Bgc Group Inc (BGC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q2 2010 BGC Partners, Inc. earnings conference call. My name is Steve and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question and answer session at the end of today's conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jason McGruder, Head of Investor Relations.

Before we being, I want to make sure that you know that our Third (sic-see Press Release). Quarter 2010 Financial Results press release was issued earlier today. It can be found at either the News Center or Investor Relations section of our website at www.bgcpartners.com. During this call we will also be referring to a PowerPoint presentation that summarize our results and which includes other useful information. After the conclusion of the call we will also post a copy of the prepared remarks that we are about to give. These can all be found in the investor relations section of our site. Throughout today's call, we will be referring to our results only on a distributable earnings basis.

Please see the section of yesterday's financial results release entitled Distributable Earnings and Reconciliation of GAAP Income to Distributable Earnings. For definition of this term, and how, when, and why management uses it. Unless otherwise stated, whenever we refer to income statement to items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. I will also refer you to the statement entitled Discussion of forward-looking Statements contained in our press release. I remind you that the information in the release, and on this call, contain Forward-Looking Statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.

Such forward-looking Statements include statements about the outlook and prospects for BGC Partners and for its industry, as well as statements about our future financial operating performance. Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements, could differ materially from those contemplated, expressed or implied, because of a number of risks and uncertainties that include, but are not limited to, the risks and uncertainties identified in the earnings release in BGC Partners' filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution it is impossible to predict actual results or outcome, or the effect of risk and uncertainties or other factors on actual results or outcome, that according, you should not place undue reliance on the statements.

The forward-looking statements speak only as of the date when we make them, and we undertake no obligation to update these statements in light of subsequent events or developments. Please refer to the complete disclaimer of respective Forward-Looking Statements set forth in today's Earnings Release, and the risk factors set forth in the public filings which we incorporate by reference. I am now happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners, Inc.

Well done, Jason. Good morning, and good afternoon to those who are with me in London today. Thank you for joining us for our second quarter conference call. With me today are BGC's President, Shaun Lynn, our Chief Operating Officer, Sean Windeatt and our Chief Financial Officer, Graham Sadler.

BGC Partners, once again out paced our peer group in terms of top and bottom line growth. Our revenues were up 14.4%, to $336.3 million in the second quarter of 2010. Pre-tax distributable earnings were up 44.7% to $46.5 million or $0.20 per fully diluted share. Our post-tax distributable earnings were up by 63% to $38.9 million or $0.17 per fully diluted share.

We had strong results across most of our products during the quarter. We again generated double-digit revenue increases in Rates, Foreign Exchange and Equities and Other Asset Classes. I am also pleased to report that our quarterly revenues, related to fully electronic trading, were up by 40% as compared to last year. The combination of our unique structure, ongoing partnership enhancement program, continued strong top-line growth and increasing proportion of our revenues relate to the fully electronic trading, contributed to our 345 basis point year-on -year profit margin expansion.

Our pre-tax distributable earnings per share increased by 33.3%, while our-post tax distributable earnings per share, increased by 54.5% when compared to the second quarter of 2009. I am also pleased to announce that our quarterly dividend to common stockholders increased by 55.6% year-over-year to $0.14, which remains consistent with our first quarter dividend. It is the Company's intention to maintain this dividend for the remainder of the year.

With respect to the financial reform bill recently passed by Congress, because the exact rules have not yet been promulgated, it is too early to speak about specific aspects of the bill. However, we believe that the net impact of the legislation will be positive for BGC. I would now like to turn the call over to Shaun Lynn.

Thanks, Howard and hello to everybody. I would like to highlight the continued growth of our brokerage revenues and the key drivers behind that growth. These were, generally favorable overall market volume and volatility in BGC's product category, BGC's growing strength in fully electronic trading, and our continued front office headcount growth as we expand the Company's global footprint and global market share.

BGC's Rates Revenues increased by 18.6% in the second quarter of 2010, compare to the year earlier period. We continue to benefit from the sizeable levels of debt issuance by governments around the world.

The earnings presentation and press release tables on our website shows some of these key factors in greater detail. Such as the 23.2% year-over-year increase in quarterly Federal Reserve US Treasury Volumes. We out paced this growth in Fed volumes with our 47.5% year-on-year increase in Fully Electronic Rates notional volumes, driven mainly by BGC's fully electronic Treasury business.

