Call it a case of the "haves" and "have nots."
Institutional investors that largely trade the most liquid fixed-income securities are getting the cold shoulder from some large investment banks that would rather trade bonds that are more esoteric, less liquid and more profitable.
The end result is that for some broker-dealers, relationships with institutions that trade in large volumes of liquid securities are no longer seen as important, broker-dealers and consultants said. The push now is to strengthen ties with institutions that flock toward derivatives transactions and with hedge funds, which have dived headlong into the opaque world of derivatives.
A study by Greenwich Associates, Greenwich, Conn., shows that a number of broker-dealers are getting a lot more particular about the types of fixed-income trades they handle, especially as spreads in some of the most liquid asset classes continue to narrow. What's more, the bifurcation of the institutional investor community by broker-dealers is becoming much more structured and pronounced, the study said.
"When we talk to certain investors, many of them are communicating that level of change in the market," said Tim Sangston, a Greenwich consultant who helped put together the study, which is based on data collected from 1,281 fixed-income investors. Both the study and Mr. Sangston declined to identify large firms that are de-emphasizing the trading of traditional fixed-income securities.
While Greenwich declined to identify the firms engaging in the practice, consultants confirmed the trend is taking place. Also, Brian Zalaznick, a managing director and head of U.S. fixed-income business at Barclays Global Investors, San Francisco, said his firm is looking to expand beyond traditional fixed-income securities trading.