Bgc Group Inc (BGC) 2014 Q1 法說會逐字稿

Welcome to the first-quarter 2014 BGC Partners, Inc. earnings conference call. My name is Ellen and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jason McGruder, Head of Investor Relations.

Good morning, our first-quarter 2014 financial results press release was issued this morning. This can be found on either the News section or Investor Relations sections of our website at www.BGCPartners.com. During today's call we will also be referring to a presentation that summarizes our results and which includes other useful information. This too can be found at the Investor Relations section of our website.

Throughout today's call we will be referring to our results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the sections in today's press release entitled Distributable Earnings, Distributable Earnings Compared to GAAP Results, Reconciliation of Revenues Under GAAP and Distributable Earnings and Reconciliation of GAAP Income for Distributable Earnings for a definition of these terms and how, why, and when management uses them.

Unless otherwise stated, whenever we prefer to income statement items such as revenue, expenses, pretax earnings or post-tax earnings we are doing so only on a distributable earnings basis. Unless otherwise stated, all results provided in the document compare the first-quarter of 2014 with the year earlier period.

In addition, certain revenue items and nonfinancial metrics have been adjusted for prior periods to conform to current reporting methodologies. These adjustments have no impact on overall revenues or earnings for either GAAP or distributable earnings.

On June 28, 2013, BGC sold [four] electronic trading platforms (inaudible) US Treasury notes and bonds to NASDAQ OMX Group, Inc. For purposes of today's call the assets sold are referred to as eSpeed, and the businesses remaining at BGC that are not part of eSpeed are referred to as quote, retained, unquote.

Also Newmark Grubb Knight Frank is synonymous with NGKF or Real Estate Services. I also remind you that the information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include statements about the outlook and prospects for BGC (inaudible) as well as statements by 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 of risks and uncertainties that include, but 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 or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that accordingly you should not place undue reliance on these statements.

Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Please refer to the complete disclaimer with respect to forward-looking statements in which factors set forth by most recent public filings on Form 8-K, 10-K and 10-Q which we incorporate today by reference.

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

Thanks, Jason. You have a lot to read on those. Good morning, thank you for joining us for our first-quarter 2014 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 post-tax distributable earnings per share increased 25% and pre-tax distributable earnings were also up 25%, a gain of over $11 million. This growth was achieved despite the sale of eSpeed which had generated $24.8 million from revenue and $14.4 million in pre-tax profits in last year's first quarter.

Our growth was led by the strong performance of Newmark Grubb Knight Frank. Real estate brokerage revenues grew by almost 50% year over year driving the surge in NGKF's pre-tax distributable earnings of over 500%.

We expect the acquisition of Cornish & Carey Commercial to close during the second quarter of this year. Cornish is the leading commercial real estate services company in the important Bay Area and Silicon Valley markets and it's addition will enable NGKF to broaden the scope and depth of its offerings to clients in Northern California and across the United States.

In our Financial Services business this morning we announced our agreement to acquire Remate, the leading Mexican interdealer broker focusing on interest rate derivatives and fixed income. We also continue to make key hires across our businesses. We expect these additions to be accretive to earnings per share beginning in the third quarter of 2014.

These investments underscore BGC's ongoing commitment to make accretive acquisitions and profitably hire and we are confident in our ability to utilize our capital to achieve strong revenue and earnings growth going forward. BGC's cash position was $717.2 million at the end of the quarter and we also expect to receive an additional $500 million in NASDAQ OMX stock over time.

We expect the companies we buy and the producers we hire will generate a greater return than our cost of capital and obviously a much higher return than we currently earn on our cash.

In addition, we expect to accretively repay debt, repurchase common shares and units and maintain our regular common dividend for the foreseeable future. Our Board declared a $0.12 qualified dividend for the first quarter which at yesterday's closing price represented a 6.7% annualized yield. With that I will turn the call over to Shaun.

