Bond Trading Sees Rise of the Machines

NEW YORK ( TheStreet) --Bonds are the new stocks, at least where Wall Street spending is concerned.

A few years ago, being a fixed income trader was a reliable path to riches on Wall Street. That has changed, even as financial institutions are upping their spending on fixed income trading technology.

A report released Tuesday by consulting firm Greenwich Consultants provides the latest evidence of the latter trend. In a survey of buy-side institutions, Greenwich found that fixed income desks are the most likely to increase spending on technology.

"Several factors are driving the desire to evaluate current systems for potential change, including the need to keep pace with new regulations that are changing the market structure in derivatives and imposing taxing new compliance demands across asset classes. With the fixed-income market arguably undergoing the most change at this point in time, it comes as little surprise that buy-side investors in this asset class are both more likely to be looking into ways to improve systems and to be spending more on technology," the report states.

What's interesting about this technology spending increase is it comes just as pay for fixed income traders is down. Compensation for fixed income traders likely fell between 0-15%, the worst performing of 13 categories in a November report from compensation consultant Johnson Associates 

Fixed income markets have long offered less transparency than equities markets, but new regulations are changing that dynamic. Fixed income securities such as swaps must increasingly be routed through central clearing facilities. While part of the spending increase is merely to connect institutions to those new facilities, firms wouldn't make those expenditures if they didn't continue to see potential profits in fixed income.

But where the profits come from is likely changing in the face of greater oversight. When prices of fixed income securities were difficult to determine, it was easier for big institutions like Goldman Sachs  (GS) and JPMorgan Chase  (JPM), as well as their buy side counterparts like Pimco and Blackrock (BLK), to gain an advantage. If anyone knew the price, they did, and that knowledge often translated directly to trading profits. But as prices become easier to see, as is the case in equities markets, being able to trade faster is the only way to get an edge. And to trade faster, you need faster technology.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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