Following a lively discussion at the Fixed Income Leaders Summit 2022, the audience concluded that now is not the time to challenge the traditional ways of the buy-side paying for balance sheet access.
Before each side was invited to speak, an initial poll of the audience found that 79% of those who voted were in favour of change, while 21% said they were happy with the status quo.
All in favour
Arguing in favour of a change to the current regime was Jupiter Asset Management’s head of dealing, Mike Poole, who said traders were bleeding alpha and it was time for a “grown up conversation” around costs, particularly when an order cannot be filled.
“Our ability to ascertain how much we pay can be curtailed by the nature of trading. Opportunity costs in a fragmented marketplace has been a silent killer of investment returns for years,” said Poole.
“We can’t get rid of opportunity costs but enhancing conversations with post-trade analysis and understanding of costs is vital as we approach new transparency in fixed income. We have a fiduciary duty to shine a light on how much we’re paying for a balance sheet.”
Instead, he suggested replacing the current “sporadic” regime with a “liquidity tree that can remain standing in the storm” perhaps in the form of paying commission on a trade-by-trade basis or through a flat monthly fee.
The case against
Opposing Poole was director and head of G7 portfolio management at EBRD Treasury, Jasper Livingsmith, whose argument was simple.
“As a price taker we have no say over the cost of balance sheet. It’s too late. The ship has sailed and there are other things we can do to mitigate cost,” he said. “We’ve been discussing for many years how to challenge this but we’ve come to accept there’s not much you can do.”
Instead, he claimed that with the ground constantly shifting in today’s market and with banks being such complex institutions, any change to this system was unachievable.
“Banks are wanton havens of complexity. It’s very hard to have clarity when banks themselves do not know,” he said. “Quite often there’s a structural reason for alpha being unattainable.”
A second audience poll done at the end of the debate found that Livingsmith had gained a large portion of ground, with the split now closer to 45% and 55% in favour of Livingsmith’s position.