Thanks, Howard. And good morning, everyone. BGC's financial services business generates revenues of $287.1 million and $59.1 million of pre-tax earnings. A year earlier, excluding eSpeed, we generated $300.2 million in revenues and $49.7 million in pre-tax profits. Last year eSpeed represented $23.6 million in revenues and $14.4 million of pre-tax earnings in the segment.

By the end of this quarter we reduced our financial services front office headcount by 9% year over year primarily focusing on underperforming brokers. While this contributed to our Financial Services revenues declining by 4.4%, it also led to our revenue per broker salesperson increasing by 4%.

This improved front office productivity along with our efforts to reduce expenses led to our financial service pre-tax distributable earnings margins expanding to 20.6% from 19.8% a year earlier. Excluding the assets sold to NASDAQ OMX, our profits actually increased by approximately 19% year on year in Financial Services.

Looking at results by asset class, our revenues from rates products, excluding eSpeed, were down by 12% in the quarter to $113.7 million. In comparison, interest rate volumes were down by 12% at Eurex and 26% at Euronext. While CME rate volumes increased our revenues are now less correlated to the CME following the NASDAQ OMX transaction.

While our fully electronic credit revenues increased by over 50% our overall credit revenues declined by 5.3% to $65.4 million. This reflected continued challenges facing the interdealer credit sector due to ongoing regulatory uncertainty and increased bank capital requirements.

For example, dealer-to-dealer credit derivatives outstanding declined by 30% year over year at the beginning of April according to the DTCC. Our higher margin fully electronic spot FX revenues were up by 6% whereas BGC's overall foreign-exchange revenues declined by 12.3% to $52.1 million.

The overall FX market continued to be affected by the personnel and regulatory issues confronting a number of banks. However, BGC performance in this asset class was better than the comparable FX volume decline of between [20%] and 37% reported by Reuters, CME and EBS.

Further equity derivatives and energy markets were mixed in the quarter. For example, equity derivative average daily volumes were down by 4% and 22% respectively according to Eurex and Euronext. Total US equity option turnover increased by 8% according to the OCC and energy volumes were relatively flat per the CME and ICE.

In comparison, BGC's revenues from our energy and commodity desks increased by approximately 75%. Although starting from a small base, the impacts of our recent acquisition and new hires will drive continued growth of this asset class throughout this year.

Our overall revenues from equities and other asset classes, which include these desks, increased by 7% to $42.8 million. Excluding these (inaudible) financial services electronic trading market data and software revenues increased by 3.3% to $23.5 million, or 8.2% of segment revenues in the quarter, compared with $22.7 million or 7.6%.

Our overall positive performance in fully electronic trading was tempered by the difficult global market conditions in foreign-exchange I mentioned earlier. Our retained fully electronic products generated a pre-tax profit margin of approximately 53% in the quarter and their revenues have grown faster than our overall financial services business for the past several years.

We ended March with 1,497 brokers and salespeople in financial services, down 9% from 1,641 a year earlier. Excluding [the increase] our average revenue per financial services broker salesperson increased by 4% to $184,000.

With respect to Real Estate Services industry metrics continued to move in a positive direction in the first quarter. According to the most recent figures from Real Capital Analytics and CoStar, sales and leasing activity both improved by around 15% in the US. While we benefited from positive industry trends, we believe that NGKF once again made strong market share gains.

Our real estate brokerage revenues improved by 47%. Management services and other revenues were up by 1.3%. And overall revenue improved by 31.2%. During the quarter NGKF also moved up one position to number four in the National Real Estate Investor magazine's ranking of top US commercial leasing firms and moved into the top 10 on Real Capital Analytics list of national commercial real estate sales brokers.

Our real estate business' significant performance was driven by strong double-digit percentage improvements from leasing advisory, global corporate services and capital markets. We had 888 real estate brokers and salespeople at quarter end, down 1% compared to 894 a year earlier. But the statistic we are most proud of is our average revenue per real estate broker which is up 47% to $125,000.

With that statistic, I would now like to turn the call over to Graham. Go ahead, Graham, and see if you can top that.

