Wall Street Fears the End of an Era

(Bloomberg) -- The masters of the corporate-bond world believe one of their few remaining preserves is slipping away. But they’re not letting it go without a fight.

Credit traders at some of the world’s largest banks are convinced hedge funds and brokers have penetrated their members-only club. The claim -- based on interviews with more than 16 bankers, including seven who head trading desks -- is that rivals and even clients are now accessing information from trading platforms that have long been the exclusive domain of the banks.

These wholesale trading venues are operated by firms known as interdealer brokers. And according to practices developed over decades, they were used solely by big banks that have served as the primary market makers for institutional investors looking to trade corporate bonds and other debt.

The platforms allow the banks to anonymously unload unwanted positions or source bonds from each other, as well as gain pricing intelligence. Effectively, this has helped the banks maintain a significant amount of control over who gets what and how much is paid in a marketplace that now trades more than $30 billion a day.

New Rules

But post-crisis regulations that curbed the banks’ ability to take risks -- while ushering in a wave of new trading venues -- diminished the banks’ role. What has followed is a brutish world where bankers, investors and smaller brokers jostle for influence and profits.

“The banks are trying to defend their turf and maintain the advantages they used to enjoy,” said Suki Mann, a debt-market analyst who previously ran credit strategy in Europe for Societe Generale SA and UBS Group AG. “But they’re fighting a losing battle.”

Caught in the middle of all of this are the interdealer firms, such as TP ICAP Plc, BGC Partners Inc. and Cie. Financiere Tradition SA. They’re fighting for a share of a shrinking pie while trying not to alienate their primary clients -- the banks.

Credit traders at 11 of the world’s largest banks -- including some that head trading desks -- said that they’re convinced that pressures faced by the interdealer brokers to boost commissions is prompting them to let investors and brokers onto platforms where dealers trade -- giving them access to a bigger universe of product and prices.

Market Conventions

The traders, who asked not to be identified because they’re not authorized to talk about their business operations, based those suspicions on trades they saw on the platforms and client queries about trades. The head of a credit trading unit at a U.S. bank also said a hedge fund client told him that they had access to the platforms.

The traders aren’t claiming any laws are being broken. But they say that -- in addition to their own profits -- it’s threatening long-standing conventions that have helped maintain market integrity and liquidity. One senior trader at a French lender said banks often try to buy or sell bonds for clients in the interdealer market, and if those investors are also present on the platforms then their ability to trade will decrease.

Spokesmen for TP ICAP, BGC and Tradition declined to comment on the bankers’ claims about their industry. Four credit brokers employed at interdealer firms spoke to Bloomberg News, asking not to be identified because they’re not allowed to talk about their business dealings. They said they hadn’t seen first-hand evidence of non-bank entities trading on their platforms.

Bloomberg LP, the parent of Bloomberg News, also offers bond-trading services to banks and fund managers.

Higher Costs

The tensions emerged after new rules intended to prevent another financial crisis forced banks to pull back from some risky trading activities. The regulations also made it costlier for them to facilitate trades by holding debt on their own balance sheets or maintaining large warehouses of securities.

As the banks’ roles were reduced, that allowed others to step in -- namely smaller brokerage firms that simply match buyers and sellers without taking assets on to their balance sheets. Investment firms, like asset managers and hedge funds, have also increased trading among themselves since they can no longer rely on deposit-taking giants to always help them enter or exit a trade.

Wall Street Fears the End of an Era

One trader at a unit of an interdealer broker who asked not to be identified because he is not authorized to speak publicly, said hedge funds should be able to trade on the interdealer platforms. Since banks provide considerably less liquidity than they used to, funds shouldn’t have to rely only on investment banks to help them find the other side of a trade, he said.

“I don’t think we should put restrictions on who can deal on what platform to favor particular groups,” said Brian Scott-Quinn, the non-executive chairman of the ICMA Centre, part of Henley Business School at the University of Reading, England. “That creates a bifurcated market and is just plain wrong. Just because the banks had privileges in the past they think they should continue to have them, but if they don’t provide adequate liquidity anymore, then those benefits should disappear.”

The interdealer firms, which earn commission for every trade they match, enjoyed their best years before the financial crisis, and also had strong trading volumes immediately afterward as banks unwound unprofitable positions. Since then, growth has stalled.

Wall Street Fears the End of an Era

ICAP does have a trading portal specifically for investment firms and its parent has said a division that serves asset managers and hedge funds will help the company increase revenues.

The tension spilled over earlier this year.

In May, a senior high-yield bond trader at Credit Suisse Group AG in London refused to trade through ICAP after he believed he had been the victim of a copycat trade, according to people familiar with the matter. Within minutes of making a price in a bond of a European retailer on an ICAP platform, the Credit Suisse trader was told that a trader at a brokerage firm had sent a similar price for a comparable size of trade in the same security to its customers, said the people, who asked not to be identified because the information is private.

The trader’s boycott lasted six weeks until ICAP wrote to Credit Suisse, its biggest client for European junk bond trades, saying it will not allow brokers on its platform, the people said.

“This is an inaccurate description of events,” said a spokesman for Credit Suisse. “No such trade occurred. Our traders have not stopped using this particular platform at any point.”

The spokesman for TP ICAP, which was formed by Tullett Prebon Plc’s takeover of ICAP Plc’s voice-broking business at the end of 2016, declined to comment on the incident.

“It’s not a very pleasant time, whether you’re in a bank or a hedge fund,” said Derrick Herndon, who has run credit businesses in New York and London for Credit Suisse, Toronto-Dominion Bank and UBS Group AG. “Both sides are pointing at each other, but it’s a deeper issue than banks just don’t have market clout the way they used to.”

©2018 Bloomberg L.P.