ICAP’s Spencer Reboots Market Stalwart With Bet on Digitalby and
Unveils structure and growth plan for new company NEX Group
Betting that providing back-office services more profitable
Michael Spencer -- tycoon, Tory, oenophile -- is making the biggest trade of his career.
For decades his brokerage, ICAP Plc, has helped turn the wheels of the capital markets by trading trillions of dollars in derivatives, currencies and other securities on behalf of global banks. Its legion of voice brokers wielding telephones embodied the hurly-burly of a marketplace where relationships and instincts mattered.
Now the interdealer broker is transforming itself from a noisy bazaar into a streamlined financial technology firm called NEX Group. The company is expanding beyond its traditional banking customers to attract pension funds, asset management firms and even corporate treasurers to its electronic trading platforms. It’s also combining its services for processing trades in the cloud.
While Spencer’s rivals have beefed up voice broking in the face of automation, he’s hanging up the phone. ICAP won final regulatory approval on Tuesday for the 1.1 billion pound ($1.4 billion) sale of its voice-broking arm to Tullett Prebon Plc, a transformation that could turn NEX into a takeover target.
“Spencer is betting the house on committing everything to electronic platforms,” says Frederic Ponzo, managing partner at GreySpark Partners, a London-based consultancy. “No one else in the interdealer broker industry has done that before.”
The move caps a shift that’s been building for years. Interdealer brokers, behind-the-scenes middlemen, have long reaped commissions by trading illiquid securities like interest-rate swaps for investment banks. After the global financial crash in 2008, lawmakers directed banks to raise more equity to offset liabilities.
Since 2013, the best performing division in the company has been its Post-Trade Risk and Information unit, which helps customers manage transactions rather than execute them. In ICAP’s fiscal year ending March 31, the post-trade unit accounted for 44 percent of earnings, more than double the voice-broking unit’s contribution. Revenues at the division, to be renamed NEX Optimisation, jumped 19 percent in the six months that ended in September compared to a 5 percent uptick for voice broking.
ICAP shares were little changed at 476 pence on Thursday, after falling 11 percent on Wednesday from a 16-month high when the company reported first-half earnings that disappointed some investors.
Reengineering a 30-year-old company with the breadth of ICAP is largely uncharted territory. It will be up to Jenny Knott, the CEO of NEX Optimization, to make Spencer’s gamble pay off on the post-trade side of the business. Knott, a Brit whose office sits a couple doors down from Spencer’s suite in ICAP’s headquarters near Liverpool Street Station in the City, joined the brokerage in August 2015. She came from Standard Bank Group Ltd., a Johannesburg-based lender, where she’d been CEO of the corporate- and investment-banking unit.
Knott, who began her career trading sugar and other "softs" at PaineWebber before stints at UBS Group AG and Nomura Holdings Inc., says consolidation has saddled banks with clunky information technology systems she likens to “congealed pasta.” Banks are hungrier than ever for technology that will allow them to shut down antiquated systems and save money, she said. When it comes to trading securities, she wants her division to jump into the breach.
“They have to simplify, to standardize, to electronify,” Knott said in an interview. “This isn’t just about automating – it’s about eliminating legacy systems.”
Knott herself will have to stitch together a mosaic of existing and developing systems and programs to deliver. At present, the division is a collection of five technology platforms ICAP acquired at different times. Traiana, which it bought in 2007, acts like an air traffic controller for banks navigating the mammoth over-the-counter markets in currencies, equity derivatives and other securities. Clients such as Bank of America Corp., JPMorgan Chase & Co., and Barclays Plc use its cloud-based Harmony network to evaluate credit risk, regulatory compliance, and to process more than $2 trillion in trades daily. (Bloomberg LP, which owns Bloomberg News, competes and partners with ICAP in various segments of its business).
Knott must integrate these platforms with startups entering NEX’s fold thanks to Euclid Opportunities, the division’s investing arm. Euclid has bought stakes in companies developing software to handle tasks ranging from automated collateral processing to using the blockchain, the technology that underpins bitcoin, to settle securities transactions. On Wednesday, Knott said all these offerings would be made available to customers on a cloud-based platform called NEX Infinity.
At the same time, Seth Johnson, the CEO of the firm’s EBS BrokerTec electronic trading business, is soliciting investment firms with his own newly developed technology tools. EBS Institutional, for example, permits pension funds to automatically adjust all the valuations in various funds to account for currency fluctuations. But winning over asset management firms can take months of meetings and painstaking due diligence.
In the meantime, the new ICAP may become a prime takeover target, according to analysts. Just about any exchange operator would covet NEX’s post-trade capabilities, and those that operate a clearinghouse, such as London Stock Exchange Group Plc or Atlanta-based Intercontinental Exchange Inc., could be especially interested, says Jonathan Goslin, an analyst at Numis Securities Ltd. in London.
“Once the Tullett deal is complete, NEX is going to be a very hot acquisition,” Goslin says.
Spencer declined to comment on that prospect.
Whatever may be in store for NEX, he has positioned his firm at the center of a historic shift in the way securities are traded, much as he did 30 years ago when he founded his brokerage. It’s just unclear how this picture will emerge, especially now that U.S. President-elect Donald Trump is poised to shake up the financial markets by changing the regulatory landscape and ratcheting up government spending.
“We do know that these technologies will become central to the market structure of the future,” says Shubh Saumya, a partner with Boston Consulting Group. “But what form they take, that’s hard to tell.”