get started, for important disclosures, please see the Morgan Stanley Research Disclosure website, more at morganstanley.com/researchdisclosures. Taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With With that out of the way, morning, everyone. Thanks for joining us at the Morgan Stanley Financial Conference. I'm Mike Cyprys, equity analyst, covering brokers, asset managers, and exchanges for Morgan Stanley Research. For our next session, it's my pleasure to welcome Howard Lutnick, Chairman and CEO of BGC Group. BGC is a leading marketplace in financial technology company serving a wide range of products, including fixed income, foreign exchange, energy, commodities, equities, and now the FMX Futures Exchange, which we'll talk about. So Howard, thank you so much for joining us here today. Really fun to be here. Great. Well, I do want to dig into FMX, but I thought it might be helpful kind of to set the stage a little bit, particularly for those in the room, that may be a little bit less familiar with BGC. So maybe we could just start with a little historical context. BGC spun out of Cantor Fitzgerald about 20 years ago. Since then, you've grown the firm, you've done a number of acquisitions along the way. It's generated $2 billion of revenue last year. Maybe just give us a little bit of a flavor for the business at BGC today, and also what's the relationship with Cantor, where you also serve as CEO? So BGC is in the business of marketplaces. We don't make money when the markets go up. We don't lose any when it goes down. We're in exchange for everything in the world that doesn't trade on an exchange, so fixed income, credit, commodities, foreign exchange. So we're a marketplace company, an exchange-like company. We sell market data. So basically same concepts. And then people would always ask me if I explain that sitting next to you at a dinner party and say, "Well, then why don't you become an exchange?" And you know, we've just gotten full CFTC approval to do a futures exchange in partnership with the 10 largest market makers and trading firms in the world. So that's pretty fun. So that's who we are. When interest rates were zero, it was kind of boring, I have to tell you, because let's face it, when interest rates are zero, how much are people trading? It's kind of—they're not really trading that much. But now that real interest rates are back, revenues are growing, volumes are growing, the relationship between issuance and secondary market trading is back with a vengeance, which is very sensible. You'd say, "If issuance grows, shouldn't secondary market trading grow?" Right? The government's doing a bigger bond deal, shouldn't secondary market trading be bigger? That was broken. What's really fascinating about BGC is, it's only been the last five quarters that interest rates are back, and of course, we've been growing straight up for those five quarters. But people say, "Gee, where were you?" And the answer was: I was stuck in zero interest rates, and it was kind of boring. Now, cash rates or rates, broadly speaking, is your biggest business, whether it's swaps, cash rates, and stuff. It's nearly a third of your revenues today, and cash rates, you've gained about 10 points of market share or so over the past, 2 years in the dealer-to-dealer marketplace. So maybe just talk a little bit about what's driving the market share gains for you guys in your cash rates business, how you see the competitive landscape evolving, and is there any room left for product innovation? Yeah. So, we have the fastest technology. We have tighter spreads. We've integrated that technology into all the clients of the world. So when we come up with a new innovation, they, they don't have to change their systems, redo their systems. It was built for that, and, and you'll see that the CME, you know, because they acquired Chicago Board of Trade, and they acquired BrokerTec, they, they have three different systems, and they, and they can't really innovate in the way we can. They can't roll out new systems, new spreads, new markets. They, they just can't do that, in the same way we can. And, and so it's both faster systems, different ways of doing business. One, one of the ways, I'll give you an example, is that we allow the market-making firms to choose not to trade with each other if they don't want to. And you would say, "Well, wouldn't that be bad for volume?" Right? You can't have Citadel trading with Jump. Jump, if you don't know, is the number one futures trading firm in the world and for volume. So if they can't trade with each other, isn't that bad for volume? And the answer is: It is bad for volume, but it's great for those firms because they're not afraid, right? If I'm not afraid that Citadel is gonna pick me off, then I can make larger-sized markets to JP Morgan. Right? I, I can be out there bigger. And so what's happened is that bigger... That, that reduction of fear has produced more volume market making, and that has produced growth. Now, you might say, "Well, now that they're all owners of yours, might they rip that bandaid off and say, 'Ah, let's just go for market share, and we'll trade with each other?'" So that's market share we've been missing, that if the market makers decide to rip