4.28.2008 |
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Banks Take On Interdealer Brokers - E Financial News
Consortium backs project dubbed V10 to put pricing pressure on incumbent firms 
By Natasha de Teran and Renee Schultes Two rival groups of banks are working towards establishing interdealer broker firms in interest rate and credit derivatives, as part of their efforts to cut trading costs and take control of market infrastructure.
If successful, the developments could put pricing pressure on the interdealer broker incumbents, including BGC Partners, GFI Group, Icap and Tullett Prebon. The interdealer broker industry’s revenues in credit and equities reached $7bn (€4.5bn) last year and is expected to reach $9.3bn next year, according to strategy consultancy Celent.
One of the most advanced plans is a project initially dubbed V10, which is understood to have involved eight banks, including Morgan Stanley and UBS, according to three people familiar with the plans. UBS and Morgan Stanley declined to comment.
The project, which may since have changed its name, is a combination of voice brokers and electronic trading, and involves over-the-counter interest rate and credit derivatives. The banks are understood to have agreed to commit $5m each.
Separately, JP Morgan, Deutsche Bank and Goldman Sachs are also understood to be in discussions about a larger all-electronic project. It would also concentrate on interest rate and credit derivatives, and involve greater financial commitment from the banks, according to two sources close to the situation. No grouping has yet been formed, but the three dealers are likely to consider either forming a joint venture with an existing interdealer broker or an electronic trading platform. They might also build their own. The three banks declined to comment.
Both ventures involve OTC derivatives, and mirror efforts in the listed derivatives and cash equities market, such as Turquoise and Rainbow, where banks have sought to take control of trading infrastructure.
Andy Nybo, a research analyst at Tabb Group said: “This development does not surprise me, given the increase in OTC turnover and projected expansion of the market, investing in the interdealer broker sector is an attractive proposition, particularly for the dealers who will wish to grab back some of the economics.â€
Richard Webley, a director in the capital markets practice of business and technology consultants Detica said banks were looking to improve the overall infrastructure for OTC derivative transactions across the life cycle of the deal. He said: “This goes from creating liquidity and trading venues, countering the interdealer brokers, through to creating central counterparty models to decrease risk and reduce cost. The pressure on the system has been created by an explosion of OTC contracts in the past 12 months.â€
Mamoun Tazi, senior banks and specialty finance analyst at independent broker MF Global Securities, said dealer-led initiatives would need to be entirely electronic in order to succeed. “Anything that involves voice brokers will necessarily be costly and I do not see how the banks will attract top quality broking staff and yet manage to undercut the existing brokers’ rates.â€
Former executives from interdealer brokers also dismissed the chances of any voice broker–led efforts being able to challenge the incumbents, but said that the time was optimal for dealers to take control of the interbank e-trading market, as little OTC derivatives business is so far transacted electronically.
One said: “This will not wipe out the incumbents, but it will put significant pricing pressure on them. Furthermore, it would ensure the dealers have control over both direction and brokerage economics.â€
Senior bankers at some of the firms concerned admitted that the projects were under way, but insisted they were “early stageâ€. Executives from large interdealer brokers confirmed they were familiar with the projects, but would not comment on their likely impact.
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