Bgc Group Inc (BGC) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2010 BGC Partners Incorporated earnings conference call. My name is Lomita 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 towards the end of the conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Good morning, before we begin I want to make sure that you know that our third quarter 2010 financial results release was issued yesterday. It can be found at either the News Center or Investor Relations sections of our website at www.bgcpartners.com. During this call, we will also be referring to a PowerPoint presentation that summarizes our results, and which includes other useful information. This can also be found in our Investor Relations website.

Throughout today's call we will be referring to results only on a distributable earnings basis. Please see the sections of yesterday's financial results release entitled Distributable Earnings and Reconciliation of GAAP Income to Distributable Earnings, for a definition of this term, and how, when, and why management uses it. Unless otherwise stated whenever referred to income statement items, such as revenues, expenses, pretax earnings or post-tax earnings, we are doing so only on a distributable earnings basis.

I also refer you to the statement entitled Discussion of Forward-Looking Statements contained in our press release. I remind you the information in the release and on this call contains forward-looking statements within the meaning of the 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 includes statements about the outlook and prospects for BGC and for its industry, as well as statements about our future financial and operating performance. Such statements are based upon current expectations that involve risks and uncertainties.

Actual results, performance, or achievements could differ materially from these contemplated, expressed, or implied because of the number of risks and uncertainties that include but are not limited to, the risks and uncertainties identified in earnings release of BGC's filing with US Securities and Exchange Commission. We believe that all forward-looking statements are based on reasonable assumptions we have made. However, because it is impossible to predict our actual results or outcomes or the effects of risks and uncertainties and or factors in anticipated results or outcomes, or the effects of risks, uncertainties, and 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. Please refer to the complete disclaimer with respect to forward-looking statements set forth in yesterday's earnings release, and the risk factors set forth in our public filings, which we incorporate today by reference.

I am happy now to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC.

Good morning, and thank you for joining us for our third 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 once again outperformed our industry in terms of top and bottom line growth. Our revenues were up 12.3% to $327 million in the third quarter 2010, pretax distributable earnings were up 57.5% to$47.3 million, or$0.20 per fully diluted share. Our post-tax distributable earnings were up by 87.3% to $39.5 million, or $0.17 for fully diluted share.

BGC had strong performance across most of our products and geographies during the quarter. We again generated substantial top line growth in the Americas and Asian Pacific region, as well as in fully electronic trading, rates, foreign exchange, equities, and other asset classes. The combination of our continued top line growth increased in proportion of our revenues related to fully electronic trading, as well as our partnership enhancement program, contributed to the expansion of our post-tax profit margin by 483 basis points.

Our pretax distributable earnings per share increased by 42.9% while post-tax distributable earnings per share increased by 70%. We are therefore, pleased to announce that BGC's Board of Directors has declared a quarterly dividend of $0.14 per share, an increase of 75% compared to last year, and remains consistent with our dividend for the first two quarters of the year. It is our intention to maintain this dividend for the fourth quarter.

With respect to the Dodd-Frank Bill recently enacted in the US, and similar laws pending in the EU, while thespecific aspects of the rules are still being ironed out on both sides of the Atlantic, 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 everyone. I would like to highlight the key drivers of the continued growth of our brokerage revenues. They are BGC's growing strength in fully electronic training, a continued global front office head count expansion and market share gain, and overall positive market dynamics in many of BGC's product categories. All of the comparisons I will discuss are for the third quarter 2010 as compared with the year earlier.

BGC's rates revenues increased by 7.7%. We continue to benefit from sizeable levels of debt issuance by governments around the world. The earnings presentation and press release tables on our website show some of the key factors in greater detail,such as a13.8% increase in quarterly federal reserve US Treasury volumes. We outpaced this growth in Fed volumes during the quarter with a 24.4% increase in fully electronic rates notional volumes, driven by BGC's fully electronic Treasury business.

