US investors turn tomore dealersfor liquidity
NEW YORK: The United States fixed-income investors are turning to a greater number of dealers to find liquidity as higher bank capital rules lead dealers to reduce their market-making activities, according to a study by Greenwich Associates released yesterday.
Dealers are focusing more of their activities on their largest clients as they shrink their balance sheets and as trading margins for fixed-income instruments come under pressure, Greenwich said. Smaller funds, as a result, are struggling more to complete affordable trades.
Fixed-income buyside firms are expanding the number of dealers they trade with to an average 9.4 this year, up from nine last year and from 7.6 in 2009. The survey is based on responses from an average 1,122 US fixed-income investors.
"Stricter bank capital requirements have drained liquidity from the US fixed-income market," Greenwich said in the report, saying that 85 per cent of its respondents cited reduced market liquidity as among the most important issues faced this year.
Some investors also complained that turnover at banks has reduced their ability to execute timely and affordable trades as they deal with less experienced staff.
At the same time, more buyside firms say that they have increased trading with firms that provide them research, as banks become more selective in sending out reports.
The number of companies that say they reward dealers for research increased to 45 per cent, up from 28 per cent last year.
Many firms that use derivatives, meanwhile, waited until the last minute to prepare for new rules that require them to send trades to central clearinghouses, resulting in them having to accept unfavourable terms from brokers to gain access to clearing, Greenwich said. Reuters