as the iPod has transformed the music industry, inter-dealer broking is being revolutionised by new technologies. That’s good news for Icap, which has invested much more in electronic broking platforms than rivals like Tullett Prebon.
The benefits are already apparent: Icap’s ebroking revenues were up six per cent last year, thanks to a 24 per cent jump in ebroking revenues in the first three months of the calendar year. In April, volumes were up 46 per cent year-on-year. For newer products, the growth is even more remarkable. When Icap launched its electronic credit default swaps platform at the back-end of last year, it was processing about 10bn transaction a day – that number is now closer to 100bn.
Of course, voice broking will remain important, especially for complex trades, but more markets will go electronic over time. That’s good new for profits, because Icap’s ebroking margins are around 40 per cent, double those in voice.
The broker should also benefit from greater scrutiny in over-the-counter markets, especially if regulators decide that electronic trading platforms will lead to more transparency. All this means Icap is looking rather cheap, trading at around 10 times calendar earnings in 2010. Historically, it’s price to earnings ratio has been closer to 13 times. Because of its market-leading position in ebroking, it probably deserves a similar valuation now, making these shares a clear buy.