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11th October 2007, 08:21 PM
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automated trading: think twice
Morgan Stanley Traders Lost $390 Million in One Day (Update1)
By Christine Harper Oct. 10 (Bloomberg) -- Morgan Stanley, the world's second- biggest securities firm, said its quantitative strategy traders lost $390 million during a single day in August as their computer models failed to account for ``widespread'' investor selling. The company's traders lost money on 13 days during the quarter ended Aug. 31, the New York-based firm said in a quarterly regulatory filing today. ``The largest loss days resulted from losses associated with quantitative strategies in early August 2007, when these strategies were adversely affected by widespread portfolio reductions,'' the company said. Morgan Stanley said last month that the quantitative strategies group lost $480 million during the quarter after being caught off-guard when other investors sold securities to reduce borrowings. Separate areas of the equity sales and trading unit made up for the losses, enabling it to report $1.8 billion of revenue for the third quarter, up 16 percent from a year earlier. The firm's quantitative trading group, like hedge funds run by Highbridge Capital Management LLC, Tykhe Capital LLC and Goldman Sachs Group Inc., uses mathematical models to pick investments. Such ``quant'' models began posting steep losses in late July and early August as surging defaults on subprime mortgages triggered a crisis of confidence in credit markets. Stock-market declines followed. The funds were forced to sell more-liquid stock investments to raise cash and reduce debt. The selling confounded the funds' computer models. Stocks that they anticipated would decline in price rose, and shares that they expected to rise instead fell. Morgan Stanley disclosed today that daily trading losses during the quarter exceeded the firm's trading value-at-risk calculation on six days during the quarter. The filing with the U.S. Securities and Exchange Commission also shows that the firm's traders generated more than $100 million of revenue on about 19 days during the quarter. http://www.bloomberg.com/apps/news?p...d=aUkBuixre03o 
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