Colourful world of interdealers faces deep structural changes

June 2, 2014 11:31 pm

Colourful world of interdealers faces deep structural changes

By Philip Stafford

The fast-growing asset management business that Terry Smith, the chief executive of Tullett Prebon will focus on when he departs the UK interdealer broker, stands in stark contrast to the industry he will leave behind.

Mr Smith, who is expected to leave the broker by the end of the year, is keen to grow Fundsmith, an asset management business he set up four years ago.

Five companies – ICAP and Tullett in the UK, US-based duo BGC Partners and GFI Group, and Tradition of Switzerland, have come to dominate global trading in off-exchange markets.

As middlemen, their telephone brokers have become highly prized for their ability to move over-the-counter and illiquid assets such as interest swaps, commodities and foreign exchange between buyers and sellers.

That ability, and the high-pressure nature of the job, has frequently landed the main operators in court, fighting accusations of poaching or bullying.

Now, this colourful world is facing its biggest change in 30 years. Regulatory investigations into alleged fixings of key market benchmarks such as Libor and IsdaFix have further damaged the industry’s reputation.

Even without that, the interdealer brokers are being squeezed by an unholy trinity forcing deep structural change.

The banks and its other broker-dealer customers, the mainstay of its business for 30 years, are deleveraging their balance sheets to meet tough new capital requirements, as laid out under Basel III. Like their customers, the interdealer brokers have reported double-digit falls in revenues from their core businesses in recent months.

Market volatility has dried up amid low global interest rates, curbing investor appetite for speculation and trading risk-offsetting products such as swaps.

Finally sweeping US regulation intended to move more OTC derivatives trading on to transparent electronic marketplaces is incomplete and complex, deterring investors from using off-exchange markets.

Few doubt the industry will not survive. As Mr Smith argued only in February: “The business provides a valuable service to clients through its ability to create liquidity through price and volume discovery.”

What form it will take is a matter of intense debate, though. Many find themselves with far too many voice brokers – the biggest cost on their balance sheets – and specialists in only limited areas.

Each has begun to adapt their business. Nearly 70 per cent of ICAP’s business comes from electronic trading of instruments such as foreign exchange and US Treasuries, and technical and arcane post-trade services. The latter, which encompasses trade affirmation and processing may be dull but it prevents complex, high-speed modern markets from gumming up.

BGC Partners sold its electronic platform trading US Treasuries to Nasdaq OMX and pushed into wholesale financial and real estate markets and last month bought Remate Lince, one of Mexico’s leading interdealer brokers. Tullett, strong in fixed income but with a limited technology offering, last month agreed to buy PVM Oil Associates for up to $160m to expand into oil instruments trading.

But the solution most industries turn to – consolidation among significant operators – is rarely undertaken. Some will talk to each other – Tullett has held exploratory talks with both Tradition and GFI – but they have come to nothing.

“We’ve been around them many times with a plan,” says one investment banker who declined to be named. “It always comes down to personalities – they have no impetus to change.”

Others have argued that the trend that is moving trading to exchange-like venues will make the companies – or the electronic parts of them – more attractive to exchanges themselves.

“The market structure changes indicate it is ‘when not if’,” argues Jake Pugh, an independent consultant who has worked at NYSE Euronext and ICAP. Even so, he acknowledges that exchanges are viewed with suspicion by banks. “The risk for the purchaser is that the bank liquidity may not continue to be provided to the interdealer broker if owned by an exchange,” he says.

Partly for that reason, privately, senior interdealer broker and exchanges executives are sceptical of such market talk.


Investment banking veteran leads chief executive race

John Phizackerley, who has been tipped as the main contender for the chief executive role at the interdealer broker Tullett Prebon, has had a long career in the investment banking industry spanning more than 25 years, writes Nick Wilson.

By far the lengthiest spell was spent at Lehman Brothers, where he worked for 22 years. From March 2006 until the bank’s collapse in the 2008 financial crisis, he was chief administrative officer for Lehman in Europe and the Middle East, and a member of the European executive committee. For two years before that, he co-headed Lehman’s European equities division and was a member of the global equities executive committee.

After Lehman went bust and the Japanese investment bank Nomura took over its Asian and European operations, Mr Phizackerley remained with the business.

He stepped down as Nomura’s chief of Europe, the Middle East and Africa in March this year after two years in the job. His departure came as a management reshuffle was taking place, and the subsequent cutbacks in the bank’s overseas wholesale business triggered a renewed wave of departures.

According to the profile of Mr Phizackerley on the LinkedIn website, he is chairman of the advisory board of Barts and the London School of Medicine and Dentistry. The global commodities broker Marex Spectron also lists him as a non-executive director


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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