Bgc Group Inc (BGC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 BGC Partners Incorporated earnings conference call. My name is Shanel and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call the conference over to Mr. Howard Lutnick, Chairman and CEO.

This is actually Jason; I'm going to read the disclaimer first.

Good morning, our third-quarter 2012 financial results press release was issued this morning. This can be found either at the News Center or Investor Relations sections of our website at bgcpartners.com. During today's call we will be also referring to a presentation that summarizes our results, which includes other useful information. This, too, can be found in the Investor Relations section of our site. Throughout today's call we will be referring to results only on a distributable earnings basis. Please see today's press release for GAAP results.

Please also see the section of today's press release entitled Distributable Earnings Results Compared to GAAP Results and Reconciliation of GAAP Income Distributable Earnings for definition of these terms and how, when, and why management uses them. Unless otherwise stated, whenever we refer to income statement items, such as revenues, expenses, pretax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making today will contrast the third quarter of 2012 and the third quarter of 2011.

I'll also remind you that the information in this 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 and Exchange Act of 1934, as amended. Such forward-looking statements include statements about the outlook and prospects for BGC and this 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 those contemplated, expressed, or implied because of a number risks and uncertainties that are included are not limited to the risks and uncertainties identified in BGC's 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 that it is impossible to predict actual results or outcomes that affect 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 development. Please refer to the complete disclaimer with respect to our forward-looking statements and risk factors set forth in our most-recent public filings on Forms 8-K, 10-K, and 10-Q, which we incorporate today by reference.

I would like now like to turn the call over to your host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning and thank you for joining us on 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's third-quarter revenues were up 17.1% year over year, driven largely by Newmark Grubb Knight Frank, which produced $141.1 million in revenues and $16.1 million in pretax earnings. Our diversification into commercial real estate is proving a significant contribution to BGC's results, as conditions in the global financial markets continue to be challenged.

I'd like to comment on the impact Hurricane Sandy is having our business. While they have proved devastating to the New York area and other parts of the country, we are open for business thanks to the tireless efforts of our partners and employees who have shown incredible dedication, and we are deeply grateful for their commitment to the Company. Although our main North American financial brokerage office in downtown Manhattan is temporarily closed, we continue to serve our customers from other offices here in the New York area and around the world, supported by our global electronic trading infrastructure, which includes eSpeed, Volume Match, BGC Trader, and Kleos, our co-location facility. In addition, Newmark Grubb Knight Frank is assisting its clients in finding temporary space and with other recovery efforts.

Given the lower volumes and volatility in the financial markets, BGC's dividend per common share will be $0.12 for the third quarter, which equates to a 10% annualized yield at yesterday's closing price. We expect to maintain this dividend for the foreseeable future.

With that I am now happy to turn the call over to Shaun.

Thanks, Howard, and good morning, everyone.

In our Financial Services segment (inaudible) was well below historical averages across most asset classes during the quarter, resulting in lower volumes industry-wide in rates. Activity has been muted due to quantitative easing undertaken by the US Federal Reserve and other central banks. The Fed alone has over $2.2 trillion worth of long-dated treasuries and agencies on its balance sheet, which are not being traded or hedged. In addition, with the beginning of quantitative easing III, the Fed is adding another $40 billion per month. Our revenues and our rates business declined by 13.5%; it is much less than the 30% decline in interest rate product volumes for CME, Eurex, and Euronext combined. Our performance was also better than the 20% drop in the Federal Reserve US Treasury volumes.

We believe the central bank position eventually will be unwound when the economy improves, which will provide us with future tailwind. We also believe rates markets will become more active over time as high levels of government debt around the world drive volumes upward in our voice and electronics rates business. BGC's volumes in fully electronic brokerage of interest rate swaps and other interest rate derivative products also improved substantially. They are a relatively small percentage of our overall rates revenues.

