Merrill Lynch & Co, the No 1 US brokerage, plans to increasingly trade its own capital, the company's chief executive said on November 15, boosting a segment that competitors have found increasingly profitable in recent years.
Merrill Lynch is also investing in other parts of its business, including trading and investment banking in China and prime brokerage, Stanley O'Neal, the chairman and chief executive, said at Merrill's banking and financial services conference.
The company is looking at acquisitions and joint ventures, O'Neal said. But Merrill has not yet seen large acquisitions that made sense for the company, he added.
Merrill has traditionally been much more conservative than competitors like Goldman Sachs Group Inc in trading its own capital, relying instead on more stable businesses like retail brokerage, investment banking and trading client funds. Goldman Sachs and others have generated strong profits from trading their own funds, known as proprietary trading, in recent years. Analysts have characterised the returns as surprisingly stable.
Merrill Lynch does not intend to make proprietary trading its dominant business but believes it can generate solid returns and serve clients better by boosting the amount of capital it devotes to trading.
Investment banks' returns from investing their own capital can fluctuate wildly from quarter to quarter but tend to be fairly stable over a year-long period, Merrill Lynch equity research analyst Guy Moszkowski told the Reuters Finance Summit on Monday. Moszkowski was not speaking about his own firm.
Looking at four-quarter periods, Goldman's trading efforts have generated revenues equal to 2 percent to 2.5 percent of total assets since the firm went public.
O'Neal emphasised the company would only invest defined amounts of capital, and given the firm's investments in people and controls, the trading does not have to add materially to the firm's risk.
In terms of acquisitions, large deals are difficult to execute, but the firm would be remiss if it did not look at them, O'Neal said. So far, Merrill has focused on smaller acquisitions, he said.