BGC's revenues from Equities and Other Asset Classes increased by 55.9% year-over-year, due in part to non-US increases in equity-related volumes and volatility. While overall cash equities and volumes were lower year-on-year in the US, they grew by double-digits in Europe. Equity derivative volumes were up by solid double-digits in the US and Europe industry-wide.

In addition, energy and commodities business performed very well, albeit, from a comparatively small level. Our continued growth and market share gains globally, highlights the increasingly diverse nature of our business, the widening of our product categories and the breadth of our technology. BGC's Foreign Exchange revenues increased by 54.6% versus last year, due to the on-going rebound in global volumes and our continuing market share gains.

Volumes and revenues for BGC's fully Electronic FX business, which includes both OTC spot and derivatives, more than tripled year-over-year. Our FX volumes, recently reported the by CLS and several major central banks grew by double digits. Once again, we out paced strong overall industry volume. BGC's Credit revenues decreased by 15% year-on- year, reflecting an industry-wide softening in corporate bond and credit derivative activity, compared to last year.

For example, according to SIMFA, US corporate bond issuance, was down 37% year-over-year. However, based on the Credit results reported so far, we continue to out-perform our peers. In addition, we once again showed strength in parts of our Credit business, for instance, revenues from our Sovereign CDS desks and our fully electronic Credit business, has more than doubled year-over-year. We continue to invest in hybrid and fully electronic technology across our product categories.

For example, over the past year, we more than doubled the number of desks at BGC Trader, and more than tripled the number with Volume Match. Now, almost 50 of our approximately 180 desks, offer e-broking, and we expect this number to continue to rise. This is largely why BGC's second quarter fully electronic volumes were up 52.6% and quarterly revenues related to fully electronic trading increased by 40% year-on-year to $31.6 million. E-broking, representing 9.4% of total revenues, compared to $22.5 million or 7.7% of total revenues last year.

This is our best quarterly top-line performance, and fully electronic trading, since the eSpeed merger, both in absolute terms and as a proportion of revenues. Our growth from e-broking was broad based across Rates, Credit and FX, and was generated by multiple desks in Europe, the Americas and Asia. As we continue to benefit from the tailwind of massive global government debt issuance, and as we roll out BGC Trader and Volume Match to more of our desks, we expect a strong fully electronic trading performance to continue.

As we have said, e-broking growth leads to higher margins and greater profits over time, even if overall company revenues remained consistent. We delivered these improvements this quarter and we expect to see continued margin expansion as we grow fully electronic trading. The third driver, of our revenue growth is front-office headcount. As of June 30, 2010, our front-office headcount was up by 11.6% year-on-year to 1,612 brokers and salespeople.

Average quarterly revenue per broker salesperson, was approximately $204,000, down slightly from a year ago when it was $210,000. This decline of under 3%, when headcount was up by almost 12%, bodes well for our future productivity. As we have previously said, BGC's revenue producers generally achieve higher productivity levels in their second year with the Company.

We expect the productivity of our newer brokers throughout the Company to improve, especially those in our newest offices in Brazil, Russia and China. With that I would now like to turn the call over to Graham.

Thank you, Shaun and good morning, everyone. For the second quarter of 2010, BGC generated revenues of $336.3 million, up 14.4% compared with $294 million in the second quarter of 2009.

Brokerage revenues were $313.5 million, up 15.8% versus $270.7 million for the prior year period.

BGC's revenues from the Americas were up by 59.2% in the second quarter of 2010. Asia Pacific revenues increased by 34.8%,And Europe, Middle East and Africa decreased by 5.5%, all compared with the second quarter of 2009.

Growth for the Americas was broad-based, driven by our continued investment in a number of asset classes, the addition of BGC Liquidez in Brazil, improved front office productivity as our newer brokers leverage our technology to ramp up production, and growth in fully electronic revenue. In Asia, the increase was driven primarily by improved broker productivity , and our head count there remained flat year-on-year. The decline in Europe, was due in part, to the strengthening of the dollar relative to the Euro and the British Pound, and lower industry-wide activity in certain parts of our European business.

Europe represented 53.1% of revenues, the Americas 31.4%, and Asia 15.5%. In the year earlier quarter, Europe represented 64.3% of revenues, the Americas 22.6%, and Asia 13.1%. These changes highlight our global diversification of the strengthening of our Americas business.

