(This article first appeared in the June 28 edition of IFR, a Thomson Reuters publication)
By Alex Chambers
LONDON, June 30 (IFR) - ICAP has decided to cut 100 voice brokers in its global broking business, suggesting the testosterone-driven traditional market model of providing interdealer liquidity could be under threat.
While the cuts account for only 5% of the 2000-strong division, they come after an extended period of becalmed trading in financial markets that has seen ICAP lower costs aggressively through reducing compensation.
Many banks reported falling trading revenue at their investment banking divisions in the first quarter of 2014, with fixed income, currency and commodities trading bearing the brunt of the slump.
“Market conditions remain challenging and, as we have previously stated, we are looking to achieve £60m of cost savings across our business,” said Serra Balls, global head of communications at ICAP.
“As part of this we are reviewing our global broking business to ensure it is properly aligned to the new market structure and operates in the most efficient manner.”
ICAP is conducting a top-down review of its corporate structure, according to one market source. The broker has appointed PwC to conduct the review.
In its full-year results announced in May, the company said it expected the challenging environment afflicting global broking to continue. It pointed to structural and cyclical factors, highlighting a decline in investment banks’ FICC divisions.
With the leading interdealer broker conducting a complete review of its corporate structure and openly stating that it sees the current trend continuing, voice traders at other brokerages fear they could be on the block next.
ICAP’s voice broking business comprises six lines, of which rates trading is by far the largest at 35%. Then comes commodities and then emerging markets, equities, foreign exchange and money markets, and lastly credit.
“They’re being made obsolete by legislation,” said Fred Ponzo, managing partner at capital markets consultant GreySpark. “It’s going to be a little less colourful. There’ll be a lot less dwarf throwing than there used to be.”
With financial regulatory reform accelerating growth into electronic and post-trade activities, these areas now account for 69% of ICAP’s operating profit. The re-engineering of ICAP’s business towards the new post-financial crisis landscape is already under way.
“On one hand the IDBs are letting go of that traditional business, while on the other they’re hiring technologists and e-sales people,” said Ponzo.
The interdealer broking market has been here before. The emergence of electronic bond trading after the turn of the century was meant to lead to the demise of voice brokers, who rose to prominence in the 1990s after the end of knock-for-knock trading.
But then came the credit crunch and subsequent demise of liquidity in the cash bond market. Voice broking boomed again, albeit briefly.
But this time the reverse could be terminal because their clients are downsizing in the face of regulators squeezing market-risk out of the system. Dealers’ FICC operations are flat-lining, but a lot of that business was not old-fashioned market-making, rather a large amount of banks trading on their own account. Now, however, proprietary trading is frowned upon, if not banned.
IDBs have also faced sweeping reforms to their own industry, as regulators push more derivatives trading on to electronic platforms in a bid to make the market more open and safer - again eroding the need for traditional voice brokers.
“It’s a dying industry, volumes are dying. It’s being regulated out of existence everything is moving electronic,” said one broker.
While ICAP’s repositioning of its business now means two-thirds of operating profit is electronic broking and post-trade services, revenue at the division dropped by 8% to £920m in the year to March 31. ICAP’s total revenue fell by 5% to just under £1.4bn.
One player said that, in the absence of revenues, it was inevitable that the IDBs would go after the buyside. Some have already done so but ramping up efforts to sell directly to banks’ clients is not without risks as dealers are adept at withdrawing their goodwill when under threat from disintermediation. (Reporting by Alex Chambers; editing by Julian Baker, Gareth Gore)