NEW YORK • Morgan Stanley this week cut staff covering short-term credit and regional broker-dealers, after a quarter in which the bank posted a 42 per cent drop in bond trading, sources said.

The sources blamed the shake-up on tougher capital rules, mounting competition from cheaper trading on electronic systems and expectations that the Federal Reserve will raise US interest rates next week for the first time in nearly a decade.

Morgan Stanley's short-term credit desk, including its commercial paper business, has seen extensive cutbacks, they said. Morgan Stanley has also significantly reduced the number of bond sales people who cover smaller, regional broker-dealers, they added, although the bank will continue to cover these types of clients.

In Singapore, the bank has fired traders in the fixed income, currencies and commodities (FICC) unit this week, with the job cuts roughly at 25 per cent of the division's headcount, sources told The Business Times. At least nine FICC traders out of about 20 were axed this week.

A Morgan Stanley spokesman declined to comment on the layoffs.

Traders and fund managers said the bank's move is hardly a surprise as tougher capital rules have made it less profitable to trade Treasuries, agency debt, corporate bonds and mortgage-backed securities.

With the Fed widely expected to raise rates next week, the daily cost for trading will likely go up. In addition, the proliferation of electronic systems and high-frequency trading firms has eroded Morgan Stanley and other Wall Street dealers' dominance in the bond market.

This year, electronic trading platforms are on track to capture 20 per cent of US investment-grade bond trading volume, a 25 per cent rise from a year earlier, according to research firm Greenwich Associates.

REUTERS