Nearly a decade after the global credit crisis, a new fixed-income ecosystem is taking form. While institutional investors continue to trade the majority of their bonds with the biggest fixed-income dealers, they are increasingly trading with an expanding list of market specialists.

A new report from Greenwich Associates, The Fixed-Income Dealer Evolution, shows that 96% of U.S. investment-grade bond investors now trade with regional fixed-income dealers. While these firms have succeeded in winning institutional business via their relationships and market expertise, they have struggled under the heavy burden of new regulations.

Regulations are the Top Concern

Complying with regulations and uncertainty about the direction of future regulations are fixed-income dealers’ top concerns for the coming year. Regulation concerns are particularly acute for the middle-market dealers, with over three-quarters citing regulatory compliance and over two-thirds regulatory uncertainty as top priorities.

“Large banks employ a deep pool of compliance and legal personnel, who can work closely with business heads to implement needed process and technology changes,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Practice and author of the new report. “Many regional dealers lack those economies of scale and find the monetary and time costs of regulatory compliance nearly unbearable, with their clients ultimately shouldering much of the additional cost via reduced sales coverage and the rising cost of principal liquidity.”

Electronic Trading: Threat or Opportunity?

While electronic trading has certainly disrupted the business models of bond dealers, it is increasingly seen as an opportunity.  Greenwich Associates research in 2015 found that 46% of bond dealers saw electronic trading as a threat to their business. Today, that percentage has dropped by more than half.  “The majority of the bulge bracket sees e-trading as an opportunity,” says Kevin McPartland, “but regional dealers are more apprehensive. They do not want their bread-and-butter relationships disrupted by lower-touch electronic executions.”