New Study Says Trading in “Rates” Products is Concentrated with Biggest Fixed-Income Dealers

A new study based on 1,067 interviews with North American institutional investors from Greenwich Associates concludes that regulators are unlikely to achieve their goal of creating a fixed-income market that is less dependent on a few massive banks.

The top five dealers in the U.S. market are involved in a bigger share of institutional fixed-income interest-rate product transactions today than before the global crisis, according to the new report - Rise of the Flow Monsters: Regulation Fail to Democratize Interest-Rate Trading.

The concentration of trading among the top five banks is the most dramatic for interest-rate derivatives, where in 2014 the top five dealers command over 65% market share. That is up from 55% in 2012, the year in which the first round of U.S. clearing mandates took effect.

Greenwich Associates expects that trend to continue with trading volume in U.S. “rates” products to concentrate further into the hands of the biggest dealers. Given the massive size of these markets, however, there will still be significant opportunities for small, specialist dealers even as these so-called “flow monsters” increase their market share.

“Greenwich Associates expects the head of the rates business to further concentrate into a few small ‘flow monsters’ and the tail to get longer, as nimble specialist firms compete on price, technology and expertise,” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates.

Smaller specialist firm’s success in carving out a niche in this marketplace can be seen in the average number of dealers used by institutions in trading rates products. In U.S. treasury trading, for example, the average number of dealers used by institutional investors dropped to an all-time low of just less than six dealers during the financial crisis. That number steadily climbed in the following years and now sits at 8.5—a 44% increase in the number of dealers used in just five years. The fact that dealer lists are expanding while the top firms increase their market share suggest that the new additions are specialist firms with unique offerings.

“The pull back of some large dealers in recent years has freed up market share that could be taken by these smaller firms that will try to make up for what they lack in scale by being more nimble and tech savvy,” McPartland says. “This long tail will only have a market share in the single digits, but it will drive more competitive pricing on the screen and encourage further technology innovation across the board.”