January 4, 2017 / 3:31 PM / a year ago

TP ICAP sharpens elbows between banks and e-traders

* Banks referring some clients to TP ICAP for trading

* IDB European govt bond volume down 36% since 2009

* Intermediaries needed to ‘oil the machine’

By Tom Porter

LONDON, Jan 4 (IFR) - Interdealer broking revenues have been battered by regulation and a shift away from voice trading post-crisis, but newly-merged TP ICAP is betting its services are still vital as liquidity dries up in fixed income.

Tullett Prebon completed the acquisition of long-term rival ICAP’s global hybrid broking operations and started trading as TP ICAP last week.

The firm’s shares had risen 9% to 449p by the close in London on Tuesday, putting its market capitalisation close to US$3bn and on a par with that of global broking firm BGC Partners.

“Since the crisis there has been a meaningful contraction in business, especially in fixed income, and costs have also risen because of regulations and investing in new technology,” said Frits Vogels, chief executive of ICAP EMEA and TP ICAP EMEA in the new management structure.

The deal will enable the firm to pool investment and reduce the costs of the business overall, he said.

Higher capital charges for holding bonds have forced investment banks to retreat from dealing post-crisis, limiting their need to use interdealer brokers (IDBs) for high-volume trades.

The IDB European government bond market, for example, has fallen from an average daily volume of 35bn in 2009 to just 22.4bn in 2016, according to data from Celent, a research firm.

In an October report, Celent said it was critical for the fixed-income market to have an “IDB-to-client microstructure for non-banks to provide liquidity”.

In that respect, IDBs are succeeding in filling the gap created as banks retreat from holding inventory ready to trade for their clients, said Vogels.

“If you’re no longer holding a large inventory, then you don’t want the cost of maintaining a big sales desk either,” he said.

“We now ask banks if they want us to trade directly for their clients. Sometimes the answer is yes and sometimes it’s no, but a few years ago asking the question would have ended our relationship.”


IDB revenues have also been squeezed by the emergence of new technologies helping corporate bondholders find each other independently of brokers, such as the electronic all-to-all models championed by the likes of MarketAxess and Liquidnet.

IDBs have also invested heavily in the electronification of trading, but Vogels believes IDBs still hold a key advantage over automated platforms.

“You can see why people think [the all-to-all model] will work because asset managers hold a huge proportion of the bonds outstanding globally,” he said.

”But the investment decision processes at those firms mean they have to trade quickly - they can’t list a bond in the morning and find a seller in the afternoon.

“You need intermediaries to oil the machine.” (Reporting by Tom Porter, editing by Alex Chambers, Julian Baker)

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