The trio of bank-owned dealers that dominate the Canadian fixed-income trading business also led a move into more electronic trading as some of their foreign competition melted away last year, new research from Greenwich Associates finds.

Greenwich reports that some of Canada’s leading fixed-income dealers have “responded to the tumultuous market conditions by narrowing their strategies and focusing their efforts and resources on a smaller group of select clients”. At the same time, it reports that many of the large foreign dealers that had built a significant presence in the market “scaled back their Canadian operations rapidly and dramatically as a result of their own serious balance sheet issues”.

The result was that many Canadian institutions “experienced disruptions in relationships with one or more of the dealers they relied on for coverage in specific domestic and international fixed-income products.”

With these gaps in sell-side coverage opening up, along with a sudden and dramatic widening of spreads, Canada’s institutions turned to electronic trading platforms as a new and alternative source of liquidity, Greenwich found.

It reports that in 2008, only 36% of institutions generating more than $10 billion in annual fixed-income trading volume used electronic trading platforms for this business. In 2009 that proportion surged to 61%, driving the overall share of Canadian institutions trading electronically to 43% from 40%.

Three firms dominate the Canadian fixed-income market, Greenwich says: BMO Capital Markets, TD Securities and RBC Capital Markets. Each of these dealers has captured a market share of 16-17%, it says, and in aggregate, they account for half of all fixed-income trading volume in Canada.

TD Securities was also one of the main beneficiaries of the significant increase in electronic trading volume last year, along with RBC Capital Markets, it says. “Both firms saw strong increases in the number of investors trading with them through the CanDeal electronic platform,” says Greenwich consultant Woody Canaday.

It also reports that institutions rate RBC as the market’s highest quality provider, and the firm ranks as the Greenwich Quality Leader in Overall Franchise Strength, Sales and Trading. BMO takes top honors in quality of fixed-income research. TD Securities ranks second in quality ratings in sales, trading and overall franchise strength. “The strong gains made by TD Securities in terms of the quality of their fixed-income platform are worthy of special note, and they place the firm in a strong position in the fight for institutional trading relationships,” says Greenwich’s Peter Kane.

While the big three continue to dominate fixed-income trading, Greewnich says that the disruptions in relationships between Canadian institutions and their fixed-income dealers also created an opportunity for other dealers to expand their franchises. And, it notes that in particular, a group of specialist firms including Desjardins Securities, Casgrain and Laurentian Bank Securities took advantage of the change in market environment by upgrading their capabilities and the quality of their service.

For example, it reports that 42% of Desjardins Securities clients say their relationship with the firm has improved over the past 12 months. “Even if these shifts have not yet amounted to actual increases in market share, these specialist firms are building new relationships and cementing existing ties to institutions,” says Canaday. “The situation parallels that seen in the United States, where regional dealers have hired talent away from the contracting bulge bracket and upgraded their capabilities. They are positioning themselves for expansion in the very near term.”

These smaller firms were making gains ahead of some of the big dealers, Greenwich notes. “There are a few major Canadian banks that actually lost market share from 2008 to 2009, even as some very credible competition receded,” says Kane. “Although it is difficult to generalize about the performance of these banks due to differences in their strategies, it is likely that some of them will look back on the past 12 months as a missed opportunity.”

IE