Marc Andreessen was right — software really is eating the world. And it looks like one of banking’s best defended businesses is about to be devoured.
While small investors often focus on stocks, professional asset managers, e.g. pension funds and insurance companies, are big on corporate bonds. This is especially true in an environment of historically low interest rates, where investments that offer extra yield are highly prized. For a long time these buyside asset managers have used banks as the middlemen to help them locate buyers and sellers of the bonds. To facilitate the trades banks would keep an inventory of bonds on hand. This served the sellers by allowing them to free up their funds without having to wait for a buyer to show up, as well as buyers who had a convenient one-stop shop for any bonds they might want to own.
And then the financial crisis happened. New rules passed in its wake are meant to ensure that banks never run out of capital or need taxpayer bailouts again. However these rules have also made it much more expensive for banks to “warehouse” the corporate bonds as they used to. At the same time, powerful computing and networked connectivity have given some nonbank institutions a real shot at the lucrative business of matching buyers and sellers. Tracy Alloway of the Financial Times explains:
BlackRock [a premiere asset manager-for-hire] is hoping to plug some of the gap left by retreating banks with a new electronic trading platform for corporate bonds known as the “Aladdin Trading Network”. The system will allow buyers and sellers of such debt, including buyside groups, to trade directly with each other instead of going through a bank.
Spotting an opportunity is one thing, having a realistic chance to exploit it is something else again. BlackRock has a few advantages that the average startup does not, including its stellar reputation and its already existing relationships with precisely the sort of firms who might want to use the new trading network. Still, technology is the ultimate enabler for its new venture. A harsher regulatory environment that envelops the banks but mainly leaves the non-banks on the sidelines helps as well.