Man Financial occupies a unique place in the futures industry. Unlike most of its rival futures commission merchants (FCMs), particularly those that are bank-based FCMs, futures within its parent company are "the main event", says the firm's chief executive Kevin Davis.
As the world's largest provider of alternative investment products with $26.1 billion under management, the FCM's sister division, Man Investments, is also heavily engaged in the futures business. Together, the units form Man Group, a FTSE 100 company, which saw a rise of 63% in core profits in the last financial year.
The group's roots date back over two hundred years to the sugar broking business of the 18th century set up by James Man, which became E D & F Man.The Man Group of today results from the selling of this original agricultural products business in March 2000, leaving the firm to focus on financial services through Man Financial and Man Investments.
Davis heads up a firm that can claim the number one spot in execution for three of the world's largest exchanges - Eurex, Liffe and Chicago Mercantile Exchange - as well as energy markets New York Mercantile Exchange and International Petroleum Exchange. In fact,"We're number one everywhere we would like to be number one," he states.
In the Commodity Futures Trading Commission (CFTC) listing of FCMs' customer segregated funds, Man is currently number eight, after the likes of Goldman Sachs, JP Morgan and Merrill Lynch. Davis is not particularly interested in this league table, which he labels "a virility index, not a profitability index". He adds: "When you are clearing in the US, with interest rates as low as they are, it can be problematic for institutional businesses to make an adequate return on regulatory capital."
In addition to the firm's passionate focus on futures, Davis puts this success down to a number of factors. Man believes in giving its overseas operations a "local" feel by having them managed, by and large, by local teams. "In France, we're French, in America, we're American, in Britain we're British" says Davis.
It has also expanded carefully."A key ingredient to our success has been the successful acquisition of execution teams from other companies," says Davis."These teams are attracted to Man for a number of reasons but, most importantly, because we regard producers [sales teams] as our customers; their customers are their customers. We never try to disintermediate our staff or imply that they are our clients.We totally respect the fact that their clients belong to them, or are attributable to them."
This approach helps the firm's focus on costs."We work very hard at keeping costs down. In most cases, where we bring in new teams, this reduces our costs through economies of scale.We share the benefits of cost reduction." This provides the teams with incentives, which Man rewards by being what Davis describes as "religiously, fastidiously honest about their pay outs and their deals.We never go back on a deal".
Being a FTSE 100 company also has its advantages:"In our institutional sales effort it makes it a hell of a lot easier to attract potential clients, particularly away from large investment banks, when you can say you are part of a FTSE 100 company," says Davis.
In addition, Man Investment is "a fabulous partner, customer and sister company". In almost all instances, Man Financial acts as the investment division's clearing firm for its futures and options business. From an execution point of view, it has to compete for business as any other third party broker. In some markets, it does as much as 60-70% of Man Investment's execution, in others it is as low as 5%."The higher our ranking on an exchange, the higher the share of the business we will get from them.They are such a big client that they will only trade with us if we have an enormous amount of other customer business so that their business doesn't stand out," says Davis.
The "tremendous relationship" also extends to other areas. "We source new managers for them and in some instances we source new investors," Davis explains. "Effectively, they are a clearing member of all exchanges that we are a clearing member of, which gives them quite a significant advantage over most of their rivals."
Davis' experience has helped his appreciation and understanding of the business. Of his 22 years in the markets - getting his first taste of futures as a floor runner at Chicago Board of Trade (CBoT) for Henry Shatkin - 15 of those were spent as a producer on a desk. "I have a fine-tuned sense of the things that matter to the sales team," he says from experience.
In a European context, for example, Davis says sales people want to be as close as they can be to as much trading as possible, so that they are able to show tighter bid/offer spreads to customers. "It's access to those flows which then enables them to give better prices to their clients and attract them," he explains.
But, with all these teams in place, is there a danger of too much internal competition? Not according to Davis. All the teams have different strengths and mostly different clients.And, furthermore, "We are religiously fanatical about cannibalisation. It is no use to Man having one team undercut the other for the same client. Everybody loses."
Despite its British roots, Man has had impressive success in the US - Davis, though British, is himself based in New York. A founding member of Nymex and at the forefront of its push into new energy markets such as natural gas, this complemented its involvement in New York Coffee Sugar Cocoa Exchange.
