September 26, 2012 / 11:56 AM / 5 years ago

UPDATE 2-ICAP sees positive signs after trading downturn

By Luke Jeffs

LONDON, Sept 26 (Reuters) - ICAP chief Michael Spencer said he had detected signs of improvement in the brokerage’s markets after a disappointing summer of lacklustre trading, which he thinks will hasten more mergers among brokers.

Spencer welcomed relative stability in the euro zone and signs regulators are close to finalising key market reforms, giving the company - which mostly trades currencies, bonds and swaps - and its clients greater clarity after months of agonising uncertainty.

“There are some signs the euro zone is past its worst point and we are close to the end of the tunnel on financial regulation reform,” Spencer told Reuters. “This is a positive development as this is clearly a critical structural issue.”

But Spencer does not see any uptick in trading being enough to sustain the already heavily concentrated inter-dealer broker market.

“Consolidation is highly likely, there is material over-capacity. There are five large brokers but there is only room for four or maybe three. The pressure for consolidation has increased dramatically in the past year,” said Spencer.

His comments came after ICAP and The London Stock Exchange both reported big falls in trading over the summer, hit by an uncertain economic outlook and leaving them reliant on other sources of revenue to sustain profits.

ICAP said markets had improved this month after five months in which trading was more muted than anticipated and group revenue fell 14 percent compared with last year.

Separately the London Stock Exchange, which trades stocks and futures, said average daily volume on its flagship British stock market fell a fifth in the five months through August, while Italian shares were off 16 percent.

But Spencer said it was “too early” to judge if the recent moves by the European Central Bank and Federal Reserve to reassure investors would lead to sustained market confidence.

The ECB in early September unveiled a plan to reduce the borrowing costs of indebted euro zone countries by offering to buy their bonds, while the Federal Reserve announced a third round of quantitative easing in the middle of the month.


Spencer also welcomed signals from U.S. regulators that they are close to finalising the details of their planned reforms to the swaps market, a move that should give ICAP and its clients some certainty after a long wait.

The ICAP chief said he was confident the market would see the definitive draft of the far-reaching Dodd-Frank Bill as it pertains to swap trading before the end of this year.

“The issue was delayed and delayed but the push to take the swaps market electronic has started again in earnest,” he said.

Regulators in the United States and Europe want to force banks and hedge funds to trade swaps on electronic exchanges, a move that has prompted ICAP and its rivals to invest in building these trading systems.

But regulatory hold-ups have left the brokerages and their clients unsure on the specifics of these platforms, which has slowed their adoption and frustrated brokerages’ efforts to recoup their investments.

ICAP competes with BGC Partners, GFI Group , Tradition and Tullett Prebon - all of which have seen trading revenue dry up this year as investors fled the market.

“The outlook for all broking businesses remains poor. The impact of regulation has not completely washed through and we expect further weakness in trading activity as it does,” said James Hamilton, an analyst at brokerage Numis.

These factors have forced the inter-dealer brokers, so-called because they match orders from dealing banks, to look to control costs in the hope of protecting profits.

ICAP said it will deliver 50 million pounds per annum of savings by the end of March next year and its full-year earnings would be within the analyst range of 307 million pounds ($499 million) to 346 million.

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