We talked to Morgan Stanley’s commodities chief about her outlook for hiring, automation, and how plastics is a new hot business

Morgan Stanley

Morgan Stanley is looking to hire again in commodities as it expands into new markets and deepens its presence in others.
Business Insider sat down with the business’s chief, Nancy King, at Morgan Stanley’s Time Square headquarters.
King said the firm is looking at plastic and paper pulp markets, expanding in European power and gas, and building up its Asia presence after cutting too much a few years ago.
King also said that commodities trading has been largely immune from the wave of automation and algorithmic trading that’s sweeping Wall Street trading floors.

Nancy King has been running Morgan Stanley’s commodities business in one form or another for the past four years. During that time, the investment bank slashed the size of the business and led many long time employees to the door.

More recently, the business has been growing again. Business Insider caught up with King recently at the firm’s Times Square headquarters and the mood was upbeat — Morgan Stanley has begun to look for growth opportunities and King professed satisfaction with the shape of the business. New growth markets include plastics and paper pulp markets, shale pipeline management and renewable power trading, among others.

King also took time to address the dearth of senior women on Wall Street, how she approaches hiring and how the firm might respond to a loosening of the Volcker Rule restrictions on proprietary trading.

Without further ado, here’s the Q&A of the meeting. The remarks have been edited for grammar and clarity, but not content.

What is your outlook for the commodities business this year?
We’re optimistic. It’s generally been a good start. We’ve seen some volatility but not hyper volatility. We’ve also seen increased opportunities with clients. Nothing hugely outsized but just general flows on the corporate side. I’d say hedge funds have actually been a little bit muted this year. The commodity-specific hedge funds have had a very rough time in the last few years so that business has been quiet, but there are some other kinds of macro funds that are not necessarily commodity specific that have been active.

How are you feeling about the state of your business and the opportunities for growth?
I’m positively predisposed to this question, which I might not have been a few years back. I think we did a lot of really tough work four, five years ago. We had to take a pretty critical look at the balance of our business portfolio given the new regulatory landscape and then decide where we wanted to put our chips. We’ve focused the group on where we thought we had strategic advantages.

We’ve been able to start growing again in what I think is a measured way. We have reinvested in our index and investor business, which is still relatively small on a comparative scale in terms of product development. We have re-engaged in the European power and gas business. In the US, power and gas is one of our biggest strongholds, so it definitely makes sense to leverage that type of activity. We are also looking to expand our metals business and, separately, build out our franchise in Asia because frankly we had scaled back so far in the region that we’re a little bit undersized in terms of product and sales.

Then we have some new niche markets that we’ve been developing, which are smaller but have very promising signs like the petrochemicals — plastics — derivatives business. I think there will be new opportunities around risk management related to LNG as that market starts to develop globally. Some of it will come out of Asia, some will be out of Europe and some will be out of the US. The pricing in those markets will be different. So there’s potential for us to offer optionality in the three regions. It’s a nascent market, but it’s definitely one that’s shifting from long-term fixed-price contracts to more dynamic pricing.

Are there any fundamental changes to commodities markets that we should be watching?
The increase in recent shale discoveries, and the dynamics of pipelines and where certain places are oversupplied relative to other places are creating opportunities. That’s why being in a lot of these underlying markets, not just the benchmark Henry Hub, is so important. In fact, a lot of the opportunities are in the less generic hubs and that’s really where risk management is key. We have physically gone out over the last number of years and hired people that have that kind of expertise. Some of them have worked at utilities in the past and so they’re not all necessarily Wall Street traders. They’re people that understand pipelines.

How will Morgan Stanley approach growth opportunities in terms of headcount and resources?
It really depends on the actual opportunities we see in each of these markets. Sometimes you can repurpose people. At the beginning they start by doing two things, right? In the past, people just tended to go out and hire and hope things happened. I think now it’s much more of an organic growth path.

How do you think about hiring?
We’ll definitely have some incremental headcount, but the other thing is you have to find the right person. If we find really great people, we’ll go out and hire them but if you only find one or two, then we will get others to pitch in. That’s really how we’ve grown the business for the vast majority of our time in commodities. We’ve never really gone out and hired groups of people. It’s just very difficult to find the right cultural fit.

