What's Driving BGC Partners and the CME Group's Interest of GFI Group

In an ongoing bidding war which publicly began in July 2014, interdealer GFI Group has been the center of interest from both CME Group and BGC Partners. Following an initial cash and stock offer from CME Group for $4.55, bidding for GFI Group has ping-ponged, with BGC Partners taking the latest swipe when they trumped CME Group’s $5.85 offer with a $6.10 all-cash bid. But what is driving the demand for GFI which, before the buyout interest, closed at an 18-month low of $3.00?

While BGC and CME both have their eyes on GFI, their interests are different. An interdealer itself, BGC Partners has been a long-time suitor of GFI Group and holds minority interest in the broker. However, enmity between GFI and BGC’s executives is believed to have squashed any "peaceful" negotiations. For its part, CME Group isn’t interested in GFI’s brokerage business but has its eye on their technology.

Tale of Two bids

When first announcing its bid for GFI Group, CME outlined a two-part deal. CME would acquire GFI’s Trayport, an energy trading platform, and the FENICS options and equity price-analysis product. The wholesale brokerage business would then be sold to a consortium led by GFI Group executives including founder Michael Gooch, CEO Colin Heffron and managing director Nick Brown. Following the deal, the consortium would continue to use Trayport and FENICS for their electronic trading through a long-term licensing deal that they would sign with the CME.

The result is that the dual nature of the deal provides GFI Group’s management with the ability to continue operating its brokerage business, while the CME Group would acquire technology and a network of existing traders using the platform. A leader in global energy trading, Trayport would allow the CME to quickly expand their presence in that sector.

Trayport was specifically mentioned by CME Group Executive Chairman and President Terry Duffy when the firm first made its offer for GFI Group. “European energy markets are de-regulating, and the regional demand for Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. Read this Term in the sector is very high and growing," He stated.

"By acquiring Trayport, a well-established business that already has a strong client base, we will both expand CME Group's involvement with European energy markets and increase operational efficiencies and trading opportunities for all European energy market participants – all while maintaining the independence of the Trayport operating platform."

BGC/GFI Synergies

Contrasting with the CME, BGC is interested in GFI's interdealer brokerage business. Due to regulatory and technological trends that are pushing over-the-phone trading online, there has been a land grab among platform operators to see who can build the largest network of dealers and customers.

In the fractured world of interdealers, firms overlap in the services they provide to their customers. Where they differ is the pricing they can provide clients by having more aggressive dealers on their network of platforms.

For BGC Partners, purchasing GFI Group offers them the opportunity to expand their customer base and, more importantly, scale the activity of trading taking place on their network of interdealer platforms. The result is a situation where 1+1 equal three, as the clout of the combined firms leads to advantageous pricing for customers--allowing the combined companies to be more competitive.

A takeover of GFI is also expected to provide synergies between the combined brokerage businesses. Overlaps where costs could be cut include regulatory and operational expenses involved with operating their interbroker business. In regards to synergies, BGC Partners CEO Howard Lutnick has told equity analysts that they expect at least $30 million in cost savings from the combination of eliminating technology and back office infrastructure, as well as re-servicing GFI debt with lower interest Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times. One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times. Read this Term.

Side Show

While BGC and CME have their own operational and economic interests in GFI Group, other forces are also at play in pushing the bidding higher. While increasing its offer from an initial $4.55 to $5.85, the vast majority of the increased cash from CME has actually been from GFI Group management foregoing a portion of payment for their shares. As a result, the material impact to CME from raising its bid has been minimal.

On the other hand, with an existing stake in GFI Group, BGC Partners benefits by driving up the price that the CME would pay for their shares in the event that they ultimately fail in gaining enough shareholder votes for their offer. As such, with GFI’s management responsible for much of the new financial burden in the CME’s raised bids, the bidding has actually turned into a contest between BGC Partners and GFI Group instead of one between BGC and the CME.