Global credit markets turnover has declined as banks adjust in new capital requirements for corporate bonds under Basel III, and because of uncertainty surrounding recently-enacted rules for the clearing of credit derivatives in the US. This is reflected in the Federal Reserve corporate bond volumes being down by 19% year-over-year, and by ICE Clear Credit derivative notional volumes increasing by 47%. In comparison, our credit revenues declined by 18.7% as the uncertainty surrounding these rules diminishes. We expect credit market volumes to rebound.

Global FX volumes have been muted so far in 2012, largely because the major central banks intervened to keep their currencies from appreciating, and because low interest rates in major economies made carry trade [trustees] less appealing to traders. As a result, quarterly average daily FX volumes declined by 16% for the CME, 23% at Thomson Reuters, and 43% at EBS. While our overall FX revenues were down by 20%, BGC's fully-electronic FX revenues increased by 77%, driven by strong performance in our FX spot and auctions bidding. Global XP markets also continued to be challenging in the quarter. Equity derivative volumes were down between 25% and 41%, according to the OCC, Eurex, and CME.

BGC's overall revenue from equities and other asset classes decreased by 42.5%. We expect to benefit from the new rules regarding OTC derivatives once they are finalized. Our understanding is that the rules being discussed will continue to allow for trading through a variety of means, including voice, and we believe the net impact of these rules and the new bank capital requirements will encourage the growth of fully-electronic trading for a number of products we broker.

Total Financial Services segment revenues from eBroking, market data and software were $42.5 million, or 14.5% of segment revenues in the quarter, compared with $44.3 million, or 12%. We now offer eBroking on over 100 of our Financial Services desks compared with approximately 80 a year ago. We expect this to continue to increase as we invest technology to drive electronic trading over our platform. Over time, we expect the growth of our technology-based businesses to further increase the Company's profitability.

Our overall Financial Services segment generated revenues of $292.6 million and $44.2 million of pretax earnings. Revenues in this segment would have been approximately $7 million higher but for the impact of the dollar strengthening versus the euro on a year-to-year basis. In the third quarter of last year this segment generated $368.6 million in revenues and $86.2 million in pretax profits.

With respect to commercial real estate, industry metrics remain generally positive compared to last year. For example, the most recent data from CoStar indicates that commercial property resale prices grew by 11.4% year-over-year in August. According to Real Capital Analytics, commercial property sales volumes were up by 18.9% year-over-year in the third quarter of 2012. On the leasing side, the vacancy rates, asking rent, and net absorption rate also improved in most of our key markets.

Newmark Grubb Knight Frank generated revenues of $141.1 million, consisting of $101.6 million in Brokerage revenues and $39.5 million in Management Services and Other revenue, resulting in pretax earnings of $16.9 million.

NGKF drove BGC's 44.4% increase in front-office headcount to 2,562 brokers and salespeople as of September 30, 2012. This included 1,735 in Financial Services and 827 in Real Estate. Average revenue per front-office employee was approximately $154,000. In Financial Services, it was $169,000; and it was $122,000 in Real Estate Services. In comparison, BGC had 1,774 brokers and salespeople and generated approximately $209,000 per front-office employee in the third quarter of last year.

With that I would now like to turn the call over to Graham.

Thank you, Shaun, and good morning, everyone.

BGC generated revenues of $445.7 million, up 17.1% compared with $380.5 million. Our revenues from the Americas were up 107.7% to $233.1 million, due to the addition of Real Estate. Europe, Middle East and Africa decreased by 21.2% to $161.2 million. And Asia-Pacific revenues decreased by 19.4% to $51.4 million. Our European revenues were negatively affected by approximately $7 million due to the impact of the US dollar strengthening versus the euro year-on-year.

Excluding the Real Estate Services segment, our global July 2012 revenues were down by approximately 13% to $99 million. August was down by approximately 31% to $93 million, while September was down by approximately 15% to $112 million, all when compared with the year earlier.

Turning to expenses, compensation and employee benefits were $266.7 million, or 59.8% of revenues. This compares with $203.2 million, or 53.4% of revenues. Our compensation ratio increased mainly due to the addition of NGKF, since the commercial real estate services industry generally has higher compensation ratios but lower non-compensation expenses as of percentage of revenue. Non-compensation expenses were $132.2 million, or 29.7% of revenues. This compares with $114.7 million, or 30.2% of revenues.

