By Luke Jeffs
(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
“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
“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.