BGC Partners Q3 Earnings Call Transcript

Nov. 6.08 | About: BGC Partners, (BGCP)

BGC Partners (NASDAQ:BGCP)

Q3 2008 Earnings Call

November 6, 2008 8:45 a.m. ET

Executives

Jason McGruder – Head of IR

Howard Lutnick – Chairman and Co-CEO

Shaun Lynn – President

Analysts

Rich Repetto - Sandler O'Neill

Daniel Harris - Goldman Sachs

Rob Rutschow - Deutsche Bank

Richard Repetto – Sandler O’Neil & Partners

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2008 BGC Partners Incorporated earnings call. My name is Dan and I’ll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today’s call, Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Jason McGruder

Good morning. Before we begin, I want to make sure that you know that our third quarter 2008 financial results press release was issued last night. We also have a PowerPoint summarizing our results on the investor relations page. If you do not have a copy of these documents you may obtain them by going to the Investor Relations section of our Web site at www.BGCPartners.com.

I also refer you to the disclaimer language titled "Discussion of Forward-looking Statements" contained in our earnings release. I remind you that the information in the release and on this call contain forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended.

Such forward-looking statements include statements about the outlook and prospects for BGC Partners and its industry as well as statements about our future financial operating performance. Such statements are based upon current expectations that involve risks and uncertainties.

Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because of the number of risks and uncertainties that are included, but are not limited to risks and uncertainties identified in the earnings release and BGC Partners filings with the U.S. Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution you that it's impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on the 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 our forward-looking statements set forth in yesterday's earnings release and the risk factors set forth in our public filings which we incorporate by reference.

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

Howard Lutnick

Good morning and thank you for joining us today on our second Quarter 2008 Conference Call. With me today is Lee Amaitis, my co-Chief Executive Officer; Shaun Lynn, our President; and Bob West, our Chief Financial Officer.

I am pleased to report that for the third quarter of 2008 our pretax distributable earning’s increased by 59% to $34 million, or $0.17 per fully diluted share, while our post-tax distributable earning’s increased by 51% to $25 million or $0.13 per fully diluted share, all when compared to the third quarter of last year.

Consistent with our dividend policy of paying out at least 75% of post-tax distributable earning’s per share to our stockholders, we have declared a dividend of $0.10 per share for the third quarter, which is payable on December 1st for shareholders of record as of November the 17th.

We expect to use the balance of our fourth quarter 2008 post-tax distributable earning’s after we make distributions to all partnership units, and dividend payments to common stockholders to buy back shares or partnership units of our company before the end of the first quarter of 2009.

The onset of the credit crisis in August of 2007 created an unusually volatile market and significant volumes which wasn’t the case this August, though it clearly was the case this September. August of 2008 marked a return to typical summer seasonality, as we had anticipated and guided.

September 2008 revenues were up approximately 21% to $118 million, which included strong growth across credit, FX, and other asset classes, while rates revenues remain flat. July revenues were up approximately 5% year-over-year to $104 million. We generated approximately $81 million of revenue in August, which was down 21% compared to the unseasonably busy August of 2007.

To assist you, we have made available our month-by-month revenues and their comparison to last year on page 15 of the earning’s PowerPoint, which is on our website.

Overall, third quarter revenues were up slightly compared to last year. In addition, our October 2008 revenues were up approximately 15% year-on-year to $116 million.

Before we get into more detailed results, I wanted to mention that my long-time partner and co-Chief Executive Officer, Lee Amaitis has decided to retire from day-to-day management of BGC. At the end of the year, he will assume the role of Vice Chairman of the company. Lee has done an incredible job for us from managing the eSpeed business after the events of September 11th to building the strong and profitable business that BGC is today.

Words just don't do justice to the gratitude and respect we all have for Lee. In his new role he will focus on acquisitions, corporate development, key broker hires, and other strategic initiatives for the company, while passing the day-to-day operations of the business to the very capable hands of our President Shaun Lynn and his team.

We are also pleased to announce additional strengthening of our management team. Sean Windeatt will become our Chief Operating Officer, effective January 1st. He has held senior positions of ever-increasing responsibility since joining us in 1997 and has worked closely with Shaun Lynn since 2001.

In addition, Tony Verrier will be joining us as Executive Managing Director. Tony has recently served as Global Chief Operating Officer for Tullet Prebon. Also, Leonard Harvey has joined us as Executive Managing Director for the Asia Pacific region. Previously, he had served as Tullet’s Chief Executive Officer for Asia Pacific.

