DJ Technology Drags Bond Industry Toward Stocks Model.Anyone who still believes the fixed income industry is immune to the revolutionary changes underway in the equities business should have attended a get-together in New York
Tuesday.
Speakers at the Bond Market Association's technology conference
painted a picture of an industry undergoing fundamental changes
as new, innovative trading and execution systems start to alter
the bond market's underlying structure.
Along with the new technology has come competitive and regulatory
pressure to change the way bond bankers work, from making prices
more transparent to reducing the time it takes to confirm and
settle a trade.
The good news is that the solutions to these challenges appear
to exist within the technology itself - bond market professionals
can thank Silicon Valley for that.
But it's not clear that Wall Street, so used to dictating change
in other industries, is up to reforming itself.
For instance, many in the industry are still resisting changes
that would lead to a central marketplace for corporate bonds,
which currently carry different prices depending on which dealer
or broker is offering them.
And while everyone agrees that a project underway to make it
possible to settle a trade the day after it's executed is a good
thing, the task may be too complex to complete by a Securities
and Exchange Commission-imposed deadline in 2002.
"We are not ready for this," said Diane Schueneman, a senior
director of asset management group operations at Merrill Lynch
and a panel moderator at the conference. "For the first time,
the marketplace is ahead of us."
"Our industry must change or risk being seen not as an enormous
provider of prosperity around the world, but as an obstacle that
must be overcome," she added.
Trade Systems May Change Profit Motive
One change bond brokers and dealers may have to make is in
the way they earn money from trading on behalf of customers.
Traditionally the profit comes from the spreads, or margins,
they charge clients for the service of buying and selling bonds.
But with a proliferation of electronic trading systems, many of
which were displayed at Tuesday's conference, investors are being
empowered with greater access to a wider choice of dealer quotes.
This process, says Donaldson Lufkin Jenrette Managing Director
Thomas Guba, could make the bond market more like the equities
market.
"We could be moving toward an equities type of world where
there is a centralized market... and where dealers don't get paid
for execution, they get paid for research," Guba said during a
conference panel discussion.
(MORE) DOW JONES NEWS 11-09-99 |