The increase in non-compensation expenses in absolute terms was due largely to the addition of real estate and higher interest expense as a result of the June 2012 issuance of senior retail notes and the July 2011 issuance of convertible senior notes. Over time we're working to drive our non-compensation expenses down to 25% of revenues, which amounts to a pretax profit improvement of over $50 million annually.

BGC's pretax earnings were $46.7 million, or $0.16 per fully diluted share, compared with $62.6 million, or $0.24. Our pretax distributable earnings margin was 10.5% compared with 16.4%. Our effective tax rate for distributable earnings was 14.5% in the third quarter of 2012 compared with 15% a year earlier. BGC's post-tax distributable earnings were $38.6 million, or $0.13 per fully diluted share, compared with $52.3 million, or $0.20. Our post-tax earnings margin was 8.7% compared with 13.7%.

Our fully-diluted weighted average share count was 325.7 million for the third quarter of 2012. This included a weighted average of 39.4 million shares associated with our convertible senior notes. A year earlier, our fully-diluted weighted average share count was 281.6 million. In both periods our GAAP fully-diluted weighted average share counts were larger than those with distributable earnings because certain share equivalence was diluted for distributable earnings but not for GAAP. As of September 30, 2012, our fully-diluted share count was 328.9 million, assuming conversion of 39.5 million shares underlying the convertible senior notes.

With that I'm happy to turn the call back over to Howard.

Thank you, Graham.

Excluding Real Estate Services our revenues for October 2012 were $107 million, which was down approximately 4% compared to last year, but included one additional trading day and, obviously, the last couple of trading days of October were deeply impacted by Hurricane Sandy. Given the continuing and uncertain impact of the storm, we are not providing an outlook for the fourth quarter of 2012. We do, however, expect to resume providing guidance next quarter.

So, Operator, we'd now like to turn the call over for questions.

Sure.

(Operator Instructions)

And our first question comes from the line of Rich Repetto, Sandler O'Neill.

Good morning. I guess, Howard, the first question is on the dividend reduction. Can you just go through the thought process and how you came up -- I see where the earnings level is, was at the main driver or -- but I also see a good amount of cash on the balance sheet, so how did you come up with the, I believe it's $0.12 dividend?

Well, the key for us was to look at October. October is really -- provides reasonably good visibility historically to the first quarter and the beginning of next year. So while our numbers (technical difficulties), because it had an additional trading day if you do that math out -- and we just do it relatively simply -- we had about a 9% decline year over year, and then taking that out into the first quarter it seemed that if our first-quarter visibility was not going to be sustainable at $0.17 we should pick a number for a dividend that we think we can maintain and feel comfortable maintaining throughout the year next year. So we had the $0.17 for six quarters and we'd like to have a stable dividend so we felt that given just our Market visibility today we've moved to $0.12 and we feel comfortable given our visibility going forward, which stems from October, pre-Sandy I guess would be the best way to say it -- that had us feel comfortable that $0.12 was a sustainable number for us going forward.

Okay. And then I guess on the guidance, I certainly understand the Markets there's a lot of uncertain things right now, but I guess the point that's the acknowledgment that you're up and running but we really just don't know where the Market is or what the impacts are going to be, at least in early November. Would that be correct or fair?

Yes.

Okay, and then last. On the headcount and your comment, Howard, on your -- that you see more as regulations get formed and Dodd-Frank gets implemented you see more electronic -- a shift to electronics and higher capital requirements for the bank pushing that way, as well. So would you foresee meaningful headcount reductions over the next year as that shift occurs, or how are you planning for this idea that, hey, more stuff will be traded by the dealers electronically rather than voice?

