* Merchants poaching traders from Wall Street
* Traders attracted by higher pay, looser regulations
* US bank shares remain depressed since financial crisis
By Jeanine Prezioso
NEW YORK, Sept 6 (Reuters) - Three Morgan Stanley gasoline traders in Europe are set to join Swiss commodity trader Mercuria, a source said on Thursday, the latest Wall Street bank to lose traders to aggressive merchants.
Morgan Stanley Managing Director Leo Sint Nicolaas, as well as Sebastian Ferraccù and Louis Mitchell, are expected to move from London to Geneva to work for Mercuria, the source said.
With bonus caps, new U.S. regulations and Wall Street job cuts, banks including Goldman Sachs Group Inc and Barclays Plc have lost dozens of traders this year, many of them to hedge funds or expanding merchant-dealers that face fewer restrictions on trading limits and salaries.
But until now, Morgan Stanley had not faced the attrition of commodities and energy personnel despite a well-publicized bonus caps at $125,000, diminished physical trading and a potential partial sale of its mammoth commodity trading desk to Qatar's soveriegn wealth fund.
"This is the first real chip I've seen coming out of that business. I'm not hearing a huge amount of people are moving. It's a really unusual time of year," said a source familiar with the trading group.
The news was first reported on SparkSpread.com.
Spokespeople for Morgan Stanley and Mercuria declined to comment.
The trend of traders leaving Wall Street to start hedge funds or work at energy merchants in places such as Geneva or Stamford, Connecticut, is nothing new.
This year alone, Taimur Hassan, a former Goldman managing director and commodities trader, founded Frere Hall Capital Management, and Todd Edgar, former head of macro trading at Barclays, started Atreaus Capital LLC.
Each has raised at least a couple of hundred million dollars in capital, according to people who reviewed fund documents.
Others have joined big merchants like Freepoint Commodities in Connecticut or Mercuria. In May, Mercuria made its boldest move yet, hiring Barclays commodities trading chief Roger Jones, one of the biggest sector executives in Europe.
Morgan Stanley's relatively successful retention record may be partly attributed to its collection of physical assets, which include oil storage, warehouses and terminals -- invaluable tools for traders, said one former Morgan Stanley employee.
"It's as if you are a traffic cop sitting in the middle of an intersection, you see everything go by," said the trader.
Such access makes it hard for traders to feel they can compete or succeed outside the walls of a hefty bank.
"That's why most of them are still there. They've generally done very well."
But tighter regulations, enacted in the wake of the financial crisis, have some traders worried.
The U.S. Dodd-Frank law includes the Volcker Rule, which prevents banks from trading for their own accounts. Internationally, BASEL III requirements will boost the amount of capital banks are required to hold.
Morgan Stanley also is regulated by the U.S. Federal Reserve, which could force it to sell off its prize physical commodity assets.
Those measures could reduce banks' trading revenues -- which, in Morgan's commodities division, fell in 2011 for the third year in a row. Morgan Stanley does not break out commodities trading revenues, but based on Reuters calculations, these fell to just $1.3 billion last year, the lowest since 2005.
On top of that, the group's ownership appears in flux. In July, Morgan Stanley was said to be in discussions to sell a stake in its global commodities trading division to Qatar's sovereign wealth fund, CNBC reported.
While the bank boosted its second-quarter trading risk, or Value-at-Risk (VaR), to the highest level since the second quarter of 2008, bigger positions may not be enough to prevent more departures, experts say.
The bank's share price, like some of its peers, hasn't managed to find its way back to pre-financial crisis levels when it was trading around $40-50 per share.
"Some people feel there's really no benefit for them to stay. Stock options are exercisable at $60 and the price is at $15," said one person familiar with the employees' thinking.