Bgc Group Inc (BGC) 2005 Q3 法說會逐字稿

Good morning and welcome to the eSpeed third quarter earnings conference call. At this time all participants are in a listen-only mode until the question and answer session. [OPERATOR INSTRUCTIONS] I would like to remind parties today's call is being recorded. If you have any objections, you may disconnect at this time. I will now hand the call over to Mr. Steve Wargo. Sir, you may again.

Good morning, this is Steve Wargo eSpeed Investor Relation's Coordinator. I'd like to remind you all that the information provided on this conference call contains forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 as amended and Section 21e of the Securities Exchange Act of 1934 as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause or contribute to such a discrepancy include, but are not limited to, the cost and expenses of developing, maintaining and protecting our intellectual property including judgments or settlements paid or received and related costs, the possibility of future losses and negative cash flow from operations, the effect of market conditions including trading volume and volatility, our pricing strategy and that of our competitors, our ability to develop new products and services, to enter new markets, to secure and maintain market share, to enter into marketing and strategic alliances, to hire new personnel, to expand the use of our electronic systems, to induce clients to use our marketplaces and services, and to effectively manage any growth we achieve, the effects of the attacks on the World Trade Center on September 11, 2001 and other factors that are discussed under risk factors in eSpeed's annual report on Form 10-K filed with the Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. I would now like to turn the call over to our host, Howard Lutnick, Chairman and CEO of eSpeed, Incorporated.

Good morning and thank you for joining us to discuss our third quarter 2005 results. Today we are pleased to report positive results with respect to our market position. Our focus on customer service, superior technology and customized pricing are continuing to show results that validate our business model. Joining me today is eSpeed's management team, Kevin Foley, Paul Saltzman, and Jay Ryan. Jay will start by reviewing our third quarter financial results, after which Paul will talk about our electronic US Treasury business, then Kevin will talk about our voice assisted business and our new products, after which I will review our guidance and outlook for the fourth quarter and for the full year of 2005. Then, of course, we will be available to answer your questions. So with that, I would like to turn the call over to Jay.

Thanks, Howard, and good morning. For the third quarter 2005 we reported both GAAP net income of $0.04 per diluted share and non-GAAP net operating income of $0.04 per diluted share. While there is no net difference in these results, I would like to take you through the various items which are largely offsetting. These items include a $300,000 charitable contribution to the Cantor Relief Fund, $500,000 of expenses incurred for cost related to patent litigation and a $600,000 gain realized from the sale of an investment. Each of these numbers is net of tax. In terms of revenues, we reported third quarter GAAP revenues of 38.8 million. These revenues include a $1 million gain related to the sale of our investment in EasyScreen, which we included in our non-operating results. Our operating revenues were 37.8 million. These operating revenues were slightly higher than expected, helped by our improved market position. Paul will expand upon this later in our call.

Turning to expenses, our third quarter operating expenses of 34.9 million are marginally up on a sequential basis. But approximately a $1 million lower than previously estimated due to a number of cost saving efforts across the company. Looking forward to the fourth quarter of 2005, we anticipate expenses will remain steady at approximately $35 million, as we continue the same level of new product and software development while remaining focused on cost management. Our revenues for the fourth quarter is expected to be approximately $36 million, which has been revised to reflect volume reductions associated with the temporary dislocation of certain market participants in a quarter with three less trading days. In terms of cash, we calculate free cash flow as operating cash flow less net cash used in investing activities, including fixed assets, software development, intellectual property and investments. For the third quarter of 2005, we generate a positive free cash flow of 11.5 million.

This amount included 5.8 million in proceeds from the sale of our EasyScreen investment. As of September 30, 2005, our cash position was 184.3 million, up approximately 2.1 million from 182.2 at June 30, 2005. As of today, we have approximately 50 million shares of common stock outstanding. During the third quarter, eSpeed repurchased approximately 1.2 million shares of the company's stock for approximately 9.5 million in cash at an average price per share of $7.93. We currently have approximately 58.7 million remaining on eSpeed's $100 million share repurchase authorization. With respect to insurance, we still have available to us up to 19.5 million of September 11th related replacement insurance once we exceed $200,000 of spend that is remaining from the first payment of $20.5 million. As such, we expect to begin to record a gain in the fourth quarter and to treat this gain as non-operating. I would now to turn this call over to Paul.