Thank you, Shaun, and good morning, everyone. BGC generated revenues of $445.9 million, down 0.9% compared with $449.8 million. The first quarter of 2013 included $24.8 million in revenues from eSpeed. Our revenues from the Americas were up approximately 18% excluding eSpeed. Revenues from Europe, Middle East and Africa were down by 10% and Asia-Pacific revenues decreased by 8%.

Turning to consolidated expenses, compensation and employee benefits were 61.9% of revenues compared with 61.7%. Our compensation ratio was essentially flat despite a larger proportion of revenues coming from real estate. Non-compensation expenses were down by $12.8 million or 10.1% and were 25.6% of revenues compared with 28.3%. And that, Shaun, is my statistic.

The decrease in non-compensation expenses was across nearly all of our GAAP line items due largely to our ongoing cost reduction program as well as to lower financial services revenues and the sale of eSpeed. An exception was in occupancy and equipment which increased due to GAAP charges we took related to impairment of fixed assets and consolidation of our real estate. Both of these items were related to our ongoing expense reduction program.

We are confident that we will achieve our target of reducing total expenses companywide by at least $100 million annualized by the end of 2014 as compared with the second half of 2012 run rate. This comparison excludes the impact of any acquisitions or significant hires completed or closed in 2014.

Our pre-tax earnings were $56.2 million, up 24.7% when compared with $45.1 million. Our pre-tax margin this quarter expanded to 12.6% compared to 10%. BGC's effective tax rate for distributable earnings was 15% versus 14.5%.

Our post-tax distributable earnings increased to $47.2 million, or $0.15 per fully diluted share, compared with $38.5 million or $0.12. Our post-tax earnings margin improved to 10.6% compared with 8.6%.

BGC had a fully diluted weighted average share count for distributable earnings of $362.1 million in the first quarter of 2014 and $322.1 million under GAAP. These compare with $357.5 million for distributable earnings and $317.8 million for GAAP a year earlier.

Our share count is only up 4.6 million shares or 1.3% from one year ago. The GAAP checkouts were lower than that for distributable earnings in both periods because they excluded certain share equivalents in order to avoid anti-dilution.

As of March 31, 2013, our fully diluted share count was 362.3 million assuming conversion of the convertible senior notes into 40.1 million shares.

As of March 31, 2014, BGC's cash position, which we define as cash and cash equivalents, marketable securities and unencumbered securities owned held for liquidity purposes, were $717.2 million. Less payable and collateralized borrowings and those payable to related parties were $408 million.

Book value per common share was $2.04 and total capital, which we define as redeemable partnership interest, non-controlling interest and subsidiaries and total stockholders' equity was $747 million.

In comparison, as of December 31, 2013, our cash position was $795 million. Notes payable and collateralized borrowings and those payable to related parties were $408.4 million. Book value per common share was $2.15 and total capital was $769.7 million.

BGC's cash position decreased from year-end 2013 primarily due to cash used to pay taxes, $22 million used to reduce fully diluted share count by $3.3 million, and cash used for the HEAT acquisition.

We have now largely paid for all the distributions and taxes related to the NASDAQ OMX transaction which we had indicated in June would be around $290 million. This means that the majority of our cash balances available for us to use to invest in our businesses, make accretive acquisitions, pay down debt and will maintain our dividend.

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

Thank you, Graham. Our revenues for April, including NGKF but excluding eSpeed, are tracking down around 2% compared with the year earlier. However, the Easter holiday was in April this year while last year it fell in the first quarter. And in addition, the second quarter this year has one last trading day if you are comparing it to last year.

So with that in mind, our second-quarter 2014 outlook is as follows. We expect to generate revenues of between approximately $420 million and $440 million which compares to $471 million last year; however, a better comparison excludes eSpeed from last year and therefore revenues would have been $447 million.

