The restructuring of the global fixed-fixed income business will continue in 2014 as banks around the world experiment to find the right size and commitment levels to keep them both viable and profitable. Amid these sweeping changes, Deutsche Bank has secured the top spot among global dealers in fixed-income trading market share, and Barclays has emerged as the leader in overall quality of service in fixed income.
Decisions by banks about their business models and strategies have shaken up fixed-income markets around the world. Some significant players essentially have exited specific products and geographic markets. Nearly all dealers have rationalized the capital and resources allocated to fixed-income businesses in the face of new capital requirements imposed under Basel III. At the same time, individual banks have sought to capitalize on the opportunities created by the pull-backs among some of the world’s largest fixed-income dealers.
Fixed Income’s ‘Goldilocks’ Moment
Banks now face the significant challenge of implementing their post-Basel III strategies. In doing so, dealers find themselves walking a dangerously thin wire as they search for the “sweet spot” in terms of size, resources commitment and profitability “It’s a Goldilocks moment. Dealers don’t want to be too big and they can’t be too small. They need to get it just right,” says Greenwich Associates consultant Andrew Awad.
Over the past 12 months, the net effect of these changes has been a modest reduction in the overall market share of the world’s biggest fixed-income dealers. As the largest dealers adjusted to the realities of the post-Basel III environment, the aggregate market share of the world’s top three dealers dipped to 28.4% in 2013 from 29.3% in 2012. “This slight contraction is probably an early indicator of a more general shift,” says Greenwich Associates consultant Frank Feenstra. “The narrowing of focus by the biggest dealers will free up market share that will be captured by banks looking to expand their presence. The result will be a narrowing of the divide between the traditional ‘Bulge Bracket’ and the rest of the market, and a decrease in concentration in some products and geographic markets.”
In Europe, retrenchment by some of the largest global banks has created new opportunities for national players that are picking up market share in their home markets, and for bigger banks like BNP Paribas and HSBC, which are expanding their customer bases.
A similar trend can be seen in the United States, where strategy shifts on the part of traditional top fixed-income leaders have helped firms like Wells Fargo, Nomura Securities, Jefferies, and RBC Capital Markets gain customers.
In Asia, the decision by some global banks to pass on the booming, but expensive-to-service local currency bond business has created opportunities not only for the western banks that choose to pursue the business, but also for large national players such as ICICI Securities, ICBC and Axis Bank.
Global Share and Quality Leaders
In 2013, Deutsche Bank led the market with a 10.0% market share in global institutional fixed-income trading. Barclays and J.P. Morgan tied for the second spot with market shares of 9.2%, followed by Citi at 8.9%. These firms are the 2013 Greenwich Share Leaders in Global Fixed Income. The 2013 Greenwich Quality Leader in Global Fixed Income is Barclays. In 2013, Greenwich Associates interviewed 4,000 institutional fixed-income investors around the world. They were asked to name the dealers they use for specific fixed-income products and to rate those dealers in a series of service categories.
Impact on Investors
Recent industry changes have not been favorable for investors. To the contrary, institutional investors report reduced liquidity in major products in markets around the world. These liquidity declines mean one thing: It’s getting harder to complete trades—especially for smaller institutions that fall outside dealers’ new target segments. Complicating the situation is the widespread phenomenon of “juniorization” of sell-side staff.
In the past, institutional investors could rely on the ideas and advice of veteran sales people who often had decades of experience. In the wake of dealer cost cuts and lower pay, headcount turnover has disrupted many of those relationships, and the replacement sales contacts are often young professionals not too far removed from university. Institutions might feel the effects of these shifts even more acutely in the coming year, when they will be forced to contend with a host of new regulations and changes to market structure.