Well, we see a -- there's a macro change going on now and it is going on I think more slowly than some people anticipated. But it starts with Dodd-Frank, Basel III, it ultimately ends up on decisions like UBS dramatically cutting their workforce. There are tremendously talented people at UBS who are now going to be looking for other places to work and those talented people, while overall (technical difficulties) requirements for these big banks the economics of certain businesses or the economics of running massive businesses might change. But the talented individuals within those areas will find other places to work and that will fragment the business.

And so the business of concentration, which we have seen over the past 10 years, will start to dissipate and you will start to see a new version, which will be fragmentation, meaning that the big guys will do better as big guys and there will be many, many more little guys and less in the middle. So it'll sort of barbell, if you will, but the opportunity to both hire talented people and the opportunity for our salespeople to cover talented people as they go to smaller financial institutions it'll provide the capital for them to do their business that don't have the Basel III capital will create a changed market environment that I think over time will be beneficial for our Company.

And so, we do expect that as products go fully electronic that we will have a margin increase in those businesses and a headcount reduction in those particular businesses that go electronic. That will happen. Whether we can and what is the timing for us to cover these new people, it is not going to take years for the talented people at UBS to find other jobs, right? It may take them months but it won't take them years and therefore those -- we know those people, we know who they are and we have their phone numbers and we'll call them up and talk to them. So I don't think this is a long-term issue, but I think it is not a next quarter issue either.

And so you will see us have less headcount in certain product categories, but you will see us also extend our client base to broader financial institutions who hire these talented people. That, coupled with the fact that with this low volume and low volatility environment, it is incumbent on us to cut our costs and Graham has stated, we will cut our costs and we are very much focused on driving down our fixed costs and getting our costs down overtime to that 25% number, which is a dramatic improvement in our bottom line.

And so we do expect to stay the course and hold our compensation ratio and not have it creep up or move materially from where it is today. Certainly there will be some bouncing up and down as we hire people in Real Estate or we hire more people in Financial Services, that will bounce around but not much. But we do expect to get our costs lower and therefore increase our margins and defend our business overall.

Thanks, Howard, thanks for the color, it's certainly going to be a changing environment out there. Thanks.

Our next question comes from the line of Patrick O'Shaughnessy, Raymond James.

Question about your share count. As I calculated it looks like your fully-diluted share count grew at about a 15% annualized pace in the third quarter. Is that a pace that you think is sustainable over time, both in terms of your potential dilution to EPS, as well as just the amount of additional dividend you have to pay out when you increase your share count?

It's Graham here. The -- included in that number actually is an element of issuance relating to the acquisitions that we made, so there's actually quite a high issuance relative to what we would normally expect. I think now -- like our run rates are resisting growth is probably around 6 million mark. Now we are expecting to continue to issue shares where we can hire and acquire accretively and we will continue to do that. On the other hand, we are looking at ways of reducing the share count issuance, or existing stock and our partnership enhancement program has now been in existence for some years and we're going to look to see how we can reduce the share issuance related to that.

Okay, that's helpful. A follow-up question, if I could. So, Howard, in terms of the impact of hurricane Sandy is your concern right now more about industry-wide trading activity and guys at JPMorgan and Goldman Sachs aren't at their desk, or is it about your brokers not being able to operate as effectively as they might be able to normally because your primary operations are being relocated?

I think basically it's difficult to forecast for you what our revenues will be for any of those topics. So I think the answer for us is normally what I do is we take our management's experience and knowledge base, we give you our revenues basically up until when we're talking to you and give you our insights going forward from our experience and knowledge base. And the problem we have today is there's nothing about my experience and knowledge base that prepares me to help you for the next end weeks. I don't know when the power comes back on for many people downtown Manhattan, the gas lines, all these things, and do they have any impact on us, I don't know.

So I think the answer for us is this quarter will be different because of hurricane Sandy and I don't think it will have a -- I don't think with respect to my first-quarter guidance it will have an impact. Meaning when we get to our first quarter, we will have a view then, Sandy will have passed and we will be able to guide in a manner that is helpful to you going forward. So I think this quarter is just not going to be helpful for having a long-term view of the Company because of the impact of hurricane Sandy.