Turning to our monthly revenue figures, BGC's April 2010 revenues, were up approximately 17% year-over-year to $112 million, up by approximately 25% to $119 million in May, and up by approximately 2% to $105 million in June. As many of you know, across the industry, June volumes were generally lower than those in May.

Comparing the second quarter of 2010 to the second quarter of 2009, base revenues increased to $139.3 million compared to $117.5 million. Equities and other asset classes increased to $50.3 million, versus $32.2 million. Foreign exchange revenues rose to $46.8 million, compared with $30.3 million. And credit revenues declined to $77.1 million versus $90.8 million.

Comparing the second quarter of 2010 to the second quarter of 2009 as a percentage of revenues, Rates represented 41.4%, compared to 40%, Credit represented 22.9% versus 30.9%, Equities and Other represented 14.9%, increasing from 11%, and Foreign Exchange represented 13.9%, increasing from 10.3%.

Moving on to expenses. Total expenses were up year-over-year to $289.8 million in the second quarter of 2010, versus $261.9 million last year. But lower by 290 basis points as a percentage of revenue. Compensation and employee benefits were $184.3 million, and represented 54.8% of revenues in the second quarter of 2010.

This compares with $178.2 million or 60.6% of revenues in the year earlier period. An improvement of 580 basis points. This improvement was driven by our partnership enhancement program and the compensation related impact of our fully electronic revenues.

We expect, however, that our compensation ratio may increase somewhat in the third quarter, due in part to seasonally lower third quarter revenues. We believe that our partnership enhancement program, growth of e-broking revenues, and the overall increase in our top line, will enable us to keep our comp ratio well under 60% for the foreseeable future.

For the second quarter 2010, non-compensation expenses were $105.5 million, or 31.4% of revenues. This compares with $83.7 million or 28.5% of revenues in the second quarter of 2009.

Our non-comp expenses were up, in part, due to expenses related to our increased broker head count and the addition of four new offices. We expect non-comp expenses to decline in our third quarter. In the second quarter of 2010, BGC's pre-tax distributable earnings were $46.5 million, or $0.20 per fully diluted share, up 44.7% compared to $32.1 million or $0.15 per fully diluted share in the second quarter of 2009.

The Company's pre-tax distributable earnings margin was 13.8% in the second quarter of 2010, versus 10.9% in the prior year period, a 290 basis point improvement. BGC produced post-tax distributable earnings of $38.9 million, or $0.17 per fully diluted share in the second quarter of 2010, up by 63% compared with $23.8 million or $0.11 per fully diluted share in the second quarter of 2009.

Our post-tax distributable earnings margin was 11.6% in the second quarter of 2010, versus 8.1% in the prior year period, an almost 350 basis point improvement. We believe that our structure and business model will enable us to grow our margin as we grow our revenues going forward.

Our effective tax rate for distributable earnings was 15.2% in the second quarter 2010 compared with 26.5% in the prior year period. During the second quarter, the Company continued its partnership enhancement program. As part of this program, the Company agreed to grant exchangeability to approximately 6.8 million units during the second quarter. To my knowledge, of those partners granted exchangeability who expressed an interest in selling, the vast majority have already done so.

Under GAAP, the Company was required to take a second quarter charge of $23.7 million relating to these grants of exchangeability. We exclude certain charges related to grants of exchangeability from distributable earnings, such as for those that do not reduce our cash position, are non-dilutive, and such amounts that would not otherwise have amortized through distributable earnings. These excluded charges have no economic impact on the Company, other than lowering our tax rate. We expect our tax rate to remain around 15% for 2010 and the foreseeable future.

Because GAAP does not allow for the inclusion of anti-diluted instruments in calculating earnings per share, our GAAP fully diluted weighted average share count was 226.5 million for the three months ended June 30, 2010. However, for calculating earnings per share for distributable earnings, we include the 21.5 million shares underlying the Convertible Senior Notes, because their inclusion would be dilutive, and we exclude the lesser interest charge of the Notes.

Therefore, our fully diluted weighted average share count for distributable earnings was 248.0 million for the second quarter of 2010 compared to 211.1 million in the second quarter of 2009. As of June 30, 2010, the Company's fully diluted share count for distributable earnings was 245.4 million, including the shares underlying the Convertible Senior Notes.

