Death of a Bond Trading Model

December 3rd, 2015 1:25 pm | by John Jansen |

Great article discussing the death of the business model which prevailed in the thirty five years I was a bond market practitioner.


Via the WSJ:

Updated Dec. 2, 2015 9:33 p.m. ET

The Masters of the Universe don’t all live on Wall Street anymore.

The shift in fortunes for the industry’s bond traders was driven home for Susan Estes last month in a large conference room at the Federal Reserve Bank of New York in lower Manhattan.

Ms. Estes, a former senior bond trader with Deutsche Bank AG, was among more than 200 traders and investors gathered to discuss the evolving market for Treasurys.

Most of the big Wall Street banks were represented, including J.P. Morgan Chase & Co. and Bank of America Corp., but they were outnumbered by employees from hedge funds, mutual funds, electronic-trading specialists and others.

One speaker that day was Kenneth Griffin, founder of Citadel LLC, a Chicago hedge-fund manager whose market-making business has vaulted past Wall Street banks to become the world’s largest interest-rate-swap trader by number of transactions.


In previous years, big banks, also called primary dealers, would have dominated this type of conference, said Ms. Estes, who is building an electronic bond exchange and now lives in North Carolina. “The dynamics are shifting, primary dealers are being pushed out.”

The numbers confirm a sea change in the $39 trillion U.S. bond market. Since 2011, overall bonds outstanding have risen 11%, according to the Securities Industry and Financial Markets Association, while big banks’ revenue from trading bonds, currencies and commodities has declined about 24%, according to research from CLSA.

Staff levels at banks also show a shift. The number of bond traders on Wall Street has declined about 17% from 2010 to 2014, according to recruiting firm Options Group.

The diminished role of banks in bond trading was underscored most recently with Morgan Stanley’s decision to cut up to 25% of its debt traders, which could leave about 400 high-paid employees looking for a job by early next year.

That move was the latest blow for bond traders, who Tom Wolfe immortalized as “masters of the universe” in his 1987 novel, “Bonfire of the Vanities,” and Michael Lewis inadvertently celebrated in his 1989 memoir, “Liar’s Poker,” of his tenure on the trading desk at Salomon Brothers.

One former bank-trading executive recalled fondly the exhilaration—and the money—that coursed through Wall Street’s bond desks in the years before the financial crisis. For more than 20 years, beginning in the mid-1980s—when many of today’s senior Wall Street executives began their careers—the debt-trading desks churned out one new financial product after another.

“It was,” he said, “the next best thing to getting paid to be an athlete.”

Of course, banks still are big players. J.P. Morgan’s bond-trading revenue rose 32% from 2005 to 2014,noted CLSA.

But the financial crisis of 2008 brought major changes to bond-trading desks, as regulators zeroed in on the risks and capital involved in the often-volatile business. The Morgan Stanley executive who oversees trading and investment banking, Colm Kelleher, said last month that revenue in bond trading across banks in recent years has totaled about $100 billion, down about one-third from what was previously thought to be normal.

Today, a former bank executive said, banks’ fixed-income businesses follow the path their counterparts on stock-trading desks took over the past decade: “Lower capital, lower risk and more technology and transparency,” he said.

Banks are now scurrying to do more with less, said George Kuznetsov, head of research and analysis at data firm Coalition Ltd., even though they can’t take the types of risks they used to. “Morale is low, there’s pressure from regulators,” he said.

Banks that once held 5,000 different bonds in their inventories to help meet clients’ trading needs might now be able to hold only 1,000 of the most popular, said Stu Taylor, a former UBS Group AG managing director who left the bank in 2012 to co-found his own financial-technology startup, Algomi Ltd.

The Fed and other regulators are looking closely at what the reduced role of banks means for investors and borrowers. In general, the concern is that banks hitting the brakes on bond trading—taking fewer risks and being less willing to buy and sell in any market—could make trading tougher at times, but make banks safer and less prone to fail during future market downturns.

But traders who have fled the Street for investment firms big and small said that electronic platforms can capably substitute for bank traders in many cases.

Zachary Chavis, a portfolio manager at Sage Advisory Services, an asset manager in Austin, Texas, is increasingly trading bonds directly with other asset managers on an electronic platform, cutting out the Wall Street banks that for decades acted as middlemen.

“When I started here, we didn’t trade with other buy-side accounts,” Mr. Chavis said, referring to money managers. “We only traded with the Street.”

Mr. Chavis previously worked for 5½ years as a bond trader in New York for French banks Société Générale SA and BNP Paribas SA.

Amar Kuchinad, chief executive officer at Electronifie Inc., an electronic-trading platform that went live about six months ago, used to trade bonds and derivatives at Goldman Sachs Group Inc. and Credit Suisse Group AG. “I hear from friends and ex-colleagues that the level of job satisfaction, the level of career growth that they see, doesn’t meet the expectations that they had.”

At November’s New York Fed meeting put together in part by the Treasury Department, Ms. Estes said the new less-bank-heavy crowd represented the changing market. The new group is a “great representation of where the market is heading, not where it’s been,” she said.

Write to Gregory Zuckerman at, Justin Baer at and Mike Cherney at


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  1. One Response to “Death of a Bond Trading Model”

  2. By lyle on Dec 3, 2015 | Reply

    I agree with the model of electronic exchanges perhaps using the futures markets model of limit up and down ranges. After all on the futures markets in turbulent times it is possible to have ones position locked for several days due to limit moves and yet the market still works. Why not use that for the new bond market and take the market maker out of the equation. Investors might have to be more careful or keep more reserves on hand to ride thru the turbulent times.

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