U.S. News

Dealer and Investor Talks Over Liquidity Fears

Nicole Bullock, Tom Braithwaite and Dan McCrum, Financial Times

The largest Wall Street securities dealers held talks with institutional investors in Boston last week to discuss concerns over shrinking liquidity in the corporate bond market and the rise of electronic trading.

Wall Street sign

People who attended said the unusual summit involved asset manager Fidelity and banks including Goldman Sachs, Deutsche Bank, State Street, Barclays, Credit Suisse, Citigroup, Morgan Stanley, Bank of America, JPMorgan Chase and UBS. The banks either declined to comment or could not be reached.

Since the financial crisis, large Wall Street securities dealers have sharply cut their holdings of corporate bonds, a situation market participants say is aggravated by concerns over the euro zone crisis and the impending Volcker rule , which places restrictions on dealer inventories.

Data from the Federal Reserve on Thursday showed corporate bond holdings among the largest dealers fell last week to $45bn. These inventories reached highs of more than $200bn in 2007 before falling to $90bn a year ago.

Asset managers are concerned that reduced liquiditywill make it harder to move in and out of large positions, particularly at times of market stress.

“The buyside is looking for an answer on how to fix this,” said one of the dealer participants.

With banks unable or unwilling to hold large inventories, market participants are looking to come up with electronic trading platforms, allowing them to trade directly with each other.

The platforms have attracted varying degrees of interest. The meeting followed the development of an electronic trading platform by BlackRock called Aladdin Trading Network. In private, BlackRock’s rivals are wary of providing information to a competitor by putting trades through its system.

Goldman has delayed the launch of its GSessions platform after encountering technical difficulties, including “trade reporting problems”, according to a person familiar with the platform.

Robert Brown, president of Fidelity’s bond division, said the participants discussed “the evolution of trading, the advancements in technologies and ... how that impacts our shareholders. We are at an infancy in terms of where it goes and it’s all focused on benefiting our shareholders and working collaboratively with our counterparties.”

“We were part of a team of buyside firms as well as sell-side firms that got together to think about the advancements in trading through technology and how those advancements may be utilized in the future given various potential regulatory changes to ensure that shareholders and clients continue to get best execution.