Regarding the balance sheet, as of June 30, 2010, the Company's cash position, which we define as cash and cash equivalents, cash segregated under regulatory requirements, and reverse pre purchase agreements, was $344.0 million. Notes payable and collateralized borrowings were $164.7 million. Book value per share was $2.25. And total capital which we define as redeemable partnership interests, non-controlling interest in subsidiaries, and total stockholders' equity, was $411.4 million.

In comparison, as of December 31, 2009, the Company's cash position was $471.5 million. Notes payable and collateralized borrowings were $167.6 million. Book value per share was $2.44. And total capital was $437.9 million. Between January 1, 2010 and July 31, 2010, BGC re-purchased or redeemed approximately 11.2 million shares and units for approximately $66.2 million.

The decline in cash from year-end 2009 was due primarily to these repurchases and redemption's of shares and units. The payment of year end bonuses, and the settlement of payables. I will turn the call back over to Howard, who will provide our outlook for the

Thank you, Graham. In 2009, BGC generated total revenues of approximately $98 million in July, $82 million in August, and $111 million in September.

Our July 2010 revenues were flat year-over-year at approximately $98 million, which reflects 21 trading days this year versus 22 last year, as well as growing through the 9% increase in the dollar as compared to the Euro and the 7% increase in the dollar versus the British Pound year-over-year. We expect to generate revenues of between $295 million and $315 million in the third quarter of 2010. This would represent an increase of approximately 1% to 8% over the $291.2 million we generated during last year's third quarter.

We anticipate pre-tax distributable earnings to increase by 30% to 47% and to be in the range of $39 million to $44 million. This compares very favorably to the $30 million we earned last year. We expect post-tax distributable earnings to be between $33 million and $37 million, an increase of approximately 56% to 75% compared to the $21.1 million we earned in last year's third quarter. Operator, we would now like to open the call for questions, please.

(Operator Instructions). Your first question comes from the line of Daniel Harris with Goldman Sachs.

Hey, good morning, guys. How are you?

Good morning.

Good morning.

So, during the quarter, Howard, obviously we had a lot of, discussions about what financial reform means and I'm just wondering if you can relay what your clients are trying to get in front of ahead of the actual rule making over the next 12 months in terms of how they are trading or how they are looking at pre and post trade analytics versus what they were thinking before?

I think still it is too early to tell. I think the concept of the ideas and how the rules will be written will have yet to see, but I think the concept of how firms will deal with their customer requests on swaps and other credit derivatives, I think is very, very much up in the air and open.

Now, that whole segment of the market has not been a part of our revenues, so that is why we think to the extent generally things will have either a positive impact, but they shouldn't have any negative impact. So this is all opportunistic or uneventful for us.

But, I think generally speaking, I think everybody awaits how the rules will be written, but everybody understands that what is up in the air is not our current business, but rather how one deals with the customers' business and how that is put in a multi party, up and transparent manner which is exactly what we do for a living.

So, we would expect to be under the rules a -- we would expect to be able to do, as far as we can tell all of the things that we do now plus others, and I think we are well positioned to handle any opportunities that come our way, both on our own or in partnering with other banks or other institutions. I think we are well positioned but we await what the rules say, but we view it as generally positive.

Okay. That was great. In terms of your FX market, this is a business that has grown from 11% of our brokered revenues to 15%. It pretty much grows every quarter. We didn't see any difference in that this quarter.

When you think about if you had to say the two core drivers for that business that should persist over the next few quarters that would drive, I mean and look there is seasonality of course, but on a year-over-year basis. What are the key things you are doing differently than peers, or differently than the market that is driving that much growth in that business?

We have a superb emerging markets business. Deep, broad and our expansion in Brazil, our expansion in China, our expansion in Russia, these are all things that will, these are great places to trade foreign exchange and our business model and business mix really takes advantage of both spot, forward, and foreign exchange options and foreign exchange derivatives. We are broad-based and we have a very, very strong market presence in emerging markets. I think when you look at the business you would see that the strength of our mix is very positive in that regard.

Secondly, the way we have been approaching our fully electronic business in foreign exchange, if you look back we worked on this for years and years to get our foreign exchange fully electronic business right. And, it took us a long, long time to get it right, but now we do, and so you have seen a triple year-over-year. It is the kind of business that is likely to continue to grow.

