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It received’t shock anybody studying FT Alphaville that financial institution buying and selling desks have developed a good bit over the previous decade. The obvious facet is how broker-dealers have mainly stopped being the latter.
Financial institution prop desks — which at their noughties peak resembled huge hedge funds with free leverage — have been killed, and their merchants largely migrated to multi-manager hedge funds. The remaining market-making operations have been constricted by rules and dearer stability sheet.
That’s not new. However it’s nonetheless unbelievable to see how a lot the enterprise mannequin retains shifting in direction of a pure brokerage mannequin, the place banks just about solely act as intermediaries even within the bond markets that they’ve traditionally dominated.
Simply check out this chart from a current report by Coalition Greenwich.
5 years in the past, US major sellers held a mean internet positions of $16bn in company bonds, a market the place the common each day buying and selling quantity was $29bn.
Final 12 months, the common each day buying and selling quantity was nearly $38bn — whereas the online holdings of major sellers had collapsed to simply $3.6bn in 2022. This 12 months common internet holdings have climbed again to $6.5bn, however nonetheless . . . Banks have mainly gone from being huge bond warehouses, to inventory-lite, to now being nearly zero-inventory on-line retailers of credit score.
Issues are much less excessive in Treasuries, the place buying and selling volumes are up by about 27 per cent since 2017 to ca $617bn in 2023 and first vendor holdings have roughly doubled to $184bn over the identical interval.
Nonetheless, that’s down from over $200bn of internet common major vendor holdings in 2019 and 2020.
And issues seems to be starker while you examine the Treasury holdings of major sellers to the exploding dimension of the general US authorities debt market, which has practically doubled over the previous 5 years to $24.8tn.
You possibly can subsequently kinda see why Stanford’s Darrell Duffie (amongst others) assume that the rising dimension of the Treasury market relative to the winnowed state of the first sellers may very well be harmful.
However Coalition Greenwich’s Kevin McPartland reckons that the unbelievable major vendor shrinkage is each a case of musts and wishes:
Sellers are utilizing much less stability sheet to commerce bonds with prospects as a result of they’d favor to not (capital is more and more costly) and since they don’t must. Digital buying and selling, which now accounts for 40% of IG buying and selling, 31% of HY buying and selling and 65% of U.S. Treasury buying and selling (full-year 2022 information), has made buying and selling as agent or riskless principal a lot simpler. When executions are nameless, the commerce is company by definition, with a brokerdealer executing the purchase from the vendor and a promote to the customer.
Even trades through RFQ, which might require a vendor to carry these bonds on their stability sheet, are sometimes riskless principal with sellers now in a position to way more shortly supply the opposite facet of the commerce through digital markets and/or extra strong information on who is perhaps all in favour of what.
After which there’s the purchase facet. With $1 trillion of property now not an enormous deal, and expertise that enables the purchase facet to submit a value (aka present liquidity) available, the most important asset managers and hedge funds are more and more appearing because the markets de facto stability sheet, the place a lot of the bonds excellent can sit in perpetuity.
That is much less true for U.S. Treasuries, given the worldwide demand for U.S. debt and the various causes buy- and sell-side companies maintain these bonds. However the demand for on-the-run U.S. Treasuries has created a liquid market (regardless of some fashionable opinions on the contrary) which means sellers can simply discover a place for any Treasuries they’ll’t or received’t preserve of their portfolio.