ICAP’s Matthew Lester

Volatility is the broker's friend and Matthew Lester is glad to see it making a comeback.

“ICAP finds itself right in the middle of the maelstrom,” says 43-year-old Matthew Lester, CFO of London-based ICAP, Europe’s largest money broker with 2006 revenue of about €1.5 billion. That’s exactly where it wants to be.

ICAP’s remarkable rise over the past two decades, from one of many “voice brokers” (guys on telephones matching buyers with sellers) to the leading consolidator of an industry increasingly focused on electronic trading, has been based largely on its unmatched ability to read market trends. In the past few years, that has meant buying its way into new markets, especially high-volume electronic-based markets, exemplified by last year’s $700m (€497m) purchase of EBS, one of the leading electronic inter-bank foreign exchange trading platforms.

The EBS acquisition helped fuel a 153% surge in ICAP’s free cash flow last year, to €256m. But it looks like paying even greater dividends this year, as the summer credit crunch roiled the money markets and turbo-charged volume.

In August, ICAP reported record average daily volume through its EBS and BrokerTec platforms of $945 billion, up 51% on the previous August and including a record-volume day (August 16th) of $1.275 trillion, some $200 billion above the previous record.

As Lester says, “We are not position takers. We literally make money as people change their views or need to move their money around. That is very good for our business.”

Do you think it will continue like this?

If you track volatility over the last three or four years, it was on a steady curve downwards. What we’ve seen in this last calendar year may be — may be — a return to historic levels of volatility. The way we think of it is not on a daily basis but to ask, “How many periods of volatility are there in a calendar year?” You know: “Do you have one volatile month, do you have six volatile months?” What we’ve seen since May is that June, July and August have all been very, very active months.

What about the risks to ICAP’s business? For example, you’ve had an increasing amount of business coming from hedge funds, which might be seeing some of their money flows drying up. Do markets look like they’re changing fundamentally?

We haven’t seen in any of our markets that they’ve become frozen because people are too scared to do anything. Historically, even if you go through things like the Russian default back in 1998 or Long Term Capital Management when that went under [also in 1998], you didn’t see markets freeze. Provided markets don’t freeze, volatility is good for this business because as volatility increases, spreads move out and there is more money to be made between the bid and the offer. Also, you need to have good price discovery and more and more business goes through a broker. As a result, you find that in the more volatile, more challenging conditions, that is the time when brokers really come into their own.


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