Change font size:   

 
Abigail Hofman:

Abigail Hofman:

I wonder if ______ is an extremely optimistic person or in a cocoon of senior management denial

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

10 reasons to tell your boss you deserve a bonus

weeklyFiXLiquid real estate
Skip Navigation LinksHome :: Back Issues :: An ill-tempered fight for supremacy

September 2002

An ill-tempered fight for supremacy


Interdealer brokers Cantor Fitzgerald and Icap fought a bitter courtroom battle this year over staff poaching. Now the two are armed for conflict in electronic bond broking.




       
Interdealer electronic bond trading has had an unexpectedly dramatic year. Cantor Fitzgerald and its daughter company eSpeed have continued their impressive recovery from their September 11 losses, with the electronic execution platform now taking its place at the centre of Cantor's strategy.
Cantor and eSpeed also surprised many in the market by entering into public recriminations with arch-rival Icap over Icap's attempts to poach its staff. The UK press delighted in courtroom stories of high-paid brokers bullying each other before repairing to lap-dancing bars for rest and relaxation.
Soon after, Icap announced its intention to buy electronic trading system BrokerTec from the bank consortium that set it up. This deal generated fewer headlines than the court case but it could reshape the market and intensify competition between the courtroom adversaries.
Worth about $156 million in Icap shares at the time it was announced, the acquisition creates something close to a duopoly in the US treasuries market, with the two biggest brokers each now owning a popular electronic platform. There are still smaller firms remaining, such as Tullett&Tokyo Liberty, and Euro Brokers, which recently hired another 18 brokers for its treasury business. Traders hope this near-duopoly will not reduce competition, as it is made up of two mutually hostile firms.
Steve McDermott, CEO of global electronic broking at Icap, argues that the merger will improve liquidity and give dealers greater freedom to select the most suitable way to trade. "Our clients are showing more and more evidence of wanting a choice between the different trading methods," he says. "It's too simplistic just to say that electronic trading is for liquid markets and voice broking for illiquid ones. Even some illiquid markets have benchmark bonds that could lend themselves to electronic trading, and clients might choose to trade in liquid markets over the phone for a number of reasons. Dealers will choose which method is best for them."
The consortium of banks selling BrokerTec to Icap also thinks the move will enhance competition and improve liquidity. Ian Rosen, head of electronic global markets at Deutsche Bank and until recently a member of the BrokerTec board, says: "Having two players in US treasuries should improve the market. It should make for narrow margins and strong competition, which is obviously what we want as dealers. There's been a sea-change in the industry's cost structure since we set BrokerTec up, as there seems to be every decade or so."
Gianluca Garbi, CEO of Europe-based interdealer system MTS, agrees, arguing that "this is an excellent step for the market. It should re-establish competition between the two largest voice-brokers in the treasury market."
Icap's McDermott adds that the trading platform will be able to achieve more when combined with a traditional voicebroker. "I believe BrokerTec realized that pursuing a pure electronic strategy was causing them to hit a glass ceiling," he says. "By combining the advantages of both voice and electronic trading, this deal should eliminate that."
Andy Nybo, an analyst covering electronic trading at the Tower Group, is also convinced of the deal's benefits. "Strategically, the merger makes a great deal of sense," he says. "It combines BrokerTec's large pool of electronic liquidity with Icap's large pool of voice liquidity. The result should be a very strong competitor to eSpeed in the US treasury market."
The battle for supremacy between the two brokers may be an ill-tempered affair, judging by the evidence of the past few months.
Cantor and eSpeed attracted widespread sympathy for their losses in the September 11 attacks, and this has continued to a great extent ever since in extremely favourable press treatment. Most notable, perhaps, was the New York post article that juxtaposed an image of Icap CEO Michael Spencer with the caption "Vulture" after his firm tried to induce brokers Edward Bird, Spencer Gill and Luigi Boucher to breach their contracts.
Cantor went on to release a statement accusing its rival of "moral bankruptcy". Its announcements portrayed its rival's moves as a "calculated assault on Cantor Fitzgerald, immediately after the tragedy of September 11 ... motivated by revenge".
Icap retaliated by claiming that the brokers were constructively dismissed when Cantor tried to change their pay structure. The judge in the London case was critical of both sides, and so, predictably, both claimed victory. Neither emerged with their reputation enhanced.
Meanwhile the consortium of BrokerTec shareholding banks simply wanted to get something back from their internet investments, even if that meant selling at what doesn't look like the most propitious time. They will be compelled to hold the Icap shares they receive in payment for a set period following the deal, so any profits will not be immediate. They will also receive incentives to carry on trading on the platform - if its revenues meet set targets the banks will get more Icap shares.
Some of the shareholding banks may have entered the BrokerTec consortium aiming to disintermediate interdealer brokers. If so, they have now retreated.
The move may have looked smart in the late 1990s when anything involving the internet was hot and investment banks' appetite for new business areas seemed boundless. In the cold light of a global banking slowdown, the returns made by interdealer brokers probably look much less impressive relative to the expenditure of capital and time needed to compete, even when divided among many of the world's top investment banks.
The banks retreat
Rosen at Deutsche Bank says his bank, at least, never really had its eye on disintermediating such brokers as Cantor and Icap. "The real gains for us and our clients are made by increasing the market's efficiency, squeezing margins and changing the cost structure," he says.
Another reason to sell out may have been banks' concerns about the US Department of Justice's investigation into BrokerTec, alongside several other multi-bank trading platforms, on antitrust grounds. The investigators have not made any announcement of their findings so far. Indeed, it's not clear what the investigation is about aside from a generalized feeling that it may be anti-competitive for shareholding banks to commit themselves to trading through their own platforms.
  Page 1 of 2  Next | Single Page






We have all the signs of emerging markets in the US now – there’s stagflation, growing unemployment, excess debt, poor monetary management – I just wonder when the US will be included in the EMBI+

A disgruntled senior emerging market banker lets it be known he’s not bullish about the US

  1. US treasury market reaches breaking point

  2. US equity market – Short selling: The naked truth

  3. Top 10 financial definitions that are funnier since the credit crunch

  4. Top 10 reasons to tell your boss you deserve a bonus this year

  5. Eksportfinans turns to government for funding

Latest Issue

December 2008
Ruromoney Jobs Post a job

Home | Mobile site | Contact Us | Debt markets | Equities | Foreign exchange | Banking | Alternative Investments | Regions and Emerging markets | Polls & Awards | Structured credit | Back issues | Euromoney store | Useful links and Related events | Site Map

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions, Privacy Policy before using the site.

All material subject to strictly enforced copyright laws. © 2008 Euromoney Institutional Investor PLC.