ICAP sees signs of improvement for interdealer brokers

* Expects H1 revenues to have fallen 15 percent

* September saw improvement in activity - CEO

* Cost cutting programme on track

* Shares (Berlin: DI6.BE - news) fall 1.9 percent (Adds analyst, CEO comments, detail, background, shares)

By Clare Hutchison

LONDON, Sept 30 (Reuters) - ICAP (LSE: IAP.L - news) , the world's biggest interdealer broker, reported a pick-up of trading in September and said a potential tie-up between rivals could bring further relief to an industry battered by retrenching investment banks and subdued markets.

Interdealer brokers, which match buyers and sellers of currencies, bonds and other tradeable instruments, have seen revenues plunge as banks pull back from risky trading activities to comply with new rules brought in after the financial crisis.

Their troubles have been deepened by years of very low interest rates, which have damped market volatility and reduced revenue from trading products such as interest-rate swaps.

ICAP said on Tuesday it expected revenues to drop 15 percent in the six months to Sept. 30, the first half of its financial year, or 10 percent adjusted for currency fluctuations.

But some analysts said that was better than feared, and ICAP Chief Executive Michael Spencer reported an improvement in the last month of the period, when a cut in European Central Bank interest rates and speculation about the timing of a U.S. rate hike injected some volatility into financial markets.

"While I do not expect a linear recovery, this provides a basis to be guardedly optimistic about future market activity," Spencer said in a statement.

Bank of America Merrill Lynch analyst Philip Middleton, who has a "buy" rating on ICAP shares, believes the market is in the early stages of a cyclical upswing and ICAP is set to benefit.

"This is the key point of the update - the company is beginning to see signs of life in the wholesale markets," he said.

Nonetheless, ICAP shares were down 1.9 percent to 388.3 pence by 1035 GMT, lagging Britain's index of small- and mid-cap companies.

CUTS AND CONSOLIDATION

In an update ahead of reporting its full first-half results on Nov. 19, ICAP said revenue at its global broking division, where brokers negotiate deals by phone, probably fell 20 percent during the period, or 16 percent stripping out currency moves.

Revenue from electronic markets was projected to decline by 6 percent, while its post-trade risk and information business was expected to deliver growth of 11 percent.

ICAP has been trying to offset a slump in trading volumes by cutting costs and said it was on track to deliver savings of over 60 million pounds ($98 million) this financial year, most coming in the second half of the period, meaning full-year profits will be more heavily weighted to the second half.

As part of those efforts, ICAP said it had cut 265 broking jobs and closed 21 underperforming desks in the global broking division since the start of the year. It is also in the process of renegotiating broker contracts to bring down the ratio of pay to revenue.

On a call with analysts, Spencer said there could also be a benefit to the industry from potential consolidation. Both exchange operator CME Group (Kuala Lumpur: 7018.KL - news) and BGC Partners (NYSE: BGCA - news) want to take over broker GFI Group (NYSE: GFIG - news) .

"Certainly consolidation in our space would be something that we would welcome. There are five global broking firms and a contraction of that number to four would be welcome and further reduction to three would be the ... ideal outcome in my view," he said.

London-listed ICAP separately announced that finance director Iain Torrens was to leave the group for telecommunications firm TalkTalk. It said the company had asked headhunter Spencer Stuart to search for a successor. Torrens is to stay on until a replacement is found.

($1 = 0.6147 British Pounds) (Editing by Jason Neely and Mark Potter)