TP ICAP’s Plan to Squeeze Brokers After Deal: Pay Less, Do More

  • Brokers are getting younger as firms recruit from universities
  • Tullett’s brokers earned average of 237,000 pounds in 2015

TP ICAP Plc has a straightforward strategy to increase profits after completing the $1.6-billion purchase of ICAP’s broking business: paying brokers less for doing more.

The business, which employs 3,425 brokers from the combination of Tullett Prebon Plc and ICAP Plc, plans to use its size to tackle one of the most persistent criticisms of voice broking: humans can’t compete with electronic markets on price. The new firm has two possible ways to reduce the wage bill: hire more young brokers or let go of older ones.

ICAP and Tullett both paid their brokers more than half the revenue they generated -- in Tullett’s case, some 237,000 pounds ($290,917) in wages and bonuses per broker. Add compliance and technology costs, and voice broking looks like an unappealing business. In its final set of results before the sale, ICAP said the profit margin for its voice-broking division was 14 percent, while its collection of electronic markets had a margin of 31 percent.

“We are taking that overall percentage number down,” said Mihiri Jayaweera, TP ICAP’s group head of strategy, referring to the broker-compensation ratio. “We want to bring the broker compensation to a level where it’s fair for all stakeholders. This trend in broker compensation is something we have seen across the industry. We are reasonably experienced in how to get this right.”

Other parts of financial services have steadily cut pay in the aftermath of the 2008 financial crisis. Europe’s four biggest investment banks reduced pay per employee by an average of 11 percent between 2007 and 2015, according to data compiled by Bloomberg.

For a Bloomberg TV discussion of the TP ICAP deal, click here.

“The moment you cut expensive, underproducing people, the benefits flow directly to the bottom line,” said David Clark, the chairman of the Wholesale Markets Brokers’ Association, a trade body for brokers.

The big voice brokers, or interdealer brokers as they are also known, had a long wait after the financial crisis before they were forced to reduce wages and bonuses. Tullett enjoyed the best year in its history in 2009, on a reported revenue basis, as the banks intensified trading by unwinding loss-making positions. Revenue from voice broking fell more quickly when financial regulators forced banks to hold more capital on their balance sheets, curtailing their ability to trade the illiquid assets that voice brokers favor.

TP ICAP’s two main rivals -- BGC Partners Inc. and Cie. Financiere Tradition SA -- also want to cut pay. Tradition’s Chief Financial Officer Francois Brisebois has said that “consolidation will put broker compensation under pressure for the whole sector, but more specifically, at the firms that are merging.”

When times were good, employees could always move to a rival, taking their clients with them. The creation of TP ICAP means there are only three major firms left, limiting options for disgruntled brokers.

A long-running dispute between Tullett and Tradition was resolved last month, potentially further reducing the ability to chase the most generous employer. An arbitration panel in the U.S. ruled that Tradition must pay Tullett $9.1 million for poaching a broker in 2010.

It’s not all gloom for TP ICAP’s army of brokers. After years of decline, Tullett’s revenue from voice broking increased in 2015, a trend that continued into the first half of 2016. If the pie continues to grow, some brokers and some desks will get paid more.

“An individual broker’s compensation will go up if it’s the right thing to do,” Jayaweera said. “We are confident at TP ICAP that we can increase the amount of business we do. That, and an improving market, will mean that the take home pay for brokers can increase.”

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