Thanks, Jay. Good morning, everyone. It's a pleasure to talk to you about our fully electronic U.S. Treasury business. In the third quarter, eSpeed's volumes increased sequentially and we saw another quarter of improved market position. Fully electronic volume was 8 trillion for the third quarter of 2005, an increase of 12.7% compared to 7.1 trillion reported in the second quarter of 2005. This volume growth compares favorably to a 6.3% decrease in treasury volumes as reported by the Federal Reserve over the same period. We believe our volume growth is the direct result of favorable user reaction to our improved customer service levels, the provision of customized technology solutions that make trading on eSpeed easier, and the impact of incentives to trade at marginally lower commissions that are contained in many of our new pricing arrangements.

During the third quarter, we also made functionality enhancements to our electronic platform that make it faster and easier for clients to trade. And we also increased the speed, reliability and stability of our trading system, demonstrating our commitment to nothing but the highest standards of quality. As we expected, our fully electronic revenue per million declined in the third quarter. This decline in this measurement is due to the transition of customers who have embraced fixed component pricing arrangements as their volumes have increased, as well as an increase in volumes among those customers with existing fixed component pricing contracts. After three consecutive quarters of volume growth and improved market position, we are working hard to continue this trend in the fourth quarter even in the face of anticipated seasonal declines in U.S. treasury volumes. Like to turn the call over now to Kevin.

Thank you, Paul. Good morning, everyone. I will begin with a review of our hybrid voice assisted business. Voice assisted volume for the third quarter 2005 was $8.6 trillion, an increase of 15.9% compared with 7.4 trillion in the second quarter 2005. This further increase reflects the full quarter impact of BGC's second quarter acquisition of Euro Brokers, including the high volumes related to the voice assisted repo business. eSpeed's revenue for voice assisted transactions declined approximately $300,000 to 6.2 million in the third quarter as the integration of certain BGC broking desks resulted in their volumes moving from voice assisted brokerage into Euro Brokers screen assisted and open outcry desks. Overtime, we expect these volumes to migrate back to voice assisted transactions and some will grow to include fully electronic transactions in line with eSpeed's business model.

Our hybrid model provides eSpeed a significant long-term pipeline opportunity, both in terms of fully electronic transaction volume and increased revenues across our product offerings underpinning the hybrid model as the life cycle of a marketplace as it matures from telephones to computer assisted trading. Historically, new markets have initially tended to trade by voice alone. As volumes improve and the structure and characteristics of the market standardize over time, its potential to leverage technology increases. The first stage of this migration occurs when open outcry trading is supplemented with market data screens provided by eSpeed, and for which we receive 2.5% of related trading revenue. For the third quarter this screen assisted revenue was approximately $1.1 million. Second stage is the migration of voice brokers to the use of keyboards and computers to keep track of increasing volumes of orders and to match trades. This voice assisted brokerage earns eSpeed 7% of related trading revenue, which for the third quarter was approximately $6.2 million.

The third stage occurs with the appearance of benchmarks which over time tend to migrate towards fully electronic trading by the customers themselves, whether by keyboard or with the assistance of computers. Fully electronic transactions that have migrated through eSpeed's hybrid model provide the company 65% of related trading revenue, which for the third quarter was approximately $18.9 million. In the long run, the migration of our pipeline represents a significant revenue opportunity for eSpeed. In eSpeed's hybrid model, the pace at which individual markets will migrate along its pipeline will vary between the different types of instruments. Both the Euro Brokers acquisition and BGC's continued expansion, are enhancing our growth in voice assisted and screen assisted volumes.

We are now progressing with technology improvements across the Euro Brokers platform, And in the future we expect additional voice broker revenue will be profitable for us through this hybrid model. Moreover, BGC's recent acquisition of ETC Pollock, a leading French intra-dealer broker, adds further to our pipeline of voice brokerage volumes that are eligible to become voice and screen assisted. Turning to new products, fully electronic notional volume for new products was $376 billion in the third quarter 2005 compared to $506 billion in the second quarter 2005, a decrease of approximately 25%. Despite this disappointment, eSpeed remains committed to new products like FX, repos and futures and will continue to develop and foster these products going forward. We've continued to invest in our FX platform over the third quarter, including the introduction of new technology features and additional market participants. However, our results have not improved.

