The window of opportunity is closing for boutique bond trading firms to make a killing from market turmoil as big Wall Street banks regain their footing and rehire staff.
During the financial crisis and its aftermath, bid/offer spreads, or the gap between the price for selling or buying a bond, widened dramatically, offering opportunities for middlemen.
Small boutique firms reaped much of the profits from these wider spreads. Many bond salesmen, traders and analysts who fell victim to layoffs or jumped ship from the big firms seized a lucrative opportunity at these smaller shops which pay commissions on trading profits.
Now the tables are turning. As the credit crisis has abated, reducing market volatility, bid/offer spreads have slammed shut over the past several months, squeezing profits at smaller brokerages.
Though boutiques are still hiring, the biggest banks and brokerages have returned to profit. They are taking greater risks and taking on staff.
Cheap credit is allowing big firms to trade bonds in volumes that swamp smaller rivals and compensate for lower profit margins.
In their search for new talent, some big banks are rehiring staff who defected to the boutiques.
The big guys now are pushing the others aside, said John Jay, senior analyst at Aite Group, a Boston-based market research consulting company. The larger firms have decided that in a more stable environment they are willing to take a little more of an aggressive stance.
LOWER SPREADS, LOWER PROFIT
Among the boutique firms that embarked on a hiring drive were Broadpoint Capital, BTIG, Cantor Fitzgerald and Chapdelaine Credit Partners. Several are hiring more staff, including BTIG, an institutional broker dealer, which said this week it has launched a U.S. convertible securities business.
But conditions are becoming more challenging for boutiques. As big Wall Street firms increase hiring, it's getting more competitive, said Sandy Ewing, a principal and founding partner of Chapdelaine Credit Partners.
When the crisis was at its height, the cost of buying a bond priced at par value, or 100 cents on the dollar could be as much as one cent, an unusually wide spread, said one bond market veteran.
Average bid/ask spreads on the highly liquid 30-year Treasury bond, have narrowed to around 0.03 of a percentage point, the tightest since October 2007. That compares to a wide of around 0.14 of a percentage point in January 2009, the biggest in at least eight years, according to Tradeweb data.
So on a $100 million trade, the bid/offer difference has narrowed to about $30,000 now from $140,000 then.
For less liquid corporate bonds, the widening of bid/offer spreads in the crisis was much bigger, so the subsequent narrowing has been more pronounced, analysts say.
All that spread to be made probably evaporated inside of nine months or so, said Jay. Last year was especially profitable for firms trading distressed debt in the secondary market, but activity in that sector has dropped off sharply since the start of this year, Jay said.
The Wall Street behemoths which came close to collapse in the crisis have repaid government bailout funds. Their business has been boosted by a rebound in prices of company bonds and stocks and a surge in government and corporate debt issuance.
Corporate bond yields have fallen since the crisis, enabling companies to borrow more cheaply via new debt sales. A near record volume of corporate bond issues has enabled the behemoths to pick up more fees for underwriting these deals, unlike the boutiques.
An important factor is that as the new issue market has opened, the bigger banks are well positioned to do new issues and the smaller brokers are not positioned to compete in the same way, said Erlend Lochen, head of U.S. credit and global head of high yield with Standard Life Investments in Boston.
Better functioning lending markets are helping replenish the traditionally deep pockets of the big U.S. investment banks. That helps them borrow heavily to leverage their own bets on bonds and magnify potential trading profits.
As they amass more capital, bigger banks and brokerages are stepping up hiring.
Peter Gonye, co-leader in search firm Spencer Stuart's private equity and investment banking practice in North America says over the past six months he has seen some senior staff move from boutiques to sell-side firms. The big Wall Street firms are looking to replace people they are now losing to hedge funds and money management firms, he said.
Job cuts have slowed to a trickle as hiring has started to pick up over about the last year.
The pace of planned U.S. financial sector job cuts decelerated sharply in 2009 to 51,505 according to outplacement firm Challenger, Gray & Christmas Inc., down from 260,110 in 2008, a record high since 1997 when Challenger started compiling financial sector data.
Last month, only 375 planned job cuts were announced in the financial area, the lowest monthly number in a decade.
(Reporting by John Parry; Editing by Andrew Hay)