So maybe to put it another way, did you see a lot lower activity on Wednesday and Thursday of this week than you saw last week?

Yes.

Okay that's helpful

That's why we said the last couple days of October were difficult -- you can pick any word you want. (Laughter) It was -- look, there was a holiday effectively -- I mean, it's not really a -- using it as holiday is certainly the wrong word to use, but the Market was closed on Tuesday, which had a mathematical effect of the equivalent of a holiday, although it was anything but a holiday to anybody who lives on the East Coast. So it had that effect, but it was the opposite of that, it was a nightmare.

All right, understood. Switching gears to ELX, as we track the trading volumes on the ELX they continue to dwindle down, at what point do you reach the decision to just shut it down?

There's a misunderstanding about ELX and its core, which I appreciate the question. ELX is a structural asset of a fully approved futures exchange that is, I think, an extraordinary asset for the going forward world into Dodd-Frank. It is an exceptional asset that we own a piece of along with a number of banks, because as the Market addresses how and why and if certain products will trade as futures contracts, certain products will trade as OTC products, certain products may go back and forth between the two, having a futures exchange that is operationally able to meet the needs of our clients in a much more customized fashion than any of the traditional futures exchange I think is an extraordinary asset.

So it was a pleasant idea to try to get together during the interim time before Dodd-Frank to try to come up with a model that competes with the CME. But make no mistake about it, the asset value of this exchange is prospective in our view, and so I think the asset is very, very valuable. That's why we invested in it and that's why we think it is very valuable going forward. So as Dodd-Frank's rules come into place and as ELX sits and addresses with clients the things that they want to achieve their customers, I think you will find over time we are excited and optimistic about the place ELX will play in the marketplace.

But it clearly will be different than just a competitor from the CME, but the idea is to be a customizable customer-friendly futures exchange in a different model than those gigantic monopolistic enterprises that exist today.

Okay. So basically to summarize, you guys have a very valuable futures exchange medallion and volumes aren't great right now but you expect that over time you can capitalize on Dodd-Frank evolution to the industry, in the meantime can you reduce the cost structure of ELX because basically at this point you're bleeding $2.5 million, $3 million per quarter?

ELX has the funds within it to last for a couple of years is my recollection, so I think from our perspective, from BGC's perspective, we are receiving our fees for servicing it and it is an excellent -- from BGC's perspective it is a paying client using our technology and so it's fine. From ELX's view, which BGC has an equity interest in it, it is a great asset optionality for future equity value. So it is currently funded adequately, so from BGC's perspective it's a good technology client and we continue to service it and whether it does more volume or less volume they pay their bills and that's fine for us.

And from a BGC perspective we like ELX a lot and from an equity ownership of ELX we are optimistic that it will produce equity value for us over time. And we work on that all the time and it is an idea to create a different type of futures exchange than those we've seen before. A more customizable, a more individual, an exchange that serves the needs of its clients in a more [spoke] fashion and I think that is what we have signed up for and that is what we work for.

Okay, I'll jump back in the queue. Thanks.

Our next question comes from Jillian Miller, BMO Capital Markets.

Thanks, guys, just a follow up on share count. So I understand that you're still recognizing some of the real estate deal-related increases, but those deals closed early in the year so I guess I'm trying to figure out how much longer we're going to be at this higher level of share adds related to those deals, when do we get back to that $6 million run rate that you had referenced -- or 6 million share run rate, sorry?

Basically it'll be periodic when they hit triggers, so it's like annually for the next couple of years.

And we hope they hit the triggers. (laughter) It's not the kind of thing that we are -- if they hit the trigger that's because things have gone well so I would not -- we don't mind the issuance because our real estate business is obviously performing very, very well so we're happy about that and it will have -- we think the full cost of these acquisitions taken, if all triggers are met, is wonderful accretive and very positive. It is only really that the financial markets, because of the low volatility and the low volumes, have masked the real extraordinary asset value of our real estate business and we think those acquisitions have gone great and those -- share issuance with respect to those has been accretive.

