ICAP buys ICE cotton options broker; beats out rivals

NEW YORK Tue Apr 3, 2012 12:53am BST

Michael Spencer, Chief Executive of ICAP, listens during a Future of Finance Initiative conference in Horsham, southern England December 8, 2009. REUTERS/Stefan Wermuth

Michael Spencer, Chief Executive of ICAP, listens during a Future of Finance Initiative conference in Horsham, southern England December 8, 2009.

Credit: Reuters/Stefan Wermuth

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NEW YORK (Reuters) - ICAP Corporates (IAP.L) has bought New York-based cotton options broker VIP Commodities, beating out bids from three other firms, as part of an expansion of its softs business.

The broker-dealer plans to move into cotton even as historic prices and volatility forced some merchants out of the market and cost others hundreds of millions of dollars in losses.

As part of the acquisition, ICAP Plc's commodity futures and options trading arm has taken on VIP Commodities' three brokers -- founder and owner Vincent Pepe, Louis Barbera, and Marco Degennaro, it said on Monday.

The well-known team, which is based on the floor of the ICE U.S. Futures Exchange in New York, will execute trades in the open outcry pit, electronic, voiced blocks, and over-the-counter (OTC) markets, it said.

"ICAP continues to grow in our already-core business of softs (commodities) and ags (agricultural futures and options). Cotton was the next logical step," a spokesman told Reuters.

While ICAP sees opportunities in ICE's second-largest U.S. agricultural commodity market as measured by open interest, joining ICAP gives the VIP team a larger client base and the chance to broaden into OTC and derivatives business.

"We think it's a good fit. They have a deep client base," Barbera said.

Pepe declined to identify the other bidders for the company he set up and would not comment on the financial terms, only saying it is a "good deal for both parties."

He began his career as a runner filing orders from the trading floor in the defunct New York Coffee, Sugar and Cocoa Exchange (CSCE), which eventually was bought by the New York Board of Trade, the predecessor of ICE.

The deal marked the first big shake-up of the cotton market since the volatility that rocked the market last year and cost players, such as Glencore (GLEN.L), an estimated $330 million on cotton last year.

A rally pushed prices to all-time highs of $2.27 a lb last March only for demand to shrivel and prices to drop by more than half.

Wild gyrations had already taken a toll on market participants in 2008 when Paul Reinhart filed for bankruptcy protection and merchant Weil Brothers withdrew from the business because of what it called difficult market conditions.

But Barbera said this was not the reason for selling VIP Commodities and finding a home in a larger company.

"We've been consistent with our earnings," he said.

Even so, being a smaller player in any of the commodities and energy markets has become increasingly difficult in the last year given the large price swings, the need for large capital flows and tightening credit from banks, analysts have said.

Cotton would only form a modest part of ICAP's existing business, especially since the trade is dominated by Allenberg and Cargill, a broker said.

While the bulk of VIP's business was in cotton, its traders had also done business in sugar, cocoa and coffee, Barbera added.

(Editing by Jim Marshall and Phil Berlowitz)

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