Sean, Tony, and Len add tremendous depth to our business and continue our tradition of combining the top people in the industry with our world-class technology.

Now I’d like to turn the call over to Shaun Lynn.

Shaun Lynn

Thank you, Howard. Just before I begin, I would also like to say thank you very much to Lee for helping me and guiding me over the past 12 years, and also for the fact that he’ll be traveling around the globe rather than me.

As you all know, there has been a great deal of movement towards creating a central clearing mechanism for credit directives. We enthusiastically favor central clearing in every overseas market, which we broke up.

There are several reasons why. First, we are very successful with OPC products and have century clearing, such as US Treasury, which are cleared by the DTCC and European Interest Rate swaps, which clear through OCH.

In addition, we probably broke up a number of exchange trading, and thus centrally cleared products including listing extra options and futures.

Second, it’s important to mention that we do not receive any revenue for clearing the roughly 80% of our brokerage revenues that involve name give-up transactions. Instead, they are bioelectrically cleared by our customers, by our clients themselves; therefore there is no revenue for us to lose to a central clear-out.

In our experience, central clearing improves efficiency and leads to high volumes, which increases revenues and as in the case with the US Treasury, paces electronification, which leads to greater profitability.

Finally, we get paid significantly faster by clearing organizations for centrally cleared trades than we do on commission for name give-up trades. Therefore, our receivables will be reduced as our central clearing comes to more OCC products. This will add to our already strong cash position.

Based on everything we have heard from our clients and the market, the unanimous opinion is that there should be no monopoly granted for perfectly integrated solutions, at both execution and clearing of CDS, or any other OTC product.

Nor should exchange listing be mandated to the CDS market. In the case of the latter, we feel that only the most liquid industries would or could be exchange listed as opposed to the single name CDS, which we believe will remain an OTC product.

For those who have expressed concern over the current state of the OTC credit products, for September 2008, we produced dramatic growth across our entire credit business, which increased by approximately 79% compared to last year, and was also up strongly in October.

With regards our fully electronic products, overall third quarter 2008 revenues related to fully electronic trading increased by 6.4% year-over-year and represented 7.9% of total company revenue for distributable earning’s in the third quarter 2008, but was 7.5% in the prior year period.

Business driven by significant increases in revenues on the fully electronic trading of new products, which include credit default swaps, interest rate swaps, and foreign exchange options, partially offset by lower volumes and revenues related to fully electronic US Treasury trades.

More specifically in the third quarter 2008, revenues from fully electronic transactions of the new products using BGC trader were more than four times greater than of the entire first half of 2008. And for the first time, these products were presented well over 10% of revenues related to fully electronic trading.

Our customer’s adoption of our technology, as well as the continuing role of BGC trader in Asia and the US, adds to our confidence of fully electronic new product volume and revenue will become a significant percentage of our overall revenue and volumes.

We repeatedly stated that as the conversion to fully electronic trading of certain anti-classes is a matter of when, and not if. For example, the most liquid part of the European CDS market appears to be close at hand. But in the FX options, also appears poised for a wider scale electronic trading for the near future.

We also continue to expand our fully electronic trading volumes in Canadian and European government bonds, as well as European agencies. Such conversions will lead to high profit margins and earnings with or without cost pointing revenue growth.

We also continue to hire new brokers, which will add to both our revenue and profitability. At the end of third quarter 2008, BGC Partners had 1,262 voice and hybrid brokers, compared to 1,247 at the end of June, and 1,200 as of September 30th, 2007. This increase in head counts does not include approximately 70 Liquid Airs brokers. We expect the Liquid Airs acquisition to close in the first half of 2009, and are very excited about our reach into the fast-growing Brazilian market with key IDB.

Since its founding in 1985, Liquid Airs has grown to become one of the top-ranked brokerage houses in the Brazilian financial market and is one of the most active participants on the Brazilian Mercantile and Futures Exchange, or the BM&F, as it is also known.

In 2007, Liquid Airs Brokerage revenues increased by 71% to approximately 51 million Real. In Brazil, most of the over-the-counter contracts are cleared by the BM&F, similar to the central clearing model I discussed earlier. Liquid Airs accounts for approximately 12% of all OTC trade on the Brazilian exchange making it the second largest broker in the market.