BGC's foreign exchange revenues increased by 24.1% due to the ongoing rebound in global volumes, and our continuing market share gain. Volumes and revenues for BGC's fully electronic FX businesses, which includes both OTC, spot, and derivatives, improved by more than double the growth rate for quarterly FX volumes, which were reported by some of our competitors and by CLS, which settles most bank to bank spot and forward FX transactions. BGC's revenues from XCs and other asset classes increased by 51.8% driven by strong growth globally from our increased investment in this cash stream. Ag growth, as shown in our earnings presentation, is particularly noteworthy, because we achieved it despite lower global exchange-related volumes and volatility in the quarter.

BGC's credit revenues decreased by 6.3% reflecting industry-wide lower corporate bond and credit derivative trading activity. For example, trades on bond volumes, which reflect most US corporate bond trades were down 6.7% in the quarter. However, based on the credit results reported so far, we once again outperformed our industry. This was due in part to revenues from our sovereign CDS desks, and our overall fully electronic credit business, both of which more than doubled year-over-year. We continued to invest in a hybrid of fully electronic technology broadly across our product categories. Now approximately 60 of our 200 desks offer e-broking, and we expect this number to continue to rise.

We are especially pleased with our strong initial results from BGC's growing suite of fully electronic interest rate derivative products. In late August we launched euro interest rate swaps on BGC Trader,followed in October by US dollar interest rate auctions, and Singapore's dollar interest rate swaps. Just yesterday we had our first fully electronic auction of US dollar interest rate swaps on Volume Match.

From the end of August through yesterday BGC has traded approximately $70 billion in notional volume of fully electronic interest rate derivatives, and we expect it to grow substantially over time. BGC's overall fully electronic volumes were up 22.9%. Revenues related to fully electronic trading increased by 17.2% to $30.3 million, andrepresented 9.3% of total revenues in the third quarter 2010. In comparison, e-broking revenues were $25.9 million,or 8.9% of total revenues last year.

Fully electronic credit revenues more than doubled year-over-year while fully electronic FX brokerage revenues were up by mid-double digits. Our overall growth from e-broking came from multiple desks in Europe, the Americas and Asia, and were driven primarily by sovereign credit default swaps, foreign exchange options, US Treasury, Canadian sovereigns, and corporate bonds. As we continue to benefit from the tailwind of massive global government debt issuance, and as we roll out fully electronic trading to more of our desks, we expect our strong e-broking performance to continue. As we have said e-broking growth leads to higher margins and greater profits over time, even if overall Company revenues remain consistent. We once again delivered these margin improvements this quarter, and we expect to see margin expansion as we continue to grow fully electronic trading.

Front office head count and productivity are the other key drivers of our revenue growth. As of September 30, 2010, our front office head count was up by 18% to 1,721 brokers and salespeople. Average quarterly revenue per broker salesperson was approximately $183,000,down slightly from a year ago when it was $194,000.

As we have said previously, BGC's revenue produces generally cheap high productivity levels in their second year of the company. We therefore expect the productivity of our newer brokers throughout the Company to improve, especially those from Mint, and our newest offices in Brazil, Russia, and China. Going forward, we expect Mint to be accretive to additional earnings. With that, I would now like to turn the call over to Graham

Thank you Shaun, and good morning everyone. Unless otherwise stated, all of the comparisons I am making compare the third quarter 2010 to the third quarter of 2009. BGC generated revenues of $327 million, up 12.3% compared with $291.2 million. Brokerage revenues were $292.3 million, up 10% versus $265.8 million.

BGC's third quarter 2010 financial results included three offsetting items that were not part of our ordinary operating business and had not been included in our guidance for revenues, expenses or earnings. First, we received $11.6 million in other revenues from a favorable FINRA arbitration ruling pertaining to Refco Securities fixed fee US treasury contract. Refco is appealing the ruling.

Second, we acquired various assets and businesses of Mint Partners and Mint Equities, which contributed approximately $3.4 million in brokerage revenues in the quarter. Third, we incurred other expenses that have not been part of our guidance, were not part of our ordinary operating business, and are not expected to recur in the fourth quarter. Taken together, these three offsetting items had virtually no impact on either distributable earnings or GAAP net income.

