Trading bonds is different from how it used to be.
Traders once dubbed "Masters of the Universe" by Tom Wolfe are increasingly "Masters of Their Neighborhoods," "Masters of Their Computer Screen Pages" or perhaps just "That Guy Who'll Help You Buy a Bond." And the less-alluring the industry becomes to the heavy hitters, the more ripe it becomes for profound disruption.
That is why there's an estimated $1 trillion of U.S. debt-trading business up for grabs, according to the latest estimates by Greenwich Associates researchers, who surveyed hundreds of investors and institutions about their fixed-income trading habits and just released the results.
Of course, this $1 trillion of business is much less lucrative compared with the same amount of trading a decade ago, which is the reason it's available in the first place. So perhaps the question isn't how much debt trading is up for grabs, but which firms are most likely to grab it and manage to still turn a profit.
The punch bowl has already been steadily taken away from the biggest Wall Street banks over the past few years, with new regulations and capital requirements making the fixed-income business less lucrative than it once was. This has prompted the biggest firms to use electronic systems more frequently, reduce staff, withdraw from certain clients and use substantially less of their own money to facilitate transactions.
Electronic trading has helped lubricate some slices of debt, including Treasuries and derivatives, which has helped some firms amass much more market share in those products.
But computerized marketplaces have had a more difficult time taking hold in the $8 trillion U.S. corporate debt market, particularly the riskier slices. Instead, mid-tier broker-dealers are emerging as the big winners.
This year, credit investors often called upon 10 dealers as they sought to execute their ideas, the most since the financial crisis and up from an average of 8.5 in 2012, Greenwich data show. This means more business to go around for smaller firms. Greenwich Associates pinpointed Jefferies, Nomura, RBC Capital Markets and Wells Fargo as being among the most successful at winning smaller investors' fixed-income trades.
Even so, investors are becoming increasingly frustrated by the basic workings of the market. Ninety percent of U.S. corporate-debt investors and two-thirds of Treasury traders said a lack of liquidity was impairing their ability to carry out their investment strategies, the Greenwich survey said. Small and midsize investment firms said some big Wall Street firms didn't even bother doing business with them anymore, forcing them to find alternatives.
The Greenwich report highlights a liquidity problem that's important to solve, which is quickly matching buyers with sellers. It matters because an increasing number of financial instruments, from exchange-traded funds to mutual funds, are predicated on the idea that the underlying bonds can trade with regular frequency. Also, all types of debt, from auto loans to mortgages, are tied to benchmark rates that are also relied upon as a real-time assessment of borrowing costs, which these markets determine. Delays in trade can lead to distortions.
The most important conclusion from the Greenwich Associates report is that many firms of all types are ready for a big change. The less profitable the market becomes, the more incentive the different constituents have to making some comprehensive changes. After all, there's $1 trillion of business at stake for whoever can make it work.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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