Our business model is simple. We hire profitably and acquire appreciatively. That is what we work on everyday. With that, I'd like to turn the call over to Bob.

Bob West

Thank you Shaun and good morning. For the third quarter of 2008, BGC Partners generated revenues for distributable earnings of $302.8 million, up slightly compared to $299.4 million in the third quarter of 2007. GAAP revenues included $1.9 million contra revenue item related to our equity pick-up charge for Aqua and ELX. The company's brokerage revenues were $274.3 million in the third quarter of 2008, about the same as $274.6 million recorded in the prior year period.

In the third quarter of 2008, credit revenues increased by 17.2% to $67.9 million. Foreign exchange revenues increased by 6.4% to $38.4 million and other asset classes increased by 42% to $25.8 million. Our rates revenues declined by 12.4% to $142.2 million all compared to the third quarter of 2007.

The increases in credit and other asset classes were primarily driven by strong organic growth across the globe and by the acquisition of our energy broker Radix. Rates revenues declined across the entire industry in the third quarter of 2008 particularly in August. However, our September 2008 rates revenues were up slightly year-over-year. We expect massive issuance of debt by the U.S. and other governments involved in the financial systems rescues.

With potentially over $1 trillion and perhaps $2 trillion in additional treasury sales alone, we could see additions to the four current benchmarks, the two-year, five-year, ten-year, and thirty-year bonds. We could even see two or three new benchmarks such as the three-year and seven-year notes and maybe even to twenty-year. It's also possible that the thirty-year we returned to its earlier glory days, if its issuance dramatically increases. These issues should improve cash swap and derivative volumes across our sweep of rates products.

For the third quarter of 2008, our rates business represent 46.9% of our total distributable earnings revenues, credit 22.4%, foreign exchange 12.7%, and other asset classes 8.5%.

Turning to expenses. Compensation and employee benefits represent 57.7% of the company's revenues in the third quarter of 2008 on a distributable earnings basis compared with 56.3% in the year earlier period. Our non-compensation expenses were $94.6 million or 31.2% of revenues on a distributable earnings basis in the third quarter of 2008. An improvement of over 5 percentage points compared to 36.6% in the third quarter of 2007.

The difference between other expenses in the third quarter of 2008 as calculated for GAAP and distributable earning is primarily the result of a $6.4 billion non-cash, non-diluted charitable donation expense with respect to BGC's Annual Charity Day. This amount will be added back to capital as the charitable donation is being made personally by the partners and not the company.

Our pre-tax distributable earnings were up 59.2% to $33.6 million or $0.17 per fully diluted share compared to $21.1 million or $0.11 per fully diluted share in the third quarter of 2007. Our pre-tax distributable earnings would have been approximately $3 million higher in the third quarter of 2008 but for the Lehman bankruptcy.

Post-tax distributable earnings increased by 51% to $25.3 million or $0.13 per fully diluted share in the third quarter of 2008 versus $16.8 million or $0.09 per fully diluted share in the third quarter of 2007. Our effective tax rate for distributable earnings is 21.7% in the third quarter of 2008 compared to 18.5% the prior year period. We continue to expect our effective tax rate for distributable earnings to be approximately 22% in 2008 and 27% for 2009 and thereafter.

Our fully diluted weighed average share count was 196.6 million for the third quarter of 2008 compared to 184.3 million in the year earlier period. As of September 30, 2008, our cash position which we define as cash in cash in equivalence in reversed repurchase agreement totaled $361.5 million while our long-term debt was $150 million.

This quarter, we reduced our net payables by $65 million, paid the second quarter dividends for our shareholders and partners of approximately $32.5 million and made stock repurchases of $15.3 million. The repurchases totaled 3.2 million shares for an average price of $4.82 per share. You can find the table detailing these purchases in yesterday's earnings release.

Now, I'll turn the call back over to Howard.

Howard Lutnick

Thank you, Bob. We expect to generate revenues of between $260 and $280 million in the fourth quarter of 2008 compared to $272.2 million last year. We expect fourth quarter 2008 pre-tax distributable earnings of between $22 and $29 million and post-tax distributable earnings of $17 to $23 million which are substantial improvements compared to last year's pre-tax distributable earnings of $4.3 million and post-tax distributable earnings of negative $2.4 million.

