“The rate of change in the bond market in the last few years has been stunning,” said Stephen Laipply, head of U.S. iShares fixed-income ETFs at BlackRock Inc. For a long time, “fixed income seemed to be like 10 years behind equities,” he said. “Maybe that’s collapsing.”
Also collapsing: margins. Executives across Wall Street are bracing for fixed-income trading spreads to begin the same slow, steady contraction that’s already taken place in equities trading.
“It’s a similar progression as you saw, to some extent, in the equities space,” said Joe Geraci, co-head of the global spread-products unit at Citigroup. “If you look at what happened to Street profitability in cash equity trading, it’s generally gone down,” he said, adding that “that’s the natural consequence of the marketplace digitizing.”
Job Cuts
With tighter spreads and lower revenue, job cuts are inevitable. Those reductions will add to the hundreds of positions eliminated this year by banks including Citigroup, Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA.
For those who stay, job descriptions could look very different.
“Instead of having 20 traders try to move 25 small line items each, let’s have one algorithmic functionality move some of those line items for us, in order to allow our traders to focus on what they do best -- which is talking to clients, talking to their research analysts, managing risk, digging deep on their credits,” said Drew Mogavero, co-head of U.S. credit trading at Barclays Plc.
Changes are coming to volume and frequency levels as well. On any given day, 70% of corporate bond market trades are valued at $100,000 or less, and more than 80% of investors find trades above $15 million to be “very difficult” to execute, according to data from Greenwich Associates. When more banks and asset managers start packaging hundreds of securities fit for portfolio trading with ETFs, those numbers are expected to jump substantially.
“The next phase of our tech journey is about competing for flow in an increasingly electrified world,” Mogavero said. “That’s where we’re starting to focus our dollars and our energy.”
This article was provided by Bloomberg News.