Had none of these items occurred, our ordinary operating business would have generated approximately $312 million in revenues, and earned $0.17 per share, which would have resulted in revenues at the high end of our range, and earnings exceeding our guidance. When considering the underlying performance of our overall business, it makes sense to either include or exclude all three of these items. To only include or exclude any one of these items without consideration of the others would create an inaccurate and misleading impression of our business. When analyzing our own business, and judging our performance as compared to other periods, we expect to use $0.17 per share as the appropriate comparative figure.

Turning to our geographic revenues, the Americas were up by 41.8% in the third quarter 2010. Asia Pacific revenues increased by 17.6%, and Europe, Middle East and Africa decreased by 2.8%. Europe represented 50.7% of revenues, the Americas 34.3%, and Asia 15%. A year earlier, Europe represented 58.6% of revenues, the Americas 27.1%, and Asia 14.3%. These changes highlight the success we have had and our ongoing effort to diversify BGC's global revenues.

Turning to the year-on-year comparison of our monthly revenues, July 2010 was down approximately 1% to $97 million. August was up by approximately 31% to $107 million, and September was up by approximately 10% to $122 million. The Refco payment occurred in August. BGC's rates revenues increased to $135.6 million compared to $125.9 million. Foreign exchange revenues rose to $44.4 million compared with $35.8 million.

Revenues from equities and other asset classes increased to $38.3 million versus $25.3 million. And credit revenues were $73.9 million versus $78.9 million. Rates represented 41.5% of revenues compared to 43.2%. Credit represented 22.6% versus 27.1%. Foreign exchange represented 13.6%, increasing from 12.3%. And equities and other represented 11.7%, increasing from 8.7%.

Moving on to expenses, total expenses were $279.6 million versus $261.1 million last year. But lower by 415 basis points as a percentage of revenue. Total expenses includes items this quarter that are not part of our ordinary operating business as I detailed earlier. Compensation and employee benefits were $177.3 million, representing 54.2% of revenues. This compares with $176.5 million, or 60.6% of revenues in the year earlier period, an improvement of 638 basis points.

This improvement was driven by on our ongoing partnership enhancement program, and the positive compensation related impact of our growing fully electronic revenues. We expect that our compensation ratio may increase somewhat in the fourth quarter. Due in part to seasonally lower November and December revenues. For the third quarter 2010 non-compensation expenses were $102.3 million, or 31.3% of revenues. This compares with $84.6 million, or 29.1% of revenues. Non-compensation expenses includes items this quarter that are not part of our ordinary operating business, as I detailed earlier.

BGC's pretax distributable earnings were $47.3 million, or $0.20 per fully diluted share, compared with $30 million, or $0.14 per fully diluted share. The Company's pretax distributable earnings margin was 14.5% in the third quarter of 2010 versus 10.3%,a 416 basis point improvement.

BGC produced post-tax distributable earnings of $39.5 million, or $0.17 per fully diluted share, compared with $21.1 million, or $0.10 per fully diluted share. Our post-tax distributable earnings margin was 12.1% compared with 7.2%, a 483 basis point improvement.

We believe that our structure and business model will enable us to further expand our margins, as we grow our revenues going forward. Our effective tax rate for distributable earnings was 15% in the third quarter of 2010 compared with 27.4% in the prior year period. We expect our tax rate to remain around 15% for the full year 2010. Because GAAP does not allow for the inclusion of anti-dilutive instruments when calculating earnings per share, our GAAP fully diluted weighted average share count was 228.3 million for the third quarter 2010.

However for calculating earnings per share for distributable earnings, we include the 21.6 million shares underlying the convertible senior notes because their inclusion would be dilutive, and we exclude the interest charge of $3.3 million net oftax associated with the notes. Therefore, our fully diluted weighted average share count for distributable earnings was 249.9 million for the third quarter of 2010, compared to 215.6 million in the third quarter 2009 for both GAAP and distributable earnings.

