By Flora McFarlane.
A Greenwich Associates report indicates banks are rebuilding their sales and trading desks in response to several quarters of growth in fixed income revenues.
This growth has been prompted partially by the emergence of smaller regional and specialist US dealers, Canadian and Japanese banks and a re-emergence of European firms, as well as pre-empting anticipated rate rises and tapering.
According to the report, as choice of counterparties for US institutional investors continues to grow with the expansion of sell-side firms, banks are searching for liquidity through a wider variety of firms.
This expansion in options for investors to find sources of liquidity, compounded by the optimism for rate-rise effects and less turmoil in the market, means banks are eager to hire professionals to expanding into select products.
James Borger, Greenwich Associates managing director said, “We haven’t seen this level of bank-to-bank personnel movement since pre-crisis years”.
The increase in competition for the business of large buy-side firms increase has, according to the report, seen the buy side diversify their list of counterparties, bringing new ones on board.
Since 2014, the share of U.S. institutional fixed-income trading volume going through the 10 largest fixed income dealers shrank by 4%, however that percentage is still at a relatively high 86%.
Greenwich data shows that the decrease did not significantly hit the top 5 dealers, whose share remained stable at 56%-57%, instead coming from those occupying positions 6-10. Overall, trading volume is still significantly concentrated on the buy-side, with a 70% share of fixed income products traded held by the largest 25 institutions, up two thirds from 2014.
“Increasingly, smaller firms are looking for ways to earn business from these large firms in the asset classes on which they focus”, said Frank Feenstra, consultant at Greenwich Associates, indicating that the increased competition is not just one-sided.
Exchange-traded funds (ETFs) are also a well-established new source of liquidity which has been disrupting the market. One in four US credit buy-side firms now invests in bond ETFs, and a 2017 Greenwich Associates study, around 40% of firms said they use them to gain access to liquidity in their credit portfolios.
The report noted that a balance still needs to be struck in the changing environment, concluding, “Buy-side institutions need to toe a fine line between doing enough business to be an important client, and their need to source liquidity in selected products from smaller sell-side firms”.
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