Okay, so the reason we saw the larger share jump in the third quarter is because the real estate business did better than you're expecting, hit a trigger and then you had to pay out those shares?

Yes.

Then the fourth quarter is seasonally the strongest area for real estate, but that's kind of a vague understanding, can you give us an idea of what type of seasonal uptick you would typically see in real estate broking revenue for the fourth quarter. Is it typically 10% higher than the mid-year level, is it 20% higher? And then also, is there any seasonal impact on the real estate management services revenue, or is that pretty much just stable constantly?

The real estate management services generally tends to be stable. With respect to the brokerage business, historically we've studied it, we note that deals tend to happen just before the end of the year because people try to get them done. That is as anecdotal as I can get. We do not have the kind of empirical evidence that we have for our business and the combination of Newmark Knight Frank and Grubb and Ellis really does not lead us to have the kind of empirical evidence that we could guide on that topic with the kind of precision that you've asked for. That coupled with that we do not know what hurricane Sandy has done to that.

Basically in New York it is difficult for people the real estate business. They may be putting off meetings, and if you put off a meeting for two weeks or three weeks does that move the whole process back a couple of weeks and does that mean that the deals slip over from the fourth quarter to the first quarter. I don't think it consequentially affects the business of real estate over time.

I think the fact is that from our perspective, we don't know if it changes timing, so I think our lack of empirical evidence leads me to say I just don't have the fundamental experience and detail to guide at that level of specificity, other than historically anecdotally that is true. However, we have had a better second quarter than we anticipated in real estate and then we had a better third quarter in real estate than we had anticipated.

I don't know if that means things are moving forward, or if we're just good doing much better than we anticipated, all of those may well be true. But we are very happy with our real estate business and we are -- and we're building.

Okay, got it, and then just one final one for me. On the non-compensation expense ratio, the plan is to get to 25% but I wasn't sure what revenue type of a run rate that was based on so I guess my question is, if what's going on in the third and the fourth quarter continues for and extended amount of time and volumes remain very depressed is that 25% goal still achievable, or is there a place where going below that threshold becomes a lot more difficult?

What I actually said was that we were expecting savings of around $50 million a year, which is coming over $50 million in a year, so that's really the target that we're aiming for. But obviously we're conscious that the revenues are obviously somewhat lower now than last quarter.

Okay, thank you.

(Operator Instructions)

Our next question comes from the line of Niamh Alexander, KBW.

Hi, thanks for taking my questions. Can you give me some color on the electronic business. I think we saw something in the release, as well, but it seems like we're getting -- competitors are seeing definite uptake from the dealer community and their clients on doing more electronic in the cash markets as well as in the derivatives, is there any more color you can share with us that BGC traders get benefiting there?

This is Shaun. Look, BGC traders and volume matches had success after success. The markets are changing, as you know but we continued to take more and more markets electronic. We've recently had some great success in Paris on European governments, we've had (inaudible) Tokyo in interest-rate auctions. It's very positive but, as you know, it's a changing landscape at the moment but we are converting more and more of our revenue to fully electronic.

Okay, we'll follow up later for some more data. And then just on the capital distribution, you've lowered your dividend in light of structural market changes for just your earnings outlook here, have you -- are you (inaudible) as your shareholders? Have you changed the distribution formula at all for the private partnership units, or have you -- because a big part of the dividend goes to the employees and is considered maybe part of their compensation structure, so is there an offset for them that maybe public shareholders aren't getting, or has the formula not changed? Are they getting a higher payout, or are they able to exchange more or less than they were before in terms of the private partnership units?

We look at the model consistently across our stakeholders so the partners and the public matter to us and to the model stays the same, which is if our distributable earnings drive both the distribution to partners and drive our dividend to our public shareholders, so if those numbers are going to go down or lower than had been in the past, then we have to change our dividend. We try to keep the dividend more balanced.

