It's market disruption, Jim, but not as we know it
Disruption is the tech trend of our times. It’s about whether technology and innovation can abolish old business models, rather than merely smoothing out their edges and adding efficiency gains.
So far, the primary markets have been impressively resistant to such changes. Most of the market structure has been in place for decades, improved and smoothed by better order management systems, electronic chat and the like but conceptually the same stuff.
To the tech evangelists, this is deeply strange and disturbing — even for the sorts of people who wouldn’t be seen dead in the turtlenecks or hoodies of Silicon Valley.
When your day job is algorithms for futures or equity execution, all of the messy relationship stuff that goes into both sides of a primary deal stinks of corruption. If you compare the margins in primary markets to those in cash equity execution, you can see why it might seem grubby.
On the other hand, primary markets are difficult to navigate, and execution fees pay for much more than deal pricing – they pay for diligent banking delivered over a relationship of years or decades.
Even frequent issuers with liquid lines, abundant auction experience and, frankly, no problem getting deals away will use syndications — the UK’s Debt Management Office has not been shy about discussing how much it values the process.
But that doesn’t mean complacency is justified. In secondary bond markets, all of the innovation is about rechannelling information about interest in buying and selling — the information which was, historically, the reason for hiring an investment bank to manage a deal in the first place.
If banks no longer sit in the flow, trade tapes are available to anyone willing to pay, and data vendors are aggregating buy and sell interest in a variety of formats, exactly what expertise does the bank add to the process?
No new entrants are on the verge of sweeping away the existing new issue process — the investment banks are still where the skills reside, as well as the balance sheet and the relationships — but it’s a juicy piece of undisrupted business, and will be a tempting target.