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Banks make terrible online brokers

Michael Spencer, group CEO of NEX

The NEX Markets unit that includes FX platform EBS and its bond counterpart BrokerTec may sell at a relatively high multiple of revenues, especially if Spencer can generate a bidding war between competing exchange groups.

The sale of BrokerTec’s competitor eSpeed in 2013 for around 7.5 times annual revenue and the disposal of FX platform 360T in 2015 at a revenue multiple of almost 13 must give Spencer hope that he can get a good price for his own electronic brokerage.

The bank consortiums that once owned BrokerTec and EBS may look at a coming disposal more ruefully.

BrokerTec was sold to Icap, the predecessor firm to NEX, at a multiple of not much more than twice revenue in 2002, and EBS moved from a separate group of bank owners to Icap in 2006 at less than four times revenue.

These sales took place over a decade ago, of course, and Spencer ensured the platforms remained leaders in electronic broking. The record of banks in monetizing the secondary value of their own dealing activity and data generation through the years remains poor, nonetheless.

Hope springs eternal in the breast of the banker, however. The planned takeover of Thomson Reuters by Blackstone might prompt a spin-off of bond platform Tradeweb that generates cash for its remaining bank shareholders.

Euromoney reported in December that JPMorgan, Bank of America and Citi are planning a new corporate bond platform to, they say, “streamline” processes and presumably attempt to exercise control of access to customers.

The issue of control highlights one of the main reasons for the failure of banks to generate any great value from online platforms. Agreeing direction for a consortium of rivals with competing motives is hard enough.

Banks also have to tread very carefully when they consider the risks of moving too closely together and facing charges of anti-competitive behaviour.

Alarm bells

JPMorgan, Bank of America and Citi were ranked numbers one, two and three for global debt capital markets revenue in 2017, according to a recent Coalition index survey. That alone should set off alarms at the banks’ legal departments as they set about developing a system that may entrench their dominance in corporate bond sales.

The banks will also have to exercise unaccustomed discipline as they discuss details of a new platform. One of the ironies of the price manipulation scandals in the foreign exchange and interest rate markets that cost banks billions of dollars in fines in recent years was the extent to which bank traders created ready-made cases for prosecutors with their ill-advised electronic communications.

A trial has just begun in New York of former senior currency traders at banks – including JPMorgan and Citi – who openly referred to themselves as a “cartel” in chat rooms where they discussed FX market flows.

Communications between bankers (and their brokers) about Libor manipulation were similarly unguarded, and contributed to the unconditional surrender by the banking industry when regulators demanded payment of enormous fines for malpractice.

Any new corporate bond electronic platform will arrive in a market that has attracted limited scrutiny but where there are plenty of questions about new issue allocation practices.

Euromoney recently highlighted the reputational risks for the biggest investors in the corporate credit markets. Banks – as allocators and traders of corporate bonds – are obviously equally exposed to potential scrutiny.

In theory, any new electronic platform should bring more transparency to the corporate bond market. It would be another ironic twist if an attempt by the top three banks in the sector to steer the online development of corporate bond issuance actually brought closer examination of market practices.

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