Equity analysts covering the U.S. exchanges. It is my pleasure to introduce Howard Lutnick, Chairman and CEO of BGC Partners. BGC facilitates trading in fixed income, derivatives, foreign exchange, and equities through its electronic platforms and interdealer broker. Howard, thank you for joining us. Thanks, Gautam. First, can you begin by highlighting some of the macroeconomic factors that you're excited for in 2023? Sure. Zero interest rates were a very, very difficult raw material for us. I mean, if you imagine we're in the volume business and interest rates went to zero in 2008 and pretty much stayed in and around zero for 14 years. I mean, that is just a tough market environment. I'll give you some statistics. Issuance used to be very positively correlated to trading volume, right? Think about it. Issuance and credit was up 2.75 times from 2008 to 2021, and volumes halved. Treasury volumes, five times the issuance, volume flat. Whereas previously, if volumes doubled if issuance doubled, trading volumes grow 66%. You had this weird world of compressed interest rates which deeply constrained trading volume. Obviously, you have the Treasury and the Fed buying all the volume. Obviously, they're not doing anything. That period has ended. 2023 is the beginning of the next cycle of trading volume. We are seeing fantastic underlying fundamentals to our business. I think what's going to happen is the difference of BGC from 2008 to 2014 was in that weird zero interest rate world. We're now back to the regular world. You're going to see BGC become a beautiful growth company going forward. We are really excited about 2023 and beyond. I think you're going to see volumes grow. I think you're going to see our revenues grow. You're going to see our profits grow. It's just going to be fun to be BGC for the first time in more than a decade. That's kind of tough. At least we're in the good times now. Yeah. As you think about the fundamentals of the core voice and hybrid business, can you speak to tailwinds that could improve broker production in 2023? Sure. If you think about it, we had zore interest rates for a long time, you had short-term rates in the United States. Well, what's there to trade, right? Now you're going to see rates volumes dramatically grow, right? And volatility doesn't really matter, because what happens is the cycle will go like this. There will always be peaks and troughs, but the graph is just going to go higher and higher and higher, and up we're going to go. I think broker production is going to go steadily higher for the next decade. I mean, You know, we had a long period behind us, and now we have a long period in front of us, broker production's going to be better. Volumes are going to be better. You're gonna watch the banks. Their sales and trading businesses are going to do beautifully well because for the last 10 years, they've been trading, making money. Now they're going to be selling and making money, right? Now they can sell and trade to make money. When your clients do well, it's much better for us. We're going to do better. Brokerage is going to do better. Our broker production is going to do better. The whole thing is going to become a growth company going forward, and this is the beginning of that period right now. We're really excited about that. The past is the past, and now we're going to the future. Maybe expanding on why interest rates are important for BGC, what's the revenue contribution from this business? What is your perspective on inflation and where that could settle or maybe where it could drive rates to settle over the next 12 months? All right. On rates, you know, my opinion is that, you know, I'm 61, so I remember rates. You're a young gentleman, so you don't remember rates. Rates stuck with us for a long time. My view is the Fed gets to 5%, holds at 5%, but holds at 5%. None of this, you know, the concept of a month ago, they were thinking rates get cut twice this year. I don't buy it. Rates get cut once this year. I don't buy it. Rates get cut next year. I don't buy it. I think the Fed just holds steady, then we get to 5% rates. We see the 10-year continue to drift higher, right? As it's been drifting now. It drifts higher and higher, and I think it crosses 4% into the low four's. you know, that's my perspective. Interest rates for us is the raw material in which we play, right? As we discussed just before, the ratio and the correlation between issuance and trading volume, it's got to be there. How could it not be there? If I issue five times more treasuries, how could we not trade more? The answer we both knew was, well, if the Fed buys them all, where's the fun in that? There's no trading in it. As the Fed issues just regular 10-year notes, the US Treasury issues 10-year notes, and the Federal Reserve doesn't buy them, all of a sudden you have volume growing. You have mortgages being issued where the buyers hedge them like normal, sell treasuries, buy mortgages, and then that becomes the velocity of money, and that trading happens. You're going to see the beautiful return of the positive correlation between issuance