Our continued commitment to spot FX products was demonstrated by the hiring of industry veteran John Capuano as global head of foreign exchange sales. John joins eSpeed with over 30 years experience in the FX markets. In short, we are not satisfied with our results to date and we are making significant adjustments to our business model. eSpeed's futures business is showing some momentum. We have the only platform in the world where certain kinds of trading in cash U.S. Governments and futures can be executed simultaneously. Progressing with the development of a cash futures platform for spot FX, we continue to pursue a strategy to increase distribution of our front-end products, further driving the volumes traded through eSpeed. Volume for the eSpeed Equities direct access product was 154 million shares in the third quarter 2005, compared with 178 million shares in the second quarter of 2005.

We expect technological changes planned for eSpeed Equities to have a significant impact on our volumes over the coming year. Following our June announcement regarding our deal with Sprint Nextel, we are now beginning to roll out the world's first wireless government bond trading solutions. Our clients are now able to trade virtually anywhere in realtime through an eSpeed trading application on their Blackberry devices. Not only has it empowered the trader in a truly innovative way, it again reminds our clients why we are different and what our focus on technology means to them. Now I would like it turn the call back over to Howard to review our outlook for the rest of the year.

Thank you, Kevin. For the fourth quarter 2005, eSpeed expects to generate revenues of approximately $36 million and we expect our operating income to be in the range of zero to $0.01 per diluted share. This guidance is based on the company's expectations that the average daily Federal Reserve U.S. Treasury volumes will decline to between 520 and 530 billion for the fourth quarter, which reflects the year-end seasonal factors. As Jay stated earlier, our revenue guidance has been revised to approximately 36 million, in part due to temporary dislocation of some of our trader clients during the quarter, the fourth quarter, which has three less trading days. Accordingly, we now expect to generate revenues of approximately $150 million and to incur operating expenses of approximately $139 million for the full year of 2005. We continue to expect full year operating earnings of between $0.13 and $0.14 per share. Our estimates assume that average daily Federal Reserve U.S. Treasury volume for all of 2005 will be between $550 and $555 billion.

With the increase of the fixed price component of our commission arrangements, the volatility in the average daily Federal Reserve U.S. Treasury volumes is producing less variability with respect to our revenues. BGE's growth and expansion continues to present eSpeed with significant opportunities globally. Following BGC's acquisition of Euro Brokers Maxcor earlier this year and its recent acquisition of ETC Pollock, one of France's leader intra-dealer brokers, BGC's pipeline of brokerage desks provides exciting opportunities for eSpeed. BGC transactions will migrate across the pipeline from open air cry to screen assisted open air cry and then on to voice assisted and finally to fully electronic trading, increasing our percentage of trading revenues along the way. While this takes time and each product category is different, the opportunities presented to eSpeed are clear. We expect these potential new revenues to produce incremental margins of 75%.

We have improved our position in our core U.S. Treasury business for three straight quarters and believe we remain well positioned for the growth we expect in the overall U.S. Treasury market. With computer assisted trading being the primary factor, we expect U.S. Treasury volumes to double by 2008. This trend will result in an increase in related volumes as traders become more and more comfortable with computers augmenting and implementing their trading strategies. Going forward, eSpeed is in a unique position to capture a greater share of this growth due to our focus first and foremost the technology company and because we have a core team of dedicated application specialists. As with most of our new clients, computer assisted traders usually commence trading under variable price arrangements so that early growth from these incremental traders will add both volume and variable revenue for us.

With respect to foreign exchange, while we remain committed to the opportunity and its related benefits, further strategic adjustments to our platform will be necessary over the coming quarters. We remain convinced our FX platform will ultimately experience significant growth. In conclusion, our improved market position in our core U.S. Treasury business reflects our hard work and recent technological improvements. Our improved trading capacity, competitive pricing model and high service standards have all combined to provide a value proposition that our market participants appreciate. We are confident in our business and our franchise and we are optimistic about the opportunities which lie ahead. Thank you and we now like to turn the call over to the operator so that we can answer your questions.