Commodities is not the most dynamic part of the trading floor these days. Do you find it difficult to recruit into the business?
In the mid 2000’s, it was like shooting fish in a barrel. Then it got much more difficult when there was a lot of uncertainty around the regulatory regime and what would be allowed. I’d say right now though, we’re in a pretty good spot. We tend to recruit from undergrad or we’ll do lateral hires that have more like the VP, or ED type level of experience. We’ve been very successful over the years at finding people.

You’re one of the most senior women on Wall Street when it comes to commodities, and sales and trading more broadly. How are you thinking about promoting diversity?
Obviously all of Wall Street has an issue with diversity. We’re slowly making strides as a firm and as an industry. I would say sales and trading in particular – and commodities even more so – is very male dominated. It always has been. It’s difficult to make a lateral hire because there just aren’t many people to hire from, so we really have to focus on those individuals we already have at the firm or on bringing in analysts that we can develop in-house. Then we have to put them in roles and expose them to different parts of the firm so they can grow into leadership positions. That’s one thing, and then also maintaining the people we have to make sure they don’t leave. This firm has been very devoted to the effort and is looking at it much more consistently using metrics, really focusing on pipelines of people. We do absolutely think about it when we’re hiring someone because we want to make sure that we at least look for diverse candidates. And it’s not only about gender, it’s really any kind of ethnic diversity, racial diversity, etc. It’s moving in the right direction. It’s not going to change overnight.

Do you foresee changing your business in response to changes to the Volcker Rule?
Right now we’re pretty comfortable with our business model and we are very client centric. Of course, in order to facilitate our client business, we do take risks. We’re not a riskless business. That said, even if the regulators were to say, "you can have 100% principal speculation,” I don’t think that’s the way the firm would want to go. So I don’t anticipate any major changes.

Let’s drill down into the growth opportunities. What’s this you say about plastics?
It’s still a pretty niche market that is really client driven. It’s entities that want risk management solutions. It could be a producer or it could be someone that is, say, a packaging company that needs to hedge some particular component of their process. We’ve also just recently, and this is very nascent, started to look into offering pulp derivatives for packaging and consumer goods companies. It’s very small and bespoke, so it’s not like we’re out there making markets in everything.

You’ve said that you’re doing more structured trades. Tell us about those.
We have focused more and more on coming up with tailored client solutions as opposed to simply trading a futures contract in the front month, for instance. The margin on the latter is de minimis but you need to do it for liquidity and client flow reasons. On a structured trade, we are developing customized solutions that involve taking on market risk as well as potentially credit risk. A lot of times what clients need are more customized transactions. It doesn’t necessarily have to be that highly difficult of a trade, but it’s more bespoke. This is where we can add real value because we have a full suite of options trading, structuring expertise, physical trading, and real time trading around some of these deals.

What’s the growth opportunity look like in renewable power?
I think being able to service corporate clients in achieving their renewable goals is actually something that is going to be right in our sweet spot. In the past, some corporates have gone out and just done it themselves, many of them without understanding some of the risks involved. For example, if you buy from a wind farm as generated, that means you’re only getting power when the wind blows. That might not fit your load profile if you’re running your plant for 24 hours a day or you have peak times, etc. Or you might be buying it on this node, but you really need power on this one, thinking that those two don’t seem that far away. Then all of a sudden that becomes a very big basis risk. Frankly, corporates aren’t going to have the ability to trade around and mitigate some or a lot of those risks. If you have a pretty expansive trading desk, like we do, we’re going to be better suited to take on and manage those risks for you.

We talk a lot about automation changing Wall Street. How much of that has come into the commodities market?
I’d say commodities is not very far down the curve on that. You’ll see it come into effect in a lot of markets prior to commodities. It doesn’t mean that we don’t look at a lot of data when we are analyzing deals but that’s always been the case. In terms of focusing on just electronic trading, we haven’t seen a huge push for that.

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