and volume. As I talked about in credit, if issuance was up 2.75 times and volumes were 0.5, you know, volumes go to 0.6. Still terrible statistic. That's a 20% growth in overall credit trading volumes, and BGC has the largest credit platform in the wholesale markets. I think you will see natural growth and then our margins. When we produce $1 more of revenue in our voice brokerage business, we generate at least 30% to the bottom line. You have margins of north of 30% in our voice business when it grows. In our fully electronic business and our Fenics business, you have margins north of 50%. Growth business north of 30%, growth business north of 50%. You're going to see really beautiful statistics, I think you're gonna see a re-rating of this company as people realize the past was not about the company, it was about the market the company was in. That market has violently and fundamentally changed. Not a secret. It's not a secret. Everybody knows we have rates now, and everybody should start to remember that with rates comes trading volume. You know, that's a good segue into FMX. Can you walk us through the futures exchange and Fenics US Treasury opportunity? Sure. The history was we built the best electronic trading market in US Treasuries. We sold it to Nasdaq in 2013 when I thought rates were going to be zero for a decade, which they were, and volumes would not grow, which they did. We sold it to Nasdaq, and then we went back in the business in 2018, started building the U.S. Treasury platform. That Treasury platform is up to 20% market share, and it's taken that 20% off of BrokerTec, which is owned by the big giant gorilla, Chicago Mercantile Exchange. We took 20% market share off of them. Now what we're doing is we're taking that Treasury platform, and we're gonna do US rate futures as well on that same platform. That's Treasury futures and SOFR futures, which is short-term rate futures. We're gonna put both of those on one platform with that same system that's got 20% market share in US Treasuries. On that same system, next, we go and bring in the banks and the big trading firms to be partners in that business. We do futures on that same platform. We sign the LCH, owned by the LSE, which is the largest holder of collateral in the world. Remember to be successful in futures in FMX, you need two things. You need a rocking front-end trading system that's already installed everywhere, 'cause you can't just call J.P. Morgan and say, "I'd like to install a system." By the time you get installed to everybody who trades, you die of old age. A, it's already installed. B, it's already got 20% market share on it, so it already works beautifully. It's already the fastest system in the world. It's already working great. Add futures on top of that, bring in partners to do it together, you've got a beautiful combination with LCH doing cross-margining, which they've agreed to be our clearer, and they will provide cross-margining. That coupled together is what we call FMX, the Fenics Markets Xchange. Banks being partners, high-frequency trading firms being partners. BGC is the majority holder, and that launches in the middle of this year, and we are really, really excited about it. We think it is a massive opportunity 'cause the Chicago Mercantile Exchange, which you know quite well, is worth over $60 billion. Great monopoly, little competition, pretty fun for us, we think the opportunity is really outstanding. The potential partners that you're gonna bring on, you know, why are these firms interested in the opportunity, and how are they incentivized to help build the success or the volumes across the platform? The futures business has gone back to unit economics, right? Meaning they charge per contract, and these banks don't earn money per contract. They're hedging themselves, they're transacting business, and you've got this huge issuance that's just happened, and you know volumes are going to explode in the rates because we just discussed that. Huge volume coming. They're getting charged by the great monopoly, the Chicago Mercantile Exchange, you know, an ever-increasing amount every year. You know, the CME is great at putting up the price every year so they can raise their price every year. The banks want competition. They want competition. Once they know they're gonna support that competition, they wanna own a piece of it 'cause they say, "Look, we're gonna help. We want this to be successful. We're gonna help make this successful, so we wanna be owners of it as well. We expect all the banks that matter to buy in. High-frequency firms will also buy in, and that will be the shareholder base that begins. We expect to basically have a real competition, which is fast system, tight spreads, cross-margining, much cheaper than the Chicago Mercantile Exchange, and build market share. I think, you know, we've been successful in US Treasuries. I think we're gonna be successful in futures, and I think it's going to produce tremendous value for BGC shareholders and for the shareholders of the banks, so they are partners in it. They're gonna make it great, use it, so they