Our guidance assumes that the last week of November, the Thanksgiving week, and the last two weeks of December will show very much like August, typical slow seasonality. The past few months have seen unprecedented turmoil in the financial markets and we remain vigilant about the market and the economic and regulatory issues that lie ahead. We are ready to adopt our business to meet whatever challenges we may face.

And operator, we are now available to answer questions, please.

Question-and-Answer Session

Operator

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

Rich Repetto - Sandler O'Neill

Hey, Howard. Good morning.

Howard Lutnick

Good morning.

Rich Repetto - Sandler O'Neill

I always have questions in the guidance here, but the $260 to $280 million for the fourth quarter, so, you were good enough to provide us what you've done so far in October, so I can back into what the guidance implies for November and December and without going through all the numbers here, but it's down anywhere from 4% to 16%.

So I'm just wondering, I understand that the seasonality here and the holidays. I just compared it to the prior year, November and December as well, so you're looking for a decline from prior years as well.

Howard Lutnick

Well, I think in part, August had sort of been my guide this year which was -- you saw what happened in August and to suggest that the last week of November will be different from the last two weeks of August so the last two weeks of December would be as good as sort of last two weeks of August sort of gave us our guide to say so this is the model that we see given what we saw in August and the seasonality.

But by showing you what we had in October that our October was excellent and there was nothing about November, like including yesterday, that was other than a continuation of October, I'm really pointing out that once people take vacation, given the volatility in world we've been in today, if they get the chance to take vacation, they're taking that vacation.

And so the last week of November is, in our estimation, going to be a significant seasonality in the last two weeks of December. But otherwise, from what we have seen and what we have shown you in October our business is in excellent shape currently.

Rich Repetto - Sandler O'Neill

And then that goes to -- the next question is, looking farther out in '09, we've had some of the changes going as far as consolidation or your customers and what do you see is the impacts and I know we've talked about it to ourselves but the impact of the Lehman Brothers going away, the consolidation of some of the other larger investment banks, what kind of an impact will it have on '09 and maybe the leveraging of hedge funds as well?

Howard Lutnick

Well, I think the -- what we have seen so far is that there is extraordinary volatility in the markets and extraordinary volatility is a friend, a great friend. Since volatility is our friend, extraordinary volatility, I guess, we could say is our best friend. So, these kind markets work very, very well for us whether the markets are going up or the markets are going down or as they are now gyrating wildly.

So, if you're going to ask me do I think the credits crisis will subside next year, I do not. And the word crisis tends to bring with it volatility and the word volatility brings with it good market conditions for us. So, I think, provided market conditions to continue to be volatile and the credit crisis continues to not sort of sort itself out instantly and become ever more boring and ever more plain, something I cannot possibly imagine as I sit here today. I think markets should remain attractive for us going forward. I haven't really obviously worked through all the possibilities of the combinations.

But as you pointed out, they all occurred in the month of October so there is no Lehman Brothers in the month of October. It hasn't been Bear Sterns since March, Wachovia -- people are not sort of getting out of bed and sort of doing as much business as they possibly can in Wachovia knowing they're merging, Merrill already knows merging so we understand our customers are having difficult time with it but volatility and their ability to trade is what drives our business not the direction of trading or the profitability of those particular trades, it's really the manner of how much trading happens.

So October ,the volatility of October and the business that we've seen in October is where we are today, but for all other things being equal, I don't know why January would be different.

Rich Repetto - Sandler O'Neill

Okay. That's very helpful. I'll get back in the queue, Howard. Thanks.

Operator

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

Daniel Harris - Goldman Sachs

Hi. Good morning guys.

Bob West

Good morning.

Daniel Harris - Goldman Sachs

You mentioned, I think the fully electronic trading revenues were about 8% and that's up a little bit year-over-year from the mid-seven last year, what the regulators very interested in seeing more transparent markets well, less than CDS or probably most other OTC markets at this point, do you think that that sort of forces more volumes to go to an electronic basis and if that is the case, how do you think that flows through your income statement based on comp or non-comp?

Howard Lutnick

Well, we are great fans of business moving more electronic, given the scale and breadth of our technology offering to our clients, the integration that's already approved for them and their pick up and use of it. So, were your question to be true that the regulators were pushing for more transparency in the electronic markets, that would be great.

One does not unfortunately need electronic markets to have more transparency although over the -- off the lent treasuries have been done by voice with screen assistance for quite some time and they are transparent.