It is an additive business. It is valuable for its clients, it looks at things in a different manner. We are not yet even back to the pre-crisis levels, so we have plenty of room to grow and then I think we are going to be well positioned to go well, well beyond our highs of the past. I don't think there will even be a stopping point for us so I think we are really in a nice spot.

Okay. That was great. Just the last question from me. You know, you guys talked, obviously one of the significant upsides to our estimates this quarter was the lower comp rate, a pretty nice drop sequentially, and you attributed that both to the partnership enhancement program and the shift to fully electronic revenues. And then Graham some guidance it should stay sub 60% for some time. As we continue to see whether or not fully electronic triples or grows substantially faster,is there room, I know you talked about that in the past, for that to stay around this 55% with some seasonality, or can it go even lower than that?

I think over time maybe the best way to look at it is, for the first half of the year we are at 58.2%. So, in any particular quarter there may be ups and downs, but so far for the year, our comp ratio was 58.2%. It is very simple and we have been talking about this for a long time. Fully electronic revenues have a much lower compensation ratio associated with them. We have said all along, that we have the ability to lower our comp ratio with respect to that set of revenues, and we have forebeared, if you will, to make sure that our interests are aligned with our brokers, and we have been doing that step by step. Our brokers are along with us, both for the fact that they understand how it works, and that they are huge equity holders in the Company, and they get their distribution and dividends from this stock. They know that our earnings are going up are going to work in their interest. So I think there is room for us to continue to lower our comp ratio from our first half numbers, and ultimately I think we will be able to sustain lower comp ratio over time, as I think Graham said, As our revenue grows we think our comp ratio will decline. As fully electronics grows our comp ratio will decline and I think eventually, sure, I think we can, eventually over time with the right revenues and the right mix of fully electronic trading can we get to 55% and maintain it?I think the answer prospectively is, yes.

Thanks a lot.

Your next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Good morning, guys.

Good morning, Patrick.

The first question would be around the seasonality trends that we have seen certainly industry wide and that your competitors we have seen slow June and July. How much of that do you attribute to seasonality, just kind of normal summer doldrums, and how much do you attribute to, maybe just given all the uncertainty around regulation, and all the volatility starting to bleed out of the marketplace that maybe we are going to be in for lower volumes for the back half of the year.

It is always the most difficult time for us, this call, because we are always smack in the middle in early August. July is always July. The rest of August, especially when you hold this call from Europe, you know the last two weeks in August are really going to be a big vacation period. We have a great Paris office and, you know, there is just a lot of vacation time.

It is difficult to project that it is other than seasonality , because I always feel this way on that call, because there is always seasonality in this period. And historically, that it how it has been. Historically those are the math, you can go back for years and years and years. So I think, it feels seasonally slower.

At the heat of the seasonal slowness, it feels really slow and then Labor Day in America comes, and all of a sudden the business starts picking up and all of a sudden you see, I mean look at last year. Last year our numbers were $82 million in August and $111 million in September, and I think you will just see that probably it is just seasonality. You know, do I have a crystal ball? I don't. But it sure as heck feels like seasonality

All right. That is very helpful. And then if Graham can go in a little more detail on the other expenses line item, kind of what were some of the specific items that caused it to jump so significantly this quarter?

Well, I have said in the past, other non-comp expenses can get lumpy from time to time, right. And I think actually if you look in the presentation that we -- is on our website, you can actually see that over time, our non-comp expenses reduces. Page 22, down to 28% of total revenues has been dropping down. I would expect that trend to continue as our revenues expand and the firm expands, but we are going to get occasional lumpiness in that.

All right. Understood. I will jump back in the queue. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Rich Repetto with Sandler O'Neill.

Good morning, Howard and Graham.

Good morning.

I got to go back to this question on the other expenses. I understand the lumpiness but to go from $4 million up to $21 million, quarter-to-quarter and even last year, it being double, can you give us any -- a little bit of granularity or specifics on that?

Well, I'm not really sure I can add much more than what I have said today on it. We think that the other expenses or non-comp expenses are going to be drifting down.

We are not talking about non-comp, we are talking about the other expense line.

Yes, I know, I understand that. Occasionally, we will get the odd lumpiness, what I said. I'm not sure I can comment any more.

