If anyone is benefiting from current market conditions, it's the major interdealer brokers (IDBs). According to a recent Celent report, IDB revenue reached $7 billion in 2007 and could reach $9.3 billion in 2009. In addition, the top five IDBs (ICAP, Tullet Prebon, BGC/eSpeed, Tradition and GFI), which already account for more than 90 percent of the market, likely will see their positions strengthened further, the Boston-based consultancy says.
As intermediaries between the major dealers that facilitate trades in the over-the-counter derivatives, bonds and cash markets, IDBs earn small transaction fees. But heightened market activity due to the subprime crisis and interest rate and currency volatility is bolstering the size of the underlying markets, boosting IDB revenues, Celent explains. Add to this volatility the growth of derivatives in emerging markets, such as China and Latin America, and IDBs are likely to see 15 percent annual revenue growth over the next two years, Celent predicts.
Further, while electronic trading of OTC instruments will continue to accelerate with increasing product standardization, voice brokerage of high-margin, highly illiquid and exotic products will remain an important part of the industry, Celent says. The firm also points out that the competitive advantage associated with voice brokerage, including deep relationships with dealers' trading desks, will insulate the top IDBs from competition. Another barrier to outside players, such as exchanges, is the current concentration of liquidity among the dominant IDBs, adds Celent, which notes that liquidity attracts more liquidity.
Given the threat of new competition, Celent continues, the IDBs are likely to explore entry into new roles, such as post-trade processing, and new geographies where the OTC markets are expected to see rapid growth.