Thank you. At this time we were ready to begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Rich Repetto of Sandler O'Neill.

Yeah, good morning, Howard, how you doing?

Good morning.

My first question is on it seems like there is a bit of a strategy shift with the lack of growth, I guess, in the new products. Now it appears like you are trying to develop a pipeline. And I'm just trying to understand the screen based open outcry. Well first, is this a strategy shift and then what products are they trading? At least I thought I understood that on the run treasury was pretty much 98, 99% electronic.

This has always been our strategy from the get-go, even when we went public. I think there was a -- obviously we had a significant dislocation in that with respect to the events of September 11th which really hit the voice brokerage group that we technologically supported. What happened is toward the end of 2004, BGC, which is the voice brokerage group that we support with our technology, started growing dramatically and adding new desks and adding new brokers, which gave us the opportunity to utilize the technology that we had already developed and put that technology back into practice across a broad spectrum of products. So while benchmark U.S. Treasuries are already, as you said, primarily electronic, off the run U.S. Treasuries, agencies, interest rate swaps, repos, currency options, a variety of categories across the worlds, European government bonds, corporate bonds in Europe, potentially corporate bonds in America. A broad, broad spectrum of products that BGC plans to broker and that's why Kevin spent the time discussing that migration, that desks many of them can start with open outcry. But then as they use a screen to assist them we will start to get 2.5% of the revenue. Once they then go to voice assisted, so the computers are doing the matching, that then moves to 7% and sort of puts you in the on-deck circle for the possibility of the products going fully electronic or parts of the product going fully electronic to which case we would get 65%. So it's really always been our strategy and it's a broad spectrum of products that BGC is brokering and the example, I guess, the easiest way to see that is ETC Polack is really trying to cover the same type of products specifically in France. You get a global distribution as well as broad product distribution and a nice pipeline of opportunity.

And just how -- any feel for what you would expect as far as how long it takes to move someone from the screen to voice to fully electronic?

Well, what we have seen in the past is once a product gets into that 7% category, that voice assisted category, then it is really in the on-deck circle to become electronic. So it is really once it gets there then that possibility begins and the concepts start to be discussed with clients of when and if it can do it. And that becomes really a practical matter of how the clients feel and how broad and deep the marketplace is for that particular product. But once something's open outcry, it completely is variable when and if it gets to screen assisted and then from screen assisted when that gets to voice. But it tends to be really highly topical within the voice assisted going fully electronic and that is really social, it's not technological. It's already been doomed by computers, now the question is when are the client ready to do it themselves. And it really becomes demand based. What we have seen in the past is as the B to C products become more prevalent electronically, those that have like the trade webs and the market access-type product, the more times the clients, the sell side clients are asked to make prices, the more they need to respond in the wholesale market and the more likely they are to move to an electronic model to offset their electronic price making to their clients for them to get out of that. They tend to be complimentary in terms of business model.

Okay. Last question, Howard. As we move into '06, investors start looking at the forward year earnings, you know, and we talked even prior to the call about this, but the license fees from the Wagner are going to roll off. Do you expect -- I know there's expense against that, it's not just all profit and I know you have a lot of other licenses as well. How do you expect to sort of replace that revenue stream?

Well, as you said, we have the Wagner patent revenues roll off in February, '07. There are approximately about half of those revenues also have expense associated with them. And that the amortization of costs associated with those patents. And we have a broad patent portfolio that we think is highly valuable. I think how one earns money from that is particular and individual to each intellectual property class. But we think, looking forward, that our opportunity just on intellectual property is exciting and, Rich, with respect to economic opportunity. Also that's why we are investing so strongly in foreign exchange and repo and futures, because we do feel that we have really this period of time throughout '06 to really get these businesses underway and get them earnings in our profits. So it's really two-pronged or even three-pronged. It would be the growth of BGC and the voice brokerage business, which will add revenues. It's a potential opportunity with respect to intellectual property. Possibility of licensing, but that's a case by case basis. And our new products. And all of those three together with what we've expect is a doubling of the U.S. Treasury volumes in and of themselves, the whole market doubling by 2008, I think gives us four ways of growing our revenues and growing our profits and those growths will each come with very strong incremental margins. So we feel we are in an excellent position to attack these four growth prongs and that's how we're looking forward to our business.

