The structure of the European bond market is becoming more concentrated, with a small core of banks grabbing a greater proportion of the trading flow, according to a survey.
Six banks account for more than 45 per cent of all trading flows in fixed income, and records suggest their dominance is rising, says Greenwich Associates, a research consultancy.
“Business is becoming more concentrated with each passing year,” says Greenwich, which calculates that the top 10 dealers captured 66 per cent of all trades last year – up from 63 per cent the previous year.
The trend is likely to be closely watched by the financial industry, since there has been a marked discrepancy between the structure of bond markets on different sides of the Atlantic.
The US bond market has long been highly concentrated, with activity dominated by half a dozen Wall Street banks. The European structure has traditionally been more dispersed, as its debt market fragmented along national lines.
Many investment bankers expect that the European pattern will converge towards a US model in the future, as the single currency creates a more unified debt market. Upheavals in some corners of European debt, such as the covered bond sector, suggest that bulge bracket banks are increasingly seeking to grab more market share.
“Small players just don’t have the resources to compete as well now – it is definitely becoming more concentrated,” said the head of fixed income at one of the largest European players.
The Greenwich survey shows that the firms with the largest fixed-income franchise in 2006 were Barclays Capital and Deutsche Bank, each with a 10.1 per cent market share of trading flows. They were followed by JPMorgan, with 8.3 per cent, Royal Bank of Scotland with 6.3 per cent, then UBS and Citigroup.
The most striking change from 2005, Greenwich said, was a sharp increase in the market share of Barclays. This follows a conscious decision by the UK bank to expand its footprint in European debt markets over the last year.
Some of Barclays’ rivals claim that the bank has only achieved this by chasing low-margin, unprofitable activity – however, Greenwich notes that many corners of the debt market are low-margin.
“Market share does not necessarily translate into profitability for fixed-income dealers,” it said, pointing out that trading in government bonds, interest-rate derivatives, covered bonds and agency securities are particularly low-margin activities.
Groups such as Barclays argue that it pays to have a large market share, even of low-margin businesses, since this generates opportunities to conduct higher-margin, bespoke structured activity.
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