(New York)

The fixed income trading business has been notoriously resistant to change. Large banks earn handsome profits from the business—JP Morgan earned $15.5 bn in revenue last year from its fixed income division—and so have been reluctant to change them. That has meant that until now, even in the face of huge technological overhauls elsewhere, most fixed income trades still happened over the phone. However, alongside regulators’ demands for standardized exchange-traded interest rate swaps, banks are beginning to automate some fixed income business. JP Morgan is now using its own fixed income system, Q.M.M., to trade government bonds and interest rate swaps, and other banks are adapting too. Many banks, including Morgan Stanley, have named technological heads for the fixed income divisions, with the broad remit to try to transfer large swaths of the business to online platforms. The banks are meeting internal pressure from traders and salesmen, who do not want to lose their jobs to computer algorithms, but banks say this will not stand in their way.

FINSUM: In the long-term this may have a tangible effect on bank earnings and liquidity, but it is still in the early phases. Corporate and mortgage bonds are likely to stay off such platforms for a long time because of their inherent illiquidity.  Banks hope electronic platforms will offer huge volumes despite much tighter margins.

(New York)

Senior Financial Times Columnist Gillian Tett has written an insightful article on the links between the recent market selloff and the important reality of liquidity. Tett explains that liquidity has been hurt by four factors, and all of them helped exacerbate market volatility over the last few weeks. Firstly, most market investors are holding the exact same views, which has left everyone caught by surprise. Last week, 100% (truly) of surveyed economists said they believed interest rates would rise soon—this helps explain the like-mindedness of investors. Secondly, and leading on from the first point, asset managers have adopted a severe herd mentality, and are all buying and selling the same assets at the same time, which makes rises and falls much steeper. Thirdly, computer programs and algorithms, despite purporting to boost market liquidity, have actually made things worse. Most of them operate in a similar fashion to one another, and because they can function at lightning speed, move markets even faster downward than in the phone-based days. Finally, and perhaps most critically, regulations have forced large banks out of the market-making space in many products. This means that there is simply not enough liquidity in trading to handle the volume of bonds in the market at an adequate level, leading to heavy losses.

FINSUM: A great article showing just how important liquidity is, how a lack of it was hidden by market gains over the last 18 months, and the individual components that have dried it up. A must read for a better understanding of the current liquidity infrastructure of markets.

(New York)

Global market turmoil, sparked by an uncertain mixture of negative financial news, worries over growth, and the end of Fed stimulus, have very likely spelled an end to dealmaking for the year. 2014 had seen M&A and IPOs at all-time highs, with merger and acquisition deals hitting a historic high of $1.3 tn, while IPOs hit a post-dot com era record of $81 bn. The dealmaking fervor hit its peak on September 19th, when Alibaba held its IPO, only to see its stock jump quickly and the S&P 500 hit a new all-time high minutes after the opening bell. However, many of the deals that were planned for the next few weeks have already been indefinitely delayed, as anxious executives and bankers wait and see how markets react to the selloff of the last few weeks. In contrast to their colleagues in trading, market volatility is very negative for M&A, as shaky markets make companies shy away from listing. However, as ever, M&A bankers remain optimistic, saying there are many more “spin-offs in the pipeline” and that lower stock prices might actually fuel more acquisitions because targets will look cheaper.

FINSUM: While this sell-off has not created a crisis, it has given all participants a serious shock. With markets looking so vulnerable, and rumblings of QE4 already on the horizon, odds are companies will stay in “wait and see” mode for the time being.

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