With respect to the regulators pushing for essential clearing, we think that will improve our business and improve electronics in that business. With respect to profitability, the profitability of electronics is significantly higher than the profitability of waste transactions because we have to -- our compensation of our brokers declines as the machine does more of the work and there are more sales people rather than literally the ones doing the transaction there, they are in charge of the sales relationship.

Now our compensation for new products for electronics is higher than our compensation for U.S. Treasuries for example, and that's simply because we are tremendously proud of our sales people who have moved our new products so dramatically higher and we compensate them accordingly.

So one of the difference is you would see that treasury volumes because you saw rates volumes decline across the industry this quarter while the treasury volumes were down and our new products were up more than offsetting it. It is part of our mix that our new products we do compensate the salesmen higher because they are doing clearly a great job.

Daniel Harris - Goldman Sachs

Well, that answers the second question I was going to have. So that was very helpful. But, and I know I can't hold you at anything, Howard, certainly, but as you think about the changes that you're seeing in the market, would you anticipate that acceleration that the electronification of certain markets will accelerate or do you just think it's going to be on the clearing end?

Howard Lutnick

Well, I think the clearing helps. Essential clearing which is clearly the massive push by global regulators to reduce counter party risk amongst the banks will be a dramatic help to our business in our view, period. I think it will also help the electronification of the business as well which would also be an additional help to our business.

So we are very excited about the regulatory pushes that are afoot now and I think Shaun sort of delineated the part of it that we -- the fact that it not be vertically integrated into one place is sort of the key thing that we care about. We think European CDS is going electronic.

As Shaun said that the future is now and it's at hand. That's why it grew the statistics that Shaun laid out for you. That ability to move to the United States and expand across Asia is what we are pushing now. Whether that happens or not in the near term, I cannot predict.

We are trying -- our salesmen are working on it everyday but it's really up to the customers to adopt it. We make the offer of the product. By the way, the product comes generally with a lower price and comes with a higher volume.

So if the customers want to reduce their costs, one of the ways to reduce their costs is to do more business electronically and that's beneficial for everyone. It's beneficial for the brokers because they have more time to focus on the specialized products, right? And they are compensated as salesmen for the electronics.

So it works for our brokers, it works for the clients, and because we built and paid for the technology, it sure as heck works for us. But we are pushing it as fast as we can. We love this business model but unfortunately, Dan, I can't tell you when it's going to happen. I just know that we cannot be pushing harder for it and we have already the investment, so it's not even that we're going to invest more in it. We are all in, in this space and it's now starting to pay off for us.

Daniel Harris - Goldman Sachs

Okay, that was helpful Howard. And I think during the quarter, you had made some public comments on some news fronts about hiring and being excited about continuing to hire on the broker's front. What are you seeing in terms of competition for new brokers, given some of the changes we've seen in the market, and how is that sort of impact and either what you have to pay upfront to get some of those brokers to transition from their prior locations? Or how you think about that in terms of some of your own brokers that may be looking to go elsewhere looking for retention payments?

Howard Lutnick

Well, I don't think there's any particular new model for us. We compensate our brokers and therefore we expect to stay within our 55% to 60% compensation ratio. One of the benefits we have is our partnership and our stock and company structure. Because while the stock price is acting consistent with the S&P in the markets at large, since our earnings have held up actually much, much better, our distributions to our partners and employees have held up consistent or above what their expectations were.

And since they're not sellers of the stock anywhere, they're owners of the company or may get as the public do huge and important quarterly dividends, I think it's been an attractive place and it's a place that the partnership has -- we have successfully used it to bring in people.

It both reduces the cash that we have to pay to keep someone and more importantly when their initial contract term runs off, the earnings of the company and the fact that they're getting them in cash every quarter, keep them here because their compensation is in fact higher because of their equity ownership and it's cash flow. Not that they can't sell it and runaway, but the fact is they get the earnings so it increases their compensation, but in the same way that you get it which is based on the bottom line of the company.

So we have used it very effectively to hire. You saw that we were fortunate to add Tony Verrier. We were fortunate to add Glenn Harvey. These are the world class spectacular leaders in our industry. They are great managers.

They've proven themselves and the fact that they've joined BGC just expresses that obviously their view of the combination of our staff and, I think maybe even most importantly, the vast extent of our technology where you know electronics are coming and you know all the things you talked about are coming. I think it's part of the pull. So we have not had to pay more. We have not. We do not expect our compensation ratios to change. We do not.