We expect pre-tax distributable earnings on approximately $47 million to $55 million, and this compares to $53.8 million last year. Without eSpeed last year's earnings would have been approximately $40 million. We anticipate our effective tax rate for distributable earnings to be around 15% and that compares with 14.5% last year.

Our guidance does not include any revenues or earnings from Cornish & Carey, which we expect to begin seeing in the third quarter. We intend to update our second-quarter outlook around the end of June 2014. And with that, operator, we are ready to answer your questions.

(Operator Instructions). Jillian Miller, BMO.

On the non-comp expenses, (inaudible) really nicely and I expect a lot of that is kind of extracting some of the synergies from your real estate acquisitions. But I was hoping you could give us an idea, assuming a steady-state without any further acquisitions rolling on, where would that $114 million figure go over the course of the year? Should we be ending 2014 at more like $110 million or even below that? Any guidance would be helpful.

I think I would expect it to come down a little. I am not sure that I can give you a precise number. But over the course of the next year I would -- absent acquisitions, as I have said, I would expect that to be -- to come down a little further.

Okay, but we are probably not going to see another $5 million decline like we did in 4Q to 1Q?

I don't think I can give you -- I don't want to be that precise.

Okay.

It will be down a little.

Okay. And then the average revenue per broking personnel in the real estate business has improved I guess almost 50%, which is very impressive. I am just wondering what portion of that growth is related to the improving macro environment versus what portions/related measures that you as a firm have taken to cut costs and improve technology and all of that.

Well, I think, you have positive macros, so that helps. You have increased market share and just our brokers are winning more business and that is another. And then we have really over the last 15 months we have had sort of lesser producing brokers left, about 150 of them, and we have hired really superb 150 coming in and the combination of the weakest 150 leaving and the best people joining our (inaudible) coming in leads to dramatically improve productivity per head.

And so if you have the same number of heads you have the same infrastructure cost and they produce 47% more -- you are just going to see dramatic improvement to the bottom-line and that is why our earnings were up five times.

So nice macros, but better outperformance by NGKF. The quality of the staff, the quality of our wins, the global corporate services winning more and more business, we're just producing more revenue per head and our brokers are winning.

Okay. And where do you think that that productivity figure can go over time. I mean are we kind of reaching like the upper limits there? Or do you think it can go substantially higher from here?

Well, I think we are going to continue to study it. I think it can be a little chunky, the real estate business if you do some big deals this quarter versus next it will bounce around. But over the course of the year I think we are studying it very closely but we said before we had improvements to go.

I think our global corporate services business still has improvements to go and that combines the technology that BGC knows so well and the data-driven aspects of the business and analysis and consulting that we are sort of key on, coupled with tremendous talents in our brokerage community of the brokers we have should lead to increased revenue [bread].

And I think that is what we are investing in and I think we are seeing the returns there now. So we are very excited about it, I think the team at NGKF has done really a first, first class job. And with the addition of Cornish & Carey coming, we really feel -- it really feels great, the Company just really feels very positive, very strong and winning.

Okay, great. And then on Cornish & Carey, can you give us a sense for what the margins are like in that business and what impact you expect on your comp rate, your other expenses and the share count growth per quarter?

It is basically consistent with our real estate business plus or minus a little bit. You take first class, world-class regional business, meaning it is spectacular in the Bay Area and Northern California, Palo Alto, Silicon Valley and that's its bread-and-butter. And so its margins are consistent with the balance of our business.

But what it has is tremendous relationships with the new and growing technology companies as well as the largest ones, I mean it did Google's headquarters, it did HP's headquarters, it did Apple's headquarters, it has all of them. So the ability to bring those technology companies into the rest of our national fold I think will bode very, very well for our overall system.

So their economics are generally consistent, but I think they will raise the economics for the overall system and we will raise theirs.

Okay, great. And then just on the share count, do you expect to be issuing some shares to them or will you do something like you did a couple quarters ago and kind of buy that dilution back?

