Who is ICAP and what is broking?
ICAP is the world’s largest interdealer broker, which means we bring buyers and sellers together to execute a transaction. When the transaction closes, we charge commission, which is where most of our revenue comes from. Our clients range from investment banks, right through to commodities firms and shipping companies.
Broking is a very distinct area of finance. There’s a huge difference between what we do and, say, an investment bank. For a start, we don’t trade on our own behalf – we’re purely an intermediary.
What are the different kinds of broking, and when are they used?
There are two kinds of broking used within ICAP: electronic broking and traditional open outcry (voice) broking. On the electronic side, the most commonly seen type of transactions are spot-FX transactions, which are foreign exchange deals due to be completed shortly after agreement takes place. The FX market is probably the most liquid market in the world, which means it’s easy to buy and sell here quickly. We conduct most of our business in this area on a platform called Electronic Broking Services (EBS).
If two banks wish to use EBS to trade US dollars and euros, they will arrive at an exchange rate using the platform (this process is known as “price discovery”). They then transact through the EBS platform at this rate, and we charge them a commission for doing so. EBS allows speedy, efficient execution for our clients.
As you go up the liquidity scale, you come to more complex products, which require more negotiation to reach an agreed transaction. In these cases, we use human brokers, and the process is known as voice broking. UK government bonds are commonly transacted instruments in the voice broking world.
Parties using voice brokers usually aren’t given each other’s names at the point of execution, which is known as name-give-up trading. For example, if two banks were to trade with each other, the ICAP broker would transact the bond based on specific instructions received from the traders at each of the banks, who wouldn’t know that they’ve dealt with each other. Post transaction, all the details go into a settlement mechanism, called CREST Euroclear, at which point the bank will know who they’ve traded with.
What are the main challenges facing the broking industry today?
Since the global financial crisis, regulators have been looking to tighten up on systematic risk across the board, and there’s a whole raft of regulation being introduced that will change the way financial instruments are traded. There will be greater obligations on participants to transact through electronic mediums than there have been before. There will also be significant amounts of new legislation around transparency, to which we’ll need to adapt.
How has broking changed in your 25 years at ICAP?
The industry is constantly evolving and brokers need to reinvent themselves every few years to keep pace with it. The markets and industries we deal with have become more complex, and the world has become much smaller.
I started in 1986 in the in the cocoa and coffee futures market in the commodity pit. There used to be lots of guys in bright yellow jackets standing around shouting orders! Just after I started, the “Big Bang” deregulation of the stock exchange happened. With the Big Bang came the introduction of much more technology, the use of which has grown exponentially over the years. A lot of the work used to be manual: open and outcry execution, ticket writing and keying trades into the system. Since then, the use of technology has meant that efficiency has increased dramatically.
Does ICAP do anything other than broking?
There are other significant elements to ICAP’s business. We offer post-trade risk management services, which will continue to become more important as regulators encourage more effective controls on trading. This part of our business is more specialised than broking, and the skill sets required are different. But there are huge long-term growth opportunities in this business, and we are hiring graduates here every year.
Information services is another part of the ICAP group. Market data is incredibly important and, as a neutral party, we generate a lot of it! We provide our clients with benchmark data: information about live trading, live pricing and incredibly accurate reference data, which they can use to make informed decisions about their investments. Reuters, Bloomberg and other financial data providers are clients of ours; they buy data from us because we’re specialists in the area.