December 20, 2012 12:15 am

Interdealer brokers retain crucial role

The popular image of trading in the City of London is of a hassled broker staring at a screen, with a telephone pressed to each ear.

This has largely passed into history as more trading goes electronic and becomes automated.

But the clichéd image still defines the role of an interdealer broker, illustrating how this institution retains a vital role in today’s financial markets.

Brokers act as conduits in the market between banks, talking to a range of traders both by phone and electronically to determine appetite for frequently illiquid assets such as interest swaps, commodities and blocks of shares.

They often use electronic screens on terminals such as Bloomberg and Thomson Reuters to provide information to banks.

The broker takes a fee for moving the often-tailored securities from sellers to buyers. They do not participate in the daily Libor rate-setting process although some trade products that are based on Libor.

Five large companies dominate interdealer broking: the UK’s Tullett Prebon and ICAP – founded by Tory party donor Michael Spencer – US duo GFI Group and BGC Partners and Switzerland’s Tradition. There are also a handful of smaller players, such as the UK’s RP Martin.

Rivalry between senior executives is often intense. Despite the growing role of computers, human relationships still play a large role and the trader with the keenest eyes and ears in the market is still highly prized.

Employee pay and bonuses are the highest costs for management and rated brokers that decamp to rivals are often also the subject of bitter court disputes.

Nevertheless, the industry faces potential long-term threats as it prepares for more of the over-the-counter derivatives market to move on to transparent trading venues to meet requirements mandated by the G20.

Exchanges and rivals such as Bloomberg have been eyeing opportunities to grab market share in the overhaul.

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