Okay. Okay. I guess moving on, Howard, you have talked at the analyst's day and prior about ELX and, supposedly getting everybody connected and seeing some, more trading just because once everybody was onboard. And just trying to see if we can update on that.

Well, we remain entirely optimistic with respect to ELX. You know, it is driven by the large banks, we have 12 partners who are the drivers of it. We are the providers of technology and to my knowledge the technology is working superbly. So, I think the issue is, how and exactly when do they pile in and back it in a big way, and I think I will leave it to them to announce how and when and where they plan to do that.

But I will say, that from my knowledge, I remain very, very optimistic about it. It is structure is great. It is value in the world today is I think ever better.

The partners, it is up to them how and where they want to do it, and how and when they want to announce it. I can only give you my personal optimism, that I really like our commitment to it and our investment in it, and I remain excited to continue to back it. No less so than the first day we started, maybe even more so.

Okay. And I guess the last thing has to do -- and I missed part of the call in the beginning but I heard some of your comments, Howard, on financial reform and I guess an incremental opportunity and you possess, a tested, tried and true electronic platform. You do [well] in the over-the-counter markets, and I guess the question is how much dialogue in the space is there right now for partnering with banks? You would think that the banks, given that they weren't undercut dramatically by the bill, that they are still going to have a lot of say so. I guess the partnership agreements that you do with ELX and those type things, could we expect to see a lot of those in the next, six to 12 months and the activity level of these types of discussions?

Well, we have superb relationships with our bank clients and we find them to be great partners in the growth and extension of our business. I mean ELX is sort of an example of that. They are connected to our technology. They know our technology perfectly. And I agree with you.

I think the opportunity to work together with banks prospectively is going to be there. I think there are going to be lots and lots of announced kind of start-up kind of things, and new ideas and new things. But these are all opportunistic events. These are parts of the business that are not currently part of our revenues. And that any modeling and any partnering much like ELX will only add to the value of our business. ELX right now does not have any impact on our business. And so it is really an option, if you will, of the upside.

And I think the entire financial regulation bill, has in fact, launched a garganshion, positive option for BGC. What relationships we make and how we do it, and where we do it, we do not see any downside from it. What we do see is, as you said, the possibility of the partnerships, the possibility of the new opportunities. These are just ideas which may well work out for us, but we'll see.

Okay. And just one last quick detail. What should the share count be in 3Q, you know, because I know you guys you are buying the partner enhancements, but you could -- enhancements but there could be share movements in and out, I think. So I guess, what do you think that the share count would be fully diluted for 3Q?

You know, we ended the quarter at 245. Our employees do receive, as part of their compensation, equity in share count. So it will probably rise somewhat and, I don't know that I can sit here and estimate it, but I would say it could rise somewhat, but not a huge amount, that is for sure. Maybe in the 250 range in some way shape or form. But I can't say if it would be 252 or some other number, but I'm saying somewhat, but not a large amount.

Got it. Thank you. Thank you very much.

Your next question comes from the line of Niamh Alexander with KBW.

Good morning. Or good afternoon your time. WheIf I could go back to ELX, I understand that when the dealers initially bought in or participated in ELX, that the moneys and cash flow there was used to build the system and which also helped expand the BGC Trader system. Is that cash kind of played out by now, is there kind of due to re-up soon, or some kind of a commitment needed there?

Well, the arrangement primarily was that we contributed the technology, so the money was not necessary to build the technology. As you know, BGC has an enormous technological infrastructure, and the best example, I think we used to give a couple of years ago, was that we provided the technology to stand up a competitor to the Chicago Mercantile Exchange without significant marginal cost, which is pretty impressive.

With respect to the economics of ELX , as I have always said on this call, this is not an ELX call, and I have agreed with the board not to use this call as an ELX call. But I think their financials I will leave to them.

But with respect to the technology, we provide the technology, the technology is robust, operational and does not need modification to operate every day. So I think it is in great shape. If there are new things they want to add, they already rolled out Euro/Dollars, if they want to roll out new things, we are ready, willing and able to provide it for them. But, so far, so good and the marginal cost for them adding new products is preciously low. I will think they are in much better shape than you

That is helpful. I was getting at it from an accounting perspective too, because I think there has been either a contract expense or some kind of a benefit flowing through to the electronic trading line and I just wanted to understand if that was still flowing through or if it kind of had run its course.

