

Goldman and Morgan Stanley have traditionally dominated commodity trading. But in recent years Goldman's commodity exposure has outpaced its rival, in line with Goldman's greater appetite for trading risk. The contrasting performance in Q2 2010, with Goldman taking risk off while Morgan Stanley continued to boost it, suggests the gap might be starting to close.

It is part of a broader reshuffling. The commodity trading business is being reshaped. Instead of the traditional top tier (Goldman and Morgan Stanley) and as many as six banks following in a second tier, trading is increasingly consolidating around four or five bulge bracket banks, with Barclays Capital , the combined JPMorganChase-Bear Stearns-Sempra and Deutsche Bank bidding aggressively for a place in the top tier, followed by a host of smaller more niche operations and some increasingly large independent traders.

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