ICAP Loses 85% of Mortgage Bond Trading to Dealerweb

ICAP Plc, the world’s largest broker of trades between banks, has lost 85 percent of its business over six weeks in the most-active part of the mortgage- bond market as Wall Street firms shift trades to their own electronic network.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and seven other banks have moved the brokering business to Dealerweb, the trading platform they own for so-called To Be Announced mortgage securities, from ICAP’s Brokertec system. Brokertec arranged about $6 billion in transactions daily in the week ended April 8, down from $40 billion in late February, according to trading data obtained by Bloomberg News.

While London-based ICAP is competing with banks over mortgage trading, it’s cooperating with them in a potential bid for LCH.Clearnet Group, Europe’s largest clearinghouse for securities transactions. Dealerweb suggested the push to compete with independent brokers in the over-the-counter TBA market could be replicated in other asset classes like U.S. agency debt, Treasuries or interest-rate swaps.



“They basically walked away with the market,” said John Jay, a senior analyst at financial services consulting firm Aite Group LLC in Boston. “They’re taking out the middleman.”

Dealerweb is taking market share from Brokertec after ICAP succeeded in gaining the majority of bank trading in markets for U.S. Treasuries and currencies, company data show.

Electronic Trading

ICAP shares fell as much as 16.25 pence, or 4.4 percent, to 350.25 pence today, valuing the company at 2.37 billion pounds ($3.5 billion). They were little changed at 367 pence as of 9:47 a.m. in London. ICAP has gained almost 28 percent this year.

Michael Spencer, 53, founder and chief executive officer of ICAP, used the 2002 purchase of Brokertec Global LLC to take control of arranging trades in the Treasury market from BGC Partners Inc., headed by Howard Lutnick and formerly known as Cantor Fitzgerald LP. Brokertec arranges about 60 percent of Treasury trades between banks, with BGC Partner’s eSpeed platform at abut 40 percent, according to the companies.

ICAP also captured more than half the electronic trading for over-the-counter foreign-exchange contracts among banks, according to the company. In 2006, the company acquired London- based EBS Group Ltd., a currency trading system set up in 1993 by a group of the world’s largest banks dealing in foreign exchange. Thompson Reuters Corp. is second among currency trading platforms.

Considering Offer

ICAP and the banks may make an offer for LCH.Clearnet after New York-based Depository Trust & Clearing Corp. agreed in October to buy the clearinghouse for 739 million euros ($958 million), according to people familiar with the plan. The banks would like to gain control of LCH.Clearnet’s service that guarantees about half of all the interest-rate swaps between banks, part of the world’s largest derivatives market.

Banks have historically used third-party platforms like Brokertec or phone brokers to trade with each other in the TBA market, where about $50 billion in securities traded in the week ended April 8. The secondary market in TBAs helps drive demand for home loans by allowing banks to package and sell existing mortgages.

Morgan Stanley, Citigroup Inc., Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG, UBS AG and Royal Bank of Scotland Group Plc are partners with Thompson Reuters in Dealerweb.

The firms also own Tradeweb, a bond and derivatives trading network. Thomson Reuters and Tradeweb compete with Bloomberg LP, the owner of Bloomberg News, in selling financial and legal information and trading systems.

Higher Costs

Dealerweb may help reduce what the nine banks pay for trading because the fees will go to a company they own, said Craig Pirrong, a finance professor at the University of Houston.

“There can be some market power if one platform becomes dominant,” Pirrong said. “It could lead to higher costs for customers.”

Dealerweb will seek “to build a broader inter-dealer business,” according to a November statement. Dealerweb will next start arranging trades in U.S. agency debt, according to people familiar with the company’s strategy.

“Competition in the inter-dealer mortgage market is good news for all participants,” Tradeweb President Billy Hult said in an e-mailed statement. “We’re seeing steady trading on Dealerweb, but it’s still early in the life of the platform.”

He declined to comment through a spokesman on Dealerweb’s plans or its percentage of market share.

Inter-dealer brokers have arranged an average of $48.2 billion a day in trades in the so-called agency mortgage- securities market this year, according Federal Reserve Bank of New York data. That compares with $60.5 billion on average a day last year, according to the Fed data.

Market Anonymity

The electronic platforms for Dealerweb and Brokertec display bids and offers for securities without the user knowing who’s posting the prices behind the trade so banks can do business without letting competitors know their market activity. Only at the settlement stage of a trade do the counterparties become known.

ICAP doesn’t report Brokertec’s revenue separately, said spokesman Mike Sheard. The unit’s largest business involves arranging trades in U.S. Treasuries, repurchase agreements in dollars and euros and U.S. agency debt, he said.

TBA trading is part of the almost $5 trillion market for agency mortgage bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae. Mortgage bonds traded in the secondary market helped fund 79 percent of home loans made in the U.S. last year, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter.

The debt finances nearly all new home lending after the collapse of the non-agency market and retreats by banks. The higher the yields demanded, the higher the interest rates lenders must charge to profitably sell securities backed by new loans.