The factors would appear to be in place. The Dodd-Frank Wall Street Reform and Consumer Protection Act's Volcker Rule places new restrictions on the big Wall Street banks' bond inventories that, along with new Basel III capital rules, should increasingly push trading of fixed-income, including ABS, to electronic markets.
None of those requirements have been finalized, but the prospect of their arrival has already resulted in major changes among Wall Street's biggest market makers. Data compiled by the New York Federal Reserve Bank showed primary dealers' corporate bond holdings plummeting to approximately $40 billion today from $250 billion in 2008.
Lou Violante, structured products manager at MarketAxess, an electronic bond-trading platform, has noted that dealer balance sheets for fixed income have reduced significantly since the credit crisis in 2008.
"In this challenging environment, investors are turning to electronic trading as an alternative solution for identifying liquidity," he said. "We've added regional dealers and dealers that specialize in structured products trading to help our investor clients source more liquidity."
MarketAxess began trading non-agency RMBS and CMBS last November and ABS earlier in 2011. Violante said the private firm does not release its own volume numbers. However, it appears to be well positioned to benefit from investors' needs for ways to trade relatively illiquid structured fixed-income products that may be less readily available from the big Wall Street firms' traditional market-making desks.
In fact, some major players in the capital markets have taken notice. Columbia Management, Fidelity Investment Management, Street Global Advisors and more than a half dozen Wall Street dealers are reportedly in early-stage discussions about creating a new marketplace for bonds. Whether that platform will trade ABS could not be clarified by press time.
A spokesperson at BlackRock said the big money manager intends "to expand into MBS and ABS over time," but its current focus is investment grade corporates. In mid-July, BlackRock held a live trading session with members of its Aladdin Trading Network, which is designed to let large buy-side investors trade directly with one another and bypass the Wall Street firms.
BlackRock, with $3.7 trillion under management, has said the network is not intended to replace the Wall Street market makers, although it has been controversial on the Street because it could put downward pressure on commissions. - John Hintze
