Nov. 13 (Bloomberg) -- ICAP Plc, the biggest broker of transactions between banks, fell as much as 31 percent after Morgan Stanley cut its earnings estimates on concern revenue will decline next year.

A 12 percent contraction in the revenue pool that interdealer brokers share will cut ICAP's earnings-per-share by about 26 percent, Morgan Stanley forecast. The London-based broker faces pricing pressure as the number of customers shrinks because of the credit crisis and trading moves to exchanges from the over-the-counter market. Goldman Sachs Group Inc. upgraded its rating on ICAP.

Revenue may fall through 2010 ``driven by deleveraging, lower risk appetite and structural change in the market towards liquid, transparent products,'' Morgan Stanley analysts Chris Manners, Bruce Hamilton and Hubert Lam in London wrote in the report today.

ICAP shares fell more than 23 percent on Sept. 29 after it failed to say whether profit will beat analyst forecasts. The company indicated revenue surged in the first half as fluctuations in the prices of the securities and contracts it trades boosted business, without providing firm guidance on whether earnings will meet or exceed analyst estimates.

ICAP was lowered to ``underweight'' from ``equal-weight'' at Morgan Stanley.

Shares Drop

ICAP fell 29.5 pence, or 10.4 percent, to 255.25 pence per share in London trading, the lowest since May 2005, after sliding as much as 31 percent to 197 pence. The shares have lost 65 percent this year, valuing ICAP at 1.6 billion pounds ($2 billion).

Goldman Sachs raised its rating to ``neutral'' from ``sell.'' Analyst Chris Turner in London wrote in a report that ICAP dropped below the 12-month share-price estimate of 250 pence.

ICAP handles contracts traded outside exchanges in the over- the-counter market, which is coming under pressure from regulators to reduce the risk of market failure after the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

The Federal Reserve is stepping up efforts for a central clearinghouse to guarantee trades in the $33 trillion credit- default swap market. The bond insurance contracts played a part in the almost $1 trillion of global bank losses, prompting lawmakers to seek controls on the complex deals.

Currency Swings

New York state Attorney General Andrew Cuomo and the Securities and Exchange Commission are conducting separate inquiries into the behavior of brokers including ICAP and at least seven competitors, the Wall Street Journal reported today.

ICAP competes with brokers including GFI Group Inc. and BGC Partners Inc. in New York and Tullett Prebon Plc in London.

ICAP spokesman Mike Sheard in London declined to comment.

The broker said in September that it expected pretax profit in the fiscal year ending in March 2009 to be ahead of the 330 million pounds it made in the previous year. ``If market developments and exchange rates are favorable, then the increase in profit could be well ahead of this figure,'' it said Sept. 29.

Since the trading report, the pound has slumped about 21 percent against the U.S. currency, boosting ICAP's dollar-based earnings.

ICAP benefits when price fluctuations increase because more customers use the products it offers. A JPMorgan Chase & Co. index that measures volatility in currencies is close to the 10- year high it reached on Oct. 27, the same day an index gauging swings in stocks soared to the highest in its 18-year history.

``Market volatility is at unprecedented levels,'' Morgan Stanley wrote. ``We expect ICAP volumes to decline when volatility normalizes.''

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: November 13, 2008 12:22 EST