What is interdealer broking?

ICAP's Head of London and EMEA Broking gives Lucy Mair an introduction to this part of the finance industry
Other finance

ICAP is the world's largest interdealer broker with a network of operations in 32 countries and expertise in financial, foreign exchange and commodities markets. The firm also offers post-trade risk management services and provides market data and financial information to its clients. We caught up with CEO of Broking for London and EMEA Gary Smith to find out more.

What is interdealer broking?

Interdealer broking involves bringing buyers and sellers together to execute a transaction in the financial markets. Brokers liaise between counterparties to establish a price and volume, find liquidity and make a deal.

Broking occupies an important place in finance because whenever someone wants to buy or sell something, they want to ensure they get the best possible price available in the market.

Interdealer broking is purely intermediary, meaning we don't trade on our own behalf, raise capital, make trading decisions or give investment advice as investment banks do. We take a commission on every trade that we facilitate to earn revenue for the firm.

What is voice broking, and how does it differ from electronic broking?

At ICAP we use three kinds of broking: voice broking, hybrid broking and electronic broking. Voice broking involves speaking to clients on the phone to negotiate prices and facilitate business. We use voice broking for less liquid, non-standardised markets. For example, credit derivatives and government bonds are commonly transacted by voice broking because they require more negotiation than standardised products.

Electronic broking is used in standardised and highly liquid markets such as certain commodities and foreign exchange. The prices are put on a platform and customers can transact electronically without the need for a human broker.

We also use a hybrid model, where a broker and the electronic system exist side by side. This allows clients to take advantage of electronic efficiencies while also having the option of discussing bespoke products with a broker.

How has interdealer broking changed since the beginning of your career?

Technology has become key to the business - ICAP wouldn't be in the market-leading position it is without technological innovation. The industry has changed significantly over the past 25 years thanks to the development of electronic trading.

How is interdealer broking faring in the challenging economic climate?

The volume of transactions in the markets is down considerably, so we're seeing subdued activity across most of our markets. As well as the global economic downturn, impending changes to regulation in the finance industry has cast uncertainty over the markets. However, we have also benefited from the price volatility in certain markets which encourages counterparties to trade.

How will the introduction of new regulation impact interdealer broking?

Stronger regulation means that financial markets will have to become more transparent and less risky. For interdealer broking, regulatory change presents opportunities to increase our volume of electronic and hybrid trading and deliver more post-trade risk management services. Financial institutions will face challenges in meeting higher reserve requirements, but our business is unencumbered by how much cash we have, so we'll play a role in locating liquidity and facilitating trades for them.

We're confident that ICAP's focus on innovation will put us in a strong position to deliver in the new marketplace. The sector is becoming more interesting and we'll need bright people to help us capitalise on these opportunities.