the bandaid off, which they are owners now, that you could see a market share spike because we don't even try to go for that business now. And those are kind of innovations that you have to build into the system, dig into the system, and, you know, so there's lots of room still for innovation, yet in this business. Great, and the SEC recently finalized requirement for market participants to centrally clear treasuries and repo. That's expected to take effect in 2025 and 2026. Like, just how do you see this impacting the marketplace across the industry? And is there any differential impact that you would expect or see in the D2D space versus the institutional client part of the marketplace? So we tend to focus on those who are the most experienced in the business, right? So those who need hand-holding go to the banks, the banks hold their hand, make them prices, and then that volume then goes to us from the banks. So as more and more firms clear, they need to become more professional. And as they become more professional, the products that we offer become more attractive, right? Because we're basically the wholesaler, and people like wholesale. Everybody wants to buy everything wholesale. You know, I'd like to buy the water wholesale, the pencils, we'd all like to buy wholesale. So the idea is that more central clearing produces more client activity for us. So we are very positive toward what that means for us. You know, when it was first announced, if you were the first person to call me, you'd ask me: What does this mean for you? And I'd say: Is it my birthday? Like, I mean, what is better than having the rules be, everybody has to be really, really organized, so that volume is simple, right? Because they can cross and they can take, you know, if I trade with JP Morgan and I take it off with Morgan Stanley, right? Then that's efficient. Now, how good is that for me, right? Because they'll just do more volume. So I think this was really, it's tremendously beneficial for the group, right? Everyone who trades rates, it's really good for them. Their volumes will grow, efficiency will grow, and I just think it's a wonderful baseline for the industry. Great. Why don't we shift gears to talk about FMX? You're about to launch an interest rate futures exchange that would compete with the CME, which is the dominant market share in interest rate futures. Many have tried in the past, including yourself. Maybe just remind us, you know, why those attempts did not work and why this time is different in your view. So to be successful with a futures exchange, you need to have two fundamental assets. You need, you need to have a fully connected front-end system and matching engine. So that means I need to be connected to Morgan Stanley, so that Morgan Stanley, if it chooses to do business, can do business now. And I need to be connected to all of your peers, all of them. And that, that connection will take years to do if you don't have a network, and if you... You know, if you do have a network, for me, it took years. Imagine if you didn't have a network, it would take forever and cost a fortune. So we have that system connected, meaning we are connected to Morgan Stanley right now. We are connected to Goldman Sachs, to JP Morgan, to Citadel, to Jump, to... They are connected. That's number one. And then number 2, you need to be able to cross margin. And cross margin means if I put on a trade with the CME, and I take off the trade with FMX, does the offset cross margin against other things and give me economic benefit that make that trade okay, right? Because if it's just standalone, new futures on the CME, I have to post margin. When taking off the futures with FMX, I have to post margin. You'd say, "Come on, that's kind of silly. Why wouldn't you just do it together and take it off?" But now, because we have cross margining with LCH, which is the SwapClear collateral holder of the world, you can get cross margining against cash. So the way I describe it is, SOFR futures are the fraternal twin sister of interest rate swaps, much like Treasury futures are the fraternal twin sister of Treasury cash. I mean, they're so similar, but they're not identical, but they're pretty darn close to identical, right? But Treasury futures and Treasury cash, that's a basis trade that should really reduce risk. SOFR futures against interest rate swaps, right? So those, when you have the interest rate swap collateral, and you can cross margin against that, that is special. So it produces better math. So I would say it this way: Each of the failed futures exchanges in the past have failed because they didn't have one of those two fundamental assets. We have both of those fundamental assets. And then if you ask the next question, has there ever been an exchange that had both of those assets? The answer is one. Which one was that? Deutsche Börse, when it competed. The German Bund future was 100% in London for more than a decade. Decades. It was 100% in London, and then Deutsche Börse announced both those things. It had cross-margining against cash Bunds, and it had a fully connected system. Over time, 100% of the volume ended up going to Deutsche Börse. So now, when you think about who has the Bund future, everyone says