Bond traders pride themselves as the last of a dying breed, old-school traders who know the person on the other end of the telephone as they use hands-on procedures for making their deals. The equities desk may get the hottest algos, e-trading platforms and dark pools, but the fixed-income desk does it much the way it has been done for the past decade and even longer. Just look at Tom in the corner; hes still using the only fax machine left in the building.
But todays fixed-income desk is evolving not only in terms of automation but in cutting out the middleman. After the liquidity crisis of 2008, the bond desk on the buyside is looking past the sellside to deal with other buyside firms.
Just ask Zachary Chavis. As portfolio manager of Sage Advisory Services based in Austin, Texas, he is witnessing these changes first-hand and likes what he sees. In a broader sense, more trading is moving toward electronic platforms. The biggest one right now is MarketAxess, Chavis said. About two years ago, they introduced the ability to trade buyside to buyside, and they act as the intermediary. (Sage Advisory has an estimated $8 billion in assets under management.)
It has changed the way that traders like Chavis, who oversees eight traders in his Austin office, work in a field that was once resistant to change. With MarketAxess, People can set up watch lists. So if it’s listing bonds I’m concerned about, I can see every time somebody else comes in for the bid or offer, and then I can go ahead and put in my levels if I want, he said. In that sense, I’m acting as a market-maker.
This means he no longer has to deal with the sellside brokers, which have been offering reduced liquidity in the fixed-income market.
It’s not market-making, obviously, in the fact that I don’t have to put levels [of risk] on anything. But if it happens to set what we’re trying to do, we can put levels on there, said the 38-year-old trader. In essence, the sellside is being overruled.
Chavis explained that this new paradigm, which he estimates has been gaining speed in the past three years, has had a large impact on the broker-dealer community. It’s cutting out the sellside because essentially the term the sellside has seen reduced balance sheets. With the new regulations, dealer balance sheets are much smaller than they were in the past. They can’t warehouse nearly the same type of risks they could have before 2008.
Meanwhile, Chavis noted that the corporate bond market continues to grow every year, breaking records in terms of new issuance. At the same time, dealers are pulling back from liquidity and risk-taking. It’s like there’s a vacuum being created, he said. To some extent, this will drive buyside-to-buyside [trading] because where does the balance sheet reside now? It resides on the buyside.
Naturally, Chavis sees nothing but good for the buyside.
It adds essentially more counterparties. That’s generally a positive. It’s generally helpful for liquidity. But in the bigger picture, the sellside pulling back from the market is not positive for us. I’m not saying that buyside-to-buyside is more than offsetting the dealer pullback. Overall, the market is still a bit less liquid now than it was back then.
Chavis said he is seeing more use of electronic orders for bond deals these days, especially for smaller trades. More volume is definitely going toward electronic platforms, especially for what I would consider smaller trades. The big-block trades, 25 million clips and others, still are not trading on electronic platforms. They’re still a phone call.
But the smaller trades — 1 million to 2 million orders — are increasingly driven by electronic trading.
Do bond traders like Chavis ever wish there were more dark-pool trading for bonds? Not at all, he said. I think that would help some of the bigger guys, but for us that would generally be negative. We’re a smaller firm, so we can move in and out of things without really moving the market, he told Traders. There’s no advantage to any kind of dark-pool setup.
These changes to the buyside-sellside relationship are not lost on Chavis, who worked as a broker for Societe Generale and BNP Paribas before joining Sage in 2012.
When I was on the sellside, I woke up every day at 3 in the morning to get my BlackBerry to see how the markets opened and what was going on there, he said. That’s less of a concern on this side because you’re not driven by every single day, market-to-market like you are on the sellside. It’s driven more by longer-term performance as opposed to, are you up and down today?
Brokers can’t take the longer-term view, he pointed out. They have to be not only right on the credit, they have to be right on the timing.