Everything is still the same. We provide the technology, primarily without cost, and to the extent they use incremental network or other things they just pay for their usage of it. So, it is a very economical model for them and I don't think, from an overall perspective, it is not a big deal for us.

Thanks. If I could understand, the dealers, we are hearing increasingly that they may need to de-lever even more just because of higher capital requirements coming out of Basil, and maybe the US rules, so there could be kind of less trading activity on their part. How is your dialogue with maybe some of the up and comers, or new market makers that are looking to position themselves in maybe a more level playing field?

I think that you just defined an extraordinary opportunity for us. You know, the number of primary dealers dropped to as low as 18. It is likely we know. There are a number of firms that are applying, there are lots of foreign banks who view this as a great opportunity to come in. I think that number will grow.

As you know, for instance in US Treasuries, most of our largest customers have a fixed price deal, so adding new customers who sign new fixed price deals with us, just adds our revenue, adds to fully electronic trading, and adds to that percentage and adds to our bottom line. All of those new players are a great opportunity for us. The other thing is the concept of de-levering at these gigantic banks.

If it means that certain desks, like the proprietary trading desk, were to depart to get re-capitalized as another organization, as a new dealer, part of a smaller bank, which is what you are seeing these are just an amoeba moment. Where you have one gigantic bank, no matter how much you suggest one of these gigantic banks de-leverages, the amount of trading and volume they do is so large, and so impressive. That if their proprietary trading desk left and then became a proprietary trading desk with sales and training, with salesmen, and it re-levered [a balance sheet], let's say, of a foreign bank, you could see just enormous growth.

From our perspective there are always going to be hills and valleys, but overall we do not see the world prospectively, as other than a place with enormous issuance, and enormous volume coming. The enormous issuance that is coming in the world is going to create, is going to create enormous volumes. And look, lower leverage, means that they will favor the most liquid products. And if you look at our mix, maybe our out-performance has to do with the fact that we are at the right place, at the right time, in the right markets and they are beneficial.

Okay. That's helpful, Howard, I appreciate it. Then if I could just, your compensation ratio guidance, thank you for that, that is really helpful. The compensation environment, though, because we are increasingly hearing that dealers are poaching back on sales people from the inter-dealer brokers. Is that something you are starting to see, are you having to maybe pay out more stock, as you try to encourage new people onboard, or do you feel like the biggest part of the hiring is behind you so maybe you don't impacted as much?

Actually, that is rather simple. There are some people who sought to compete with the dealers, who hired salesmen and were successful in 2009 competing with the dealers because the dealers were dealing with other issues. That competition is finding for a new player like that more difficult now. That has nothing to do with us, right.

We are in the service business and our salesmen don't go to banks. We hire often, salesmen from banks who want to switch, and want to change to our side. But it is very rare, indeed, that our sales people go back to the banks. It is the other way around. So, the answer simply is no, we have seen absolutely none of that. It doesn't mean some of our peers don't have the visions that are different from us, and that compete with the banks and they have suffered that, but that has nothing to do with us.

Okay. That's helpful, thanks, Howard.

And your next question comes from the line of Michael Wong with Morningstar.

Hi. I missed part of the beginning of the call so hopefully you haven't hit upon these. In general do you believe industry-wide, cash, fixed-income trading revenues have already reset lower for this cycle, and that the cash, fixed-income revenue pie is just smaller instead of maybe just shifting to [i] banks that are using more of their balance sheet?

Our Rates revenues were up 18% to 19% year-over-year. We think, the massive, massive debt issuance coming from the governments' of the world, is going to create basically a foundation of relentless growth. It doesn't mean that with volatility there, again, won't be hills and valleys, but, the overall market for fixed income prospectively is great. So, the credit markets will, they will again, there is [less] issuance in corporate bonds so the credit business might decline. If you are talking fixed income overall, the opportunity for us is great. The Rates business I think is very, very well positioned for growth. And I think Credit will have hills and valleys, but again to count Credit out as a major growing asset class in the world I think is, preposterous.

Okay. And in terms of your general out-performance for the second quarter, can you talk about I guess if you didn't hit upon it earlier the specific revenue lines that may have been affected by the European sovereign debt worries and how it impacted separately FX, Rates, Cash, Credit and Credit derivatives?

