Everyone who makes a living in the fixed income world should be concerned about the long-term future of small dealers.
The ever-rising regulatory burden comes with real costs. As one warning sign, the number of broker dealers registered with the SEC slid to 3,989 in March 2017 from 5,892 a decade earlier. When Greenwich Associates last year asked bond traders if they would choose the same career if they were starting all over again, only 39 percent said yes. Just over half said no. That’s hardly a vote of confidence. But it’s no surprise.
The regulatory backlash against risk, fears of getting in trouble in an environment filled with red tape and worries about automation all have affected morale in a field once glamorized in best-selling books and Hollywood movies.
Under the Dodd-Frank legislation, banks have been required to keep more assets in cash, and that has been blamed for reducing liquidity in bonds. Critics also argue that the “Volcker rule,” which mandates greater transparency for investors of corporate and agency bonds, hurts the corporate bond market. Those are just two examples out of many.
While there are arguments on all sides of the regulatory debate, we believe it’s best for the bond market when a varied array of dealers can prosper, with all sizes in the mix. Startups help stir competition and innovation that strengthen fixed income markets. New enterprises give consumers more choice for fixed income portfolio management. Smaller dealers can be nimble about introducing new ways of doing things, including advances in fixed-income analytics.
Small Trading Firms Have Bright Futures
The good news is, small trading firms can thrive in the future. Sensible changes in regulation, along with innovations in fixed income technology, can ease some of the challenges in portfolio management that are especially costly for the smaller firms.
On the regulatory side, we need more officials who recognize that rules come with costs. The Brookings study cited above, for example, was written by Hester Peirce, a thoughtful expert on financial regulation who has warned that burdensome red tape can hurt the economy. On January 11, she was sworn in as a commissioner on the SEC.
At the same time, regulation is not the whole story. Veteran traders may feel threatened by the growing push for automation. And smaller companies may be at a competitive disadvantage when it comes to incorporating costly, high-end order management systems.
Fixed Income Technology Matters
If technology presents some challenges to the smallest dealers, it also points the way to a prosperous future.
Fixed income technology can provide tools, such as comprehensive analytics and front-end trading applications, that help smaller traders navigate today’s regulatory environment. Tools that make it easier for small dealers to manage their bond inventory and enable traders to fill orders swiftly are becoming increasingly affordable. These products can help a firm more effectively participate in electronic bond trading and still avoid the kind of inadvertent over-selling that can prompt regulatory sanctions, streamlining work flow and empowering traders to do what they do best – buy and sell securities.
As one example, our own BondPub is a cost-effective and light-weight execution management system innovation that enables traders to manage publication of varied fixed income offerings and bids more easily than ever before, in an efficient, easy-to-use platform.
These innovations in fixed income technology can help firms of all sizes prosper, even in a challenging regulatory environment. Increasingly, they will offer a valuable boost in productivity for small firms and level the playing field in fixed income portfolio management. And that will be healthy for the entire bond market.