A new report from Celent Communications, Evolution of the Interdealer Broker Industry: Smells Like e-Spirit, predicts that there is still plenty of room for expansion in terms of revenue and the amount of business that is transacted electronically. IDBs are big and growing, the report begins, adding: The industry reached $7 billion revenues in 2007. Heightened market activity due to the subprime crisis, interest rate and currency volatility, and the furious growth of derivatives in emerging markets such as China, India, Korea, and Latin America, will likely ensure an industry annual growth of around 15% over the next two years to reach $9.3 billion revenues in 2009.
Celent points out that the broking industry has seen some profound structural changes over the past five years and has consolidated into just four to five major players: ICAP, Tullett Prebon, BGC/eSpeed, Tradition, and GFI. The top three players command about 70% of the total industry revenue, up from under 50% in 2001, says Celent.
Because of pressure on margins, it is inevitable that electronic broking will increase. Celent predicts that this will reach 35% of total revenue (up from 6% in 2000) and 65% in volumes by 2010. Voice brokerage will continue to remain an important part of the business and will cater to the high margin, highly illiquid, exotic, or customized product segments, it adds.
According to Celent, it will be harder for new entrants to penetrate the market and the lack of competition will encourage the IDBs to continue their expansion into non-traditional roles, such as post-trade processing: clearing and settlement and counterparty risk functions.
The industry is in an exciting stage of evolution with prospects of faster than average growth, better margins, and increasing adoption of technology over the next two years, Celent says. Further, the top five players are well-entrenched in the market because the environment is not conducive to outsiders (exchanges, top financial institutions) entering the market and threatening their dominance. On the contrary, the next two years are likely to witness faster growth of the major IDBs through deployment of new channels of trading across all product categories and heightened activity in emerging markets. The most promising way for one of the smaller existing players to gain market share is through the introduction of new instrument categories, particularly in the commodities space.