ICAP Bets on Currency Market
By KATIE MARTIN
October 11, 2007; Page C3
LONDON -- The global currency market faces a shakeout after yesterday's agreement by interdealer broker ICAP PLC to buy independent foreign-exchange-processing firm Traiana for $238 million.
The union propels New York-based Traiana into the cadre of big-hitting players in the $3.2 trillion-a-day currency markets, enabling it to challenge the central bank-supported monopoly CLS Bank, which ensures each side of currency trades gets paid.
CLS is the only service provider in this area, although banks settle between themselves about 50% of deals.
Traiana's foreign-exchange business revolves around smoothing post-trade flows for only certain types of trades. But co-founder Michael Laven said in an interview that he is ready to "flip the switch" to package together all types of currency deals, potentially slashing the flow to volume-hungry CLS and setting dealing banks on a collision course with central banks.
London-listed ICAP's chunky price tag for Traiana, which is expected to generate just $15 million in revenue in the year ending January, is a sign that it sees the firm expanding its capabilities.
"ICAP is making an interesting bet on the future of the marketplace as much as on Traiana's business today," said Justyn Trenner, principal at London-based ClientKnowledge, which advises banks on strategies in foreign exchange.
A person familiar with discussions on CLS's board said the move is "a big thing" for CLS. "The implications are clear," the person said, adding that the acquisition is likely to be high on the agenda at CLS's next board meeting at the end of this month in Geneva.
CLS processes and charges a fee for each trade that is submitted to it individually. That model made sense when it was set up in 2002, but since then, the amounts traded in the global foreign-exchange markets have boomed, and the number of deals has exploded.
The world's central banks have indicated through the Bank for International Settlements that they want currency-dealing firms to use the system, dubbing the use of other settlement methods as "backsliding" into risky practices.
CLS's board -- made up of representatives of foreign-exchange banks -- has made it clear it doesn't intend to change at this point, because a shift to accepting batches of trades would be economically "disastrous" for the system's smaller users, said the person familiar with CLS's board discussions.
CLS declined to comment.
Some bigger banks are considering and even testing ways to dodge CLS's processes to ease the costs and the data overload, despite their assurances to CLS that they support it.
