The agency based trading model will likely succeed principal trading in fixed income markets, but there will always be a place for principal trading, experts agree.
Increasing regulatory pressure and bank balance sheet constraints are expected to impact the move, and as these pressures mount it is thought principal trading could migrate towards more liquid markets like foreign exchange.
A panel at the Fixed Income Leaders Summit discussing whether the agency based model will dominate principal told delegates an agency based can making trading easier to achieve.
Mike O’Brien, global head of trading at Eaton Vance explained on the panel agency trading certainly has its place in the market.
He said: “We use the agency model in credit markets and I’m not surprised to hear it’s growing. It will continue to grow and as the buy-side seek out anonymity they will migrate towards an agency platform.”
Paul Adams, chief executive officer at Tixall Global Advisors added: “It’s becoming harder and harder for the principal model to hold paper on the balance sheet. The market is becoming more fragmented and you find yourself ‘groping’ for yield.”
Adams added: “It’s harder than ever to internalise inventory and agents plays a significant role in being an aggregator of liquidity. It’s more transparent and good for best execution
The buy-side want the least expensive trade possible, Michael Sanderson partner at MOS Solutions told delegates.
He said: “The sell-side acting as either agent or principal are trying to make the most money from a trade, and the two currents coming together will drive a more agency based model.
“The sell-side are naturally resistant to this, but I think that is what will ultimately drive this trend.”
The panel agreed principal trading will occur in more liquid markets like foreign exchange, and Eaton Vance’s Mike O’Brien explained the treasuries market isn’t as far along as FX, but it’s not far behind.