Fixed Income trading paradigm upheaval: banks restrict principal market making | TABBfixed conference

The fixed income (FI) trading markets are evolving faster today than within living memory - according to panelists and speakers at Tabb's Annual conference Fixed Income 2014: Breaking Rates at the Times Center, Manhattan on Thursday January 16th. You can follow the tweets via #TABBfixed or read the Conference outline, agenda and speakers here.

Bank withdrawal from traditional market making

The message was clear and repeated - bank balance sheet incentives and constraints due re-regulation in response to the 2007-9 crisis are causing a significant withdrawal of banks from the traditional principal market-making approach: taking on a position and holding it on balance sheet until the opportunity arises to sell or fully hedge.  The effect is consistent across cash Corporates, Mortgage-backeds and Treasuries as well as OTC Rates & Credit.  You can see a video of the overview of the day together with the first panel session on Corporate Bonds here.

Rapid trading paradigm shift

Now the markets are undergoing rapid innovation to find ways to fill the emerging resulting gap in liquidity provision.  Panelists and speakers representing eTrading platforms, pricing vendors, hedge funds, traditional buy side and banks discussed whether the future FI trading model will be more like today's equities, FX or futures markets?  In particular the following solutions were discussed:
  • Order driven electronic venues grow
  • Products standardize
  • Banks shift to risk-less principal or agency execution models
  • Hedge fund / high-frequency traders fill the liquidity gap
  • RFQ voice and electronic models survive
  • Participants shift to low cost alternative products

SEF mandate imminent

Oh and by the way Thursday was also the deadline for CFTC to make changes to the earliest MAT submission from Javelin.  Everyone expected no change meaning the 30 day implementation clock started ticking leading to a mid February live date for the Javelin product scope.  Roll on the scramble to get ready.  Several speakers said out loud that 5,000 trades a day could sustain maybe 4 or 5 SEFs not the 21 currently in play.

The takeaway

All of the above were rationally argued for.  The rub will be which solutions are more prominent, which providers generate adequate market share and ultimately which solutions continue to work through the next crisis.