I think we will definitely be issuing them some shares and partnership units because it is part of our retentive nature of how we retain our staff and have all interests aligned together, we want their brokers to be owners of the Company, we want their interest to be aligned with yours.

And as you saw, we will -- we are not going to try to time it day by day, month by month or quarter by quarter but we will be expecting to buy back shares and units over the course of the year to constrain our share count and share growth. So it may be a little lumpy but we will opportunistically be a buyer of our stock.

Got it, thank you.

Rich Repetto, Sandler O'Neill.

I guess one more [cut] on the expenses. You got this $100 million target, can you -- or expense reduction, with the $114 million this quarter can you tell us where we are at in regards to achieving against the 2012 run rate target?

One thing you can look at is the average non-comp expenses in the second half of 2012 is actually $132 million for each of those two quarters. So they are $114 million now. So that is $16 million different -- $18 million different.

Okay. And we are committed to getting it out to be about another $7 million a quarter, is that how we (inaudible)?

Yes, that is just in non-comp obviously. It is not only non-comp that we are targeting.

Got it. Okay. So that $100 million doesn't have to be in this (inaudible) it can be -- it doesn't have to be down by the $25 million per quarter?

That is correct, yes.

Okay. Okay, well then (multiple speakers).

(Multiple speakers) an indication. Either what you want is visible clearly from what you can see.

Yes, there is still more to go there, but it's not all on that one particular line item.

Okay, okay. And then I'm a little confused on -- and not to get too nitpicky on this -- but on side 28 because we are talking about just on April revenues being down 2% and I'm not sure -- I thought you said including eSpeed and excluding NGKF?

No, the other way around. Obviously we don't include eSpeed, so we exclude eSpeed when you are doing a comparison to last year. But we are now going to do this kind of guidance including NGKF.

Okay, okay, sorry. And lastly, Howard, I guess you sort of talked about the real estate brokerage -- broker productivity, but the financial services broker activity, that improved not the 47% but it did improve. And is it all from the elimination of underperforming brokers or what else are we doing there -- on the financial services side?

Hey Rich, it is Shaun. We have, as we said, we -- for want of a better word, operated some of our broking staff and we have also cut some headcount that was underperforming and we have taken market share. It has been a great combination without doubt that we have reduced headcount which we felt was -- would be better for us in the long run to consolidate that back.

As we have been showing you in the numbers, that has been dropped to the bottom-line and made us much more profitable. Because you can cut cost that are attached to those brokers. And you should expect to see us continue to do that throughout this year.

Yes. Okay, that is helpful. One last, stepping back. The reason why I think I am confused on this, on slide 28 the title says monthly revenue excluding Real Estate Services. April is different.

[Poor] Jason.

You are right, you are right, you are right. To be fair, Rich, the bars, all the bars do exclude real estate. The only thing that includes real estate is that call up, that 2%.

Okay.

Sorry, we will make that more clear next time, I apologize for that.

Okay, that is all I had, guys. Strong quarter.

(Operator Instructions). Michael Wong, Morningstar.

Are there any real technology stumbling blocks or even behavioral differences that would keep staff more or less naturally separated into dealer decline and dealer to dealer or in the end will the dominant stuff will all of the dominant stuff be all to all?

There is a natural propensity for the sell side liquidity providers to try to have a differentiated market so that there is a difference in providing liquidity and those who take liquidity. And the buy side understands that because if they eliminate the capacity for the sell side firms who are providing them liquidity to exit their positions then low and behold that liquidity will no longer be provided and those buy side firms, which is the reason why they call them the buy side, will then have to find liquidity from other buy side firms and find themselves all on the same side each time and that will create tremendous volatility and huge swings and the market as all buy side firms try to get into market with no one providing liquidity. And all of them trying to get out of it in time with no one providing liquidity.

So I think they we will find a balance where people respect each other for the values that they bring in order to make sure that those counterparties that bring value get appropriately compensated for bringing that value. And that is finding its way now.

I didn't say it is going to be simple. But there is no technological impeding event, it is a practical one whereas if you would task those who provide the liquidity eventually they won't. And therefore you are left without it.