should own it with us. Looking ahead, as you think about historical value creation from building technology platforms, what are the potential ways you can monetize the FMX platform in the future? The deal I have with the banks, you know, it's a separate company, right? It's gonna be managed separately. It's gonna be on our platform, right? Our network, our platform, we're of course the majority holder, so we'll install the CEO and eventually, I think, the group may decide to take it public. We have to agree together with the banks. If BGC, together with the banks, decide it's time to take it public, it's okay. That's the platform. You know, we have high hopes for it, meaning the numbers we discussBetween BGC and the banks, the numbers we discussed are well north of $10 billion in terms of value. We expect this to become an extraordinarily valuable asset because the CME is a spectacular organization, it's a loan. It can have a competitor, they'll both be worth a fortune. FMX is the competitor because it's got the system, it's got the clearing connected to the banks. It's got all the ingredients necessary to win. Really, it's so exciting. I just so look forward to it, that's 2023. given the positive outlook for the voice and hybrid business, potential for margin expansion and cash flow accretion from FMX operating independently, can you share your perspective on capital deployment? Sure. I'll just give some examples for you. Because interest rates were low, we became a catalyst company. I mean, when you first met us, you'd say, "Look, tell us what's happening." The answer was, "Well, we built this insurance business. We're gonna sell the insurance business." We sold the insurance business for over $500 million, which we had built. What did we do? We bought back 12% of the stock in the company, right? We went right out and bought huge amounts of the stock of the company back. We think the company is incredibly undervalued because of, A, the core business is now a growth business, whereas before, you know, there was nothing you could do with zero interest rates. Now that it's a growth business, I think the world is going to understand it's important to rerate BGC. It's a growth company. When I would come to a conference, some would say, "Oh, you're a melting ice cube," because every year the business would be a little smaller. They would say things like, "The electronic guys like MarketAxess and Tradeweb, they're eating your lunch." They didn't realize that MarketAxess and Tradeweb are primarily B2C companies, right? They're buy side to sell side companies. They're an adjacent space. They have a little overlap with us. We probably have a 10% overlap both ways, us doing them and them doing us, but they're really adjacent. What you're going to see is they are going to grow nicely in this interest rate environment, and we are going to grow nicely. We are going to they are going to outgrow us some quarters, and we are going to outgrow them some quarters. When we outgrow them some quarters, people say, "Well, I don't understand. I thought they were eating..." No, they were never eating our lunch. They were just an adjacent business. The opportunity for us to rerate our business and grow is so exciting for us going forward. Switching to some of the corporate decision-making. The firm recently announced the intent to pursue a corporate conversion and change the company name to BGC Group. Can you remind us where you are in that process and what the potential implications are for the company's tax rate? We have completed all the internal documentation necessary, meaning the board has approved it, all the documents are signed, so it is really just process to completion. We've got regulators who need to sign off on it in all the different markets we operate in. Just because you're changing your corporate structure, you have to apply and tell them. It's process really only. It's just a process, documentation and process. There is nothing standing in the way other than documentation and process approvals and otherwise. I would expect it in the middle of the year. You know, the idea for us is that if you've seen we were an Up-C, and now we're converting to a corporation. If you look at the other Up-Cs who've converted to corporations, their stock has traded brilliantly for simplicity purposes, that the institutional holding of those companies has demonstrably increased. Sometimes over a 100% increase in institutional holding. You know, when I used to go see, big buy side firms, after they spend time deciding, do I like the company? I would have to spend 2 meetings just discussing our structure. You know, which was very tax efficient but complex, guaranteed. Now that will be over. We'll be simple. We'll have a simple explanation of the company, and we're a growth company. I think the combination of the new growth because of the new market and interest rates, coupled with the structure, I think will demonstrably improve the shareholding of the company, the breadth of people who buy the company, and of course, I think the stock price will naturally follow. As we think about BGC's