The idea that bigger is safer has driven consolidation in the interdealer broker market – its handful of titans argue size makes them better able to cope with some of the challenges the industry faces. And they’re right, to a degree.
It’s easier to deal with falling derivatives volumes and margins if a broker covers a diverse range of products. Diversity also cushions the blow as dealers seek to internalise client flows in some products – by offsetting them with other customer business – rather than paying brokers to find the hedge.
Bigger firms may also be better positioned to ditch the ‘interdealer’ label and take on a wider range of clients, or to absorb the costs of a major regulatory refit such as Europe’s second Markets in Financial Instruments Directive (which helpfully raises the barriers to entering the business).
When it comes to Brexit, though, everyone is in the dark, and the agility of some smaller firms may work to their advantage.
It’s not yet clear on what terms EU market participants will be allowed to access UK liquidity pools from next April, leaving firms unsure whether they will have to send voice brokers to the continent to continue business – another costly exercise.
Gottex chief executive, Spencer Nathan, told Risk.net in June that some European brokers were already looking to move out of London in advance of any Brexit-related difficulties.
“With the unknown questions surrounding Brexit, people are starting to look for alternatives. And it seems many job applicants here are much younger than we would have employed historically. The Generation Y, 30-plus age people are happy to move around. They’re happy to find new cultures, new languages and new ideas, and that’s been an attraction to us when employing people,” said Nathan.
London-headquartered Kyte Broking has been drawing up contingency plans for a “staged migration” to a French entity of the EU27 clients that make up around 30% of its global client base, according to chief operating officer, Michelle Zak.
The firm has also been checking on the plans of third parties, such as exchanges and clearing houses, to ensure it can continue trading as necessary.
When this kind of uncertainty is piled onto the various pressures brokers already face, it’s not surprising there have been changes in Risk’s broker rankings this year. While Icap retained its position at the top of the overall rankings, its stablemate Tullett Prebon fell to fifth position – down from second in 2016 and third in 2017.
Tradition, on the other hand, shot up to second on the back of improved performances in rates, and strong showings in equity and currencies.
Some smaller, boutique brokers also make it into the top three of some of the categories for the first time this year, including Continental Capital Markets and OTCex.