Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

There's one club on Wall Street where only dealers are allowed.

It's a place known for its handshakes, lavish dinners and loud traders. In this insular world, elite banks anonymously trade big blocks of debt with each other without tipping their hand to other firms or outside investors who aren't permitted in the club.

But that may be about to change.

Debt Dealing
ICAP, one of the largest inter-dealer brokers, is trying new strategies as debt trading changes
Source: Bloomberg

ICAP, one of the biggest inter-dealer brokers, has been working on something it calls the Sponsored Access Model, which will likely be unveiled within the next few weeks. It lets investment firms participate in sessions once open only to dealers, in which firms submit orders for securities at a set price. The new initiative will focus first on emerging-market bonds, with the goal of subsequently expanding to investment-grade and high-yield bonds.

There's a caveat, of course: These asset managers may only participate if a dealer invites them. Basically, this is like having a friend who belongs to an exclusive club that won't let you step inside. Now, the club still won't let you to join, but your friend can invite you for lunch sometimes. 

This may not sound like a big deal, but it is. This relatively small change is a huge shift in mentality. Just a few years ago, ICAP may not even have bothered spending time on such an initiative. It wouldn't have been worth it. Dealers would have revolted because this market has traditionally given banks an upper hand when negotiating with investor clients. Previous efforts to include non-dealer investors quickly fizzled. 

A lot has changed though, even in the past year. Activity at inter-dealer brokers has declined as big banks buy less risky debt with their own money. Investors are increasingly finding new ways to assess fair-market pricing. Traders at big banks are often less informed than those at the biggest asset managers. Wall Street debt-trading profits have plunged.

Falling Fortunes
Debt-trading profits at the biggest Wall Street banks have been falling in recent years
Source: Bloomberg Intelligence
Data from 2009 and 2010 only include profits reported by eight banks

With this backdrop, this inter-dealer club now needs more members -- or at least a few more folks to show up for lunch.

Last year, BlackRock said it started trading bonds directly with inter-dealer brokers, which seemed to attract little protest from dealers, who would probably want to do business with the world's biggest investment firm anyway.

It's unclear whether ICAP's new initiative will take off, or whether it'll open the inter-dealer market to investors more substantially going forward. There's a lot of competition, with a growing number of firms trying to create new models for debt trading on electronic marketplaces. Each has a slightly different model to cater to different concerns.   

But this step by ICAP highlights a bigger change in thinking. Big banks once thought of investors as trading counterparties, with the goal of profiting from having more information than the end buyers. Those days are ending. 

The once secretive inter-dealer club can't afford stay so secret anymore. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net