Bond Investors Said to Mull Consortium in Trade Talks With Banks
BlueMountain Capital Management LLC, Pacific Investment Management Co. and Fidelity Investments are among money managers that are in discussions to form a consortium that would seek ways to make it easier to buy and sell corporate bonds in the U.S.
The firms, along with AllianceBernstein Holding LP (AB) and Wellington Management Company LLP, have been reviewing ways to invigorate the $19.4 trillion market, according to six people involved in the talks who asked not to be named because the details are private. The goal is to propose a set of market structure changes to the dealer banks they rely on for trading, the people said.
While banks aligned in the past to solve such issues and firms such as Goldman Sachs Group Inc. are working on new trading systems, money managers haven’t attempted such a unified strategy before, said three of the people involved in the discussions. Bond volume has shrunk as dealers reduce inventory to comply with new capital rules and traders have warned of market disruptions as the Federal Reserve prepares to reduce its own purchases under quantitative easing.
“I don’t think there has been” a consortium of investors in the bond market, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York and author of “Wall Street: A History.”
Representatives of the money managers declined to comment. Bloomberg LP, the parent of Bloomberg News, offers electronic bond trading through its fixed-income trading platform.
The investor discussions come amid a 76 percent decline in corporate debt inventory at the world’s biggest dealers since a 2007 peak. Stricter capital requirements from the Basel Committee on Banking Supervision have made holding bonds more expensive for dealers, while speculation that the Dodd-Frank Act makes it harder to facilitate bond trades adds regulatory risk to their traditional warehousing strategy.
Smaller bond inventory has led to reduced profits at some of the world’s largest banks. Citigroup Inc. (C) said today that its fixed-income trading revenue excluding an accounting adjustment dropped to $2.78 billion, a decline of 26 percent from a year ago. JPMorgan Chase & Co. (JPM), the biggest U.S. bank, last week reported an 8 percent decline in bond trading revenue, to $3.44 billion.
Tabb Group LLC, the research and consulting firm, is attempting to help the investor group as it considers its strategy to work with the banks. The New York-based company hosted a Sept. 24 dinner in Boston to make its pitch that it can help unify voices across the investment firms.
“We’re trying to see if we can help provide insight on what’s out there,” Larry Tabb, chief executive officer of Tabb Group, said in a telephone interview. “Outside of that, we’re not sure if there’s a role for us or if the buyside wants help.”
Dodd-Frank and the Basel capital rules have spurred initiatives by firms from Goldman Sachs to BlackRock Inc. (BLK) and Deutsche Bank AG (DBK) to create trading systems that can accommodate the market structure shift. The money managers considering a unified approach have been meeting since last year with bank executives to try to iron out a new trading protocol. At a group meeting in July in New York the banks told them they understood their concerns and wanted them to return with a list of changes they’d like to see, according to a person who attended.
One idea being considered is the creation of an electronic trading platform that brings multiple buyers and sellers together in a system known as many-to-many, one of the people said.
The growth of electronic bond-trading is expected to continue, according to a study released in August by McKinsey & Co. and Greenwich Associates.
The consultants surveyed 117 portfolio managers, traders and analysts at investment firms in the U.S. and Europe for the survey, and conducted interviews with eight of the 10 largest dealers as well as representatives of electronic trading systems. About 70 percent of U.S. respondents expect electronic auctions to buy or sell bonds, known as request-for-quote systems, will be the method of electronic trading that proliferates in the next five years. In Europe, 85 percent said the same, the report said.
Investment-grade volume on MarketAxess Holdings Inc. (MKTX)’s electronic system are on pace to exceed $400 billion in 2013 after surging 45 percent to $44 billion in September from a year earlier, according to data from the company.
Deutsche Bank, Europe’s biggest investment bank by revenue, has pitched its plan for an electronic trading network to JPMorgan, Citigroup and Barclays Plc (BARC), people briefed on the talks said last month.
The system, Oasis, is known as an indication of interest, where clients tell their bank how much of a particular corporate bond they want to buy or sell and the dealer enters a resting order into the electronic system, two of the people involved said. If another party is interested and the trade crosses, the transaction would be done between banks so that the clients remain anonymous, the people said.
Dealers have resisted a shift to electronic bond trading because the increased transparency can cut profits. In the 90 days after the Financial Industry Regulatory Authority’s Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.
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