combination of data from the interdealer broker and technology platforms, what are the incremental opportunities from building new data products and new capabilities? I've been focused on making sure we capture all of the data that we have available to us. I mean, we have huge breadth of data. People underestimate the scale and scope of the breadth of our data. We are one of the two largest wholesalers in the world, and we capture all that data. The capturing of that data, augmenting that data with AI to make sure we solve for all the questions that buyers of information want, that will make a fundamental difference. We're excited about the scale by which we can grow our data business. I think it's been growing between 15% and 20% a year. It's got really nice growth, really great margins. That's sort of a 40%+ margin business. I think the data business is a great place for us to grow. As I said, strong double-digit growth and great margins and great data capture, great data breadth. I don't think we've touched it. I think we have multiples to do. We can double that business and double it again. I think, you know, we've got long, long runway ahead of us in the market data business. BGC currently has about $100 million of data and technology revenues. As you look at the competitors out in the marketplace, what do you see them doing well that you can kinda emulate to grow the business? You know, maybe just touch upon the rate again of how much growth do you see in that business over the next three years and maybe longer term. We primarily focused our data sales on markets, really the literal... You need to know where the thing is trading, right? That was sort of our core and what our peers have done, they've sold lots to pricing engines, people pricing their portfolios, end-of-day pricing, regulatory pricing, the whole back office sales. That's why they are now double our size. Now, you know, we were out of this world for a while because of 9/11, you know, we sort of are relatively newer in the space because of the events of 9/11, we have grown ourselves to now be as big as anyone in the world. I think that's the place where you should expect us to grow. We started signing some big contracts lately on the regulatory front, right? Being end-of-day reporting, regulatory reporting. These are additional usage. I would hope we would double the business over the next three, four years. That's just near term, I would expect, you know, 20%, 20% growth rates. You know, we've been running between 15 and 20, but I'd like to see us step that up to the 20% growth rate. That 20% growth rate with the same, you know, +40% margins is my expectation over the next three, four years. Maybe just walk through Fenics Markets versus the Fenics Growth platforms. How do you see these two businesses or divisions kinda diverging going forward? What is the objective of Fenics Markets as you compare it to Fenics Growth platforms? Fenics Growth are native for electronic businesses, okay? The easiest way to think about something that's in Fenics Growth is that it's just a beautiful technology that can be easily sold to an exchange, okay? The history of BGC is we have sold a variety of businesses to exchanges, right? We sold Trayport to the New York Stock Exchange, we sold eSpeed to Nasdaq. The exchanges like to buy sort of pretty electronic, fully electronic marketplace. Fenics Growth are those ones that we're building. Fenics Markets are the mature businesses on which we have electronics, and those are businesses that while some are integrated into our voice business and some are not, they're just more mature businesses. The growth are new, like US Treasuries was new, Spot Foreign Exchange is new. Those businesses are relatively newer, but they are the kind of businesses that are easily sellable. The history of the company is we have sold our fully electronic businesses in the 11 and 12 times revenue category, right? Since BGC currently trades just over one time revenue, we can sell assets for 11 or 12 times revenue, more along the lines of MarketAxess and Tradeweb. I'm not just pointing to them. We've produced, created marketplaces and sold them to exchanges, and I think that is in our future. We will continue to create markets and then transact with exchanges. We'll just have tremendous capital in which to deploy. You know, obviously, we like buying back our shares. As you've seen when we sold our insurance business, we bought back a ton of shares. Can you speak to the evolving dynamics in credit markets? There's a lot of enthusiasm for growth in credit trading in 2023. Can you speak to some of these changing market dynamics and how BGC is expected to benefit? Sure. There's the traditional credit trading, and BGC has the largest in the wholesale space, the largest platform for credit trading globally. That's one of our best businesses. We expect those volumes because of interest rates and because of issuance to continue to grow, and therefore, we expect our revenues and credit to dramatically improve as compared to where they've been. We're gonna have nice growth rate, and that growth rate