Deutsche Börse, and no one can remember that it was in London. No one can remember it's in London. One time it's happened, and it was incredibly successful. I am very excited by the fact that we have both of those pieces, and so is Morgan Stanley, who became a partner, and so did your, all your peers. So JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, Citi, Barclays, and Wells Fargo... Citadel, Jump and Tower. If you don't know Jump, they are the number one futures trading firm in the world. Citadel, you all know. Tower, again, an amazing electronic trading firm. All of those partners agreed that this is the opportunity to compete with the CME, create a competitor, and because we have both of those things... Remember, we first signed with the LCH in 2018, and we signed a full agreement with them in 2020. You say, "Wow, you've been working on this for a long, long time," and we've spent plenty of dough along the way, and now is the time to harvest. Maybe just digging in a bit on that cross-margining point. I think that's important there with the arrangement you have with LCH for the swap collateral. Maybe just give us an example of just how that works, any numbers you're able to kind of throw out there, just to kind of help us flesh out really how these clearing efficiencies, margin efficiencies work exactly. Okay. So let's, I'll just make up an example for you. So you do a trade on the CME, and you go long SOFR futures, and let's say it's $20 million of margin. And then they offer, they say, "Well, do you have any Treasury futures, and do you have any Treasury cash at the FICC?" 'Cause we have a, it's sort of a two-part, but basically a less efficient, more like a cousin than a fraternal twin, cross-margining system with them. And we can together give you 25% off, right? So you go down from $20 million in margin to $15 million in margin, 'cause you did it at the CME. Now you wanna take off that trade, so you're gonna sell your SOFR futures, and you decide to do it with this new exchange, the FMX, 'cause you've got all these banks and all these market makers, and they have a better price, so you sell on the FMX. Normally, you'd have to have new margin of $20 million because, remember, it's the same trade, it's the other side of the coin. $20 million of futures margin. But you also are long swaps collateral, so you relieve 80% off... And I'll say it as a lower number, it's probably higher, but just for this conversation, I'll be more conservative. You take 80% off of the futures side, and you take 80% off the cash side. So you have $40 million coming down 80%. That only requires $8 million of margin, and I've released, right? 12. So here I released 12 compared to over there, right? It actually, strangely, you would say, it's technically more efficient. It's technically more efficient because I have the cash there. If I actually traded at FMX, it's mathematically more efficient to take it off, because if I do my futures over there, I'll get better cross-margining because it's more aligned with cash. SOFR futures are more aligned with cash, and the benefit of swaps, is swaps of course, have the variable price, which is SOFR, but they also have the fixed price, which is Treasuries. So they are as efficient as the model between the CME and the FICC. So you get as efficient with Treasuries and more efficient with SOFR, wildly more efficient than SOFR. So I think the problem the CME has is that it's just better math. And I promise you this, the banks did not invest, all of them, without doing this math calculation themselves. This was not an anecdotal evidence, right? This was literally taking a snapshot of your positions throughout a quarter and running, "What if we took a random amount of these trades and put them at the new exchange? How would that mean for our capital allocation in margin?" And the answer was primarily a little superior to materially superior, but not inferior. And that's how you get all ten to be partners. It's better math. Do you need any regulatory approvals in order to obtain the benefits that you're describing at this point? Yes, and we have them. Do you need any incremental- No. -approvals? No. We are ready to open with everything I discussed, done. Don't need more. Nothing. And then anything with the collateral sitting in London, the swap collateral versus trades taking place in the U.S., is there anything from a cross-border, any regulatory approvals you need- Approved. -in Europe? Approved. All approved. CFTC approved, FMX opening with LCH as our clearer, done, done, done. So that was interesting. January of 2004, full announcement, full approval, fully done. Now, CurveGlobal also sought to bring competition to the interest rate markets in Europe. They had connectivity as well to the LCH, backed by the London Stock Exchange in partnership with dealers as well, and yet that never really took off. I think one of the lessons learned from that experience is that they had difficulty in building liquidity, especially in a vertically integrated marketplace. So how are you planning to build liquidity and any lessons learned that you take away from CurveGlobal? Okay. So CurveGlobal, that's why I described the two things that are needed, right? So CurveGlobal had