Inter-dealer brokers, the fast-talking middlemen who match buyers and sellers of complex financial products, are under pressure to strike takeover deals as business shrinks and regulators shine a light on their murky trillion dollar markets.
For the last decade, five big companies have dominated global broking: Britain's ICAP and Tullett Prebon , BGC and GFI in the United States and Switzerland's Tradition.
Often seen with a phone glued to each ear shouting frantically across trading floors, the brokers trace their roots to a by-gone age when "jobbers" ran between traders on the London stock exchange floor cutting deals.
But the big five's cosy world could be ripe for a shake-up.
Trading volumes have declined since the 2008 financial crisis as their customers, banks like Barclays, JP Morgan and UBS, pull back from the market.
At the same time, regulators are pushing for more electronic trading of derivatives, potentially depriving brokers of higher-margin phone business as greater transparency means price anomalies are levelled out.
These drags on earnings could force brokers to buy each other, as a means to cut costs, or to sell to an exchange operator such as U.S. groups CME or the IntercontinentalExchange.
"All the brokers are struggling to a degree. There's simply not enough volume to go around and if trading levels don't improve I'd expect to see some consolidation," said Fred Ponzo, managing partner at consultant Greyspark.
This year has been particularly bad, with European share trading down 15 percent, interest rate futures down a fifth and foreign exchange down a quarter in the year to date, data from Berenberg Bank showed.
Michael Spencer, the chief executive of ICAP, said in May: "There are five big players out there at the moment when there is really only room for three or perhaps four."
Keen to avoid another market meltdown like the one sparked by U.S. bank Lehman Brothers' collapse four years ago, policymakers want to force the $700 trillion over-the-counter (OTC) derivatives market that trades behind closed doors between banks to use electronic exchanges, like public stock markets.
This would give regulators more information on opaque markets by standardising the most complex trading instruments and create a more level playing field for customers, lowering prices.
But for the brokers, who still take buy and sell orders largely over the phone, a switch to electronic trading using so-called swap execution facilities (SEFs), would mean lower margins, putting pressure on them to cut costs.
"Consolidation does make a lot of sense on the face of it because firms can cut costs in the back office by merging businesses," said Stuart Duncan, an analyst at Peel Hunt, referring to the brokers' administration functions.
But while the case for takeovers is getting stronger, pulling deals off might be tricky as the notoriously competitive big five brokers have a deep-seated mistrust of each other.
Most of their chief executives have crossed swords, with BGC, Tullett and ICAP in particular having engaged in regular feuds over poaching staff and patent infringement, many of which have ended up in court.
BGC and Tullett have pursued various legal claims against each other in recent years while ICAP and BGC's rivalry can be traced back to a high-profile 2003 court case.
"All of the big five brokers are run by dominant personalities which increases the difficulty in reaching agreement," said Duncan.
Previous attempts to combine have failed. Tullett came close to a merger with GFI in 2008, but the deal collapsed when management could not agree a price while Tullett also held talks with Tradition as recently as last year but, again, no deal was struck.
One ICAP shareholder believes deals are possible, however. "I can't see BGC and ICAP getting together but GFI and ICAP is a different story, and the relationship between Tullett and Tradition - while not as warm as that between GFI and ICAP - is not a dealbreaker," one of ICAP's top-15 shareholders said.
The brokers have responded to the regulatory reforms by setting themselves up as SEFs, which effectively makes them exchange operators and could make them an attractive target for this type of buyer.
"An exchange buying a broker does make some sense as the OTC markets become more electronic because modern exchanges are essentially technology platforms," said Duncan.
The five brokers themselves refused to comment specifically on mergers in the sector. But they accept in private that their market is likely to shrink, particularly as the regulatory plans are better defined and passed into law.
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