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Article by DailyStocks_admin    (11-18-08 03:52 AM)

GFI Group Inc. CEO Michael Gooch bought 93046 shares on 11-10-2008 at $3.45

BUSINESS OVERVIEW

Our Business

Introduction

We are a leading global inter-dealer broker specializing in over-the-counter ("OTC") derivatives products and related securities. We founded our business in 1987 and were incorporated under the laws of the State of Delaware in 2001 to be a holding company for our subsidiaries. We provide brokerage services and data and analytics products to institutional clients in markets for a range of credit, financial, equity and commodity instruments. We function as an intermediary on behalf of our brokerage clients by matching their trading needs with counterparties having reciprocal interests. We focus primarily on the more complex, and often less commoditized, markets for sophisticated financial instruments, primarily OTC derivatives, that offer an opportunity for strong growth and higher commissions per transaction than the markets for more standardized financial instruments. We have been recognized by various industry publications as a leading provider of inter-dealer brokerage services for certain products in the credit, financial, equity and commodity markets on which we focus.

We offer our clients a hybrid brokerage approach, combining a range of telephonic and electronic trade execution services, depending on the needs of the individual markets. We complement our hybrid brokerage capabilities with decision support services, such as value-added data and analytics products, and post-transaction services, such as straight-through processing ("STP") and transaction confirmations. We earn revenues for our brokerage services and charge fees for certain of our data and analytics products.

At December 31, 2007, we employed 1,037 brokerage personnel (consisting of 880 brokers and 157 trainees and clerks) serving over 2,200 brokerage and data and analytics clients, including leading commercial and investment banks, corporations, insurance companies and hedge funds, through our principal offices in New York, London, Paris, Singapore, Seoul, Tokyo, Hong Kong, Sydney, Cape Town, Calgary, Sugar Land (TX) and Englewood (NJ).

Based on the nature of our operations in each geographic region, our products and services, production process, customers and regulatory environment, we concluded that we have three operating segments: North America Brokerage, Europe Brokerage and Asia Brokerage. Our brokerage operations provide brokerage services in four broad product categories: credit, financial, equity and commodity. We aggregated our operating segments into two reportable segments: Brokerage and "All Other". The Brokerage segment includes operations from North America and Europe. The All Other segment captures costs that are not directly assignable to one of the operating business segments, primarily consisting of our corporate business activities and operations from analytics and market data. In addition, the All Other segment includes our Asia-Pacific brokerage operations. See Note 19 to the Consolidated Financial Statements for further information on our revenues by segment and geographic region.

Website Access to Reports

Our Internet website address is www.gfigroup.com . Through our Internet website, we make available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; and our Current Reports on Form 8-K; our proxy statements on Schedule 14A, Forms 3, 4 and 5 filed on behalf of directors and executive officers; and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act").

In addition, you may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You also may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains our reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC at http://www.sec.gov.

Information relating to corporate governance of the Company is also available on our website, including information concerning our directors, board committees and committee charters, our Code of Business Conduct and Ethics for all employees and for senior financial officers and our compliance procedures for accounting and auditing matters. In addition, the Investor Relations page of our website includes supplemental financial information that we make available from time to time.

Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Our Industry

On most business days, trillions of dollars in securities, commodities, currencies and derivative instruments are traded around the world. These products range from standardized financial instruments, such as common equity securities and futures contracts, that are typically traded on exchanges, to more complex, less standardized instruments, such as OTC derivatives, that are typically traded between institutional dealers, which are primarily global investment and money center banks and hedge funds. Buyers and sellers of exchange-traded financial instruments benefit from the price transparency and enhanced liquidity provided by liquidity facilitators, such as market makers and specialists, who participate in those markets. Buyers and sellers of many OTC instruments, on the other hand, frequently rely on an inter-dealer broker to facilitate liquidity by gathering pricing information and identifying counterparties with reciprocal interests.

Market Evolution

We define a liquid financial market as one in which a financial instrument is easy to buy or sell quickly with minimal price disturbance. The liquidity of a market for a particular financial product or instrument depends on several factors, including: the presence of a number of market participants and facilitators of liquidity, the availability of pricing reference data, and the availability of standardized terms. Liquid markets are characterized by substantial price competition, efficient execution and high trading volume. While a market for an exchange-traded instrument is ordinarily liquid, some large OTC markets, such as the market for U.S. treasury securities, are also highly liquid. In such liquid, OTC markets, commissions are generally lower because there are often numerous, readily identifiable buyers and sellers causing the traditional telephonic brokerage services of inter-dealer brokers to be less essential and to command less of a premium.