really cross-margining like we have. But what they didn't have, they didn't have the front-end system already connected to everybody. So they're like, literally calling Morgan Stanley up, saying, "Can I connect to you?" And you can imagine, let's say your trading desk says, "Sure." They send them to your technology group, who only has 2,000 projects that they're currently working on, and they say, "You guys are kind of important. We'll put you at 1,464," right? I mean, you know, and so when is that gonna happen? And the answer is, so let's say one of the other banks decides, "You know what? I love this. I'm gonna put it in now, and I'm gonna make it a priority number one." So they install it now, and Morgan Stanley installs it in two years, right? By the time Morgan Stanley installs it in two years, think of how upset this guy is that he prioritized you. So what happens is, unless you can bring it all open and ready to go, it doesn't work. And so our treasury system is what proves it, right? Our treasury system, this is the exact system of rates that everybody's gonna use for futures. That has been growing one or two sequential market share points per quarter. So Curve did not have that. And in fact, when we went to the LCH and said, "We'd like you to do our cross margin," and they said, "Would you like to buy Curve?" And I said, "Well, what is it about Curve that I would buy? They don't have a front-end system, and I have a great front-end system." And prior to that, they'd come to us and say, "Can I buy your front-end? You know, can I vendor your front-end system?" And I said, "Of course not. You know, that's ours. We're gonna do it ourselves." And so that's a classic example. Curve had only one of the two, and they went on the dustbin. Whenever you only have one of the two, you end up on the dustbin, but if you have two of two, you end up sitting next to Deutsche Börse in the winner's circle. So one thing to have the connectivity, but another to have active engagement. And to that end, you brought in a group of dealers, as you alluded to, market makers, that took a minority stake in FMX. So just how do the economics work for you there? How do the economics work from a trading, from an economic ownership standpoint, and how do you think about incentivizing their activity to engage on the platform? All right, so the banks have... The banks, so it's seven banks. Those seven banks also have what's called an FCM, which is they have the connectivity, which sponsors in the clients. So, the seven banks are really, really attractive because they have big trading desks, and they have client engagement, which is really important. And so they'll be owners of the company. They also sign an all-you-can-eat deal, which is they sign the subscription-based model, and that breaks unit economics, meaning they're not paying per trading one. They can do all-you-can-eat, and so they have no marginal cost of trading. So the first trade and the last trade don't cost any money. So what it does is it makes it very... Look, we've studied this a long, long time. It's very difficult for the CME to reduce price when your clients have a subscription model with the other side. There's no marginal cost. So, you know, if you said I was charging $1, how about I charge $0.50? $0.50 is more than 0, right? Now, they're not paying 0. They're paying one price, and therefore, they can bring more volume, and that more volume will get volume from other people who will pay. So that's attractive, plus it creates market data. So subscription models for the 10, we will likely add subscription model pricing for others because we like that model for the largest volume trading firms in the world. We like that model. They own 35% of the exchange, and they have the... If they hit their volume targets, they maintain that 35%, and if they don't hit their volume targets, then that fades back to 25%. But it's an individual, so it's not 35% or 25%. It's firm A will have 40% more equity, bought 40% more equity, which they will lose if they don't hit their volume targets. Okay, and as you think about it from a product standpoint, this is focused on interest rates today, so from SOFR to Treasury, including options and, and futures, just how are you thinking about the product set at launch as well as over time? So the product set, as you correctly said, the four products for FMX at launch are Treasury Cash, which is growing 1 or 2 market share points per quarter, and Spot Foreign Exchange. So I would point out that the CME paid $5.5 billion for those two, and those are growing rapidly, right? Our Spot Foreign Exchange business is up more than 40% so far this quarter. So that is growing rapidly. Our treasury business, again, growing rapidly, far above where the CME's rates are. Like, they've published so far this quarter, I think they were down a little bit. Is that right? CME said they were down 2% and we were up, I think I can say, because I'm with you, and you're webcasting it, I think we're up more than 35%, so. In cash? Cash. In cash. But that's not the same, right? They're down 2, and we're up 35. That's, you know, we are growing at their expense, and, you know, and that's-- we've only just begun. So those two are there, and they were