A broking license will allow Morgan Stanley to trade securities and provide research in Indonesia, which is expected to draw extra fund flows after an upgrade to investment grade by credit ratings agencies Moody's last month and Fitch in December.
A senior official at Indonesia's stock exchange said it had suspended trading by local securities firm PT Tiga Pilar Sekuritas on Wednesday pending approval of its plan to transfer its seat to Morgan Stanley.
Goldman appeared to show insufficient enthusiasm after completing due diligence last year, said a Jakarta-based source, one of several in Jakarta and Singapore who have direct knowledge of the matter and spoke to Reuters.
With no Goldman deal forthcoming, Tiga Pilar's owners initiated discussions with Morgan Stanley, said the sources, who declined to comment on the financial value of the deal.
Tiga Pilar, Morgan Stanley and Goldman declined to comment.
"We have suspended the trading activities of Tiga Pilar today as we will process their transfer to a third party, which is Morgan Stanley," Uriep Budi Prasetyo, director of compliance and supervision at the exchange, told Reuters.
Morgan's move to expand in Indonesia follows Nomura Holdings (8604.T) and Citigroup (C.N), which last year ramped up equity teams in Jakarta to challenge leaders Credit Suisse CSGN.VX and Deutsche Bank (DBKGn.DE).
The deal still requires regulatory approval.
The stock exchange will not expand beyond its current 120 members, so foreign banks must buy an existing seat, said Eddy Sugito, a listing director at the Indonesia stock exchange.
The deal value is likely to be in the low millions of dollars as Morgan Stanley is only seeking to buy the brokerage license, but it will need to inject at least 50 billion rupiah ($6 million) in license costs and required brokerage capital.
Tiga Pilar, which is controlled by the Tan Pia Sioe family, traded 178 billion rupiah by stock value in the first nine months of 2011, ranking it 114 out of 117 active brokerages, according to stock exchange data. The firm is not listed.
Morgan Stanley has hired James Brewis, former head of sales at UBS's UBSN.VX Indonesia unit, as the head of its Indonesian equities and plans to hire more salesmen, traders and research staff in coming months, the sources said.
Morgan Stanley secured an underwriting license in 2008 but is seeking a bigger presence through a fully-fledged broker license, while Goldman does not have an underwriting or broking license in Indonesia.
James Gorman, Morgan's chief executive officer, said in a statement in November that the U.S. bank planned to establish an onshore presence in Indonesia this year with a new equity brokerage operation in mid-2012 as it sees the country as a strategic priority.
"The level of competition is obviously going to be heightened, whether it is about underwriting and stock deals or human resources," said Harry Su, head of research at Jakarta-based brokerage PT Bahana Securities.
"I think brokerage firms will have a challenging time hiring across the board as they will aim to take many people from local firms, while there is a scarce supply of good brokerage professionals here," Su said.
Citigroup bought Indonesian brokerage Republik in 2010 and then added bankers and analysts, including veteran Ferry Wong from Macquarie (MQG.AX) as its new head of research.
Citi has since surged ahead in the league table for underwriting equity deals to rank second among global banks behind Deutsche, while topping the debt underwriters' table last year.
Additional reporting by Fathiya Dahrul; Editing by Matthew Bigg and Will Waterman