Morgan Stanley to Maybe Drop a Quant Fund

Morgan Stanley is looking to spin off its quantitative proprietary trading unit. The fund, in the words of The New York Times, is run by a “mathematical whiz” and a “secretive band of traders” who “use high-speed computers to turbocharge their mathematically powered investing skills.”

They program their computers to track different data and variables like the historic relationship between certain pairs of stocks. If the relationship goes out of kilter, a quant might make a bet, amplified with borrowed money, that the historical relationship between the stocks will return.

In other words, the fund is like the trading software in CNBC commercials, except that it’s more powerful and it actually makes money. Citing a book about quant funds, The Times says the fund made $4 billion in profit from 1996 to 2006.

The spinoff was something Morgan Stanley had been planning to do before President Obama signed the Dodd-Frank financial reform law, but it’s happening faster now that proprietary trading looks to become illegal soon. Morgan Stanley still has one prop desk to get rid of, but according to The Times it’s just a little statistical arbitrage unit.

mtaylor [at] observer.com | @mbrookstaylor