July 23, 2024 — Interest-rate derivatives (IRD) trading is an increasingly competitive business for dealers. In 2023, revenues for dealers declined, even as trading volumes increased, and a growing share of those revenues were captured by the biggest global IRD dealers, leaving the rest of the market fighting for a piece of the action.
“IRD dealers face a host of challenges, including regulatory mandates governing capital, competition for talent and the need to constantly invest in technology,” says Stephen Bruel, Senior Analyst in the Market Structure & Technology group at Coalition Greenwich and author of Derivative Investors’ Expectations for Sell-Side Technology and Services. “These forces can erode the quality of service if not managed closely—if a dealer loses top traders or underinvests in technology, their clients will notice and can redirect flow to other banks.”
Pricing and Coverage; Humans and Technology
Buy-side clients allocate trading volume to specific dealers based on a variety of factors, including pricing and coverage quality.
Across the entire corporate and investment banking franchise, dealers’ technology spend is growing at a faster rate than other areas, such as operations and administration, and much of that spending is focused internally (risk management technology, for example). The buy side, of course, has additional ideas about what is important.
How the buy side interacts with a dealer is partly a human story and partly a technology story. Technology should enhance interactions but can impair the relationship if not up to par. The buy side’s view on how their dealers can better leverage technology reveals patterns that dealers can address to further cement their position with their clients.
“Some on the buy-side are satisfied with their dealers’ technology platforms,” says Stephen Bruel. “However, many buy-side firms believe their dealers could be doing a better job leveraging technology to improve both operations/workflows and pricing.”
Derivative Investors’ Expectations for Sell-Side Technology and Services analyzes buy-side perceptions of their dealers and outlines ways dealers can strengthen client relationships and increase revenues.
