Some of the top global brokerage firms are voluntarily surrendering fixed-income market share in the face of new capital requirements, which are impacting profitability, says Greenwich Associates.

In a new report, Greenwich reveals that Barclays Capital and Deutsche Bank are the global market share leaders in the fixed-income business, with J.P. Morgan ranking third. The same three firms led the rankings last year, although gains by Barclays vaulted it from a tie for second place with J.P. Morgan last year, into a tie for first with Deutsche.

Notwithstanding the fact that the top three held onto their market-leading status, Greenwich reports that their aggregate share slipped year over year. From 2009–2010, the three firms captured an aggregate 32.9% of global fixed-income market share. In 2010 – 2011 that share declined to 31.4%, Greenwich says. The number four and five global dealers, Citi and Goldman Sachs, respectively, posted relatively stable market share results for the period, it adds.

“Market share lost by the world’s leading fixed-income dealers was redistributed among a broad group of competitors. Among the firms winning market share from 2010 to 2011 were Morgan Stanley, BNP Paribas, UBS, HSBC, and Nomura,” says Greenwich Associates consultant, Tim Sangston.

The research firm says that while some of the decline in aggregate market share among the leading firms can be attributed to changes in institutional trading practices and increased competition, its research finds that some of the biggest dealers in these markets are voluntarily ceding share in response to new capital reserve requirements that reduce profit margins in core fixed-income business.

Greenwich says that new capital requirements have eroded profit margins in some fixed-income businesses, causing many dealers to reassess their strategies, and even business models. As part of this process, some of the world’s biggest fixed-income dealers have abandoned strategies based on amassing market share in favour of more targeted, profit-focused approaches, it reports.

“Dealers are becoming much more judicious in their allocation of capital and resources,” says Greenwich Associates consultant, Frank Feenstra. “In simpler terms, some of the central players in global fixed income are intentionally ceding customers and market share that they view as insufficiently profitable under the new capital requirements.”

Greenwich suggests that this ‘flattening’ of global fixed-income markets could be reversed quickly in the event of a new market downturn. “During the past crisis, institutions demonstrated that they will rapidly shift fixed-income business away from dealers seen as posing significant levels of counterparty risk. In such an environment, institutions will once again look to concentrate their trading business with the market’s most solid counterparties and banks with the strongest balance sheets and lowest exposure to the crisis will once again emerge the winners,” it notes.