Technology is the key to success

Its bid through the purchase of EBS to break into the interdealer space looks set to be successful because of EBS's dominant position in the market. However, as with other parts of the market, it is the successful implementation of technology that will really determine how much Icap's purchase will benefit investors.

The ClientKnowledge research on technology spending by the sell-side indicates that those who ignore the arms race are likely to be left behind. But simply throwing large amounts of cash at a department and hoping it will solve structural problems will not lead to the benefits that are hoped for. Certain banks that had the most advanced in-house technology and platforms that seemed to be ahead of their competitors found themselves left behind.

Without a solid distribution network extolling the virtues of your state-of-the-art single-bank portal there is a danger that there will be a limited take-up. This is why the biggest players seem to have won the e-trading war. Of course, they built good platforms that met the needs of their clients, but it was the fact that their sales force went out to the market to explain the benefits of the system that meant they picked up significant market share.

This does not mean that mid-tier banks need to give up on the drive to build up clients through developing new technology. Innovation that meets client needs will always be rewarded. Smaller banks that focus on niches that the biggest players neglect will always be able to make a good living.

Algorithmic trading, for example, is rightly seen as a threat by many of the largest banks. They have been devoting time and resources to limiting the extent to which they can be hit by fast-moving hedge funds looking to arbitrage them. Smaller banks have more of an opportunity to use the changes that algorithmic trading will bring positively. They can be nimble enough to set up the technology to actively trade algorithmically rather than merely protecting themselves from the danger that it presents.