And I think as you go ask the senior buy side people they will be able to articulate this position from a defensive perspective of themselves, which is they are deathly afraid of their liquidity providers not being able to make an adequate amount of money and therefore not providing them liquidity any longer.

You can ask any of them, it doesn't matter who you ask, the buy side firms have no interest in harming the sell side firms because they provide them a very valuable asset called liquidity.

Okay, thanks for that. And for a while regulatory uncertainty has been commented on as impeding just general volumes and revenue brokerages. I mean, there has been quite a bit more clarity around that. Do you still believe that there are financial firms that are standing on the sidelines after more or less step rules have come up, capital rules have come out, mandatory clearing?

Do you think they have enough clarity in regards to all of those rules that we are at a relatively normal level or are there still a lot of financial firms on the sidelines?

Enormous sidelines, a crowd -- it is sort of like a football game right now. The crowd is all in the stands and on the sidelines and there are very few people on the pits. There are just very few people on the field. It has got an enormous, enormous way to go, the friction, the uncertainty. Just the story I told you before, the liquidity, the lack of liquidity, how do you play, where do we go? That is in every conversation we have and it restrains transactions always.

And you also think about the huge (inaudible) at some of the major banks at the moment and the complete change of business plan as well as some of the personnel changes we have seen, as I mentioned in my piece, in some of the major banks. And so just foreign-exchanges for one and the LIBOR issues that are still ongoing. You are going to see this continue for some time yet.

Okay. So even though the rules are out people are still adapting to implementation?

Yes.

Okay, thank you.

Niamh Alexander, KBW.

Shaun, if I could just go back to those comments about your dealer customers changing, because we are -- we concur we are seeing still like fixed income groups being drastically shrunk and now FX and it has been reached for a while and it is still is a lot of the rates area. We don't know if it is done.

So, net-net, are you starting to see some of the new dealers emerge? Because there is, as you say, going to be a need for market makers and for liquidity especially as rates start changing and buy side activity needs to pick up.

So where are you seeing maybe some signs of new dealers, new liquidity providers emerging? I mean US is much less of a democracy than in Europe. So are you seeing some signs in Europe? Are you starting to see more of a pickup in activity over there yet? And what can you share with us on that?

I think across the board in all asset classes you are seeing emergence of more counterparty, new counterparties or counterparties that have been at it for many years that are changing tax and looking at more of an aggressive role because they can't get all the liquidity that they are looking for from the sell side. And some of it are sort of second and third tier counterparties.

It is an evolving landscape. As some of the dealers fall out from some of the major banks they're going to lose a lot of their hedge funds that are looking to pick up and take over some of the opportunities that are there from a creating liquidity and giving liquidity. But you will certainly see it from high-frequency traders.

Yes, there is a lot of those that are coming to the market and picking up from and taking over from some of the liquidity that is needed in the marketplace. And they are connecting to the brokers and you should expect to see those guys come online throughout this year. And I think that it will be -- it is a challenge because it is a lot of work that needs to get done with regards to connectivity and the technology that surrounds that.

For us that plays to our sweet spot because we have that technology and it is effective for us and fast. And we've proven that over the years. So for us it is something that we welcome and we are looking forward to growing and developing.

Okay, that is helpful. Thanks, Shaun. I guess you just led into the next question just on high-frequency trading, the topic du jour. I mean your eSpeed platform probably had the biggest proportion of HFT business. But what other parts of your business do you have maybe exposure to this customer group and help me think about what lines of revenue you should be looking at.

There could be -- the issues raised publicly seem to be predominantly focused on equity market structure. But if there is some pressure on the group and other profit or other profit lines, maybe pressure is what they are doing with you guys as well.

So what parts of the business are you in? Can you give us a sense of maybe what size they are? And was it eSpeed where they were kind of the dominant source of the flow there?