We benefited from a variety of things. Our Rates business was up because of the significant issuance of government bonds around the world. And the volatility in the quarter. So those are the two things, volatility is a friend for the Company, since we are not risk takers, as sort of the major part of our business.

You know, we make money when there is Volumes and volatility and so both of those worked well for us. With respect to foreign exchange, what happened during the credit crisis since we have a huge emerging markets business, the credit crisis reduced the volume that the emerging market banks who are comparatively smaller than the G-7 banks, the amount of volume that they could trade. So therefore you saw an unduly large drop in our foreign exchange business for the credit crisis, andas that has dissipated, and in fact now I think lots of people speak positively of how the emerging markets are growing.

So, the emerging markets are growing, the banks credit comparatively has strengthened,their trading credit lines have dramatically increased, and our business is coming back. But as we said, it is not even back to the 2008 levels. I think we have got great opportunity in foreign exchange and that will continue to grow. Great in Rates. And, yes, Credit, certain parts of Credit are down, but other parts of Credit are up.

You know, the sovereign, who would have thought two years ago, that sovereign credit default swaps would be a topic worthy of conversation on this phone call. But it is growing and it is interesting and you know, when you put Greece on the front page of every newspaper for three weeks straight, it is going to create volume for us.

Especially in our Greek business and across our continental European business. We do have a big business in Europe, so we are well positioned to handle those issues. We have a big business in emerging markets and we are well positioned to handle those issues as well.

One last question. How do you tested at the OTC clearing options that many of the exchanges are developing and do you have any opinion on which one has the best value proposition at the moment?

Can you say that again?

Have you been testing the OTC clearing capabilities of the various exchanges in the US and Europe and do you have any opinion on any particular value proposition at them?

No, we tend to being agnostic , so we are happy, whichever one the customers want to use or whichever is the cheapest, or most efficient, we expect to connect without -- with indifference to all of them and so far I don't have anything to say. I will just make a quick comment which is, the opportunity in this new regulation is that there will be a significant amount of new business out there. There will be new comer competitors that appear, and we try to go after that business and so you can't really say what that will mean. From my perspective I think there is significant upside and we are well positioned to do it. But, of course, you will see a lot of names popping up, and we have to see how it goes, and how we deal with those but from our position, I think we are extremely well positioned and

Thank you.

You have a follow-up from the line of Patrick O'Shaughnessy with Raymond James.

Hey, Howard. What is the thought process behind coming out and saying you want to maintain the $0.14 dividend for the next couple quarters. If we have a seasonally slow third or fourth quarter as is usually the case, it will be a higher percentage of your distributable earnings. Can you walk me through me through the thought process there.

The seasonality in our business is a big first quarter. Slightly slower second quarter. Slower than third quarter, slower then fourth quarter. Big first quarter again. This concept of having our dividend sort of decline over the course of a year, to then leap higher in the first quarter as it did this year.

To have a $0.06 dividend in the fourth quarter to rise to a $0.14 dividend in the first quarter, seems that it is time and we are big enough and strong enough and have enough visibility into our business that it is our perspective that, we earned $0.17 in the first quarter and only paid a dividend of $0.14. We earned $0.17 in the second quarter and only paid $0.14.

As you know , in distributable earnings we count the most dilutive view, which is to count the 21.5 million shares from the convertible note, even though we are not actually paying that cash out, we are only paying the dividend out. So from a cash perspective, the cash of the Company is much higher than the $0.20 because we only have to pay the coupon. But for an earnings per share, but as Graham said, the appropriate is to take the most dilutive view of it.

So we should have more cash because of that, and we thought if we keep our dividend constant, then if you look at it for the overall year, I think we will be well within our parameters. And then I think we will re-look at it next year as the first quarter tends to jump up with its seasonality to reevaluate things then.

But, it just seemed to us that we should have a consistent dividend, and it is our goal and our intention to try to keep our dividend consistent and then, of course, reviewing it all the time but for today that seems like that is how we are going to look

Alright. Appreciate the clarity.

That concludes the Q&A portion of today's conference. I would like to turn the call over to Mr. Howard Lutnick for closing remarks.

Well, thank you very much for joining us today. Obviously, we are very optimistic and positive about our business and we look forward to speaking to you again next quarter. Have a good day. The rain has abated in London, so we look forward to speaking to you again next quarter. Thanks, everyone.

Thank you that are your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.