As of September 30, 2010, the Company's fully diluted share account for distributable earnings was 250.8 million, including the shares underlying the notes. Regarding the balance sheet, as of September 30, 2010, the Company's cash position which we define as cash and cash equivalents, cash segregated under regulatory requirements, and reverse repurchase agreements was $316.9 million. Notes payable and collateralized borrowings were $177.1 million, book value per common share was $2.36, and total capital which we define as redeemable partnership interest, non-controlling interest and subsidiaries and total stockholders equity was $419.6 million. The increase in total stockholders equity decreased as the new joint and involved partnership interests, and other such changes in BGC's total capital, are explained in greater detail in our third quarter 2010 earnings presentation located on our webpage.

With respect to our dividend, we expect that at least 10% of our common dividends paid in 2010 will be treated as a non-taxable return of capital for common stockholders. And the remainder will be treated as a qualified dividend for tax purposes, we expect to increase the percentage of our dividend that is a non-taxable return of capital in 2011. We go into much more detail in the section of yesterday's financial results press release called non-taxable return of capital. The earnings presentation on the website also includes a taxable equivalent yield analysis of our dividends for your convenience.

With that, I am happy to turn the call back over to Howard.

Thank you, Graham. Our October 2010 revenues were up approximately 5% year-over-year to $115 million, compared to $110 million last year. We expect to generate revenues of between $295 million and $315 million in the fourth quarter of 2010 as compared with $299.8 million in the last year's fourth quarter. We anticipate pretax distributable earnings to increase by 65 to 91%, which would be in the range of $38 million to $44 million compared with $23 million last year. We expect post-tax distributable earnings to be between $32 million and $37 million, an increase of approximately 117% to 150% as compared to the $14.8 million we earned in last year's fourth quarter.

Operator, we would now like to open the call for questions, please.

(Operator Instructions). And your first question comes from the line of Rich Repetto from Sandler O'Neill. Please proceed, sir.

Good morning, Howard.

Good morning.

I guess the first question is, again, a little bit on the nonrecurring expense and nonoperating expense. Can you quantify, and sort of what the driver was, I guess I am still trying to figure that out?

Well, we felt that the best way to discuss this was the way we sort of discussed it on our call, which was to discuss with you the fact that as Graham pointed out, that these are distributable earnings figures for all of them. They don't fall into what we have consistently called, outside of our distributable earnings numbers. So the revenues and the expenses were in, and we think the appropriate way to look at them all is all together. And so they are $327 million in revenues, and we had additional expenses associated with them that are part of our distributable earnings. So to take one piece out would not be right, but they are all in it together and they all make up our business. So I think it is not really the particular line items. As Graham said, we do not expect this level of other expense to be with us next quarter, and we guided such.

Okay. But you still have not given the driver of what is the reason for the higher nonrecurring expenses?

Just it hasn't been our practice to go into other expenses in that level of detail. So that is the best way I can say it is just that from our perspective, these three items were not in our guidance, and they were not expected when we guided at the end of last quarter, and that notionally they all effectively equaled similar numbers and canceled each other out and offset each other. However, they were just not part of our guidance, and we don't expect them to occur again this quarter.

So I think from a net perspective, the Company performed much better than we had anticipated. The revenues from sort of our ordinary business, as Graham was saying, were at the high end of the range, but our earnings at $0.17 were superior, and these other three items were sort of offsetting and not part of our guidance. So that is sort of the easiest way to look at it, was to include them all or exclude them all, but not to pick and choose, because you give either too positive or too negative a view, which is not how we look at it, and it is not actually how it worked out.

Okay. And I guess to move on, so you recently launched dollar denominated interest rate swaps, and you have launched euro denominated, can you tell us what type of customers, what do you think the catalyst is? Is it just early on to try to get a platform up and running, but what would be the catalyst, other than just the regulation, the regulatory, or maybe that is it, the regulatory rules being written to really get some volume growth there?

Hi, this is Shaun. The customers that have been dealing with us so far is our normal mainstream customer base, obviously regulation would be the catalyst potentially to expand that. But as we said in our earnings, we don't know when that is going to happen, and we don't know what form that is going to take. But so far, the pick-up has been very, very good. Everybody has embraced it. Been naturally acquisitive, and they all sit in the same position as we are at the moment. We are all watching and waiting but it has been very good so far.

