Amid Pull-Back by European Banks, Gains by U.S. Dealers, Reduced Market Liquidity

Europe’s fixed-income markets are showing the effects of continued pressure on the regions’ banks and their balance sheets.  European banks are ceding market share in fixed-income trading to U.S. competitors and investors are reporting diminished liquidity.

Amid these shifts, Barclays remains the clear market leader, with a 12.8% market share in fixed-income secondary trading, with Deutsche Bank second at 10.5%. But several U.S. banks have been gaining market share as their European counterparts pull back, and the top five is now rounded out by J.P. Morgan with a market share of 9.3%, Citi at 7.7% and Morgan Stanley at 6.3%. These five firms are the 2013 Greenwich Share Leaders in Overall European Fixed-Income Trading.

Reduced Liquidity
Banks around the world have suffered from soft fixed-income trading volumes in Europe and North America throughout the second half of 2013. In the 12 months prior to that, however, trading volumes in Europe had actually been on the rise, driven largely by increasing activity in government bond trading. That recovery was stopped short in June by statements from the U.S. Federal Reserve suggesting that the Fed might start “tapering” its economic stimulus program in September. But even before that reversal there were clear signs that all was not well in European fixed-income markets.

Institutions participating in Greenwich Associates 2013 European Fixed-Income Investors Study expressed strong concern about reduced market liquidity, and the study results suggest they are acting on those concerns. Over the 12 months ending July 2013, the typical European institution added new fixed-income counterparties. This is a remarkable finding in light of the fact that Europe’s major banks were scaling back their fixed-income operations and coverage. Although the most notable example of that phenomenon was UBS’ pull back from fixed income and the bank’s wholesale exit from certain business lines, virtually all the region’s major banks have been retrenching.  As they move to comply with new Basel III capital requirements, Europe’s major banks are rationalizing their capital commitments across products and clients. “As part of this process, they have stopped trying to be all things to all people,” explains Greenwich Associates consultant Andrew Awad. “The banks are identifying their most profitable products and priority accounts and focusing their capital in these areas. That means less coverage for all but the largest and most important institutions.”

With banks scaling back their coverage and capital commitments, it would be logical to expect to see a reduction in institutional counterparty lists. Instead, the opposite appears to be true. In 2012, European institutions used an average 8.4 dealers for fixed income. In 2013 that average increased to 9.0. “It has become more difficult for many institutions to execute trades, and our data suggest that they are reaching out to new dealers in an attempt to source needed liquidity,” says Greenwich Associates consultant Peter D’Amario. This has benefitted several US banks as well as “National Champions” like UniCredit, Commerzbank, Banca IMI, and Rabobank.

Greenwich Leaders
Every year, Greenwich Associates asks the institutions participating in its study to name the dealers with whom they trade and to rate these dealers on a series of service and coverage categories. Firms that receive ratings that top those of competitors are named Greenwich Quality Leaders. Barclays is the 2013 Greenwich Quality Leader in European Fixed-Income Trading, Sales and Overall European Fixed-Income Service in Rates products. J.P. Morgan is the 2013 Greenwich Quality Leader in European Fixed-Income Research and Overall European Fixed-Income Service in Credit products.