Shrinking Bond Desks Taken by Journeymen as Masters Fade

Graphic: U.S. Bond Market Grows as Trading Volume Decreases

It was the profession that inspired Sherman McCoy in the novel “The Bonfire of the Vanities.” In the 1980s, the excitement in the trading room, with hundreds of people talking on the phone, was palpable, like a sporting event, said Kerry Stein, head of credit trading at Lloyds Securities Inc.

Those days are gone.

“It’s surprising how quiet a place could be compared to what I had known,” said Stein, who began trading bonds in 1985 at Drexel Burnham Lambert Inc., the house of Michael Milken, who was nicknamed the junk-bond king.

As trading in dollar-denominated bonds declined 22 percent in the past five years to an average daily $809 billion, so have the jobs, leaving even some of the most senior traders and salesmen moving from firm to firm. Dozens of journeymen are populating an industry that used to attract the young in throngs, lured by money and prestige, according to Michael Maloney, president of fixed-income recruiting firm Michael P. Maloney Inc.

“The business model is broken and 50 percent of the people in our world who are in trading are stuck right now,” Maloney said in an interview in his New York office.

“For every 10 of them there’s going to be three or four left,” he said. “What’s the timeframe? Well, everybody I know is looking for a job -- not looking for a job, looking for a career.”

Trading Slump

While the size of the U.S. bond market ballooned by more than $5 trillion since 2008 to $37.8 trillion at year-end, trading in the debt has slumped, according to data from the Securities Industry & Financial Markets Association. Average daily turnover fell to $809 billion last year from $1.04 trillion in 2008.

That’s partly because banks have pulled back from making markets in bonds as higher capital requirements make it less profitable. The business -- where buyers and sellers are primarily matched over the telephone or through e-mails -- has also suffered shrinking margins because of regulator-mandated price transparency and the rise of electronic trading.

Transaction costs declined after the Financial Industry Regulatory Authority introduced its bond-price reporting system, called Trace, in 2002. Wall Street bond traders lost about $1 billion in fees in the next year, or about $2,000 a trade, according to a study in the Journal of Financial Economics. The system is intended to provide transparency in an opaque market, and help prevent investors from being fleeced.

Declining Pay

“Despite attempts to get it to be electronic, it’s still a voice market,” Mark Pibl, head of research and fixed income strategy at Canaccord Genuity, said in a telephone interview. “On the equity side, there’s just one security whereas on the bonds of an issuer there could be five or six or more, there could be different subordinated issues. To a large degree, that complexity within the capital structure doesn’t allow itself to easily be automated.”

Since the credit crisis, jobs and compensation have declined as Wall Street retrenched. Total pay at the biggest banks has fallen as much as 50 percent for high-yield and investment-grade traders and up to 25 percent for distressed-debt traders since 2010, according to New York-based recruitment firm Options Group.

The number of credit traders working for the firms plunged 30 percent to about 300 over the same period, even as companies issued record amounts of bonds in the U.S. to take advantage of historically low interest rates, according to Options Group and data compiled by Bloomberg.

Liquidity Drop

The decline of the profession matters because it’s become harder for everyone to buy and sell debt as banks cut the amount of capital they’re devoting to trading. Primary dealers slashed the amount of bonds they hold by 76 percent from a record high in October 2007 to $56 billion in March 2013, when the Federal Reserve changed the way it reported the data.

Turnover in investment-grade corporate bonds fell to a 72 percent annualized rate during the first half of this year, the least in the past decade, according to a Sept. 12 Barclays Plc report.

Liquidity may only get worse when bond prices start falling as the Fed withdraws its record stimulus, which may make the market’s swings more dramatic, according to Peter Tchir, head of macro strategy at Brean Capital LLC in New York.

“Banks are less able to and willing to take risks,” Tchir said. “The real risk when rates rise is that you get heightened volatility because the nature of this business has changed.”

Salomon Brothers

The changes to the bond business have affected some of the industry’s most seasoned veterans.

