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A slew of equity-only agency brokers have been launching fixed-income trading desks over the past year to fill the void left by the traditional banks and bulge-bracket brokers that are committing less capital to debt markets since the credit crisis. Seeing an opportunity to service buy-side institutions and hedge funds through their deep client relationships with institutional accounts, at least a dozen agency brokers -- including Bay Crest Partners, BTIG, Concept Capital and JonesTrading -- have set up bond-trading desks in the past six months alone to expand into the credit markets. And the agency brokers are hiring talent from the major sell-side firms to staff their new desks with seasoned sales traders, desk analysts and former bulge-bracket syndicate managers.
"It's a game of musical chairs out there, where a lot of people want to leave where they are and there are a lot of boutique options," relates Will Geyer, president of JonesTrading Institutional Services, an agency-only broker-dealer specializing in block equity trading. According to Geyer, JonesTrading began building out fixed-income trading capabilities a year ago, and in May the firm hired Mark Edgar, the former director of convertible bonds at Deutsche Bank and one of Wall Street's top sales traders in convertible bonds, to develop the convertible bond group at JonesTrading.
The new wave of fixed-income agency brokers have entered the business in the wake of the disappearance of two of the market's top players, Bear Stearns and Lehman Brothers, and the absorption of Merrill Lynch into Bank of America. Meanwhile, given its financial woes, Citigroup's position in the fixed-income space has been weakened, and UBS reportedly has been hit by a drain of fixed-income talent.
"[Agency brokers] are trying to migrate this principal-based fixed-income business that was captive to the broker-dealers to the agency side," says Larry Tabb, CEO of TABB Group. "It's an interesting time to do this because there are much fewer people in the large firms and they don't have the capital to do this."
Not-So-Risky Business
Since the credit meltdown, the buy side has been challenged to liquidate its bonds and spreads have widened because there are fewer firms bidding on the bonds, according to Tabb. "Institutional investors, when they are trying to sell their bonds, now have a lot fewer places to go," he says.
Tabb explains that the fixed-income market historically has been a capital-intensive business in which the big banks or brokers buy bonds and build an inventory with the intention of liquidating them over time. In contrast to equities, for which typical orders consist of 300 shares valued at $10,000 to $15,000, large bond orders can be worth several million dollars, he adds. "From the standpoint of the agency brokers, whether they're moving $5 million worth of shares or $5 million of IBM bonds, there's no difference -- they're moving product," says Tabb.
But the agency-based fixed-income model is different from the principal-based sales trader model, points out Allen Oppici, managing director of fixed-income sales and trading at Concept Capital, a prime brokerage/hedge fund services shop that launched a fixed-income trading desk in February. Unlike the traditional firms that risk their capital to hold bonds in inventory for a period of time and provide a two-way price to institutions, the agency-based brokers are working to find the other side of the trade. In the agency model the trader is more of a "traffic cop," says Oppici, adding, "You're not taking risks."
Agency-based brokers don't hold positions and there is no proprietary book, adds Gregory Nassour, principal and cohead of investment-grade fund management within Vanguard's fixed-income group. "We're basically in a new environment where agency trading has overtaken principal trading," says Nassour, who oversees corporate bond trading at the giant mutual fund manager. "It's lucrative to [agency brokers] because it's a huge commission business, and they can pick up the good traders that have been punted from the good firms."
While the major banks are still making markets in fixed income, they are not risking as much capital, according to most buy-side traders. "Some of the firms have lost some of the value they provide in liquidity," suggests Todd Soots, senior investment analyst at the Ohio Public Employees Retirement System (OPERS), which has $61.5 billion in assets under management, including $11 billion in bonds. Some of the bulge-bracket firms probably have less capital available to their trading desks and likely have lost traders on those desks as well, he notes.
Soots says he's been getting calls from a number of new agency shops that have popped up in the fixed-income space. "Wall Street Access, Knight Libertas, Cohen & Company -- those are some of the firms I've been trading with," he relates, adding that Cantor Fitzgerald, which opened a fixed-income agency desk a few years ago, is particularly good at finding bonds.
Other fixed-income agency-based shops include Broadpoint Capital and MF Global as well as Jefferies & Co. Even interdealer brokers are getting in the game -- in addition to Cantor Fitzgerald's presence, GFI started Christopher Street Capital, a full-service end-client broker with Citigroup hires that specializes in the credit markets.
Tapping Sell-Side Talent
Some of these equity-oriented agency brokers are delving into fixed income now simply because the talent is available. In the past there were 15 large firms dominating the primary and secondary market, and while an agency firm might have executed trades, it wouldn't have attracted any of the talent. With the credit meltdown, however, some of the larger firms have reduced their operations, downsized sales and trading staffs, and slashed bonuses. "Due to the disruptions that have taken place in the markets in general, there is an unusually good opportunity to put together very strong fixed-income teams," comments John Purcell, cohead of global fixed income at BTIG.
BTIG, an equity-oriented execution firm, hired two industry veterans -- Purcell, who came from Citigroup, and Jon Bass, formerly of UBS Investment Bank -- to cohead its global fixed-income group. Both had left the large investment banks to pursue other opportunities given the changing Wall Street landscape, according to a BTIG spokeswoman. Purcell and Bass started to build the fixed-income team in March 2009, and the firm's fixed-income desk went live three weeks later.
The firm, which received an undisclosed investment from Goldman Sachs last year, launched the fixed-income desk with 20 people and has plans to hire more than 60. As of May, it had hired 45 people, including seven traders, 23 sales people and support personnel, according to Purcell, who says BTIG's expansion will allow it to operate seamlessly between debt and equity markets and provide insights across the capital market structure.
"We're trading high-grade and high-yield across all sectors, and we will be picking up loan trading and emerging markets shortly," Purcell relates. "We will also move into structured credit and [asset-backed and mortgage-backed securities]."
Sean Rice, managing director of fixed-income trading at Bay Crest Partners in New York, is among the fixed-income executives who have made the jump from a bulge-bracket firm to an agency brokerage. He says the availability of talent coupled with declining service from the big banks has created an opportunity for agency brokers.
"There is a market opportunity that is fairly well understood by a number of people," he asserts. "Banks are deploying less capital, either intentionally or by attrition, and they have lost a lot of talent."