part of the BrokerTec acquisition. And then we have futures, which are coming. We're going to launch SOFR futures, which will be out in September, and then, we'll do Treasury futures, in the first quarter. And, and what you're going to see when we launch those futures is you're going to see, for the first time, open interest rising... So if you wanna know, how would I rate you? I would say, look at our Treasury market share, look at our foreign exchange average daily volume, and look at open interest on our futures contracts when we open. Because the determination of ultimate success is going to be, are people willing to leave their futures contracts open at night? And the definition of that will be described because you'd say, "Well, if it's more efficient, Howard, then they're gonna leave the contracts open." And when you see the contracts open and they're growing, you will then go study when has this ever happened before, and you'll end up looking at the Deutsche Börse. And then, you know, when you invite me to the conference, you'll think things are really good, and I'll be in a good mood like I am today, and that's sort of how it'll work out. So that's how we're starting. You said, "Well, what other futures contracts you're gonna grow?" Now, you have all of us as your partner, so shouldn't you grow those futures products across the spectrum? The answer is, of course, of course, we're going to grow. But how about we do the two biggest futures contracts in the world to start? Doesn't that sound fun? So SOFR futures are the number one futures contract in the world. Brilliant that we decided to open with them first. I love when people ask me, "Why did you decide to do SOFR futures first?" I said, "Because they're the largest in the world," and someone says, "Well, that makes some sense. What about options on those futures? Is that something that could be in the cards? Of course. Now, these are not, like, for us and for our systems and for our capacity, these are not a challenge. Is that options like a couple of years down the road, would you- I think it's up to our clients when they want to focus on it, when they want to bring it, right? I, I leave that... The beauty of being partners with all the banks and, and these great market makers, if they say, "Let's do options," right? I think you'll see us roll it out next quarter. I mean, we have the systems, we have the capacity to do it. It's not stressful. It's an unusual model when you don't have to go build it all, right? We have a product called Fenics GO, right, which is global options. So we have the system, it's already installed around the world. Everyone uses it. We do like, you know, Korean equity options on it, so obviously, we could do SOFR future options. We could do Korean equity options, it could do SOFR future options. Fair enough. Maybe shifting to execution quality, maybe just talk a little bit about how you think about driving strong execution quality, tight bid-ask-spread, particularly as compared to the CME. Is that something that could take a little bit of time? How do you see the cadence of that playing out, and how do you sort of drive that on your exchange? So we thought we would use the same playbook we used for our success in Treasury, which is we have a one-increment tighter spread. And in some Treasuries, we have more than one increment tighter, okay? But one increment would mean, they're at a quarter, and we have an eighth spread, and which means that our trades can often be more than in many of these products, more than 50% of the time, the trades are at a price that is superior to the one on the CME. So the CME has plenty of volume, but, you know, if we are offering at an eighth, we have a client who's offering at an eighth, and they only have an offer at a quarter, right? They clear the eighth first before they go to the quarter. And we may not have as much volume, but our volume is growing one or two market share points per quarter, so it's growing more and more and more and more. So we plan to use that same model, which is tighter increment, right? Now, since we don't make markets and we don't make money on spread, right? We want a tighter spread, but the question is, do our clients want a tighter spread? And the answer is Citadel, Jump, and Tower, three partners, they have signed on to this model. They said, "Yes, we will make plenty of money if we have a tighter increment and spread." So we are gonna come out, we're gonna open with a tighter increment, and we are gonna remain at a tighter increment. If you ask, "Well, how can you remain at a tighter increment?" I would say, "I was so good at math in the ninth grade." Really, like, if you say an eighth, I can say a sixteenth, and if you say a sixteenth, I can say a thirty-second, and a sixty-fourth, and one twenty-eight, two fifty-six, and five twelve, and ten twenty-four. Seriously, I killed it in ninth grade. It was amazing the way I ripped through that stuff. So if they're at a quarter, we're gonna be at an eighth. Their systems are not designed for spread modification. A spread modification for the CME is an announcement and a modification of software, and a lot of time as their client base works that through their system. Our system was rolled out