Merrill Lynch & Co., the third largest securities firm, said profit rose 31% as stock-market gains and historically low financing costs spurred more trading, share sales, and takeovers.

Net income in the second quarter jumped to $2.14 billion, or $2.24 a share, from $1.63 billion or $1.63, a year earlier, New York-based Merrill said in a statement. That exceeds the average estimate of $2.02 a share in a Bloomberg survey of 17 analysts.

Trading revenue rose a Wall Street-leading 34%, helping Merrill weather the deepening crisis in mortgage-backed securities and the near-collapse of two Bear Stearns Cos. hedge funds. The chief executive officer of Merril Lynch, Stanley O’Neal, who’s pushing the world’s largest brokerage to generate more revenue overseas, is on track to post a fourth straight year of record earnings.

“While it’s probably too early to tell for sure how the subprime is sue will work itself out, Merrill appears well positioned,” an analyst at Minneapolis-based Thrivent Financial for Lutherans which owns about 500,000 Mer rill shares, Erin Archer, said “They’re still able to get deals done, and not seeing significant contagion.”

Merrill said revenue from structured finance and investments which include the firm’s mortgage business, declined in the second quarter. Mr. O’Neal said in the statement that the market environment was “volatile and, at times, hostile.”

Total revenue rose 19% to $9.73 billion, and Merrill said its annualized return on equity, a measure of how well the firm reinvests earnings, climbed to 22.4% from 18.6% a year earlier.

Merrill’s earnings performance compares with the 1% gain that Goldman Sachs Group Inc., the world’s largest securities firm, posted last month. Morgan Stanley boosted net income by 40%.

Shares of Merrill fell $1.19 to $86.20 in composite trading on the New York Stock Exchange. The stock has dropped 7.4% this year, the second-worst performance in the Amex Securities Broker/Dealer Index after Bear Stearns. Goldman has gained 10% and Morgan Stanley is up 7.8%.

Those two New York-based firms reported earnings for the three months ended in May, before the Bear Stearns hedge funds unraveled and the firm was forced to rescue one of them with $1.6 billion in emergency funding. Merrill was among the creditors to seize collateral from the funds in the form of CDOs, fixed-income securities that repackage bonds, loans, derivatives, and even other CDOs into new bonds.

The chief financial officer, Jeff Edwards, said on a conference call with analysts today that the collateral is “appropriately marked” to market and Merrill’s “exposure” to the Bear Stearns funds is ” limited” and “contained.”