Consolidating inter-broker services
World-wide there is a move to consolidate financial services, most notably with the London Stock Exchange (LSE) being the subject of a bidding war between the New York Stock Exchange (NYSE), NASDAQ, and the Dubai Stock Exchange, and the management of the Euronext stock exchange in talks with the LSE, the NYSE, and Deutsche Börse. The exact change is unknown, but the consensus is that the world's public stock exchanges are about to undergo serious consolidation.
Now there is a big move in the bank services brokerage area. ICAP PLC, a UK firm that is already the #1 inter-dealer broker, has agreed to buy out US-based foreign exchange and commodities broker EBS Group Ltd. ICAP, which has pursued the deal for several years, outbid British stockbroker/inter-dealer Collins Stewart PLC.
The deal is for around $800 million, and it gives ICAP a big opportunity in the growing area of electronic trading. Traditionally, both bond and currency trading have been done by phone, but that is changing. For a middleman like ICAP, electronic trading is twice as profitable ICAP says that the deal should double its electronic transaction revenue.
An inter-dealer broker is a company that runs as middleman between banks (on the one hand) and bond issuers, derivatives packagers, and other banks (on the other hand), preserving confidentiality for affiliated banks and smoothing out liquidity issues for individual banks.
EBS has an interesting if short history. It was created in 1993 by a consortium of some of the biggest international banks, in order to handle foreign currency exchange and to set up an alternative to an exchange operation run by Reuters. . The founders include: ABN Amro (Netherlands); Bank of America, Citigroup, JP Morgan Chase, and Lehman Brothers (US); Commerzbank (Germany); Credit Suisse and UBS (Switzerland); Barclays, HSBC, and Royal Bank of Scotland (UK); Skandinaviska Enskilda Banken (Sweden), and the Minex Group (Japan). In addition to currency trading, EBS does a limited amount of metals trading.
EBS now handles around $130 billion in currency transactions each day. Its closest, and only major, rival is Reuters.
ICAP in 2003 acquired BrokerTec Global, an online broker of US Treasury bonds for $250 million. That transaction greatly extended its electronic services. It also made ICAP the world's largest seller of US Treasuries, with a 60% market share.
According to a Financial Times article ("Icap snaps up EBS for £464m", 4/22/06), this deal will also allow ICAP to become a truly global company:
The transaction will give Icap access to new markets in South America, Middle East, and New Zealand, and expands its presence in Asia. It will make Icap the world's second-largest exchange by revenue behind Deutsche Börse, and Europe's largest bond broker behind Italy's MTS.
All this, as we have stated, is part of a trend throughout the financial sector. As an article in the Daily Telegraph ("Icap wins fight to create trading colossus", 4/22/06) notes:
There has been a rush of merger and acquisition activity among trading platforms and exchanges in recent months, due to the fragmented nature of the sector and as ownership shifts from banking consortiums to private equity groups and corporate dealers.