from the beginning with the capacity to do decimals or all of these brilliant numbers that I rolled off my tongue so swiftly, right? So that's built into the system, so if we wanna go to a sixteenth, we can roll it out to a sixteenth, and it's not stressful to my client base. It is not stressful. It is built into the system. So the reason the CME... There's no reason for them to match me, because if they match me at a quarter, I'm just going to an eighth, and if they match me an eighth, I'm just going to a sixteenth. So what's the point? And they're not gonna be able to keep up, and so we will be one increment inside of them. I think that is just an interesting asset to bring to the party, and we hope to do that. So tighter increments you're looking to, to bring, but how do you drive, I guess, sufficient depth? And volume there to incent and bring participants across the marketplace to want to transact and create the sort of liquidity flywheel? So we had success in Treasuries by we allowed market makers to not trade with other market makers that they felt they didn't have a good experience with. So Jump wants to trade with the banks. Citadel wants to trade with the banks. Jump and Citadel don't wanna worry about each other. So if you could say, "Look, you two won't trade with each other because you're kind of fraternal twins of each other, and you don't wanna trade with each other," fine. Our treasury system marks them out with each other. So intellectually, that sounds like a lower volume model, right? You don't have the biggest volume people trading with each other. But what happens is, since they're not worried about trading with each other and getting picked off, they can make a larger size price to the banks. Because remember, the banks underwrite a corporate bond. They hedge it with Treasuries, right? They wanna come in and trade it, and Citadel and Jump and all these algorithmic and quantitative firms are there, and then they spread it out and make the trade. And so everybody's happy. Like, no one at the end of the day is unhappy. The banks are saying, "Good. I'm glad I made a point. You made a penny. Good for you." And that's an ecosystem that works, right? So that model has worked. So now the other thing is futures. Market makers make money on something called the rate of arrival, right? And when you're making markets, what you want is, you want someone to sell to you at 14 and buy from you at 14 and 1/8, and sell at 14 and buy at 14 and 1/8, and just go back and forth, back and forth. Like, the faster you have people coming in and out, the better for you as a market maker. So that's called rate of arrival. So if you're a 14 bid on the CME, you are going to be the 14 bid on FMX. Because if someone sells to you at 14 or buys from you at 14 and 1/8, you don't care where it happens. The more it happens, the better. So people, like, who talk to me about this, they're like, from another age, when computers didn't make the prices. You know, they'd say, "Well, how are you gonna get liquidity?" I'm like: Jump and Citadel are my partners with Tower. They're gonna provide liquidity the moment the thing turns on, because their computers are on. It doesn't take any work. They can make you a 14 bid, they'll make another 14 bid. And if they buy it here, they'll be happy, and if they buy it here, they'll be happy. They're not doing me a favor. It's their business to make prices in as many places as there'll be a rate of arrival. And imagine Morgan Stanley says, "I'm gonna favor FMX," then Jump and Citadel and Tower are gonna say, "Then I'm gonna make sure I have a place there." So when Morgan Stanley chooses, if I have both the 14 bid, if it chooses to there, I wanna do it there. So that's a benefit. So I think what's gonna happen is the algorithmic and quantitative trading firms are going to provide liquidity, and that liquidity is gonna grow. And then what you'll see is the client business will go consistent with our market share. So when we're at 10%, that 10% of the client business will come in, because it's gonna come through the FCMs, 20, 20, 30, 30, because we have the FCMs, it'll remain consistent. To your earlier point on segmenting liquidity, right, between having the market makers not transacting with themselves, but transacting with the, the dealers, that's something you're doing already in cash markets. Is that something... It sounds like, is that something you're gonna do in the futures market, you can do that? Maybe just talk about- I'd like to do it, but we have to apply to the CFTC, and that's up to the CFTC to decide whether that's an okay thing. But it... Remember, it reduces volume, right? So now that they're the biggest quantitative trading firms, professional trading firms, are my partner, they might choose to rip that Band-Aid off anyway. Say, "Let's just do more volume. We don't mind anymore. You know, it's one thing when we're helping your new system, Howard. It's another thing when we're owners of it, let's bring the volume." So I'm gonna ask the CFTC, but it is unimportant to us whether it's approved or not. Okay, great. I think we're out of time, Howard. Thank you so much. Appreciate you taking the time. Thanks for spending time with me. Appreciate it. Thank you.