Wall Street dealers are increasingly middlemen, coalition says

Wall Street dealers are holding significantly fewer bonds on their balance sheets while trading more of the securities, as technological advances and regulatory changes transform their role in the US government and corporate debt markets, according to Coalition Greenwich.

Dealer holdings of corporate bonds slid 77% from 2017 through the end of 2022 to $3.6 billion, while their average daily trading volume grew 29% to $37.7 billion, the financial services consulting firm said in a report Tuesday. During the same period, dealer daily transaction volume of US Treasuries jumped 22%, while their net holdings of government debt stayed roughly flat.

The shift reflects how electronic trading has allowed dealers to match buyers and sellers of bonds quickly without the need to tie up valuable capital warehousing vast sums of debt. Electronification has also attracted more non-banks to the market-making business, boosting the number of meaningful liquidity providers for both Treasuries and credit, according to the report.

“Dealers are using less balance sheet to trade bonds with customers because they’d prefer not to (capital is increasingly expensive) and because they don’t have to,” wrote Kevin McPartland, Coalition Greenwich’s head of market structure research. “Bond dealers are increasingly acting as bond brokers by facilitating the movement of those bonds with little or no holding period in between.”

The decline in dealer holdings comes amid a surge in borrowing by the US government and companies in recent years.

The Treasury market has grown to about $25.5 trillion from $13.9 trillion at the end of 2016. The corporate bond market stood at $10.6 trillion at the end of the second quarter, up from about $7.96 trillion, according to data from the Securities Industry and Financial Markets Association, a trade association representing brokerages and investment firms.

As the markets have grown, so has the share of trading done via electronic platforms. E-trading now makes up about 40% of transactions in investment-grade debt, about 31% in the high-yield market and 65% in Treasuries, according to Coalition Greenwich data through the end of 2022.

Greater electronification has allowed large asset managers and hedge funds to take a more active role in providing liquidity, according to the report.

“The largest global banks remain critically important to the US bond market’s functioning, but it’s less about their balance sheet than it used to be,” McPartland wrote. “Electronic trading has increased agency trading and allowed the buy side to supplement dealer balance sheets via the increasingly huge portfolios of their peers.”