Understood. Thank you.

Thank you. Our next comes from Richard Herr of KBW.

Hi, good morning.

Good morning.

Just a quick question on market share, looks like it's rebounding. Looked like July and August you had probably the strongest month of the quarter, gave back a little bit in September. Can you maybe talk about was there anything -- maybe talk about why that kind of gave up a little bit back in September and was there any type of competitive reactions from any of your competitors?

Thanks. This Paul Saltzman. No, I don't think there is anything particularly unique about the trend over the summer. The summer months are difficult months to capture trends given vacation schedules and so forth. As I indicated, we continue to be pleased with the improving market position and the feedback that we are getting from our customers is pretty simple, which is they like the commitment to customer service, the focus on customized technology solutions, and the speed and reliability of our technology. And it's not too difficult in terms of what we need to do, we just need to keep at it and continue to push through the fourth quarter and work hard to continue the trend.

Okay. So if I am -- I think if I'm understanding you correctly, maybe September is a better idea for a run rate for market share is what you are saying?

Again, as I said, I'm not so sure that any one month is a predictor of future market position. We look at our sequential growth quarter over quarter and we're pleased with the results this quarter. And we look forward to working hard to continuing that trend.

Okay. And just one other question. Clearly I think clearly the building the pipeline is definitely accretive for eSpeed. I guess my question is, just from the perspective of BGC, doesn't looking to move more of that volume to electronic, how does that affect BGC's fortunes and does that put them at a disadvantage relative to eSpeed or does everybody benefit?

It results, actually, in everyone benefiting when the time is right for the product. I mean, the fact is that volumes start to become -- the way to make more money from BGC's perspective is to trade more volume. Open outcry without a screen at all, you can only cover so much ground by calling all your clients and telling them what's going on. So at some point you decide I really need a screen to advertise all of the products I have to keep my clients informed as to what the prices are. And when they ask for that, that's a pretty low threshold of technology for us, something we done years ago that we have really in the bag. And when we roll that out we start to get 2.5% of those revenues. Then as that becomes more and more busy, I mean it really becomes imperative for the computer to assist the brokers in getting their business done. And it just has to do it. So the fact that they might be able to do 50% more business and have a 7% technology cost. So the economies to BGC are tremendous as the businesses grow. You really need technology to help you. It's sort of the same, I think, in everybody's business which is once your business gets to be a certain size, if you could pull off the shelf technology that you know would work and it's really variably based, I mean, that's key. So for BGC they don't have to take the risk of investing in the business. We've already made that huge investment in technology, so they really get to pull off the shelf tremendous technology which they get to pay for in a variable basis and it's only a small percentage. So I think over time out of the businesses are ready to spring board into that new volume, it works for everybody. It's a very attractive, variable model. But things have their course in time and they don't go from one to the other unless the volume is about to leap alongside it. It's very complimentary and it's something we have been doing for a very, very long time.

All right. Makes sense. Lastly, just one more question. The U.S. Treasury's come out and said basically how much they plan to issue in Q1 in terms of debt. Looks like it might a record number. Any kind of color you can give us on what you expect in terms of the return of the 30 year as an impact on your business? Thanks.

Well, the 30 year is one of the great friends of this company. And we've missed them for a long time, having the 30 year go away. Now we are thrilled, we are thrilled that the historically strongest particular security of this company for its entire history is back. So we love that. That's great. With respect to how auctions impact volumes, I would say that more auctions is the defining factor of more volume. As you can imagine, if the treasury auctioned 30 billion of a particular five year note or 27 billion or 33 billion, you wouldn't really change the average volume traded per day over the next quarter. But if you added three more auctions, right, or three new whole issues coming, that would actually be material. So, basically what has happened is there is a new auction. It's the most volatile issue and it's the 30 year. So that from a math perspective, that's just an absolute good. It makes us all real happy and we look forward to having our 30 year being a material and sizable part of our business, because of the length of time it's taken since they've issued 30 years last, the volume of 30 years has decreased because of the outstanding amount to trade. Now that will change and it's very, very exciting.