Yes, really it was eSpeed, they were very dominant in -- with regards to the legacy business that we have at the moment. Yes, they are coming into the marketplace and it is very small at the moment.

Okay, so not a really big source of revenue. And then if I could just go back to the SEF landscape. The mandate took effect, there are all of these exemptions so that I think due to expire, very, very soon and then there seems to be a bit of regulatory arbitrage going on.

So how comfortable do you feel that you are going to be one of the top three SEF in the rate specifically because that is your kind of market corner, as it were? So how do you make sure that you are still one of the top three when we do get past all of these question marks and issues of eventual use of the SEF?

Well, I think we are confident that we will be successful and that we think the opportunity there is tremendous for us over time. There continues to be uncertainty as to the international ability of how to do business offshore versus onshore. There is tremendous uncertainty still on what these specific things mean and how do they get from the regulators, what does this mean, what does this mean.

I mean this is a river with lots of jagged rocks, just maybe a stream just beginning. Someday it will be a well-worn river with smooth things. But right now it is new, it is rough and it is difficult for people to navigate. And I think that over time the business will include the business that currently exists between banks and their client.

In that business is so, so gigantic as compared to the interdealer broker space that any small percentage of it that falls towards us in the gigantic growth of what was interdealer broking now becomes intermediation of various product categories will mean that the person who comes in first, second or third or fourth or fifth or sixth or seventh or eighth or ninth will make much more money than the interdealer brokers of the past.

I think the opportunity coming our way is great and therefore our ability to make more money as a Company, for our employees, our shareholders I think is superb and we really like the opportunity, we like our technology, we like our position. We are very fond of our management. And so we think we are going to do very, very well.

Okay, fair enough. I mean, Howard, even with say one very big platform in there with just a flat fee irrespective of how much you are trading, you still see a big data to client opportunity for the interdealer brokers?

Well we are good at helping people execute their transaction. That is what we are great at. And we hire the best people to do that and we build technology and we understand. And I think we will be a player in the space. And how that plays out and who gets what shares and how it works out we don't know.

But we do know the clients well and we knew service well. And if you know clients were injured of service well likely category is that we will have great performance. So we are -- we like our position and we like the opportunities coming and it is a step-by-step process.

Okay, thank you. And then just lastly, just for Graham and just on the distributable versus the GAAP. So one of the big differences there is -- and I'm sorry if I missed this before -- but you are not allowed to include the GAAP earn out -- you are not allowed to include the NASDAQ earn out on a GAAP basis, is that correct? But you do include it on a distributable earnings basis?

Yes, the earn out we take -- we first filed it in Q3, right, and then we market to market each quarter. And in our distributable earnings we are effectively spread it over the remaining quarters.

Whereas on a GAAP basis you just included one quarter of the year?

(inaudible) we have to, we just have to market it to market.

Yes, yes. But it still flows through the P&L on a GAAP basis?

Yes.

Okay, fair enough. Thanks.

Patrick O'Shaughnessy, Raymond James.

So kind of building off of the questions on stats, and so even if kind of one buys in the premise that there can be multiple winners in the SEF landscape and that the overall volumes are going to accelerate quite a bit as more people get on platforms and it just broadens opportunity besides interdealer brokers.

I think that one of the concerns out there has been that SEF pricing has come in a lot lower than what people expect and that you have competitors out there with different business models that can basically price their transactions at very low rates.

So with that in mind, how comfortable are you that the actual revenue opportunity will be meaningful and that you will be able to price your trading capabilities appropriately for what you think you are providing?

Well, historically we have had a broad category of pricing across our products. We have had the most liquid to the least liquid, low price to high price. We are technologically capable and we can do high touch, higher margin. And we can do technology and liquidity and speed and connectivity as another feature.

So we are confident that over this great landscape or great rainbow of products that will fall under the SEF category that there are all of those types in there. There are going to be some that are low price, high-speed and there are going to be some that are illiquid big spread no speed and service related.

