Dear Buy-side. You seem very concerned about liquidity. Can I suggest paying for it? – Bull Market
June 4, 2015 \
7 Comments
There’s no law of the universe which says that a higher capital requirement for inventories should mean that banks stop wanting to be in the business of bond trading. What ought to happen is that, if the capital requirement is higher, pricing should go up, in order to cover the cost of the larger capital requirement.
Comments
First, and only in the spirit of the Friday Newsletter’s effort to educate and provide clarity, there is no Fiat Yugo. There is, surprisingly to most, a Fiat Ferrari, Alpha Romeo, Chrysler, Dodge, Jeep, Lancia, Maserati and even Ram trucks, but no Yugo. But I digress. Getting back to the core of the article, liquidity, or put another way, immediacy, comes at a price. The dealer model is to provide liquidity, to buy when others sell and sell when others buy. They don’t do so out of some sense of philanthropy, but rather, to make money. There, I said it.… Read more »
Warning, this is a long explanation. I believe this article is somewhat wrong with its premise- the buy-side does realize that liquidity is an issue, they just don’t have any idea how it is to be solved. By no means is the buy-side slow and dumb or taking things for granted. They have little predictive ability (neither does anyone else) of gauging how bad liquidity will be but they are aware that things will change. However, with that said, I have attended many conferences discussing the dynamics in the bond market structure of late and the same conclusions seem to… Read more »
I dont want to rehash the mountains of new regulations/dealer inventory reductions/capital constraints headlines. Imagine if Google started charging for gmail. Would you pay for it? Most would probably say sure, for a reasonable price yes. $1.00 a month, no problem. $1000/ monthly? No. The transparency in the bond market is only topped by the variability in the variety of approaches dealers have to providing liquidity and the buyside has in taking it. But the buyside is now use to having their “gmail” for free, or a controlled (Trace monitored) margin. The historical capital commitment market that dealers exchanged with… Read more »
Ther unintended consequences of new regulation has crimped the ability of the sell side to provide liquidity in secondary corporate bond. Sundown accurately states of the buy side: “However, their largest influence has been to force the sell-side and independent third parties to come up with solutions such as building venues that could be helpful going forward.” Liquidity is not an entitlement. New liquidity can’t just materialize. The institutional buy side (who own 84% of corporate bonds outstanding) need to explain the risks of the new landscape to their end users. Buyer beware. The buy side should also hold enough… Read more »
Good article, but in almost every discussion about liquidity, the same problem appears: everyone’s talking about it, and no one is actually explicating it. 1) If I buy a house with (almost) no money down, did I provide liquidity to the seller? 2) If as a yacht dealer I use my warehouse line to purchase a boat from the manufacturer, did I provide liquidity to the seller? 3) If I use my savings to buy a mortgage note from a bank, did I provide liquidity to the seller? 4) If as a highly-levered bond dealer I buy a bond from… Read more »
All great comments. I never thought of the issue as one of ‘immediacy’ but it resonates with me. Please note that my comments really are focused on the corporate bond market, after all, this is the Corporate bond Friday Newsletter. The way I always looked at it is that there is plenty of liquidity, the buy side just doesn’t like the price of that liquidity and I think the article and comments all deal with this in a variety of ways. I am sympathetic to the author of the article and what is being communicated which is basically what everyone… Read more »
A lot of great points here, many of which touch on market participant’s classic tug-of-war between short term and long term incentives. If a participant believes there is a potential problem, who in a production seat on either side is incentivized to change anything in the short term? Is management willing to attempt a different long term strategy, at the risk of short term downside..and are they willing to push that path down the org chart? There certainly has been a lot of jawboning from the buy side, but as Merlin said “… talked about ideas and possible behavioral changes… Read more »
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