will continue for the foreseeable future. We have a very positive look on it. You have the business of the growth of these passive ETF. People think when it's a passive ETF, that's gonna somehow reduce trading volume. You realize every time a dollar goes into a passive ETF, what do they have to do? They have to buy credits, right? Every time a dollar goes out, they have to sell credit. Every time, there's a maturity, right, or any corporate action, there's going to be buying and selling of credit. It's just another type of fund buying and selling credit. We have that, it's called Fenics PortfolioMatch, and that's a business that is growing in leaps and bounds within the company. That would be a growth platform, right? That's a new electronic market. It competes with Tradeweb and MarketAxess, but it's in the same model. Credit is both a regular credit trading and this portfolio, what we call portfolio, but it's really passive ETF electronic portfolio, where they buy lots of names in small size. They don't. You know, the regular credit market, people buy $5 million or $10 million of a particular name. We are really bullish on the volumes of that. We went over before You know, it makes me so happy when I go to sleep at night to think 2.75x the issuance produced 0.5 volume since 2008. That ratio is going to go back positive. It's gonna to 0.6, 0.7, 0.8, 0.9, 1.0, 1.1.2, and you're gonna see volumes in credit double over the coming years. That's just great for our business. It's just wonderful for our business. Maybe thinking about the other assets traded across the interdealer business, like energy and commodities, you know, how do you think about the negative volatility, how that impacted markets in 2022, the outlook for 2023, and maybe also touch upon the ESG initiatives that you have and how you can benefit from ESG? The commodity markets, we have a nice business in commodities, but we are undersized. You should see us. We're gonna hire and acquire in that space and grow our market position in commodities, right? We hired a new leader for our Houston business. We're very focused on growing and building our business. We just did an acquisition in the energy space, relatively small, but still it's an example of how we're just going to continue to plug and play in the energy space. We're excited about that. I can tell you the name is Trident, and that's a business we just bought. We're excited about how that's going to add and grow to our commodity space. You're gonna see us invest in and grow in the commodity space. we think volumes will work well for us and that's a great business for us. Remember, we make money on volume, not if it goes up or it goes down. We just want volume, volume. I think the bigger we are in that space, the better it'll be. we are, I think we're a little undersized in commodities as compared to our peers, and you're going to see us march up that and be bigger. I think we can pause here for investor questions. If you have a question, please raise your hand and they'll bring a microphone. While we get that Oh, hi. Can you hear me? Sure. Hey, thanks. Actually, thanks for taking my question. Thanks for going into Fenics, but I've followed your company, but I've always tried to figure out Fenics. If I understand it correctly, as more volume goes into that platform, your margins should get better and better and better over time, right? Can you tell me how that transformation's going as far as taking volume from voice and, I forgot the other process to go into Fenics? When we have a voice business, we generally pay our brokers on average between 55% and 60% payout on average, all in. The full cost of having them. They, you know, that counts the people and their assistant and all of the work. The compensation is tends to be between 55% and 60%. Our margin on that business would be in the neighborhood of about 15% with scale, right? Which makes sense. When I convert the business to electronic, those same salespeople. I'll just do a simple example of how you convert it. Those same salespeople become electronic salespeople because they don't need as many assistants. They don't need people with them. They can go help the client. Let's say the desk had 10 people on it. We can have an electronic business which has three people. The three rainmakers. The three rainmakers can make 50% more money, right? Our comp ratio will drop from 55 to 35. Our payout, right, and our therefore our profits go to 35, and then over time, it drops to 30%, right? All of a sudden, our profits are 40%. That's the model which is converting it electronic, and that's Fenics Markets, right? The idea is what's electronic and where are we in that process, right? If a trade is fully electronic, right, and our margin... The way we describe what's Fenics Markets is we have to have at least a 25% margin in the business. The only way you can really get a 25% margin in the business, the most practical way to get 25% margin in the business is to move things electronic, right? Because the margins get higher and higher and higher. That's the model. Where we are now is we have fully electronic