As financial regulators try to reduce systemic risk in the financial markets further, industry analyst firm Greenwich Associates finds that the top five fixed income dealers have increased their share of the interest rate and US Treasuries market.
The top dealers –Goldman Sachs, Deutsche Bank, Citi, JP Morgan and Barclays – each have a greater percentage of buy-side flow rates than they did before the financial crisis, according to Kevin McPartland, principal, market structure and technology at Greenwich Associates and author of a recent report on the subject.
Although the interest rates and US Treasuries markets are both witnessing liquidity concentration, there are separate drivers for each that are loosely correlated, McPartland adds.
Since the introduction of mandatory clearing for some fixed-income products in 2012, the top dealers increased their portion of buy-side order flow by 9%, from 56% to 65%.
“While the correlation between more central clearing and increasingly dominant bulge brackets are hard to prove definitively, it is nearly impossible to dispute,” he writes.
McPartland, however, sees the interest rates market as large enough “to support robust business for a substantial number of smaller specialist firms able to compete on price, technology and expertise.”
A similar concentration of liquidity has occurred in the US Treasuries market since the beginning of the 2008 financial crisis as the top bulge-bracket firms took up the slack in buy-side demand from those firms that closed their doors.
Prior to the crisis, the top five dealers had 44% of the US Treasuries market. Today, their share has grown to 56%.
And like the interest rates market, McPartland sees the emergence of ‘long-tail’ specialist firms offering their services to the buy side in this market.