Debt trading poll 2008: All change in secondary markets
The liquidity crisis has contributed to a dramatic change in the trading of fixed-income securities. A year ago the curtailment of the liquidity to investors could be written off as a temporary state of affairs that would be rectified as soon as market conditions got back to normal.
However, now the illiquidity in cash trading appears long term, the dominance of levered investors such as hedge funds, and prop and structured credit desks is a distant memory.
Investment banks are not only short of funding avenues but also of capital. With capital in short supply – and often provided by new stakeholders such as governments – the commitment of numerous dealers has come under scrutiny. Furthermore, measures of risk such as VAR have exacerbated the problem. Volatility in the underlying market conditions has led to all banks cutting their risk positions at the same time.
Some banks remain in the secondary trading game but the withdrawal of several players has had a significant impact on overall liquidity. The trading houses that come out well in the latest trading poll have mostly been strong players in previous years. Société Générale emerges top of the pile this year, while there is one notable new entrant – Canadian bank RBC.
It is not a completely bleak outlook for the liquidity of the cash bonds. The re-emergence of agency brokers points to a significant change in the micro structure of the market.