Okay. And one last comment or follow-up to an earlier question. We found in the Q in the last filing, Howard, your other expenses, and this is exact, other expenses increased by $9.7 million in the quarter compared to the year ago, and it goes on to say that the increase was primarily due to additional costs associated with the hiring of new brokers. Could that be similar in this quarter?

Yes. I would say similar, yes.

Okay. Alright. Thank you.

Yes. I think with respect to Shaun's answer on fully electronic trading, because we have the capacity and the technology built, our ability to provide the electronic access and create markets and drive, really the results that the clients want is really a key asset of the Company. And having that built already, so that now when the client starts to look at it, both because volumes of interest rate swaps are growing and they like to do fully electronic trading, which cuts their costs of transactions as well as regulatory framework, really puts us in a superb position to serve our clients, and to satisfy their desires and needs and to produce a good business for ourselves.

So we are really in the right place, at the right time with the right technology, which comes in only one way. It is because of our significant investment over many, many years, and you are now seeing the payoff of that investment with dramatically increasing margin, and operating margin flowing to the bottom line. We have had many years where you saw our investments were very large, and maybe our profit margin wasn't as high as some others who had under invested. Now you will see us dramatically improving our margin as we capitalize on that investment and bring it to market, and we are very excited about the fact that yesterday our electronics were able to be in US interest rate swaps. I mean this is a huge market right here. And very excited about US.

(Operator Instructions). Your next question comes from the line of Daniel Harris from Goldman Sachs. Please proceed

Hey, good morning, guys, how you doing?

Good morning.

So you noted that 9.2% of your revenues were related to fully electronic trading year-to-date so far in 2010. Outside of cash treasuries, where are you seeing the most pickup in the electronic trading?

We have increased revenues in FX options, now with straight swaps, and from European governments, single name CDS, goes to sovereign CDS as well. It has been broad based across all of our products globally.

So is it safe to say, though, that given that cash governments are highly electronic in many cases, that the rest of the products are still very much in the early stages, some 10% or maybe even some 5% of the revenues of those are electronic?

I think it's fair to say that we are already, we are on the way, it is very much early days. 60 desks of our 200 already live. There is still so much more than can grow out of this. I mean I think that when you consider that we have built our technology over the last ten years, we have implemented it into pretty much all, if not most major, if not all major banks globally across the board, all of the products we do have electronic capability. We are still very much in the first phases of this growth.

Okay. Fair enough. So just looking at your revenue growth over the course of the year, you guys started the year out exceptionally strong, north of 22%. And this quarter, it is 12%, and it seems like at the midpoint of your range next quarter it seems you are at around 2%. How do you see the market changing? Is it just that 2009 was much weaker than what you have done here in 2010 in the industry, you guys made some acquisitions that has been a help. But do you think the 10% to 15% growth rate is likely going forward, or do you think you have to continue to hire brokers, and look for acquisitions to drive that kind of growth?

We are in the business of looking for acquisitions that we think are accretive, and to hiring brokers that we think are accretive. So we would say that the recent hires and the recent acquisition of Mint, puts us in a very attractive position to deliver double-digit revenue growth next year. We now have over 1,700 brokers, and as their productivity, as Shaun said, as their productivity reaches its steady state in its second year, you will see that just doing that math alone drives our top line revenue.

So the Mint acquisition, for example, with nearly 100 brokers, just adds a lot of people. As they come onto our technology platform and ramp up to our average revenues you are going to see very, very attractive numbers for us. We also have lots of opportunities to grow. You saw that our Radix acquisition in energy was a small beginning. But it puts us in a nice position to grow in energy, to grow in commodities, there are an enormous amount of places that we can grow. Property derivatives and the whole real estate and property area we think is a coming business for us.

