Moving up the value chain
June 25, 2009
Tales makes an interesting point on the problem of scaling up a people intensive dealer/broker activity: sales coverage of clients. He considers the problem from the perspective of scaling up the number of clients an individual sales person can cover. In my experience there’s another angle – moving up the value chain. I see dealers attempting to strip out cost by putting more of their vanilla flow business on electronic channels: Bloomberg, TradeWeb, Caplin based single dealer platforms. In my world that flow is European Govt Bonds, US Treasuries, vanilla swaps. Autoquoting, autonegotiation and STP mean that trades are priced, executed and settled with no manual intervention. A big advance on the voice trading of 10 years ago. A few years back I was toubleshooting on the desk when I heard one of our market making traders refuse to take a client voice inquiry for a small ticket, he just said “do it on Bloomberg !”
With vanilla flow on electronic channels, sales and trading can focus on higher margin structured deals, thereby scaling up earning power. Of course constant competitive pressure pushes back. Products that were bespoke voice trades become electronic trades: for example flys, custom swaps, custom structures.