Michael Spencer's decision to sell ICAP's global broking operation to Tullett Prebon allows him to extricate himself from a shrinking business that's being torn up by regulators and technology.
ICAP, the world's biggest interdealer broker, will take a minority stake in smaller rival Tullett as part of the deal. There shouldn't be anything to stop ICAP selling that stake or returning it to shareholders in time, leaving it to focus purely on electronic markets (such as its EBS foreign-exchange platform) and providing post-trade information.
Both ICAP and Tullett have suffered as record low interest rates crimp volatility and banks scale back their fixed-income, currencies and commodities operations.
ICAP's global broking unit, its biggest revenue generator, has been particularly exposed to the slowdown in the rates business. The operation accounts for a dwindling proportion of ICAP's operating profit: 25 percent in fiscal 2015, down from 34 percent in fiscal 2013. ICAP has responded by slashing more than 500 jobs to reduce costs, but margins were squeezed to 8 percent in 2015 from 10 percent in 2014. By contrast, margins at ICAP's electronics markets business were 36 percent in 2015, down from 40 percent in the year-earlier period.
The sale will also help Spencer rid himself of an operation that's been the focus of legal attention by regulators investigating attempts to manipulate Libor.
As a smaller competitor, Tullett is in an even grimmer position. The broker said today it will cut 5 percent of its front-office staff after trading volumes declined since June. Excluding its oil operation PVM, Tullett's revenue fell 5 percent in the four months through October.
Putting the two businesses together should allow Tullett and ICAP to cut costs. ICAP will bring 1,458 brokers across. It's unclear how many of those jobs will go. For Tullett, the deal will also remove a competitor. ICAP shares rose 7.6 percent to the highest in more than two years. Tullett climbed 6.5 percent to an eight-month high.
And if -- somehow -- there's still life in the voice broking business, Spencer could still hang on to that stake in Tullett.
(Bloomberg LP, the parent of Bloomberg News, competes with ICAP in some businesses, including foreign-exchange and swaps trading.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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