The Healthiest Part of the Financial-Services World

Bloomberg has a big article up on the slightly sleazy world of inter-dealer brokers. It's a world I know a little about, since I used to have an inter-dealer broker as my roommate.

This chap was eminently qualified for the job: he had the gift of the gab, he could make friends with anybody, and, most importantly, he loved to party. In fact, he loved to party so much that he eventually got fired for failing to show up to the office in the morning one too many times.

But he certainly never made anything like $4 million a year, which is what Tradition is reportedly paying its top CDS brokers, on top of a $4 million signing bonus. Just, wow. Remember that the amount of financial knowledge these guys need is pretty slim: you basically just need to be able to describe a contract, and charm two dealers into coming to terms on a price. Then you match them, take your commission, and move on to the next deal.

Traders love the inter-dealer brokers, for obvious reasons: any time they want they can be taken out on lavish all-expenses-paid no-questions-asked evenings of crazy debauchery. The money spent on entertainment is huge:

Brokerage firms spend as much as 5 percent of their revenue on entertaining, Citigroup's Fandetti said. On fees of $10 billion, that would come to $500 million for the industry.

Have you ever wondered why there are so many steakhouses in New York and why they all seem to be doing so well despite charging stratospheric prices? There's your answer right there. And those people who actually pay the thousands of dollars for top tickets to music and sporting events? Yep, it's the brokers again.

And the great thing about the inter-dealer brokerage business is that it's risk-free, and involves essentially zero capital (beyond those signing bonuses, of course). It's hugely profitable for the inter-dealer brokers, it's hugely enjoyable for the traders, it's hugely important to the strippers, and it's a whopping great money sink for investors, bank shareholders, or anybody else not directly involved.

The Bloomberg article does try to hint that the golden age of inter-dealer brokers might be coming to an end, pointing to how ESpeed killed the brokers in the Treasury market. But while the Treasury arm of the industry might have been cut off, the CDS arm which replaced it is much stronger and healthier than the Treasury arm ever was, since inter-dealer brokers thrive on any market where there's illiquidity and complexity. The industry is as healthy as it's ever been, and there aren't many parts of the financial-services world which can say that right now.

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