Daniel Harris - Goldman Sachs

Thanks Howard. I'll get back in the queue as well.

Operator

Your next question comes from the line of Rob Rutschow from Deutsche Bank. Please proceed.

Rob Rutschow - Deutsche Bank

Hey, good morning. I apologize if you've addressed these already, but the first question was on your rate business. Generally, I think we're looking for a lot more issue in government securities and maybe less issuance in government securities and maybe less issuance in some of the structured products and mortgaged backs. Historically what would a shift like that mean for your rate volumes?

Howard Lutnick

It would be great for us since we are entirely focused on the government bond side, and we have no mortgage or really the mortgage business is near zero for us. So, with respect to the mortgage business, we have virtually none, and with respect to government bond businesses, we have one of the great rates products around the world. So, massive government bond issuance is perfect for us. Thank you.

Rob Rutschow - Deutsche Bank

Is there any differentiation in terms of margins or revenues per trade there?

Howard Lutnick

Well, remember, because we don’t have a cost of goods, these are all digital products. Really the amount of commission per million, we are completely insensitive to it. It’s really gross revenue, it’s volume times the price of.

If we halved our price and doubled the volume, we would be indifferent to it, and so therefore, I think U.S. treasuries is electronic, so more volume is very profitable. European government bonds, massive issuance creates the need, and you’ve seen reports that the Europeans are now talking about potentially doing a central issuer.

I mean, if you can imagine, what would be better for BGC than a central issuer, which we’d want to issue things electronically, and there are only two global electronic platforms, of which we are one of them.

So, that would be great for us. But all of the sovereign issuance would be great for our business, and basically if it’s done by voice, we compensate our brokers approximately 60%, and the rest we have a fixed cost model, so the balance would basically fall to the bottom line, and electronics are higher than that because we compensate our brokers instead as salesmen.

And it doesn’t use up all of their time, so they can do other things with their time and still get paid on electronics. So, electronics obviously are even more profitable, maybe 75% margins for us.

Rob Rutschow - Deutsche Bank

Okay. My second question is just with regard to acquisitions. Is there any change in the willingness or desire of sellers out there and any particular geographies where things look to be more active?

Howard Lutnick

Well, I think it’s slower because like in most markets out there now, the seller had some number in his mind, and that has to do with kind of the stock price of sort of pre Bear Stearns. Right? So, everyone sort of has this view of, well, in the first quarter I was worth this; why can’t I still be worth this. And for us it’s very simple.

We know what we’re trading at now, and we are going to do accretive deals. So, that sort of drives the map, then we’d say, look, we have a global technology platform. We have 1,200 brokers. We have scale, we have scope, and you have a certain size, and we’re only going to do accretive deals.

So, we have lots of friends, but maybe the deal velocity might decline until people realize that basically the model is join us and earn our dividends along with us and we will drive profitability much higher and you’ll make more money by being our partner.

So, I think there will be a slowing of general velocity for a while until sellers sort of get the idea that this is the way the world is, it’s not just going to be a momentary thing. But with respect to areas, we are a scalable business, so to us, if we find energy brokers or an energy acquisition, that’s great.

We don’t need to have a huge energy business, as we showed with Radix, a small business leveled on our technology and leveled on our infrastructure. Works great. Equities works great. Emerging markets are a great place.

We had our transaction in Brazil, and we’ll add to that transaction the way we did in Paris where we did our first transaction in Paris and we did our second transaction in Paris, then we hired, I don’t know, 50 other brokers on top of those two in Paris.

So, I would think you would expect to see us expand dramatically in Brazil, which is a great place for us, and Latin America. So, I think those are areas where we’re focused, but I would think that the opportunity for us to hire profitably and acquire assertively is no less.

So than maybe less companies willing to do the deal today, but I don’t think Lee will be less busy doing acquisitions over the coming year. And as Sean said, Sean is excited about the fact that Lee will be flying around the world doing these things, and Sean will be focused on the day to day instead of the reverse.

Rob Rutschow - Deutsche Bank

Okay. I guess in that context, should we assume you might be more willing to buy back stock in the near term?

Howard Lutnick

I think we are happy to buy back stock. I think the yield is extraordinary, and that’s a return for our partners and our shareholders. We’re all in it together and we showed that we were interested in buying back stock, and part of our plan is whatever we do not distribute to our shareholders we use to buy back stock, and we expect to continue to do that.

