A new fixed income ecosystem is evolving, suggests a report from Greenwich Associates, with institutional investors increasingly trading with an expanding list of market specialists.
Greenwich says that this development has occurred despite new regulations, but that regulation remains a heavy burden.It also said that the number of bond dealers who see electronic trading as an opportunity rather than a threat has declined sharply in the last two years.
The report found that 96 per cent of US investment-grade bond investors now trade with regional fixed-income dealers, but these firms have struggled under the heavy burden of new regulations.
The report found that complying with regulations and uncertainty about the direction of future regulations are fixed-income dealers’ top concerns for the coming year, and that regulation concerns are particularly acute for the middle-market dealers, with over three-quarters citing regulatory compliance and over two-thirds regulatory uncertainty as top priorities.
Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Practice and author of the report said: “Large banks employ a deep pool of compliance and legal personnel, who can work closely with business heads to implement needed process and technology changes. Many regional dealers lack those economies of scale and find the monetary and time costs of regulatory compliance nearly unbearable, with their clients ultimately shouldering much of the additional cost via reduced sales coverage and the rising cost of principal liquidity.”
The report said that: “While electronic trading has certainly disrupted the business models of bond dealers, it is increasingly seen as an opportunity.Research in 2015 found that 46 per cent of bond dealers saw electronic trading as a threat to their business. Today, that percentage has dropped by more than half.”
Mr McPartland said: “The majority of the bulge bracket sees e-trading as an opportunity, but regional dealers are more apprehensive. They do not want their bread-and-butter relationships disrupted by lower-touch electronic executions.”