Okay, that's very helpful. Thanks.

Thank you. Our next question comes from Alan Schein of Jay Goldman Company.

Hi. Quick question, I wanted to understand in the previous quarter you talked about even as you transitioned to the fixed fee pricing that a significant amount of -- there'd be still a significant amount of variable pricing. But it looks like revenue has gone up dramatically, I mean, not revenue, volumes have gone up dramatically but revenues hasn't followed suit. Why is that?

This is Paul, again. I think as I said in my remarks, it's pretty simple. Depending on the percentage of the pricing arrangement that is fixed, we have seen two phenomenon over the course of the quarter. One is a transition of new customers and existing customers to pricing arrangements that have a greater percentage of fixed component and increasing volumes from those customers. And secondly, especially with respect to the majority of our larger customers where we've previously reported, we've renegotiated pricing arrangements increasing volume from those customers who have fixed component pricing arrangements. So by definition, the revenue per million will decrease. So that is the explanation that I think we laid out both on the previous call and today.

Yes, but -- I understand why revenue per million would decrease, but I'm trying to understand why as volumes increase your absolute revenue number is not going up, if you're still suppose to be capturing some variable price? There should be some incremental flow through. I understand the per million number is going to go down.

I think what happens with respect to our business is that it's not smooth but rather chunky, which is that when some clients come online they, as I said, new clients tend to start with variable pricing and significantly higher. Then as they build their models and do more and more business, they get volume discounts, so their average revenue declines but their gross revenues continue to grow and then they can sign on to a fixed price arrangement. And if they get big enough, they are actually going to fix and contractually agree they are going to do a certain amount of revenues with us and they fix that and then their revenues no longer grow. But their volumes could continue to grow but the revenues no longer grow. And that life cycle, depending on when we make that change, could potentially even have the impact of lowering our revenue because generally clients don't want to commit to the fixed price until they exceeded that fixed price in their minds. For instance, a client who was paying us $500,000 a quarter is not ready to sign up for a $750,000 quarterly fixed fee. But when they are doing 850 or 900,000 a quarter, then they call Paul up and say, okay, I now see my bonds are going to be there, I would like to do that. So we have that one quarter, while we have grown from the 500, that the next quarter will look like it's declined. So it's chunky. But remember, we expect one of the key ways we are going to grow our revenue going forward is more new clients having signed fixed price deals. So while existing clients might enter fixed price deals and our averages might decline and even our, really our gross revenue line should remain steady to growing in increasing volume, the number of fixed price clients will grow and therefore our revenues from a gross perspective should definitely grow as well. Another way to say it is we don't expect from our largest clients to make more money from them. We expect to have more large clients.

Okay. So this last quarter effectively all this increased volume was from clients on fixed -- pretty much effectively all the increased volume was from clients on the fixed fee model, so you didn't see zero flow through?

I wouldn't say, again this is Paul, all, that probably overstates it to a certain degree. But obviously a large percentage of the increase in volume, keeping in mind that overall fed volumes declined substantially, but I think drawing the conclusion that a significantly large percentage of our volume increase came from those customers whose marginal incremental commissions were either at zero or low, I think is a fair assumption.

Okay. Thank you.

Thank you. We have another question from Rich Repetto of Samuel O'Neill.

Howard, I just wanted to follow up on the 30 year, because investors are looking at that not only from a eSpeed perspective but other companies that are -- that could trade potentially the futures of the 30 year. But the question is, what impact -- is the cannibalization if the 30 year is issued, does it talk away from 10 year volume, from 5 year volume? More specifically, if you could just give us a little color on the incremental impact of the volume in the 30 year.

I think it's just good. I mean, there might be a slight decrease in 10 year volume, but nowhere near the growth that would come from the 30 year. So I think it will grow out of business of the long end of the U.S. Treasury market. And I think spread trading between 30s and 10s will make up any shortfall on the near-term of people trading just 30 years from 10s. I think with respect to the futures markets, I think it's just an absolute good for the cash market. In terms of volumes, I think it's a absolute good for the futures markets in terms of volumes. It's just a new area and it's going to be great.

