Image Source: Business Insider
Whatever happened to the “Masters of the Universe?”
I’m not talking about comic book characters. In the early ‘80s, interest rates spiked, following inflation. Long-term bonds yielded 15%. Bond traders reigned supreme. The hubris of the bond market’ culture was immortalized in Tom Wolfe’s novel, The Bonfire of the Vanities. Massive trading floors at big investment houses buzzed with phone conversations, shouted orders, and thousands of small rotating electric fans continually dissipating waste heat from endless rows of computer terminals.
But all that is gone.
Institutional investors used to be able to purchase hundreds of millions in Treasuries with just one phone call. Now they have to spread their orders across an array of electronic platforms. Bill Clinton once lamented that the success of his economic proposals (and his prospects for reelection) hinged on the judgement of a bunch of bond traders. But half a decade of zero interest rates and new regulations via Dodd-Frank and Basel III have caused dealers to slash bond inventories and decimate their trading staff. Those cavernous trading floors now house small teams of back-office, legal, and tech professionals.
Image Source: University of Toronto
Moving the bulk of bond trading away from direct phone lines and hoot-n-holler speakers may be the natural evolution of the technology that has allowed black boxes and coiled fiber optic cables to replace specialists and floor brokers at the New York Stock Exchange. In essence, the capital/labor trade-off has come back to bite the capitalists. But will algorithmic bond trading also give us front-running and flash crashes in T-bills? Let’s hope not.
For now, the most liquid market in the world is a little less deep. Investors need to be careful they don’t take a high dive into the shallow end of the pool.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!