Risk 25 firms of the future: GFI Group

Michael Gooch, GFI Group

If bravery is defined as sticking your neck out and making bold predictions during a period of extreme uncertainty, then Michael Gooch, chief executive of GFI Group, is a brave man.

He says the brokerage he founded in 1987 will follow in the footsteps of rival Icap – which acquired Plus Stock Exchange in May – and buy an exchange. Bilaterally executed over-the-counter trades will account for no more than 5% of the business of any of the big brokers in the future, he says, which will lead to consolidation– and Gooch thinks a maximum of three of these firms will end up competing in each product area. In interest rate swaps, one of the brokers to have moved earliest – Tradition, with its Trad-X swap trading platform – will be one of the ones to fall, Gooch says.

Some of those predictions may be right – and some may be wrong – but for each, Gooch is willing to make his case. First, because OTC trades will be executed in a variety of ways in the future, a successful broker needs to offer all of them. That includes the exchanges and trading platforms required by the Group of 20 (G-20) nations for standardised derivatives – whether those platforms are the Dodd-Frank Act’s swap execution facilities (Sefs) or the European Union’s organised trading facilities (OTFs) – as well as covering the bilateral market, Gooch says.

“Seeing Icap do that transaction was sort of an ‘Aha!’ moment for me. I said: ‘That makes sense, we might as well have an exchange licence in our bag of tricks’. So we could buy something. I expect GFI will operate in unregulated markets. It will own a broker-dealer, an exchange, a Sef and an OTF, and it will route business to whatever the most efficient execution vehicle is, including routing orders to competing Sefs and exchanges,” he says.

That ambition is indicative of how rapidly things are changing, and Gooch is far more focused on GFI’s Sef and OTF plans than on traditional bilateral derivatives brokerage.

The dealers are trying to keep their dealer-only market protected until the last minute and then, when they have to open up, they will. But the guys in their protected cocoon will just die on the vine

Of the five global brokers, Gooch says only GFI, Icap and BGC have the ability to rival other platform operators such as Tradeweb and Bloomberg. “The other brokers will be involved but I don’t think they are market leaders in developing the new environment. Icap will be because it is the biggest, then GFI because of our technology advantage and BGC should get some credit too,” he says. “Tullett Prebon and Tradition will bring up the rear. You won’t end up with more than three firms that can really have successful liquidity in any one product, so you’re going to have areas of business where some of these guys fall to the sidelines.”

And Gooch predicts the first to go will be Trad-X. While it has the backing of big market-makers and has broken fresh ground in interest swap markets by operating a central limit order book model, Gooch says it won’t last. “The dealer community will decide what happens to Trad-X. The dealers are trying to keep their dealer-only market protected until the last minute and then, when they have to open up, they will. But the guys in their protected cocoon will just die on the vine. I wouldn’t look at Trad-X and think ‘These guys are getting set up for the future’. Instead, they may be getting set up to fail,” says Gooch.

When the dealers make their move, they will move to platforms that have a different approach, and the technology requirements will be difficult to satisfy, he says. “It’s going to take quite a significant amount of technological prowess to put in place the type of venue that will be broadly successful in the post-regulatory world.”

Some have questioned GFI’s own ability to compete. Speaking unprompted, rivals say the whole brokerage sector is struggling at the moment, but pick out GFI as a firm that is having a particularly hard time, pointing to the downgrade of its debt by Standard & Poor’s in April. “This was based largely on macro-economic factors such as a lower volume trading environment, European debt crisis and their negative outlook for broker dealers in general,” said Gooch, speaking on a recent earnings call with investors. He also argued the criticism doesn’t take account of GFI’s subscription-based trading software, which isn’t dependent on volumes.

GFI has also recently announced expansion in China, but Gooch is keeping the rest of his cards close to his chest. “We are not really advertising a lot of the stuff we are doing, because I am not too interested in educating our competitors in what they should be doing to be positioned for this new market.”