Jon Bass sat just five desks from Chief Executive Officer John Gutfreund, 85, at Salomon Brothers Inc., the firm that inspired Tom Wolfe’s 1987 novel “The Bonfire of the Vanities.” Gutfreund was dubbed the “King of Wall Street” by Businessweek in 1985.

Wolfe referred to bond traders including protagonist Sherman McCoy as the “Masters of the Universe” in his novel that chronicled excesses on Wall Street. The book topped the New York Times’ bestseller list for two months and remained on the list for more than a year. It was made into a 1990 film starring Tom Hanks, Bruce Willis and Melanie Griffith.

Jefferies Hire

Bass went on to help run UBS AG’s fixed-income business before leaving the Swiss bank in 2009 after nine years. Now, the 52-year-old Bass is on his fifth job in as many years, joining Jefferies LLC in a senior sales role after less than two years at BNP Paribas SA as deputy head of fixed income.

His recent positions included five months at Mizuho Securities USA Inc., a year at now-bankrupt MF Global Holdings Ltd. and less than two years at BTIG LLC, according to Financial Industry Regulatory Authority records.

Bass didn’t respond to phone calls seeking comment.

“We recruited Jon because he has exceptional references from a broad and important client base,” Rich Handler, chief executive officer of Jefferies, said in an e-mailed statement. “He has a reputation as a team player and as a strong and honest leader. We look forward to having him join Jefferies.”

Lee Fensterstock, 66, has had at least five jobs since leaving his role as managing director of the fixed-income division at Jefferies in 2007.

Outside Hollywood

Along the way, he led Broadpoint Securities Group Inc., the bond dealer that bought Gleacher & Co. in 2011. Gleacher said in March it would liquidate its business after attempts to find a merger partner or sell the defunct brokerage failed.

Fensterstock didn’t respond to calls and an e-mail seeking comment.

The evidence shows that the business has lost its luster, holding little appeal for newcomers, said Stein, 56. He said that when he started out at Drexel in 1985, Wall Street was “the hottest job outside of Hollywood.”

“When I started, I think you could count on one hand the number of people over 35,” said Stein, who said he isn’t sure he’d advise his teenage son to follow in his footsteps. “Now I don’t think being 50 in this business makes you an outlier anymore. A little gray hair is a good thing - it means you’ve had the opportunity to see good and bad markets.”

Mark Jicka, who’s been in the bond business for more than two decades, now trades bonds at Canada’s CIBC World Markets Corp. in New York and is on his fourth job since leaving Barclays in 2008. Jicka’s resume includes positions at MF Global, Mizuho Securities and Loop Capital Markets. He declined to comment.

Rising Rates

There may be increased demand for experienced traders once interest rates rise, according to Canaccord’s Pibl.

“Liquidity has dried up and when the thing hits the fan, it’s hard to see an orderly exit,” he said. “That’s where the distribution comes in and having a trader who knows the client base” will be crucial, he said.

Some younger traders have gotten out and moved into industries from real estate to public relations and information technology.

Rob Morelli, 37, quit UBS during the 2008 financial crisis and started a business called Sirona Advisors to trade distressed debt through broker-dealer A.K. Capital LLC. He wound it down two years later.

“After a couple of years the big banks recapitalized and it became very difficult for Sirona and for other smaller groups to survive,” Morelli said.

New Skills

He now runs a business focused on a mobile application called HomeKeepr that allows real estate agents to recommend local services. “I am getting paid zero now,” he said.

Michael Chuang, who worked at Lehman Brothers Holdings Inc. for seven years before spending almost two years at UBS, runs a software company called iTBconnect that provides traders with access to electronic-trading platforms.

While growth has been slow for electronic trading in corporate bonds, it’s inevitable that more business will be conducted on these systems in the future, Chuang, 38, said.

“If you are a bond trader now and you refuse to change and refuse to acquire new skills, you will be out of a job,” he said.

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