Tom Cornacchia was unusually frank.
The global cohead of fixed-income sales at Goldman Sachs told attendees at a housing-finance conference earlier this year that a culture shift was underway in
his part of the bank — which sells bonds to big investors.
The shift was causing some “awkwardness” and “friction” among employees.
He wanted his team to focus on long-term relationships, he said, and put less pressure on clients to make a trade right this minute.
“We are pushing that agenda internally so that you guys can get can get the best of Goldman Sachs without having to worry about what you’ve got to deliver on the phone call,” Cornacchia told conference attendees.
The comments led to some raised eyebrows among former colleagues who recall a culture where clients were seen as counterparties taking the other side of a trade, not customers. The change is real, however, according to investors and market-watchers, and it is taking place on fixed-income desks across Wall Street.
“A culture shift is occurring. It is tangible,” Chris White, the founder of consultancy ViableMkts and a former Goldman employee, told Business Insider.
The question is no longer one of, “How can we do more business with you?” It is now one of, “How can we serve you better?”
“We had dealers who were focused on their [profit & loss], asking us how they can trade more bonds with us. We were a counterparty,” Tim Morbelli, vice president of credit trading at AllianceBernstein, told Business Insider. “Now they are asking us how they can service us — how we can be a client.”
A few things are driving this. First, fixed-income businesses across Wall Street are in dire straits. Revenues are down and investment banks are cutting staff. That means that they’re looking at new ways to win favour with clients.
Second, the big investors, or “buy side,” now have much more power than they once did, with assets under management exploding over the past decade.
The asset base of buy-side entities is expected to reach around $100 trillion by 2020, up from an estimated $74 trillion in assets under management (AuM) in 2014, according to Boston Consulting Group.
In other words, it is the fund managers, not the investment banks, that carry clout in the bond market now.
“The old way of doing business doesn’t result in long term, profitable relationships anymore,” Kevin McPartland, principal in market structure and technology at Greenwich Associates, told Business Insider.
“Not to mention, the buy side holds most of the bonds these days, so maintaining a good understanding of who holds what and what they’re willing to do with it is much more important than it used to be.”
There have also been changes in management in fixed-income divisions, with traders from other parts of the securities business brought into head-up units. In many cases, these new managers are shaking up the old way of doing things.
“Major broker dealers have changed management, and in many cases they have replaced the heads of fixed income with equity guys,” AllianceBernstein’s Morbelli said.
Fourth, the way bond trading is conducted is changing. There is less liquidity, which means that it is more difficult now to buy and sell big positions.
More trading is now done on an agency basis, where a bank is sitting in the middle of two counterparties that are ready to trade. Principal-style trading, where banks take on bonds to their balance sheets for longer periods of time, is out of fashion.
All of these factors have combined to drive one of the most powerful changes that have taken place in the bond market. Given the shift toward agency trading, the shrinkage of dealer balance sheets and the growth of buy-side balance sheets, investment banks are having to give away more information to clients.
“When you prioritise opportunism over customer service, you’ll get things like dealers withholding information, or not providing pricing,” White told Business Insider. “The theory that the customer is always right is heresy. You tell the customer that you won’t service them unless they are more profitable.”
“Now dealers are willingly giving up their information to the clients in whatever form the client wants,” he said.
This can be seen in the development of initiatives like Project Neptune, a platform designed to allow traders to advertise bonds and has a large number of banks and asset managers signed up.
“They’re trying to integrate their firm with our firm as much as possible, that is what is changing,” Morbelli said of the investment banks. “They know what we’re trying to do, and they want to know how to help us.”
That includes make information on what bonds they’re involved in available to certain clients. That would never have happened in years gone by where bank traders were making their own outsize bets, according to market participants.
“They have to show what they are involved in,” Morbelli said. “There has been a larger shift to agency-based trading, and if I don’t know who is active, I don’t know who to go to. They are trying to push as much information as possible. That is why they are taking an ‘Open Kimono’ approach with the clients they care about.”
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