products, and we have these integrated products where electronics are in it, and Fenics did $442 million in revenues, trailing 12 months. It's an excellent business. The margins, I said the minimum margin to be in Fenics must be 25%. The highest, of course, will be the fully electronic businesses, which are north of 50%. The average, you know, if you look at where Fenics is, it's in the low 30s now, right? It's going to continue to march higher and higher, as more and more of it goes electronic. You're gonna see as our margins grow higher and higher, we're going to get into the mid-40s. Just to follow up on your statement. The Treasury volume will increase just because you're saying the Fed won't be there to take away the volume that would go to traditionally the brokers or the banks. Is that the way to think about what's gonna happen with your volume increasing? Right. 'Cause people say, "Oh, look, Treasury issuance was up five times. Five times. Why is there not more trading volume? I mean, how is it." Well, A, if the two-year note is zero and Treasury bills are zero, and the five-year note is zero, what are you gonna trade? There's not a lot of fun to trade. Normally you would have mortgages being hedged with treasuries, but the Fed's buying all the mortgages too. There really wasn't a lot to trade, so volumes were suppressed. Now you have quantitative easing done. Right? Whether it's quantitative tightening, you know, but they're basically just letting everything run off. Now you're gonna have 10-year note issuance with no Fed buying. Everyone's gonna trade it. There's gonna be huge volume as compared to what the old ones were, right? The old auction, they would issue, you know, $40 billion, but the Fed would buy it. There was no trading and no hedging and no nothing. Now that volume will be traded, that $30 billion, $40 billion issuance will be traded. The volume. You're gonna watch volume and treasuries just grow, relentlessly grow as the pleasure of trading comes back into the market, the need to hedge comes back in the market, the value of transacting comes back in the market. You're gonna just watch that creep up and that ratio between 5 times issuance and the same volume that were traded in 2008 with 5 times more issuance. You just watch that grow. As that grows, you're gonna watch our treasury business do better. You're gonna watch our rates business do better. You're gonna watch our credit business do better. Basically, you've had the most interesting concept for 14 years. 14 years of in a bad raw material market where the market declined. Like we said, credit went from 1 to 0.5, half of 2008 volume. When that ends, which it has ended now in 2023, right now, all of a sudden you have a growth company. The reason our stock is still where it is, you know, why would people have figured that out yesterday? That's why you're having me here to talk about it, right? That's why you understand the business, because you're talking about that the world has changed for BGC. You picked up coverage on the company as the world changed because you understood that the world was changing. This was an inflection point, and you need to find. You know, you've got all these mortgage companies who have stress, right, with rates going up. Who's winning when rates are going up? Let's go find the companies that are gonna win when rates go up. This is it. It was just we're back to the company that we were. We were a great growth profit-making company before interest rates went to 0. Now you're going to see something really exciting. You know, the company is really. We're just in a new place, and that begins in 2023. It's, it's brand new. You haven't missed anything. The stock, no one's really paid attention yet, and the stock's going. As my expectation is, you're going to see growth quarter after quarter after quarter going forward for such a long period of time that we're just a growth company. We're just a growth company having changed from zero interest rates, which was weird. Do we all agree that that's weird to have zero interest rates when I mean, the US Treasury has a $31 trillion deficit that it gets to finance for zero. Not anymore. Now we have rates. Okay, my last one. When you convert to a, I guess a C corp, right? Will the Cantor, I guess, percentage ownership be the same or how will that get sorted out? Right now, really directly or indirectly, I own about 20% of the stock, right? I'm the biggest shareholder of BGC. Cantor owns about 21% and will still own 21% when this is done. The employees own just under 20%, and the public owns just over 60%. I think that will stay the same. I don't think that will change. You know, I wouldn't expect Cantor. Cantor's not sold any and doesn't intend to sell any. You wouldn't expect me to sell any. Having listened to the talk today, you know, the only time I ever part with BGC shares is every once in a while I give some to charity. Other than that, I'm keeping these. This is so much fun. Finally. Finally. With that, I think this is a good place to pause. Howard, thanks for joining us today. Thanks so much. It was a lot of fun.