Tullett Prebon and GFI Group are in detailed takeover talks that could lead to the creation of one of the world’s most powerful interdealer brokers, threatening to eclipse the king of City bond players, Michael Spencer’s Icap.

It is understood that the two listed companies would do a deal based on shares, rather than a big exchange of cash, with Tullett paying a premium. It is believed that Tullett, led by Terry Smith, its chief executive, would have the upper hand in the combination.

Shares in GFI, listed in New York, rose as much as 19 per cent yesterday after a report that the two brokers were days away from an agreement. Tullett, listed in London, rose more than 3 per cent and then confirmed that negotiations were under way.

It is understood that the two brokers, which have been in on-off talks for years, are progressing towards an agreement, but a concrete proposal is more likely to be weeks, rather than days, in the making.

An interdealer broker stands between institutions on deals including bonds, derivatives and energy trades. Companies such as Tullett, GFI and Icap have ridden a wave of volatility in markets over the past year as the credit crisis has prompted some dealers to chase trading opportunities and others to seek safer investments.

However, Icap is clearly the dominant player in the market, leaving some dealers to argue that a second major force is required.

A combined Tullett Prebon/GFI would be the largest interdealer broker, measured by staff numbers, and the second-largest in terms of revenues and posttax profits.

A combination of the two companies would create a broking power-house worth at least £1.6 billion.

Tullett Prebon specialises in trading interest-rate derivatives, foreign exchange and conventional financial products such as bonds.

GFI is better known as a player in more modern and esoteric markets, such as gas and other energy trading products.

It is not yet clear what the board structure of a combined group would be if the negotiations succeed. Mr Smith, a former UBS analyst who is highly respected in the City and has a reputation as a deal-driver, could become either chief executive or chairman. Mickey Gooch, GFI’s chief executive, is also a contender for the top job.

Under Mr Smith, Tullett has diversified rapidly since being demerged from Collins Stewart last year. About 80 per cent of its business is shared equally between London and New York, with the remainder in Asia and emerging markets. Both GFI and Tullett are keen to diversify further.

Mr Smith and Mr Spencer, whose Icap is the world’s biggest interdealer broker, have been regular sparring partners in the testosterone-fuelled world of City dealing. Icap has about 30 per cent of the market.

The two men have had a number of run-ins in the past over the poaching of staff in an industry in which lurid tales of strip joints and late-night drinking sessions with clients abound.

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