Efforts to deregulate financial services won't halt changes in fixed-income market structure — particularly the increased use of electronic trading venues, sources said.
Such changes, spurred by both market and regulatory factors, have become the norm in the industry, and any efforts by the Trump administration to remove rules that came from the Dodd-Frank Wall Street Reform and Recovery Act, including the Volcker rule, will have less of an impact on fixed-income trading than in other financial services.
“I think the horse has already left the barn on this,” said Anthony Perrotta Jr., CEO of TABB Group, New York.
Added Michael C. Buchanan, deputy chief investment officer and head of global credit at Western Asset Management Co., Pasadena, Calif.: “Our view is that the evolution of electronic trading sped up because of regulations, but it's happening either way.”
Regulations like Dodd-Frank, along with Basel III requirements for banks, forced dealers to have capital backing for fixed-income securities in inventory, causing many to drastically reduce or eliminate their fixed-income trading desks. That was a factor, sources said, in the move toward electronic venues like Tradeweb and MarketAxess for fixed-income trading, particularly with odd-lot, or small block, trades.
But fixed-income trading hasn't turned into a zero-sum game, in which electronic venues win while banks lose. Many banks adapted by restructuring their trading desks, focusing more on non-risk business while moving to a role of agency broker from their pre-crisis role as market maker, said Daniel Lomelino, director, head of North American fixed-income manager research, Willis Towers Watson PLC, Chicago.
“Banking regulations are important, but we've already seen the sell side cleaning house,” Mr. Lomelino said. “Income from fixed-income sales and trading have gone pretty well in the last couple quarters.”
That's evidenced by data from industry analytics firm Coalition Development Ltd., London, which showed bond trading revenue at the world's top banks rose 9% in 2016, the first increase since 2012. That rise was in contrast to a 13% decline in equity trading revenue for the year, the largest decline since 2008.
“Banks kind of like the idea of just crossing bonds,” Mr. Lomelino said. “I don't think we'll ever see the rate of inventory held by banks as you saw before.”
“The sell side has shifted from a capital-and-people game to a more intellectual, technology-driven, efficient use of capital and return on resources,” said Thomas Thees, head of fixed income at investment bank CastleOak Securities LP, New York. “If we roll back all the regulations, you won't see a switch back by banks to their former position anywhere near the level they were pre-crisis.”
“Today, banks are in the moving business more than the storage business,” Mr. Thees said. “Pre-crisis, the tendency would be more on the storage side. There's an unbelievable reduction in that behavior now. On the flip side, all investors have gone into the moving business. And that's been enhanced by the use of technology.”