Morgan Stanley 1998 Annual Report Download - page 25

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Principal Transactions
Principal transactions include revenues from customers’ purchases
and sales of securities in which the Company acts as principal and
gains and losses on securities held for resale.
Principal transaction trading revenues were as follows:
FISCAL fiscal fiscal
(dollars in millions) 1998 1997 1996
Equities $2,056 $1,310 $1,181
Fixed income 455 1,187 1,172
Foreign exchange 587 500 169
Commodities 193 194 137
Total principal transaction
trading revenues $3,291 $3,191 $2,659
Principal transaction trading revenues increased 3% in fiscal 1998,
primarily due to higher equities and foreign exchange trading revenues,
partially offset by a decline in fixed income trading revenues. In fis-
cal 1997, principal trading revenues increased 20%, primarily
reflecting higher equities and foreign exchange trading revenues.
Equity trading revenues increased 57% to a record
level in fiscal 1998, primarily reflecting higher revenues from equity
cash and derivative products. The increase in revenues from equity
cash products was primarily attributable to higher trading volumes
in European markets, which benefited from the Company’s increased
sales and research coverage of the region that began in mid-1997.
European equity trading revenues also benefited from generally
favorable market conditions and positive investor sentiment regard-
ing EMU. Revenues from trading equity derivative products also
increased, primarily due to increased transaction volume and the high
levels of market volatility that existed throughout the year, particu-
larly in technology-related issues. Equity trading revenues increased
11% in fiscal 1997, reflecting favorable market conditions that con-
tributed to strong customer demand and high trading volumes. The
increased revenues were primarily from trading in equity cash prod-
ucts, as the strong rates of return generated by many global equity
markets contributed to higher customer trading volumes and the con-
tinuance of high levels of cash inflows into mutual funds. Revenues
also benefited from the strong performance of many foreign equity
markets, particularly in Europe, which led to higher trading volumes
as U.S. investors sought to increase their positions in these markets.
Fixed income trading revenues decreased 62% in fis-
cal 1998, reflecting significantly lower revenues from investment
grade, high-yield and securitized fixed income securities. Revenues
from investment grade fixed income securities were adversely
affected by the severe economic and financial turmoil in the Far East,
Russia and emerging markets that occurred during the year. These
difficult conditions caused investor preferences to shift toward
higher quality financial instruments, principally to U.S. treasury secu-
rities. This negatively affected the trading of credit-sensitive fixed
income securities by widening credit spreads, reducing market liq-
uidity and de-coupling the historical price relationships between
credit-sensitive securities and government securities. Revenues
from high-yield fixed income securities also were impacted by the
turbulent conditions in the global financial markets due to investors’
concerns about the impact of a prolonged economic downturn on
high-yield issuers. Revenues from securitized fixed income securi-
ties also declined, as the relatively low interest rate environment in
the U.S. increased prepayment concerns and resulted in increased
spreads. Fixed income trading revenues increased 1% in fiscal
1997. Revenues from trading in fixed income products were posi-
tively affected by high levels of customer trading volumes, a large
amount of new debt issuances and increased demand for credit-
sensitive fixed income products. Revenues from trading in high-yield
debt securities and fixed income derivative products were particu-
larly favorably impacted by these developments. Securitized debt trad-
ing revenues also increased, as the Company continued to focus on
this market segment by expanding its level of activity in several key
areas. Trading revenues benefited from higher revenues from trad-
ing in commercial whole loans and mortgage swaps, coupled with
increased securitization volumes and innovative structures. These
increases were offset by lower revenues from trading in government
and investment grade corporate securities.
Revenues from foreign exchange trading increased
17% to record levels in fiscal 1998. The increase was primarily attrib-
utable to high levels of customer trading volume and volatility in the
foreign exchange markets. During fiscal 1998, the U.S. dollar fluc-
tuated against major currencies due to concerns about the U.S.
economy’s exposure to the financial crises in the Far East and emerg-
ing markets, as well as from the Federal Reserve Board’s decision to
lower the overnight lending rate on three occasions during the fourth
*TWENTY
-NINE *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT