At the recent FIX Trading Community regional meeting the topic for discussion was liquidity in the fixed income market.
Several market making banks bemoaned the current market conditions, which have depressed the market and created illiquid trading periods. Banks that have a market making business also moaned about the increased risks they were having to take and the difficulty in making a market with wide spreads. All this really causes me concern and some bewilderment, as the difficulties of market making are in reality the same as they have always been. Jobbing or market making as it is now known has over centuries has been managed very successfully, until it appears today, the skill of being a good market maker is knowing how to turn whatever the market is doing to your advantage.
So why is the fixed income business suffering? Well, economic factors are still playing their part. Globally the economic outlook is still dreadful; despite pockets of sunshine, which we find sporadically showing up around the world’s markets.
The UK has had a reasonably good period and at times the USA, but in the Eurozone the economic crisis is still deep and shows no quick incline. This has clearly impacted the Fixed Income market, as Governments and Central Banks work together to buy back debt. Corporates have chosen to sit on piles of cash rather than invest and raise debt. It’s all very understandable but hardly a unique condition as we have seen over past decades. The task of the market maker is to create markets and in Bear markets that means taking risk. This is the view of Sassan Danesh the Co-Chairman of the Fixed Income committee at FIX Trading Community “The banks are risk averse today and with diminished appetite to take on positions onto their books. Especially with liquidity tight and potentially have to hold the position for some considerable time.”
Now of course in times of economic downturn the appetite for taking on risk within banks will be a difficult decision. However, that is the risk of being a market maker. There should be no fair-weather market making, just taking advantage in the good times, but running for cover in the bad.
It’s questionable to me anyway, if today’s market makers actually know how to make money in a falling market. An old Jobber that was extremely successful and that I had huge respect for, back in the day, used to say to me that making money in a rising market is easy, anyone can do it, but you earn your money when the market falls. This demands the capability to understand how to build strategies and hedge where possible, reduce spreads to increase liquidity and that in turn will find the market level.
Today, we have to suffer fragmentation in the markets and no end of regulatory barriers and technology silos that impede liquidity and raise risks. None of this, I might add, can ever be resolved by regulation alone. Rather the future solution will be found by collaborative measures across asset classes and communities. It is here where the FIX Trading Community has a massive role to play. FIX has no vested interests in a particular area of the industry, nor a profit based agenda.
Sassan Danesh illustrates the FIX Trading Community approach “FIX has recently rebranded to better represent the work we do and the business interests of our members. Nowadays, we are as much interested in the business imperative, as we were in technology and messaging from where we started years ago. We now represent a global community across asset classes and have a strong business focus and can be a forum to share knowledge and provide direction. For example OTC regulatory impacts is worrying in its potential to inflict serious risks in CCPs and CSDs/ ICSDs and FIX is trying to help lessen detrimental industry impacts and highlight problems and introduce solutions.”
My view is that the FIX Trading Community is a genuine cross industry global organisation able to ally technology messaging with business processes and provide a forum for the international markets to discuss and build a mutually focused agenda. Concentrating on improved market operations, increased revenues and efficiencies, whilst reducing risks and costs to the end investor or client. Achieving these goals would also mean that it will never be far from the needs of regulators or Governments. The most important thing for the securities industry is to take back ownership from a regulatory drive and introduce business led solutions. By collaboration, I believe the industry can achieve this and I believe FIX is ideally placed to enable this to happen, setting a global direction.
For more details on the FIX Trading Community please contact: Tim Healy
Tel: + 44 (0) 203 440 5954 or Email: email@example.com