Buy-side traders, cast your thoughts back to the mid 2000s, before Lehman Brothers failed.
Think back to trading good old fashioned corporate bonds. It was pretty simple, anything small could be traded through an electronic platform.
If you had good IT systems then you had a nice FIX integration so you could route an order by FIX from your OMS to the platform (MarketAxess, Bloomberg or whatever) and then send an RFQ to a number of banks. Pick the best price and then receive the execution by FIX into your OMS, click on a few buttons, send the allocations by FIX, received the allocation acknowledgement and then press the button to send to the back office. The competing quotes were all logged into the OMS database and job done.
Now we see a vastly different trading landscape. At this point, if you have not already read the article, I suggest you read Small fish, big prize: The market makers out to eat the banks' lunch
Summarising, the point made is that the liquidity is shifting from the big banks to non-bank institutions such as KCG, South Street Securities, XTX Markets, Citadel Securities, Virtu Financial and others.
This shift in the provision of liquidity is understandable as banks have pulled back capital from this sort of trading. On the other side we see the market microstructure changing, on this blog we covered this in Fixed Income Trading: New venues.
So, if we have new liquidity providers and a new market structure - what is changing for big buy-sides in terms of the way that they access this liquidity. Throw into that MIFID II and any buy-side can be forgiven for being a little perplexed as to what to do in order to achieve best execution for their clients...
If we look at the Tradeweb website for European Credit we see these liquidity providers:
ABN Amro
ANZ
Banca IMI
Bank of America Merrill Lynch
Barclays
BBVA
BNP Paribas
CIBC
Citigroup
Commerzbank
Credit Agricole
Credit Suisse
Daiwa Capital Markets
Deutsche Bank
DZ Bank
Goldman Sachs
HSBC
ING
Jefferies & Co.
JP Morgan Chase
Lloyds Bank
Millennium
Mitsubishi UFJ
Mizuho Securities
Morgan Stanley
MPS Capital Services
Nomura
Nordea
Rabobank
RBC Capital Markets
RBS
Santander
Société Generale
TD Securities
UBS Investment Bank
UniCredit Markets
On the same website for US Corporate Bonds we see
Bank of America Merrill Lynch
Barclays
Citigroup
Credit Suisse
Deutsche Bank
Goldman Sachs
Morgan Stanley
Nomura
JP Morgan Chase
RBC Capital Markets
Wells Fargo Securities
We can look at the MarketAxess website
AKBank
Banc of America Merrill Lynch
Banca IMI
Banco Santander
Barclays
BB&T Capital Markets
BMO Capital Markets Corp.
BNP Paribas
BNY Mellon Capital Markets LLC
Bradesco Securities Inc.
Brownstone Investment Group, LLC
BTG Pactual US Capital
C.L. King
Cabrera Capital Markets, LLC
Canaccord Genuity Securities LLC
Cantor Fitzgerald & Co.
CastleOak Securities, L.P.
CIBC World Markets Corp.
Citigroup Global Markets Inc.
Commerzbank AG
Credit Agricole Corporate & Investment Bank
Credit Suisse Securities
Deutsche Bank
DZ Bank
Erste Group Bank
Fidelity Capital Markets Services
Fieldstone Capital Group
First Ballantyne, LLC
First Tryon Securities, LLC
FTN Financial Securities Corp.
Gleacher & Company Securities, Inc.
GMP Securities, LLC
Goldman Sachs
Hapoalim Securities USA, Inc
HSBC
Imperial Capital, LLC
Incapital, LLC
ING
Interactive Brokers
Janney Montgomery Scott
Jefferies
JPMorgan
KeyBanc Capital Markets Inc.
KGS-Alpha Capital Markets L.P.
Knight Capital Americas
Lazard Capital Markets LLC
Lloyds TSB Bank
Loop Capital Markets
Maxim Group LLC
Mesirow Financial Inc.
Millennium Advisors
Mitsubishi UFJ Securities (USA)
Mizuho Securities USA Inc.
MorganStanley
National Bank of Canada Financial Inc.
National Financial Services, through Fidelity Capital Markets
Natixis Securities Americas LLC
Nomura Securities International, Inc.
Odeon Capital Group LLC
Penserra Securities
Pierpont Securities
Piper Jaffray & Company
Prudential Bache Securities
Raiffeisen Bank International AG
Raymond James & Associates, Inc.
RBS Securities Inc.
Royal Bank of Canada
SAMCO Capital Markets, Inc.
Sberbank CIB (UK) Limited
Scotia Capital (USA) Inc.
Sea Port Group Securities, LLC
SG Americas Securities, LLC
Sierra Pacific Securities
Société Generale
Southwest Securities
Standard Bank Plc
Standard Chartered Securities (North America)
Sterne, Agee & Leach
Stifel, Nicolaus & Company, Incorporated
StockCross Financial Services
SumRidge Partners
SunTrust Robinson Humphrey, Inc.
Susquehanna Financial Group
Tahoe Fixed Income LLC
The PrinceRidge Group
The Royal Bank of Scotland
The Toronto Dominion Bank
UBS Securities
UniCredit MIB
US Bancorp Investments, Inc.
VTB Capital
Wells Fargo Securities, LLC
Williams Capital Group, L.P.
Winslow, Evans & Crocker
So we don't see many of the "new" liquidity providers in these markets. So let's bear in mind Buy-side desktop real-estate in a new Fixed Income world and then Fixed Income trading – exchanges/MTFs/SEFs/same old stuff?
Perhaps the answer is, as proposed back in 2011
"My humble suggestion: RETAIL+INSTITUTIONAL=TRADES!
If I was starting up one of these exchanges I would approach the big private client businesses and ask them to participate on the platform – to provide limit orders for the book of their inventory. Allow for multiple small clips on one side of the book to be traded against one big order on the other side in a neat way. Allow retail and institutional folks to dance on the same platform with protection against stubbed toes…
I would also ask institutions to place limit orders for all of their hard to value/hard to sell inventory. So many institutions find themselves holding a credit that is traded by one man in a bank in Luxembourg and he’s on paternity leave. Stick it on the order book and see what happens. Let’s be realistic – it’s not like you are “showing your hand” anymore than you would be if you phone the Luxembourg bank up for a price – you might find that you don’t get your face ripped off."
Perhaps the answer is, as proposed back in 2011
"My humble suggestion: RETAIL+INSTITUTIONAL=TRADES!
If I was starting up one of these exchanges I would approach the big private client businesses and ask them to participate on the platform – to provide limit orders for the book of their inventory. Allow for multiple small clips on one side of the book to be traded against one big order on the other side in a neat way. Allow retail and institutional folks to dance on the same platform with protection against stubbed toes…
I would also ask institutions to place limit orders for all of their hard to value/hard to sell inventory. So many institutions find themselves holding a credit that is traded by one man in a bank in Luxembourg and he’s on paternity leave. Stick it on the order book and see what happens. Let’s be realistic – it’s not like you are “showing your hand” anymore than you would be if you phone the Luxembourg bank up for a price – you might find that you don’t get your face ripped off."
Time for some (misquoted) Bull Durham?
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