And we really think that our position, our technology and the way we think about our business is really, really attractive. So I think our brokers who we have now set us up for strong growth going forward as they increase their productivity, and our ability to hire and acquire accretively will be really, really strong. We have Brazil, we have China, we have Russia, we have all sorts of places where we have a really strong sense of growth. So we do not see internally any constraints to the opportunity in front of us to deliver strong top line revenue growth going forward.

Okay, Howard. Thanks a lot. Last question from me, the first year and a half or so of ELX, generating open interest was a challenge in the Treasuries, over the last couple months in euro dollars, open interest, the last couple of months of your electing euro dollars, you guys have actually generated north of 100,000 contracts in open interest. I am just wondering what do you attribute the success to in euro dollars versus the more difficult goings on US Treasuries, in terms of generating open interest in the futures contracts, and how do you think that progresses from here? Thanks a lot.

Well, I think and I have said before, I generally have agreed with the ELX Board, that our conference calls would not be the place to announce all sorts of interesting things about ELX. However, I would say that we have and remain very optimistic about ELX. As you point out, Euro dollars which we opened just recently at ELX has gained really, really nice open interest growth. Volumes have picked back up across the board in ELX in September, and then again in October. And there really are great opportunities in front of us for ELX.

Our partners are superb and some of the largest traders in the world, and we think that the opportunities in front of ELX are growing. I think the simple answer is more commitment from the partners, as well as growth from nonpartners in ELX. We are seeing more and more players who are not partners in ELX trading more and more. And so as we expand the client base using ELX, the natural underpinning volumes and open interest continued to grow. So just positive statistics.

Thank you, Howard.

And your next question comes from the line of Rob Rutschow from CLSA. Please proceed, sir.

Hey, good morning, everybody. I guess a couple housekeeping items first. It looks like just on the press release you reclassed some revenue from rates to FX, in terms of the brokerage business. I was just wondering what happened there, and sort of what sort of business that was?

I think that was, what three quarters ago?

Yes. That was a while ago, three quarters ago, I think.

Okay. And then in terms of the other expense, I think you guys identified the three items. Presumably those were all in other expense, the charitable contribution, the workmans comp, and the acquisition-related cost. If I strip that out I come to a number of about $17 million for other expense. Is that a good sort of run rate number going forward?

Yes. We don't normally comment on ongoing levels of other and what is in there, because it is everything else.

It is everything else.

Yes. Okay. I was also wondering you guys have you had some growth in the forgivable loan balance. Do you guys do a provision for that, and have a reserve, or how does that work?

When we hire and often when we acquire, as part of our retention goals and objectives, we give either forgivable loans or loans to our employees. And it is a way to give them cash and to keep them connected to the Company. And so we do expect to either get paid back the loan, or to forgive the loan. If the loan is expected to be forgiven, it is amortized over the course of the period by which we expect it to be forgiven. And if it is expected to be paid back,then we expect it to be paid back.

As it turns out, our ability to project these things has been rather good so far, because they are with our employees and we know if someone has just signed a three or four-year contract, and they expect to pay back the loan, we know where they are getting the money from, because they are getting the money from us. And so the connected view of long-term employment contracts connected with those loans, means that when we do give an employee a loan, we have a high degree of confidence that we will get paid back, and our experience is that we do. And if it is going to be forgiven, then we are amortizing it anyway, and it is going through our comp expense.

But I guess from a distributable earnings standpoint, those loans don't ever really hit the income statement?

Sure. The amortization would go to our compensation numbers, of course they would.

But that would be noncash right?

No. No in our regular compensation expense if we gave someone a $300,000 forgivable loan over three years, we would charge our compensation expense $100,000 a year for three years.

Oh, okay.

Simple math. It is just simple math. Nothing special.

Okay. Last question. And you guys may have gone through this before, but I was just hoping you could help me out understanding the allocation to founding partners used to be pretty close to the minority interest charge. And so the difference is pretty wide this quarter and last. I was just trying to understand why that switched, and if some of it is related to the debt?

Some of it relates to the fact that in the first quarter we made a loss, and that loss didn't get allocated to the sort of REU holders or the redeemable partnership interest. In the next quarter we would catch that up. Actually you end up with if you like, what looks like sort of an excessive allocation to cantors. But actually to the noncontrolling interest, but actually it is just straightening it out on a year-to-date basis, in the first quarter

How long will that take to sort of work through that minority interest number?

