Corporate Bond Market Transformation: Dealers, Platforms, Investors

Executive Summary
Risk is like energy. At least in today’s global markets, it isn’t being destroyed, merely transferred. As regulators tighten the screws on banks, they are moving risk from one part of the market to another. Liquidity risk is being transferred to institutional asset managers, which have absorbed dealer inventories as well as billions of dollars of newly issued bonds. Net Asset Values will plummet once interest rates increase. As a result, the buy side is driving the debate on how to trade bonds away from dealers and in alternatives to the over-the-counter (OTC) market.

New marketplaces and a plethora of trading protocols are emerging. All the constructs have something to offer, be it continuous trading in odd-lots, session-based protocols for blocks, all-to-all matching, or a single, centralized exchange. It is fascinating to observe the diversity of firms – exchanges, independents, sell-side institutions, interdealer-brokers, and large asset managers – that are looking to establish new ways of electronically trading bonds. Is this testament to the fact that no one knows who they are anymore? 

There is certainly little consensus on the best business model among dealers. Part of the problem is that roles are changing. Banks are becoming agents even as agents sense a new lease on life for their own capital base; interdealer-brokers are turning into marketplaces as hedge funds look more like the sell side; and asset managers have consumed dealer inventory and a glut of primary issues (Will they be the liquidity providers of tomorrow?). It’s hard to strategize and understand one’s role in the market when everyone is changing chairs.

To better understand how firms plan to build out their businesses, we asked banks and agents about their strategic advantage in corporate bonds and their challenges, as well as their attitudes toward regulation and how they think it will affect them in terms of capital, sales and trading, technology and resources.

Corporate Bond Market Transformation: Dealers, Platforms, Investors
This study was conducted in the late summer/early autumn of 2012 and includes findings from conversations with two dozen corporate bond dealers. Banks made up the largest segment of study participants, accounting for 63% of respondents, with agency dealers making up the balance. There was a broad array of answers to many of the questions we asked, not just because the changes in the fixed income market are so widespread, but also because views differed according to business responsibility.  Participants were more or less evenly split between traders, business heads and e-commerce executives. Nearly three-quarters of the firms we spoke with were based in the US; the rest were based in Europe, though 18 of the firms we spoke to were global, across both the bank and agent demographic.