U.S. Primary-Dealer List Shrinking
NEW YORK - The departure of Continental Bank Corp. from the list of U.S. primary dealers highlights how hard it is to maintain that once-coveted status, traders said last week.
Continental's move was announced Aug. 30 as part of a broader corporate restructuring that included loss provisions and layoffs. Its departure from the ranks of primary dealers leaves 39 firms authorized to conduct government-securities-business with the Federal Reserve.
That number, which had grown with the influx of Japanese and other foreign banks in the 1980s, is down from a peak of 46 in 1988 and further defections are expected.
Shakeout Is Under Way
Traders generally expect four or five more dealerships to fall by the wayside.
"Between the competition, the general dissemination of information, and market efficiency, there's a real strain on the business," a bond dealer said. "And it's not changing."
After a crush to get into the exclusive club of dealers in the late 1980s, the U.S. Treasury market has seen a series of dropouts as market share has not kept pace with the growth in dealerships.
"There is one piece of pie that was once divided 35 ways and then it was divided 46 ways. It's pretty simple to see what happened," one dealer said.
No Big Surprise
Continental Bank's departure "wasn't a complete surprise, given the cost structure of the business," a trading manager said. "It's forcing the marginal shops out."
In addition, bank mergers could reduce the number of dealers. The pending union of Chemical Banking Corp. and Manufacturers Hanover Corp. will reduce the dealer ranks by yet one more. Other bank mergers would have the same effect.
With the top 10 dealers doing roughly 50% of the business, the smaller players have to scrounge to maintain the 1% market share the Fed requires of them, traders said.
And competing has become more difficult, with traders hard-pressed to offer better prices than the next shop.
"There's no real edge in pricing, the market's so efficient," one participant said. "The spreads are razor-thin."
The recent tarnishing of a top dealer, Salomon Brothers Inc., by violations of auction rules has not helped the image of primary dealerships. Traders, however, doubt Salomon will be removed from the list. The New York Fed said it would make an announcement clarifying Salomon's status in a few weeks.
"Salomon seems to be making a lot of moves to institute internal procedures to make sure it doesn't happen again," one trading manager said.
In another sign of change in the primary dealer community, Sanwa Bank Ltd., one of the top five Japanese banks, announced a restructuring at its subsidiary that included the naming of co-presidents, John Knight and Shizuo Kato.
Sanwa said the unit, Sanwa-BGK Securities Co., has increased its market share to 3% from 1% since its acquisition in 1988, but profits have not met expectations. A company spokesman stressed there was no connection between Sanwa-BGK's management change and the U.S. investigations of Salomon Brothers.
Mr. Knight, 50, was a founder of BGK Securities, and Mr. Kato, 46, has been with Sanwa Bank for 20 years and a general manager of Sanwa-BGK since 1988.