And where you put each product category in that continuum I promise you this, no one has the answer to all of them. But some of us have the answer to some of them. If you actually analyzed all the IDBs and you put them all together, while we all act like we compete with each other, if you actually looked at each segment and how we do, most of us have two in every segment.

But there are so many different segments and so many different areas that we think the opportunity to say the word SEF to suggest that that is a blanket that covers more than just your toes, it is just an overstatement. It is just gigantic. Each of these -- right, these are -- each desk, each area, each concept is slightly different, and so I think there is just much more nuance to the word SEF.

And I don't think this stuff is new. I think what has happened is it has pushed the bank to dealer business into a more open playing field. It has not really touched the bank-to-bank business and that combination leads to opportunity as far as we can see it from here. We have the technology, we have the relationships, we have the connectivity, I think we win.

What number we come in, and what is the scale of that victory, I don't know and I can't say. But we at this Company are confident that with our resources and our scale and our ability to invest and our ability to deliver service to clients, and they know we can, I think we are likely to win.

Got you. And I guess speaking of the broad umbrella of SEF and all the different things that it can include, any update on the ELX? I know it has kind of been a hedge of yours in some ways. Any progress in terms of new things that it might trade or new people signing up to use the platform, etc.?

Yes, we -- ELX is in talking. We have meetings and most of our meetings are extremely well attended and extremely well focused. This is exactly the point where people consider what is the change that they want for the business, what is emerging and what is possible. And they think about it and they examine it and they sign up for it.

So I think we have -- you saw a flurry of activity toward the end of the year, early this year. And then as people sort of qualified for it and checked on it and now they are building it into their systems to connect to others. So I think ELX remains a long option, an opportunity.

It is an option, it is built into our cost structure now, it is part of our mix. And if it emerges as a winner it could be a gigantic winner. We are in, I don't know, let's call it the second mile of a marathon. But it's a long time running, we have got a great asset and it is a great option. What's it worth today? It is worth making sure we keep that option.

But can it win? Do we spend time, effort and energy on it? We do. Do we think it is likely to succeed? I can't say that. Do I think I am delighted to own that asset and thrilled with the optionality of it? Sure.

Got you, thanks. And then on Remate, can you just kind of give a little bit more color on exactly kind of which types of products they do well in and what sort of trends we have seen in those products?

They may focus a bit on credit and rates. They are the premier and leading broker in Mexico. We have been doing -- and we've had an arrangement with them for many, many years, trusted partner with us. And corresponding agreement with them.

The Management Group are world-class, they have been in the market for many, many years. Jacques Levy who leads Remate is an amazing manager who has grown the business dramatically over the years and has continued to stay at the forefront of the broking industry in Mexico.

And they also have an office here in New York and we are very, very proud and pleased to be able to reach an agreement with them to acquire them.

Okay, that is helpful. Thanks. And then last one for me, so as we thought about your commercial real estate business historically it seems like first quarter is the softest quarter of the year and then you have a pretty nice rebound as the year progresses. Would you still expect that to be the general case in 2014?

Well, I think the first quarter was just much better than we expected. So I think -- I doubt you will see the big giant bump because we just had a much better first quarter. So I think it will be -- it goes up, but I am not predicting that because that went up the whole year went up.

I think what we're saying is we just substantially outperformed on the first quarter and I think the second quarter would be more consistent as we expect from a much bigger, much better, stronger Company. And then I think you will see in the third-quarter, as we go towards the second half of the year, again a substantial bounce.

Got you. Thank you very much.

We have no further questions at this time. I would like to turn the call back over to Howard Lutnick for closing remarks.

Thank you all for joining us today and we look forward to speaking to you next quarter. We are hosting our Analyst Day on May 29 and if you would like to watch that, that will be available via webcast. We look forward to speaking to you next quarter. Have a great day today, everybody, and thanks for spending the morning with us.

Thank you. Ladies and gentlemen, this concludes the first-quarter 2014 BGC Partners, Inc. earnings conference. Thank you for participating. You may now disconnect.