New Technology and Tougher Rules Shake Up Fixed-Income Trading
Bond traders have long defined Wall Street’s swagger and, in good years, generated a large share of its profits. Now, though, an upheaval is taking place in the bond business that is wiping out billions in profits and thousands of jobs.
Wall Street banks like JPMorgan Chase, Goldman Sachs and Credit Suisse managed to keep their grip on the bond market in recent years, amassing huge inventories of bonds for clients and trading them mostly in private over-the-phone transactions.
But tighter regulations being enacted this year and new electronic trading technology being rushed to market are threatening to permanently constrain this bastion of big bonuses and risk-taking.
“It was a rock-solid kind of career not too long ago,” said Lou Ricci, a co-founder of the Hagan-Ricci Group, a headhunting firm. “You give me a really good bond trader right now, I probably can’t find them a job.”
In the second-quarter financial results that the nation’s largest banks have announced over the last two weeks, revenue has dropped across several business lines, pressured by the continuing economic malaise. But the pain in the fixed-income operations — called that because of the “fixed” interest rate that most bonds pay — has been particularly acute. Morgan Stanley’s second-quarter fixed-income sales and trading revenue declined 60 percent from the previous year, more than other parts of its operations. Companywide, the bank said that it would be cutting about 7 percent of its work force this year. No banks report the specific staffing levels of their bond operations.
Fixed-income desks help companies and government agencies raise money by selling bonds to the public. They have made even more money trading existing bonds for their own account and on behalf of clients such as pensions and mutual funds, and managing the portfolios of these clients. The same divisions at banks have also bought and sold derivatives, financial contracts whose prices are based on bond values.
But those derivatives are being forced onto open exchanges or other platforms under the Dodd-Frank financial regulation law. Other new rules, requiring strong capital buffers, have made it more expensive for banks to hold the large inventories of bonds that allow them to serve as the middleman for buyers and sellers. That, in turn, is a big reason money managers and banks are creating open electronic marketplaces for trading government and corporate bonds. Still more new rules will limit banks from using their own money to make financial bets on bonds.
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