Complex financial instruments that are traded OTC are often less commoditized and are traded primarily by more sophisticated institutional buyers and sellers. In these markets, an inter-dealer broker can provide greater value to the efficient execution of a trade by applying its market knowledge to locate a number of bids and offers so that buyers and sellers may find counterparties with which to trade, which can be especially helpful for large or non-standardized transactions. An inter-dealer broker ordinarily accomplishes this by contacting potential counterparties directly by telephone or electronic messaging and, in an increasing number of cases, market participants post prices and may execute transactions via proprietary trading technology provided by the inter-dealer broker. In addition, in a less liquid market with fewer participants, disclosure of the intention of a participant to buy or sell could disrupt the market and lead to poor pricing. By using an inter-dealer broker, the identities of the transaction parties are not disclosed in many transactions until the trade is consummated and, therefore, market participants better preserve their anonymity. For all these reasons, in a less commoditized market, an inter-dealer broker can offer important value to market participants.

As a market for a particular financial instrument develops and matures, more buyers and sellers enter the market, generally resulting in more transactions and more pricing information. In addition, the terms of such financial instruments tend to become more standardized, generally resulting in a more highly-liquid market. In this way, a relatively illiquid market for an instrument may evolve over a period of time into a more highly-liquid market. As this evolution occurs, the characteristics of trading, the preferred mode of execution and the size of commissions that inter-dealer brokers charge, may also change. In some cases, as the market matures, an inter-dealer broker may provide a client with an electronic screen or system that displays the most current pricing information. In addition, a market may have some characteristics of both more liquid and less liquid markets, which requires an inter-dealer broker to offer integrated telephonic and electronic brokering. We refer to this integrated service as hybrid brokerage. In some cases, hybrid brokerage involves coupling traditional telephonic brokerage-services with various electronic enhancements, such as electronic communications, price discovery tools and order entry. In other cases, hybrid brokerage involves full electronic execution supported by telephonic communication between the broker and their clients.

The Derivatives Market

Derivatives are increasingly being used by financial institutions, hedge funds and large corporations to manage risk or take advantage of an anticipated direction of a market by allowing holders to guard against gains or declines in the price of underlying financial assets, indices or other investments without having to buy or sell such underlying assets, indices or other investments. The underlying asset, index or other investment may be, among other things, a physical commodity, an interest rate, a stock, an index or a currency. Derivatives are commonly used to mitigate the risks associated with interest rate movements, equity ownership, changes in the value of foreign currency, credit defaults by large corporate and sovereign debtors and changes in the prices of commodity products. Common types of derivatives include futures, options and swaps. They derive their value based on the inherent value of the underlying asset.

Derivatives are traded both OTC and on exchanges. According to a recent report of the Bank for International Settlements, OTC derivatives accounted for over 84% of the total outstanding global derivatives transactions as of June 2007 (as measured by notional amount). The liquidity of markets for particular OTC derivative instruments varies from highly liquid, such as the market for Eurodollar interest rate derivatives, to illiquid, such as the market for certain customized credit derivatives which are structured to meet specific investor needs.

The International Swaps and Derivative Association, Inc. ("ISDA") also reported in a recent survey of its members that in the first half of 2007, among the derivative instruments surveyed, credit derivatives were the fastest growing segment of the derivatives market with notional amounts outstanding growing 32% over that six month period. The survey stated that at mid-year 2007, notional amounts outstanding of credit derivatives grew to approximately $45.5 trillion from approximately $26.0 trillion at mid-year 2006. This increase represented period-over-period growth of approximately 75.0%. Although several exchanges launched exchange-traded credit derivative products in 2007, credit derivatives are currently traded almost entirely in OTC transactions, either directly or through inter-dealer brokers and other financial institutions.

