In the interest of transparency, I must confess to being a small shareholder in Icap. The news that it purchased Traiana for $247 million this week – or 16.5 times the company’s projected revenue to the year ending in January 2008 – triggered some turgid coverage about how it was going to potentially challenge CLS in the post-trade environment. I simply don’t see where that story is coming from.
The issue of how much CLS is charging is fairly emotive, but it is not a given that it is too expensive. That view seems to emanate from those who reside in the front end of the very active banks. It is important to remember that CLS is an industry-owned consortium and the industry itself decided not to allow pre-settlement netting.
However, it is apparent that some back offices are creaking. Traiana is used by many of the market’s great and powerful to streamline their post-trade processes. The company already provides a netting service to various platforms, including Icap’s EBS, which allows banks to effectively aggregate trades with certain clients. CLS has repeatedly said it has no issue receiving these on a netted basis.
It is inconceivable that Icap, or indeed the major banks, would run the risk of aggravating the regulators in actively seeking to undermine CLS, although if a solution did present itself, they’d obviously like to be able to capitalize quickly. I have no idea if such thinking is a factor in the deal. What is clear is that processing costs are still relatively high. I’m led to believe that it still costs over $4 for most top 10 banks to process tickets, which is probably twice as much as it costs to trade per million on most platforms. If true, this would suggest that the prime brokerage operations in some institutions are at best only marginal businesses. But is that the fault of CLS or the result of poor commercial judgement?
Still, the industry will always seek to reduce ticket-processing costs. Even those who moan about how expensive it is to trade FX must admit that it is cheaper than other assets – and this may well be where Icap will capitalize on the purchase of Traiana. The company says that the annualized cost of ticket processing across assets is $5 billion and that it believes there is scope to reduce this by as much as 60%.
At first glance the price paid for Traiana looks extremely rich, but, as an Icap spokesman points out, the same was said when it bought BrokerTec and EBS. “Companies are all too often defined by where they’ve come from, not where they are going,” he says. Traiana’s products were always designed with multi-asset capabilities. Apparently, it costs more than $200 to process a ticket in both the swaps and credit default swaps markets. Obviously, these tend to be for a far greater notional amount than those in spot FX, but it does perhaps suggest where the real opportunities for Icap lie in the future.
