UPDATE:GFI Group Sees Bottom In Derivatives Trading Activity
February 20 2009 - 12:00PM
Dow Jones News
Despite renewed turbulence in financial markets, derivatives
trading has stabilized and will soon begin to rebound, the chief
executive of interdealer broker GFI Group Inc. (GFIG) said
Friday.
"In spite of the [Dow Jones Industrial Average] being at the
six-year historic low, I'm quite confident we're at a bottom in
terms of trading volumes in our marketplace," said Michael Gooch,
chief executive and founder of GFI Group, as the company reported
lower profits for the fourth quarter of 2008 and forecast a
continued decline in brokerage revenue for the first quarter.
Gooch said it would be three to five years before trading
activity in structured products and derivatives makes its way back
to pre-crisis levels, though sectors like equity derivatives and
emerging markets "will rebound in due course."
"It looks to me that we're at a stabilized base," Gooch
said.
Gooch said he also sees signs of life in credit derivatives
trading, and introducing central clearing to the $30 trillion
market may help revive volume.
While exchanges and clearinghouses in the U.S. and Europe are
competing to clear trades in the over-the-counter credit default
swaps market, Gooch said banks prefer a dealer-backed clearing
solution for credit derivatives, and don't want to deal with
multiple clearinghouses.
In the U.S., a clearinghouse developed by Atlanta-based
IntercontinentalExchange Inc. (ICE) has secured support from nine
banks following ICE's planned acquisition of The Clearing
Corporation, a bank-owned clearing entity that was working on its
own CDS clearing service prior to the ICE deal.
GFI is also a Clearing Corp. backer.
Across the Atlantic, London-based LCH.Clearnet - another
bank-owned entity - announced plans of its own to launch credit
derivatives clearing by the end of the year.
LCH.Clearnet is already partnered with NYSE Euronext (NYX) to
clear credit derivatives trades via the BClear platform, which
remains the only operational service for the swaps. The financial
chaos that broke last fall and put the spotlight on clearing CDS
trades may have actually slowed dealers' move toward clearing,
Gooch said.
According to Gooch, regulatory turf battles in the U.S. and
Europe over who will supervise credit derivatives put the brakes on
dealers, who were already moving toward central clearing for the
market.
While some credit derivatives trading is taking place, Gooch
said that clearing or no, volumes won't rebuild until some of the
regulatory uncertainty around the market is resolved in both the
U.S. and Europe.
GFI on Friday reported $192,000 in earnings for the fourth
quarter, breaking even on a per-share basis, compared with $25.2
million, or 21 cents per share, for the year-ago period.
Brokerage revenue for the quarter declined 19% to $193.8 million
as GFI cut brokerage desks and headcount over the quarter in part
of a restructuring effort, which translated to lower trading,
according to officials.
Brokerage revenue in the first quarter is expected to continue
to decline 34% to 37% year-on-year, with overall revenue down 32%
to 35%.
Gooch said if business remains tight, and markets continue
lower, there are "certain initiatives in technology" that GFI could
scale back to reduce costs, but for the time being the company
continues to pursue these, and he emphasized the company's strong
cash position.
James Peers, chief financial officer, estimated GFI's cash
balance stood at about $342 million at the end of 2008, with about
$190 million available to manage cash operations.
"We might have seen downturns in our business, but we've still
had pretty good years and we're making money," Gooch said. "We see
opportunity right now to gain market share against the competition
and those of us who have money in the bank are in a better position
to do that."
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com