J.P. Morgan and Lehman Brothers have the biggest market shares in U.S. fixed-income trading and are also rated by institutional investors as delivering the best service quality across fixed-income sales, research and trading, according to new research from Greenwich Associates.

Lehman and J.P. Morgan tied for the number-one position overall in Greenwich Associates’ 2007 U.S. Fixed-Income Dealer Rankings. Each year, Greenwich Associates interviews roughly 1,300 institutional investors active in fixed-income trading. These investors are asked to name the dealers with whom they trade, to reveal how much of their trading business is allocated to each dealer, and to rate the service quality delivered by the dealers in a variety of categories.

“In 2007, J.P. Morgan and Lehman Brothers tied for first place in terms of total market share in U.S. fixed-income trading,” says Greenwich Associates consultant Woody Canaday. “The two firms are also equal first in the service quality ratings awarded to them by their fixed-income clients.”

In terms of market share in U.S. fixed-income trading, the two leaders are followed in rank order by Deutsche Bank, Goldman Sachs and Banc of America. “Of the firms with top-five rankings in market share, Banc of America, Deutsche Bank and J.P. Morgan all grew their fixed-income trading businesses over the past 12 months, suggesting that these franchises are generating significant momentum,” says Greenwich Associates consultant Tim Sangston. “Also demonstrating momentum in terms of overall market share growth were Merrill Lynch and RBS Greenwich Capital. Lehman Brothers, by comparison, has had consistently high market share for several years.”

Certain firms made notable market share gains in individual fixed-income product categories, it noted. Merrill Lynch and Credit Suisse increased their market shares in rates products, Morgan Stanley grew its market share in credit products, and Banc of America’s market share expanded in securitized products. “It is interesting to note that three foreign firms — Deutsche Bank, RBS Greenwich Capital and Barclays Capital — increased their market shares in at least two product categories from 2006 to 2007,” says Greenwich Associates consultant Frank Feenstra. “These results certainly suggest that the significant investments that some foreign firms are making in U.S. fixed income are paying off — at least in terms of market share.”

Greenwich notes that certain fixed-income dealers have backed away from a market share-based strategy in fixed income, preferring instead to concentrate their attention and resources among clients with the potential to generate the biggest profits. Among the relatively small group of institutions generating more than $50 billion in annual fixed-income trading volume, Lehman Brothers and J.P. Morgan are joined at the top of the market by Deutsche Bank and Goldman Sachs, all of which have amassed roughly comparable market shares, it says. Lehman Brothers and J.P. Morgan share top honors in service quality assessments among these large institutions, followed by Deutsche Bank and Goldman Sachs, which are essentially tied for third place.

Greenwich Associates’ research shows that Lehman Brothers has built up the biggest market share among hedge funds, followed by Deutsche Bank and J.P. Morgan, which are essentially tied for second place. “Hedge funds give the highest scores for service quality to Lehman Brothers and J.P. Morgan, followed at some distance by Credit Suisse, Bear Stearns, Deutsche Bank, and Goldman Sachs in a four-way tie,” says Greenwich’s Dev Clifford.