Howard, the other thing I just wanted to add, it will definitely take away some volume from the short-end as the treasury seeks to sort of lengthen its average maturity. The treasury borrowing advisory committee's announcement speak to that. The other thing that's exciting is the introduction of the 30 year will introduce customer flow for our customers who seek to acquire long dated assets and, I think as Howard has consistently said, if our customers are profitable and seeing customer order flow and a volatility is there because of that activity, there is going to be more trading on our system and that's net/net a very good thing.

And then, would there be any potential to amend this fixed pricing model with the larger clients.

No, I don't expect -- I think the way we've said it I think is right, which is from our large clients now we've made a number of fixed component arrangements with them and we don't expect to make more money from our largest clients. We expect them to trade more volume with us, therefore drawing in more new large clients. We think the addition of the 30 year will give more clients who trade with us more ability to do more volume which will then reach those high fixed cost, fixed price component and sign long-term fix price deals with us at much higher levels than they are current paying. So basically, as I said, the easiest way to think about it is whatever number of large clients we have doing fixed price deals, we would expect over the next coming two or three years to have twice as many of those fixed priced contracts out and therefore our revenues to be significantly higher.

Understood. Thank you.

Thank you. Once again, if you'd like to ask a question, you may press star, one. Our next question comes from Raj Sharma of Polestar Investment Research. Raj, please check your mute button. Your line is open.

Hi. Good job on the market share gain this quarter. How would you think of per million pricing for fully electronic and voice assisted in Q4, does it go down from Q3 or does it go up due to the lower volumes in Q4? And then I have got another follow-up question on foreign exchange.

Well, I guess --

Hello?

Sorry, Mr. Wargo, we were unable to hear you? Hello? One moment, sir. Please stand by, the conference will resume momentarily. Sir, please continue.

Sorry about that. I guess somehow that we got disconnected. Raj, why don't you ask your question again so we can at least have some continuity.

I wanted to understand how would you think of the per million pricing for the fully electronic and voice system in Q4? Does it go down from Q3 or does it go up due to the lower volumes in Q4?

If the only change were that volumes declined, our average revenue would grow. That being said, there is rarely an instance where nothing ever changes. There will be, A, we are going to try, as you saw this quarter, our volumes were up 12.7% while the Federal Reserve averaged daily volumes were down 6%, the Chicago Board of Trade was down 10% or 9%, the CME was down, Eurex was down, all the statistics were down but we were up. Obviously our objective is even in down volumes to try to continue to grow our market position and our market share and therefore have our volumes grow. So we don't want everything to stay the same. But the point is, all other things being equal, a declining volume would cause us to have an increased average but lower gross revenue. An increased volume would have a lower average but more revenue, more gross revenue except for the idiosyncrasies of any particular set of clients renegotiating their contracts and becoming more fixed which might make it look like we had slightly less revenue per volume in that particular quarter. But the benefit of that is a solid and stronger base of clients going forward on which to build into what we expect is a doubling of the business over the next three years. So it's really the setting up of the doubling of the business to cause us a strong foundation as we seek to get a strong percentage of the doubling of the business that's coming, which will grow our revenues dramatically. Certainly not double our revenues, but it's our objective to have it more be 50% of revenues come with doubling of the business.

I also wanted to understand the stability of the pricing. So are most of your large clients, or the majority of your clients now on a new pricing structure that is expected to hold for how long?

Yes, most of our large clients have been repriced over the last year or so. And that's what we have said on the calls and we expect that pricing to remain stable for the foreseeable future.

Okay. And then I have a follow on question on foreign exchange. I know that volumes can be lumpy in a new business, but can you give us some color on why the volumes were down in the third quarter? What's happening? Is it -- are these issues related to Q1, Q2 when some of the market makers have backed out? Can you talk a little bit about that?

Well, I just placed it as a general context that market participants, expectations in electronic trading, spot FX are evolving. And that's influencing the business model that potential participants, potential market makers want to play in and want to see succeed. So it's a combination of factors, I suppose, that leads to our not having had growth. We think that going forward we are making adjustments that fit the desirous expectations of potential large participants and that's why we remain committed, remain focused and still think there is significant opportunity ahead.

