LSE, ICAP profits to hold up despite slow summer trading

LONDON, Sept 25 Tue Sep 25, 2012 8:54am EDT

LONDON, Sept 25 (Reuters) - The London Stock Exchange L> and broker ICAP are expected to see off the slowest summer for trading in years with only minor dents in profits, thanks to increasingly diverse income sources.

London's two top trading firms will report on Wednesday that trading for the five months to the end of August was down heavily on last year, including a dramatic slump in August that saw trading in some areas fall by half.

But analysts are not issuing profit warnings on these companies. They see first-half profits down just a few percent, citing changes made by both firms to diversify and break their reliance on trading revenue.

The LSE bought index provider FTSE for 450 million pounds in December and plans to go further when it completes the takeover of clearing house LCH.Clearnet later this year.

ICAP has been pushing hard its post-trade services such as Traiana, which enables banks to handle complex products more effectively, a potentially valuable asset as regulators look to reform trading of these instruments.

"Underlying profits at the LSE and ICAP will be down but faster growing areas and cost control will have helped partially offset the slump in trading through the summer," said Richard Perrott, an analyst at Berenberg Bank.

The LSE, and exchange rivals such as NYSE Euronext and Deutsche Boerse, take commission for matching buyers and sellers of stocks and futures.

ICAP and its peers, such as Tullett Prebon and BGC Partners, draw revenue from matching orders in assets traded off exchange, like bonds, currency and swaps.

Summer months tend to see slower trading because many bank staff takes annual leave, but this year was particularly bad due to concerns over the outlook for the global economy.

LUCRATIVE NEW MARKET

European share trading in July and August was at its lowest since mid-2009, down a third on last year, according to Thomson Reuters data.

Share trading at the LSE was estimated to be down a fifth over the summer and suffered particularly in August when the value of trades fell 47.7 percent, according to the exchange.

Similarly ICAP reported electronic trading down 27 percent in July and 29 percent last month, while the broker's foreign exchange business was especially slow, seeing trading levels down 41 percent and 49 percent for the two months.

"Volumes in foreign exchange are very poor but they will recover," said Gil Mandelzis, chief executive of ICAP's EBS, the broker's foreign exchange unit.

Yet analysts don't see the recent dramatic slowdown in trading having a huge impact on the firms' profitability for the first half of their fiscal year when the companies report those numbers in November.

A consensus of analysts said LSE profits for the six months to the end of this month would be 120.8 million pounds ($195.6 million), 5 percent down on the same period last year, while ICAP would clear 122.9 million pounds, 4 percent down.

The LSE and ICAP are keen to reposition themselves to tap what looks to be a lucrative new market as policymakers are set to force the $700 trillion over-the-counter market to start using exchanges and clearing houses.

"We expect the exchange model of the future to be biased towards less trading volume dependent business," said Nese Guner, an exchange analyst at Citigroup.

"We think the near term regulatory opportunity is in clearing over-the-counter derivatives and collateral management," he said.

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