Furthermore, the number of different derivative instruments is growing as companies and financial institutions develop new and innovative derivative instruments to meet industry demands for sophisticated risk management and complex financial arbitrage. In its 2007 annual survey, Risk magazine identified 119 categories of derivatives, excluding commodity derivatives. Novel derivative instruments often have distinct terms and little or no trading history with which to estimate a price. Markets for new derivative instruments therefore require market intelligence and the services of highly skilled and well-informed brokers and reliable market data and pricing tools.

An example of more novel, OTC derivative instruments would be credit default swaps on leveraged loans ("Loan CDS"). These instruments allow investors to take or offset the risk of default on senior secured debt of non-investment grade companies. The advent of the Loan CDS market is an example of how the overall credit derivatives market is expanding to different areas of the credit spectrum. Another example of an innovative and complex OTC derivative instrument is carbon emissions options, which allow trading houses and other market participants to take or offset their exposure in the fast growing European market for carbon dioxide emissions allowances under the European Union Emissions Trading Scheme, or ETS. The ETS permits European-based companies that exceed individual carbon dioxide emissions targets to purchase emissions allowances from other companies that emit less than their emissions targets.

Our Market Opportunity

We believe the markets for financial instruments, especially the markets for derivative instruments, present us with the following opportunities to provide value to our clients:

Need for efficient execution in both liquid and less liquid markets. While the use of execution technology is becoming more common in the inter-dealer brokerage industry, only certain highly liquid and standardized financial instruments may be fully traded electronically in an efficient manner. More complex OTC products, such as derivatives, typically require telephonic brokerage to provide market intelligence to clients and to aid the execution process. We believe that inter-dealer brokers who provide a combination of telephonic and electronic brokerage services are better positioned to meet the particular needs of the markets in which they operate than competitors that cannot offer this combination of services.

Need for expertise in the development of new markets. In order to better support their clients' evolving investment and risk management strategies, our dealer clients create new products, including new derivative instruments. Dealers also modify their trading techniques in order to better support their clients' needs, such as by integrating the trading of derivative instruments with the trading of related underlying or correlated financial assets, indices or other investments. We believe the markets for these new products and trading techniques create an opportunity for those inter-dealer brokers who, through market knowledge and extensive client relationships, are able to identify these new product opportunities and to focus their brokerage services appropriately.

Need for market intelligence. Inter-dealer brokers that execute a higher volume of trades of a particular financial product and have access to more market participants are better positioned to provide valuable pricing information than brokers who less frequently serve that market. In less commoditized financial markets, including markets for novel and complex financial instruments, market leadership becomes more important because reliable pricing information is difficult to obtain. Market participants in these less liquid markets utilize the services of the leading inter-dealer brokers in order to gain access to the most bids and offers for a particular product. Similarly, inter-dealer brokers who have a leading market share can offer superior market data and analytics tools based on their access to the broadest selection of transaction and pricing information. For example, some market participants pursue trading strategies that combine credit default swaps with convertible bonds or equity derivatives of the securities of a single issuer or a basket of issuers. Inter-dealer brokers that have high volumes of bids and offers in the credit derivative markets and have access to technology which allows them to track such market data against activity in the bond and equity markets are well positioned to provide such market participants with analytical insight into correlated movements in related securities of a single issuer or related issuers or indexes.

Increasing industry consolidation. Historically, the inter-dealer brokerage industry consisted of a number of small and mid-sized private firms that used traditional telephonic brokerage methods to serve their clients and to compete against each other in various product categories. The industry has begun to consolidate in recent years, in part, due to the increasing importance of technology, including electronic execution, integrated trade processing and analytics and market data. Through acquisitions, larger inter-dealer brokers with access to capital have been better positioned to make the investments necessary to supply their clients with this technology. We believe that inter-dealer brokers with developed technology resources which enhance brokerage execution and pre-and post-trade analysis and processing are better able to consistently meet the execution needs of their clients and recruit and retain the most capable brokers. As a result of these trends, smaller inter-dealer brokers may find it harder to compete and several have been acquired by larger inter-dealer brokers with developed technological capabilities and better access to capital. We believe that the continued consolidation of the industry provides an opportunity for these larger inter-dealer brokers to strategically expand their businesses to better serve evolving client demands.

Our Competitive Strengths

We believe our principal competitive strengths are the following.