Okay. Thanks.

Thank you. We have another question from Alan Schein of Jay Goldman Company.

Just trying to understand as all of these changes take hold and new fixed fee model is in place and these different sources of revenue come on stream, if you look out a few years do you have a perspective on what your targeted long-term operating model is going to look like?

We do. We have a -- it's our view that our revenues come with 75% incremental margins. So the treasury business has an opportunity of doubling the business. And if that business -- if we were to get our share of doubling the business we think that will come with a discounted model, but let's say it came with 50% revenues as opposed to 100% revenue so a 50% discount to that volume and those -- again we perceive things coming with a 75% incremental margin. The migration of voice business over the next three to five years should continue both the gross size of BGC and the businesses we support should grow, so even the same products should expand and grow their business as well as that migration will produce significant returns to us again at margins well above 50% for that business. And new products, we -- there is really two ways to go on new products, either to cover our costs or to not have the costs. . Over the coming years we will either build our new product businesses to get the revenues up to covering their costs so that the opportunity does not cost us money, but rather is an opportunity and only an opportunity cost. Or at some point we will have to take the decision that maybe we will invest less in that business and therefore have our costs go down without the negative impact of losing the revenue. So the fact is we think we are well positioned to gain from each of these market segments. Pretty much as the markets goes forward we have the opportunity in front of us to gain earnings from each of those segments going forward.

If you look at the business on a consolidated basis, are the historical years representative of the earnings power of the business? Have these changes changed the potential profitability that you are targeting for the business in its new form.

Well, obviously lots of things have changed, but the treasury business, on those prior volumes, things have changed. But if you were to double the volumes, then the opportunity, of course, grows which would then say we would be able to have this scale of leverage to make the profits or even exceed those profit levels of the past. So if the volumes of the treasury market were to be fixed at those old levels, then the new pricing could not get back there. But, if the volumes in the treasury business dramatically grow and the addition of new clients obviously allows us to add new revenue streams, we think those opportunities absolutely remain in front of us to meet or exceed those kind of numbers.

I guess, let me just ask in a little different way. Is the return to the historical profitability dependant on new business initiatives or dependent on the existing legacy business volumes and new clients growing?

I think it could be either of them. It could come from the treasury business growing and new clients coming in in the treasury business so our core treasury business definitely could drive significant revenues and profits going forward. New products, if they are successful, could drive that. But that needs to get some traction, which it does not currently have, and we are investing significantly in those businesses so that you can see that investment, I guess if you compare things to a year, year and a quarter ago, our expenses as compared to where they are now, we said our expenses have primarily grown for discretionary reasons because we've made investments in sales force and in technology to support these new products. Then lastly, we have, of course, the opportunity from our stream of migrating across the pipeline with respect to BGC, which was not something that was there in the past, in the recent past, but it was, of course, a key part of our business model pre-September 11th and is now back to being a key part of our business model, which is very exciting for us. I think we have lots of opportunities in which to meet or exceed those historical levels and that's very much what we are focussed on and working toward.

And just you allude to this, but you obviously constantly evaluate the expenses that you are committing to the new initiatives, but is there -- obviously it hasn't been as -- it's been disappointing relative to your expectations. Is there some sort of timeline that youv'e laid out in terms of realizing success or covering those expenses?

I don't think I have a specific pipeline, but those of you on the call who know me well and know our management team well, know that we are an impatient group. And so we are relentlessly re-evaluating our position, relentlessly making change. And as long as the opportunity remains there, as long as we do not think that any other set of companies has actually taken up that opportunity in front of us, then that opportunity is there. It's available to us. There is no one in a better position to do it. There is no one who can do it at a lower cost than us because of our leverage and scale. Therefore, we remain excited by it. If those parameters ever change, then we take it under advisement and we can reconsider things all the time. It's part of our impatient nature, which is we want to get there and we want to get there now.

Okay, thanks for the answers.

Thank you. That concludes today question and answer session. I will now turn the call over to Mr. Howard Lutnick for closing remarks.

I would like to thank you all for joining us. We appreciate your time, spending the time working with us to understand our company. And we look forward to speaking to you again next quarter. So thank you all and have a great day today. Thanks.