Ay Ay Icap!

Some market commentators have seized upon Icap's "broad ranging strategic review" of its cash equities businesses as another sign of the structural shortcomings at play within the mighty inter-dealer broker. After all, shares plunged nearly 30 per cent at one stage following a profits warning last month. However, under the stewardship of chief executive, Michael Spencer, Icap has consistently demonstrated itself to be an innovative market force and the leader (followed by Tullett Prebon) in the IDB sector. While there are certainly issues that require remedying, the fact that Spencer has placed his political ambitions on hold to focus on the business should go some way to assuage nervous investors. The Telegraph's Questor certainly believes so, tipping punters to buy shares yesterday, and adding that "it would be wrong to underestimate Spencer himself."

The ill-fated foray into cash equities has undoubtedly been faltering and progress extremely slow. Spencer bowled into the sector at the tail end of 2008 to try and fill a gap in the market left by the demise of Lehmans. Icap recruited heavily and aggressively – hiring over 200 staff to join the division. To be fair to Spencer, he saw this as a once-in-a-lifetime opportunity to profit from the glut of available talent, as many trading desks were decimated in the wake of Lehmans.

And, he was definitely not the only one to share this opinion. There was considerable activity from the ‘traditional’ brokerage firms, large and small, and from the new wave of smaller providers, to seize the market opportunity that the demise of Lehmans, plus those of Dresdner Kleinwort and Bear Stearns, created. BarCap and Nomura were certainly conspicuous in their hiring sprees as they looked to build their equity teams. However, cash equities is a fiercely competitive business, and it seemed doubtful that the size of this market opportunity was sufficient to sustain every individual business plan. Unfortunately for Spencer, Icap faltered. Breakingviews highlighted some of the inherent problems the IDB faced: "Cash equities is a difficult, low-margin and commoditised business. The costs are high, and the continued need to invest in technology, keeps them that way. The business is dominated by a handful of big banks with the scale to make it pay."

Icap will bounce back from the problems with cash equities and as some analysts have already noted – Spencer has the bottle to simply shut the unit down rather than let it limp lifelessly onward. Panmure Gordon even notes that winding up the business will be of little strategic importance to the group. Nonetheless, Icap still needs to navigate some choppy waters – notably regulatory reform, as Obama's plans to curb proprietary trading by banks will undoubtedly hit revenues. To keep with the nautical theme – Spencer certainly has the wherewithal to keep an even keel.

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