I think it has worked through.

Okay. So next quarter --

I would expect so, yes.

The allocation should look similar to minority interests?

That is about what I would expect, yes.

Okay. Great. Thank you very much.

And your next question comes from the line of Justin Hughes from Philadelphia Financial. Please proceed.

Good morning. I hate to come back on this but just to follow-up on the noncomp expenses, if I look at the midpoint for guidance for revenue and pretax for 4Q, and assume the comp ratio is flat, kind of back into a noncomp number for 4Q of about $100 million if you are saying there is $11.6 million of nonrecurring noncomp in the third quarter, why doesn't that drop down to closer to like a $90 million run rate, instead of the $100 million that you are suggesting for 4Q?

As Graham said because of the seasonal revenues being slower in November and December, Graham said he expected our top ratio to increase somewhat. Simply that we do have a back office of fixed expense. So if you have a slower Christmas and holiday season, the last week of December is always slower, Thanksgiving in America always slower, it just takes down your revenue numbers. And by math would increase our compensation ratio with respect to our nonvariable based compensation. So that is why Graham sort of expressed that in his remarks. So that should help you just put the comp ratio up a bit to square all of those numbers together.

Okay. So we should back into a comp ratio that would have noncomp closer to $90 million? Does that make sense? If I target $90 million I forget what the comp ratio is, to get to the midpoint of your pretax guidance?

I don't know if I can, I don't know if we looked at it that way with such a fine point. But the idea is that you are doing two things correctly, which is if you take the comp ratio up you will take the noncomp expense down, and those two things will work out, so what level you choose to put for compensation will create an offsetting, a lowering of noncomp expense. So the two variables are right, and what numbers you put in really your choice. We haven't really guided with such a fine point as of yet.

Okay. And then did you say that Mint added 100 brokerage and salespeople?

Just under, yes.

Okay. So your total quarter on quarter grew 109, so excluding Mint you added roughly nine people?Why did you have so much expenses from hiring brokers, when it only looks like you only hired nine during the quarter?

It is not just the nine, it is 109 plus lots of comings and goings, and lots of costs associated with brokers that we have previously hired. These are just other expenses, and they have to do with if you look at the overall growth of the Company's head count over time.

Okay. Thanks.

There are no questions at this time. I would like to now turn the call over to the management for closing remarks.

There is one more. One more. Operator.

Would you like to take that question, sir?

Absolutely.

Yes.

Yes.

Okay, your next question is from Niamh Alexander from KBW. Please proceed.

Thanks for taking my questions. If I could I go back to the interest rate swap opportunity, because you have rolled out some options you have rolled out some swaps, I am just trying to understanding the competitive landscape, because ICap I guess it started in October with some of the big banks, and they [spent] several billion dollars, and I am just understanding is it still up for grabs as multiple potential venues to become electronic procuring, and does it matter that where they are forced, or are they in swaps and euro in options. How should I think about that as you think about the competitive landscape shaking out?

I think from an operational perspective, BGC and Icap have the technological capacity to provide fully electronic trading in the swap derivative landscape to the large players of the world, and we would expect us both to be reasonably successful, and reasonably competitive in one of the great electronic opportunities out there. So we are in a great position. It is definitely an opportunity for us since we have a big voice business, and we have the technological capacity to move it electronic. If the client wants to do that and obviously that is our point, is they are open-minded now and are considering using it, trying it, it is already installed there so that is one of our great benefits. And Icap is trying to do the same thing. So I think we are both, whether they are one step ahead of us or one step behind us, would be a very fine point that I am not aware of. But I would suggest we are both relatively speaking in lock-step going forward.

Okay. That is helpful, thanks. And then help me understand your willingness to work with the dealers going forward, if for example, there is much less of a democracy with the business in the USversus in Europe, so would you feel that maybe there is an opportunity to sign up and share some economics with the dealers, in order to ensure that they are using your venue, and maybe one other, or what not, do you think that we should look for opportunities like that?