Rob Rutschow - Deutsche Bank

Okay. Thank you, Howard.

Operator

Your next question is a follow-up from Rich Repetto from Sandler O’Neil. Please proceed.

Richard Repetto – Sandler O’Neil & Partners

Yes, Howard, I guess my question is how does BGCP differentiate itself from Creditex in the trading of CDS and the electronic trading of it? That’s the question.

Sean Windeatt – Chief Operating Officer

Sorry, it’s Sean here, Rich. I think the main difference with us is that we have focused on indices. We’ve focused on indices as well as single name on a global perspective. I think our competitor Creditex has mainly focused on electronic trading in the European sector but not in the U.S.

And I think one of the main differences between us is we have a global footprint which we’re using. Also, one of the big things that we have in addition is our strength in cash, which we can use to service our customers to give them the opportunity to hedge their position with the cash bonds.

Richard Repetto – Sandler O’Neil & Partners

Understood. Okay. And then the other question I had, you mentioned, Sean, that you didn’t think that the vertically integrated CDS model was the most beneficial one to the industry. If you could structure -- obviously I think you’re referring -- and I’ll make the assumption, but the CME’s proposal.

So, I guess my question is, what instructions and what model would you propose that the whoever the New York Fed does implement and how would that work?

Sean Windeatt – Chief Operating Officer

I think it would be one clearer that has no affiliation with the broker. I think it doesn’t color the trade. It doesn’t color customers. They feel that there is no allegiance to one or the other. They will do business with any broker that they see fit that will then post the trades to the central clearer. I think that’s the best model.

Richard Repetto – Sandler O’Neil & Partners

And so, that would rule out ICEs because well, at least they were, the clearing corp. was owned by brokers. Would that rule them out in your perfect world scenario?

Howard Lutnick

Well, it’s not perfect, but obviously, for instance, BTCC is owned by everybody. Right? And OCC as an example, is owned by five exchanged, but it’s operated by everybody and operates as a not for profit and gives its earnings back to really all of the participants based on usage.

So, that’s a model where ownership has no impact on economics so, that’s a useful model. The LCH is a good model. If I tried to turn Creditex into a monopoly, sort of connecting it in some model, that won’t work, and obviously I don’t think it would work for the banks of the world either.

I think the model is if it’s a distributed earnings model where the users of the central clearer get the profits, like OCC, like DTCC, like LCH, like all of the central clearers that have been successful in the world, then I think it will work not only well for the market but extremely well for us because we have been very successful in those markets, as Sean said in his comments before.

Richard Repetto – Sandler O’Neil & Partners

Okay, and very last question is, the pricing structure, at least that I was aware of for the old eSpeed, had, I guess, caps placed on let’s just say a Lehman Brothers. If the paid you so much, I don’t know what the period is monthly or quarterly, then they wouldn’t have to pay above that?

And I guess the question is, is that structure still in place? How do you think about, because you talked a lot about the scale, how do you balance that with -- how do we balance it, thinking about higher volumes, but you might have some price caps in there?

Howard Lutnick

Well, you may remember that with respect to ESB, those fixed-price arrangements were with respect to U.S. treasuries and they were with a broad range of our largest clients, and those are still in place and they are long-term, and when market volumes are slower, as they were this summer, it mitigates it; and when market volumes are higher which we expect them to be prospectively, then they reduce the average cost for our clients.

But so, the biggest clients who produce the volume were happy to have long-term fixed-price arrangements with them in the U.S. treasury product. That has nothing to do with new products, although it would be fantastic.

I mean, we would love the market presidents to come to us and sign fixed-price deals with us consistent with the way we’ve done U.S. treasuries, but the market has to be a certain size before everyone is ready for that.

So, I think with respect to new products, there’s no reason for you to include that, and with respect to just U.S. treasuries, I think that will stay in the mix consistent how it’s been in the past. So volume, increasing volumes in U.S. treasuries is helpful but not as exaggerated, but on the downside, the same is true as well.

Richard Repetto – Sandler O’Neil & Partners

Understood. Thanks, Howard.

Operator

At this time there are no further questions in queue. I would now like to turn the call back over to Mr. Howard Lutnick for closing remarks.

Howard Lutnick

Well, thank you all for joining us today, and we look forward to speaking to you next quarter, and have a great day today everybody. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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