Once upon a time when we started this process we had a variable dividend to the public because we had a variable distribution to our partners and that seemed to not be aligned with how public shareholders do dividends. So we went to a stable dividend trying to estimate effectively what that level would be for the course of the year and pick a sustainable number and that would generally be fair and consistent and that's what we continue to try to do. And so by moving to $0.12 we're saying given what we see now that seems a sustainable number for us for the foreseeable future.

Obviously, if our distributable earnings were to go up in the low volumes and volatility that we see today were to pass and things were to become more normalized as they had been then obviously it would be our pleasure to raise that. But as we see right here, right now this is a sustainable number going forward and reasonable and consistent with how we will distribute to our partners, as well.

Okay, fair enough, Howard. So I guess when we see the cash flow statement we should see that, too, there won't have been a spike in exchangeability, or there won't have been a spike in the distributions from dividends going down or anything like that, so that should come out with the Q probably.

Wait one sec. So exchangeability is non -- it's a non-cash factor, meaning if they had units of the partnership and they own public shareholder units, exchangeability proves the point which is, the employees have partnership units and its earning them X and the public shares are earning X and they exchange one from the other obviously it's because the return from the public shares it's effectively satisfactory for them to switch from one to the other. Obviously, there would be no exchangeability if the yield on the public stocks were substantially different because why would someone switch if they --

Well, they could sell the stock, they couldn't sell the partnership units, right?

They can but the value of it, obviously, would be consistently applied, the value is the value. So I don't think exchangeability is the point. I think cash distributions is the point and that's the point exactly right, but I would not say exchangeability where they hold units that are in already in our share count and whether they exchange them to the public or not is a different equation.

Okay, fair enough. Thanks, Howard, for clarifying that one. And then [Cantor] is a sister company, it's a separate company, but we saw some downgrades during the quarter. They own a portion of BGC stock a portion -- I mean you own a portion of Cantor. Can you just remind me, the downgrades, the capital, is there any kind of issue there that they might be interested to exit some of their BGC position or anything like that that we should be concerned about?

No.

Okay, short and sweet, but I needed to clarify. And then on the acquisition side, with the dealers shrinking so much it's kind of hard to think why should you be growing at this point but you certainly grew through the crisis the last time around. But are you seeing more appetite of sellers, do you think you're closer to -- in the core financial services area do you think you're closer to getting some deals sealed and whatnot from here?

The difficult nature of acquisition is simply a matter of sellers have to align themselves with us viewing the acquisition as accretive, and because of that nature we are certain kind of buyer and we say, look, our stock is trading at X and we have technology and we have scale and we have scope and we have all these things and you're smaller company and you have less. So we want the transactions to be accretive, we want the employees to take public stock.

I think the low volume and low volatility world makes companies reach reasonable decision making more quickly. So we think the current market is going to produce acquisition targets for us that make us happy and attractive. So I do think the market in front of us bodes well for us as an acquiring entity, so I do like that. So we do think there's plenty of opportunities out there.

Okay, fair enough and I'll get back in line. Thanks.

Our final question comes from the line of Patrick O'Shaughnessy, Raymond James.

Had a follow-up question for you guys. Just on the terms of the FSA review over in the UK, can you update us on the progress of that and does it still look like it's probably going to wrap up maybe in the first half of next year?

In fact, we are happy to tell you that the things that we had talked about have wrapped up. The Company was officially informed that we are no longer on the watch list and that we are in good stead with the FSA. So we did an enormous amount of work, we told you we would do that work and we have done that work and that is happily in the past. We are -- they have a standard review process, which is rigorous, that -- so every now and again we will continue. We will have another one of these standard reviews, but that all financial service companies go through probably starting at the end of this year. But thereafter I should think we should be on an ordinary cycle, so I'm happy to report that part of our relationship with the FSA is behind.

All right, great. Thanks

There are no further questions, I'd now like to turn the call back over to management.

Thank you very much, everyone, for joining us today and we look forward to updating you again next quarter. So, thanks very much and have a great day today.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation, you may now disconnect. Have a great day.