In Chicago, a couple of big acquisitions ensured Man got a firm footing in the futures community. GNP Commodities was acquired in 1989, followed some nine years ago by Geldermann, which put the firm into the grain market - it is now ranked fourth for clearing by volume in CBoT's grain markets. Other deals have included the Chicago team of Tullett & Tokyo Futures. All subsequent acquisitions have been retail.
Going forward, Man hopes to use the lessons its has learnt from the transition from floor to screen in Europe to its advantage in the US as that process gets underway.And its acquisition of GNI last November could help in that regard.
"GNI gave us a dramatic uplift in our equity derivatives business," explains Davis. "But the hidden secret in GNI was actually its traditional core futures franchises - most particularly in financial futures, energy and metals. In all these products their business has at least doubled since the merger.
"We had virtually no client conflict," he continues. "And the individuals and teams have complemented each other far beyond our best expectations.We'd been trying to hire Steve Harragan, ceo of GNI, and Cal Harber, deputy ceo of GNI, for 15 years," he says, referring to their "inspirational leadership" qualities. "And these two managers really complement our existing management team. It's been a fantastic merger at virtually every level.We've learnt so much from this transaction, most particularly about electronic futures broking. And, whilst it is true that the previous management at GNI made some strategic IT mistakes, it's also true to say that we have learnt from them and are the better for having gone through that process."
With GNI in place, GNI Touch remains largely focused at the professional trader, while Man Direct is for the retail client base. The two brands will continue to run side by side, says Davis. "We intend to keep that differentiation so that clients understand the different aspects of those two businesses."
For all that expansion, Man remains very focused. "We never take great leaps into new markets, " says Davis."We step into adjoining markets." He cites the firm's activity in natural gas OTC broking as an example of a move that was natural given the firm's activity in the futures market.
The same is true of its global expansion. In Asia, the firm has a presence in Singapore, Taiwan and a very important one in Australia.This is largely due to two important acquisitions it has made in the last ten years: Standard Chartered Futures, just after the Barings crisis, and Ord Minett Futures from JP Morgan.
It has also made "enormous strides in China" (SARS not withstanding) where it is one of the very few approved brokers in the metals industry in the People's Republic. This has been helped by its position on London Metal Exchange where it is ranked number two - having seen its market share grow by 60% (from 10% to 16%) in the past year.
While Davis' passion for the business is impossible to disguise, it also accounts for his desire to see certain issues resolved, particularly in the area of clearing. The London Clearing House model is the best around in his view. For, "there is an inherent conflict between an exchange's desire to attract more business and therefore setting its margin requirements as low as possible, and the clearinghouse requirement to ensure and guarantee financial stability, which means setting margins higher than some exchanges would like. Some exchanges with their own clearinghouse have difficulty getting that balance right."
He continues: "When the exchange becomes a for-profit institution, in my view, it is better for the market if the clearing function is separated." He praises the lobbying by Futures Industry Association (FIA) toward greater freedom in clearing. Futures is the only market where you have to settle in the same place, he points out. "It is extremely disturbing that there does not seem to be any regulatory control over the monopolistic control that certain exchanges have over certain products." He cites the increase in fees put in place by Chicago Mercantile Exchange last year, despite the fact that volumes were at all time highs, which raised the ire of many FCMs.
Such situations will be resolved, in time, says Davis. More than ever before, futures are increasingly a main stream product. "Today, futures are pivotal to the financial system and, accordingly, will begin to attract more interest from regulators. In due course the same pressures that forced stock markets to liberalise will be brought to bear on the futures industry. This may not happen next year, but it will happen within the next ten years."
With the firm's recent performance and the benefits of the GNI acquisition, it is not surprising that Davis remains bullish about the futures business. "As it gets more and more mainstream, volumes will continue to grow," he predicts. "There is very little indication of a let-up in the momentum for growth."
If anything, recent credit problems have brought to the fore the value of the central counterparty system, which Davis describes as the greatest benefit of futures exchanges. While he acknowledges the continued downward pressure on margins, volumes have grown fast enough to offset this - "as is evidenced in our 15-20% annual compound growth in profits".