The demise of the oldest profession
Bond Traders Lose $1 Million Incomes on Transparency
By Mark Pittman and Caroline Salas
[T]ransparency has hastened the demise of one of Wall Street's oldest professions and a moneymaker since bonds financed the expansion of railroads into the American West 140 years ago.
Oct. 24 (Bloomberg) -- Richard Seifer's corporate bond traders each made as much as $1 million just three years ago, working from their office in a skyscraper 150 yards from the New York Stock Exchange.
Today his company is defunct, along with a generation of traders who were casualties of automation. Bond salesmen are becoming relics of a time when the debentures of American companies traded by appointment over the telephone.
"I used to make a good living, and then we were breaking even one month, losing money another," said Seifer, 61, whose offices in the old U.S. Express Building at 2 Rector Street are now occupied by companies that trade equities and derivatives.
Since July 2002, traders that buy and sell the $5.2 trillion of bonds issued by companies from automaker General Motors Corp. to computer company International Business Machines Corp. have been required to report sales to an NASD computer system that disseminates prices to anyone with Internet access. "Technology took a lot of the margin out of the business," said Richard duBusc, a Credit Suisse banker who started working on Wall Street 40 years ago when the NYSE closed on Wednesday afternoons to catch up on its paperwork. "Is that good or bad? It's bad if you're losing your job. It's good if you're paying a tighter bid-ask spread."
The U.S. Securities and Exchange Commission began to break down the secrecy of the market in 1992 because of concern high- yield, high-risk bonds were being sold based on inside information about future takeovers. Former SEC Chairman Richard Breeden's probe into junk-bond trading led to the creation of the Fixed Income Pricing Service.
President Bill Clinton's choice to succeed Breeden at the SEC, Arthur Levitt, wanted a database to collect the prices of trades on all registered corporate bonds. That system, now operated by the NASD, posts prices 15 minutes after trades occur. The system, called the Trade Reporting and Compliance Engine, is known by its acronym, Trace.
Breeden didn't return phone calls for comment. Levitt, who's a member of the board of directors of Bloomberg LP, parent of Bloomberg News, said the corporate bond market used to work like an "Oriental bazaar." "Transparency was at the core of all of its problems," said Levitt. "Our intent was to make the market fairer. The result was that it was also less expensive."
Now that fixed-income prices are available on the NASD's Web site, bond salesmen have lost their advantage.
"You're lifting the veil of ignorance," said Peter Campfield, head of taxable fixed-income trading at San Francisco- based Charles Schwab Corp., the biggest discount brokerage by assets, which trades an average of 500 corporate bonds a day. "Pre-Trace? It wasn't pretty. Price discovery was a challenge. You had to hunt and peck and dial numerous dealers to ascertain what a real market looked like."
UBS AG, Europe's biggest bank, fired between five and 10 bond traders in the U.S. to cut costs in its fixed-income unit, a person with knowledge of the decision said today. UBS combined some sales and trading functions, making the jobs redundant, said the person, who declined to be identified because the firings haven't been disclosed.
One-fourth of all corporate-bond traders, analysts, brokers and salesmen have lost their jobs in the past two years, according to Michael Karp, head of New York-based executive search and consulting firm Options Group. David Hendler, an analyst who covers financial firms for CreditSights Inc., estimates as many as 500 people work in corporate bonds at the five biggest firms.
Securities firms are jettisoning corporate bond staff because they're not generating as much money. Bond traders lost $1 billion in fees from mid-2002 to mid-2003, or about $2,000 a trade, according to a study to be published in the Journal of Financial Economics.
Since then margins have dropped even farther. Last month the average spread ranged from 55 cents per $1,000 in bonds for General Electric Co.'s 5 percent note maturing in 2007 to $2.10 for Johnson & Johnson's 3.8 percent note due in 2013, according to Trace.
"You have a market that was completely dark for 200 years and instead of letting a little bit of transparency in there, they just opened the windows completely and all the shades and everything, and it was complete sunshine," said Jeff Stambovski, a senior high-yield bond salesman at Miller Tabak Roberts Securities LLC in New York until he quit in 2004 with the advent of Trace.
Seifer's firm, housed in a neo-Renaissance building, had a 5,000-square-foot office that featured a putting green and a kitchen. After work, the traders often went to Harry's at Hanover Square for drinks with rival bond salesmen from such places as Paine Webber and Dean Witter, two firms that have been taken over.
"Maybe it was excessive, maybe we earned more than we should have," said Seifer, who now trades bonds at Aegis Capital Corp. in New York. "Some of us would walk away with upwards of $1 million, but we provided a service that large firms can't provide for accounts. What gives the NASD the right to say it's wrong to make $1 million trading bonds?"
The Trace system wasn't intended to drive anyone out of business or reduce the amount of money anyone makes, said Douglas Shulman, vice chairman of the NASD, formerly known as the National Association of Securities Dealers.
"Our goal was to improve the overall quality of the bond market, and we think we have achieved that," Shulman said. "Changing from an opaque market to a transparent market makes markets more efficient, and better for all players in the long run. But it's inevitable that some players are going to make less money than they did before Trace."
"There have been reduced transaction costs, but the question is, `Has it gone too far?"' said Randy Snook, executive vice president of the BMA and former co-head of debt syndicate at Goldman Sachs Group Inc. in New York.
The outlook is so gloomy that some banks don't even call it the corporate bond department anymore. Frankfurt-based Deutsche Bank AG and other firms renamed the business "credit," a nod toward faster growing derivatives markets.
The hot markets today carry higher margins, such as derivatives, or financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
One type of derivative, credit-default swaps, allows investors to bet on the ability of companies to repay their debt without buying bonds. The market for credit-default swaps has more than doubled in the past year to cover $26 trillion of securities, according to the International Swaps and Derivatives Association.
"The more experienced corporate bond traders are being moved into the credit derivatives and structured credit space to handle increased demand for those products," Option Group's Karp said.
One of Seifer's former employees, Bill Fecci, who turned in his carpenter's union card 10 years ago to become a corporate bond salesman, is back to hanging sheetrock on weekends to make ends meet.
The 40-year-old broker at Seidel & Shaw LLC in New York says his job on Wall Street will be eliminated by year's end.
It's all just a small part of that great productivity drive the Greenspan so dearly loved. It also shows how much money people can make screwing other people simply because they can keep certain information secret or proprietary, like copyrights and patents, and thereby monopolise it.