The successful dealer service model is one that focuses on satisfying customer needs in a profitable manner.  In the corporate bond markets, this means a broader role for dealers likely to include agency execution to complement market making.

Our most recent research in evolving trading practices, published in a recent report entitled Changing Approaches to Credit Trading, illustrates that most asset managers are actively changing how they seek liquidity from both dealers and non-dealers.  Constrained market conditions in the investment grade and high yield markets are adversely impacting liquidity.  Diminished dealer risk appetite and other factors have forced asset managers to seek alternatives to traditional execution methods.  This is impacting how they interact with dealers, trading venues and other buy-side firms.

Many asset managers who source block liquidity from dealers are increasingly breaking up block trades into smaller lots and increasing use of electronic venues.  They are also seeking ways to better access non-dealer sources of liquidity.

Many asset managers are seeking venues that facilitate direct access to other buy-side firms and sources of liquidity.  New and existing venues and execution protocols are facilitating this interaction, which is poised to accelerate as the market and participants become more comfortable with these alternatives.

Market evolution presents both opportunities and threats to dealers and execution venues.

Organizations able to effectively provide liquidity to and facilitate liquidity between buy-side participants are well positioned for sustained profitability.

Dealers and venues that cling to the “status quo” are at risk.  The traditional dealer-to-customer liquidity model is clearly insufficient to meet buy-side needs.  Remaining relevant means adapting to new practices and perceptions of trading and “Best Execution.”  This now involves much more than traditional market making.

The picture is clear.  Changes are occurring.  Dealers and venues that promptly embrace change and evolve will be positioned for growth and profitability.  Those who cling to antiquated ways are doomed to failure.

This is capital markets Darwinism at its best.

Additional information about Changing Approaches to Credit Trading and Woodbine Associates’ Market Intelligence Service can be found by clicking the respective links.

Sean Owens
Director of Fixed Income
Phone:  203-274-8970 ext 204

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