Banks build ETF businesses as growth stalls in bond trading

Thu Feb 18, 2016 10:34am EST
 
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By Olivia Oran and Trevor Hunnicutt

(Reuters) - Wall Street banks are ramping up businesses that trade exchange-traded funds full of bonds, a bright spot of growth at an otherwise bleak time for trading but one that may carry unappreciated risk.

Barclays PLC (BARC.L: Quote), Credit Suisse Group AG CSGN.VX and Goldman Sachs Group Inc (GS.N: Quote) have all created special teams to make markets in bond ETFs. The teams include staff across stock and bond markets, since the ETFs trade like stocks on stock exchanges, but their underlying securities are bonds.

All told, 12 to 15 banks now have a presence in the business, whereas a few years ago almost none did, said Anthony Perrotta, global head of research and consulting at TABB Group.

"There are a lot of institutions that, even though they might be retrenching in fixed-income trading, are looking at ETFs as a way to galvanize their business," said Martin Small, who oversees U.S. operations for BlackRock Inc's (BLK.N: Quote) iShares unit, which is the largest ETF issuer.

Although these businesses are sprouting up across Wall Street, they are unlikely to make up for huge profits banks earned during the glory days of bond trading, at least not anytime soon.

Investors pay banks 0.01 percent to 0.03 percent to trade a bond ETF, according to TABB Group, compared with 1.03 percent for an individual bond. Traders say they are hoping to make up for piddling margins by selling more of the product, since the ETF business is a bulk-volume one that is rapidly growing.

The sales push comes after years of pressure from leading ETF creators like BlackRock and State Street Corp (STT.N: Quote) to make markets for the bond ETFs. Those firms rake in billions of dollars' worth of revenue from ETFs each year, and view bond ETFs as a way to grow their own businesses.

Firms that create ETFs need banks to act as intermediaries for sales, and also to ensure that prices are in sync with underlying securities. Before banks entered the market, trades were handled by market-makers like KCG Holdings Inc KCG.N, Cantor Fitzgerald and Susquehanna Capital Group, who have been in the business for years.   Continued...

 
The logo of Swiss bank Credit Suisse is seen below the Swiss national flag at a building in the Federal Square in Bern May 15, 2014. REUTERS/Ruben Sprich