Meet Your (OTC) Market Maker: Return on Market Share

The fixed income industry is rapidly being reshaped as banks focus on their ability to deliver profitability. Yet, rather than focusing on market share, the current low revenue environment is forcing firms to focus solely on short term profitability, making it difficult to justify investment in the highly automated market-making technology required for firms to regain longer term profitability. As markets become increasingly order-driven and competitive, only those firms able to algorithmically automate cash trading while maintaining profitability will become the market leaders of the future. The FID business model now needs to revamp, integrate and automate.

As banks redefine their trading business, molding headcount and technology to reflect their new requirements, a parallel shift has also emerged in the benchmarks for success. Two separate camps have emerged among dealers, those who see the potential for fully electronic execution on order-driven markets and those that see a renewal of existing sales/trading based on updated technology. Both are looking to be as efficient as possible, given the now dominant need to prove profitability.

TABB Group spoke with 14 trading desks at banks operating global fixed income businesses during the second quarter of 2014; this outreach involved multiple interviews at the same firms to capture differences in approach across products. Respondents included heads of electronic market making as well as quantitative pricing and market making across the firms.

TABB Group Analyst Radi Khasawneh provides analysis of bank efforts to consolidate pricing models and technology in the shifting fixed income landscape.