And then secondly, you are primarily focused in dealer to dealer space. Should we think about with the new legislation you looking to kind of expand into the dealer client space providing some SEF role there?

We are definitely open-minded and we have a superb relationship with the largest trading firms of the world all around the world. And they know our technology and that is sort of how we got ELX as an example, so I think we are open-minded to working together to solve for the business objectives of all parties, ourselves, the dealers, the trading community at large, and the regulators. And I think as those rules get written, I think having the technology built and installed and ready, and being a trusted counter party for all of these banks around the world, I think puts us in a very good position to work together to solve those new regulations, and do so in a way that they feel comfortable that they want to support, and we feel comfortable that will be great for our shareholders over the long term.

And getting through that, and how we do that we will play out over time, but we want to make one thing very, very clear. Central clearing from our perspective, central counter party clearing from our perspective is excellent for volume, and excellent for our business. And since nondiscriminatory central clearing is part of the US rules, and we expect it to be part of the EU rules, this is just a baseline positive for our Company.

Okay. That is helpful. Thank you, Howard. And lastly if I could touch on eSpeed. Could you help me understand the competitive barriers there, if someone else decided that they wanted to participate in an all-electronic venue for that particular treasury product. Are there pretty high competitive barriers to entry there for a new entrant?

I think what has happened over the many years, we haven't talked about it for a while, but the majority of our largest clients have fixed fee long term business arrangements with us, which means they pay a contracted fixed fee for unlimited volume. That commission structure means they can marginally trade the next trade for zero. And so if they were to bring a new participant in, whatever they paid the new participant would be just an economic increase.

So I think the structure of the market has created high barriers to economic entrants, and it has been that way because it is an economic reality that the largest players do huge amounts of volume. And by having a fixed fee contract, they can rely on us and we can rely on them, and that as volumes grow, it is not them who is paying our revenue growth. We have new players that come into the market and they pay the variable. But our largest clients have a fixed fee.

Okay. That is helpful, thanks Howard. And I guess lastly on the expenses maybe it is a just an observation, but you had a great revenue quarter and clearly you are outpacing competitors here and the acquisitions are delivering, but when you are kind of so vague about how maybe it is kind of driving expenses up, it us hard to see any benefit in the multiples from it. Like it doesn't seem like what you were saying was maybe driving the other expenses, or kind of outside the course of ordinary business, you are kind saying take our word for it it is nonrecurring, but it sounds like it is part of the regular course of business of hiring and moving people around, and things like that , that is driving that line. Am I

Well, look how we view our business, as we said, if you include all items from our business, then it is clearly $327 million for $0.17. If you wish to parse some of them out, and say gee, those were not part of your guidance and they were not part of your expectation when you last spoke to us, you would still end up with $312 million and $0.17. Either way you come to it you come to us delivering $0.17 per share to the bottom line, and paying a $0.14 dividend, and we are very proud of how this Company is operating.

The benefit of having Refco actually finally pay us for the years and years, back then, there was a time we had to take Refco out of our earnings and out of our revenues, and we suffered the consequence of that out underperformance at that time, so it is all part of our distributable earnings. We are not saying it is not part of it.

We are just trying to make sure that we express to you that which is sort of ordinary in our operating business, and that which is extraordinary by putting Refco in other revenues. We are sort of highlighting it for you, to make sure that you understand where things are coming from, to be more transparent, and to help you understand what is ordinary for us. But we can't really go into each and every point all of the time in our other category. But as Graham said, we don't expect this to be next quarter, and we didn't expect it last quarter. So I mean I think we are just going through it. I hope we have answered it for you reasonably.

Okay. Fair enough, thanks, Howard.

And there are no questions at this time. I would like to now like to turn the call over to the management for closing remarks

Well, thank you very much for joining us this morning. The Company is in an excellent position. And it continues to grow its distributable earnings, and we are very excited about our opportunities and prospects going forward, and we look forward to speaking to you next quarter. Thank you very much everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.