Strong Brand and Leading Position in Key Markets. We believe that over our twenty year history, we have successfully created value in our brand that our clients associate with high quality services in the markets on which we focus. Our leadership in these markets, such as the markets for certain credit and equity derivatives, foreign exchange options and commodity products, has been recognized by rankings in industry publications such as Risk magazine, FX Week and Energy Risk magazine. In an annual survey of dealers and brokers conducted by Risk magazine, we have been ranked as the leading broker in more categories of credit derivatives than any other inter-dealer broker over the last nine years. In its 2007 annual survey, Risk magazine also ranked us as a leading broker in credit default swaps and numerous currency and equity derivative markets. Energy Risk magazine also listed GFI as #1 Energy Broker in 2007. In addition, GFI's Fenics® FX option analysis product is a leading analytic tool in the foreign exchange markets, and our electronic trading platforms, Creditmatch® and GFI ForexMatch™, were also recognized for excellence by Financial News and FX Week, respectively.

We believe our leading positions in these markets provide us with greater access to market and pricing information, including a broad selection of proprietary market data that we are able to provide to our clients. In addition, we believe that our leading market share in key OTC markets, such as credit derivatives, and our ability to use technology to track such market data, enables us to provide market participants with better analytical insight into correlated movements in related securities of a single issuer, related issuers or indexes in the credit derivative, bond and equity markets. In addition, we believe that, because of these leading market positions and differentiated technological capabilities, we are better positioned, compared to many of our inter-dealer competitors, to serve the growing needs of clients who are pursuing sophisticated capital structure arbitrage strategies and correlation-based trading.

Ability to Identify and Develop High Growth, Less Commoditized Markets. We focus primarily on complex and innovative financial markets where liquidity is harder to achieve and, therefore, our services are more valuable to market participants. We believe these markets offer an opportunity for growth to inter-dealer brokers that move early to foster liquidity. We seek to anticipate the development and growth of markets for evolving, innovative financial products in which we believe we can garner a leading market position and enjoy higher commissions. For example, we entered the credit derivatives market in 1996 at a time when we believed the market showed promise but had only modest activity. According to the British Bankers' Association, the size of the global credit derivatives market was only $180 billion in 1997 (measured by notional amount outstanding). According to ISDA, notional amounts outstanding of credit derivatives have grown to $45.5 trillion at mid-year 2007, a compounded annual growth rate of over 79% for that nine and a half year period. We believe our familiarity with the needs of such rapidly growing markets and our experience with complex product structures allow us to better serve clients in high-growth, less liquid markets than many of our competitors.

Hybrid Brokerage Platforms. We seek to tailor our use of electronic trading and other technology to the transactional nuances of each specific market. While the more complex, less commoditized markets on which we focus often require significant amounts of personal and attentive service from our brokers, some of our other markets may benefit from the introduction of electronic brokerage platforms. Depending on the needs of the individual markets, we offer a hybrid approach to our clients that combines a range of electronic and telephonic trade execution services. For example, our clients may choose between utilizing our CreditMatch®, GFI ForexMatch™ or EnergyMatch® electronic trading platforms to trade a range of credit derivatives, foreign exchange options or emission allowances entirely on screen or executing the same transaction over the telephone through our brokers. We also believe we add value for clients who trade in complex financial markets by offering data and Fenics® analytics products for decision support. We seek to establish data communication and STP connections with our clients' settlement, risk management and compliance operations in order to better serve their needs and to strengthen our relationships with them. STP generally involves the use of technology to automate the processing of financial transactions, from execution to settlement, in order to minimize human error, reduce operational costs and time, and enhance transaction information and reporting. We believe our hybrid brokerage approach provides us with a competitive advantage over competitors who do not offer this technology.

On January 31, 2008, we acquired Trayport Limited ("Trayport"), a provider of electronic trading software and services to the commodities, fixed income, currencies and equities markets. Trayport's GlobalVision products have an industry leading position in supplying software to the European OTC energy markets including electric power, natural gas, coal, emissions and freight. Its technology accommodates electronic trading, information sharing and STP capabilities in commodity and financial instruments. The acquisition of Trayport, with its leading position in the European OTC energy markets and its trading and processing capabilities further enhances our hybrid brokerage model.

Quality Data and Analytics Products. We are one of the few inter-dealer brokers that offer a broad array of data and analytics products to participants in the complex financial markets in which we specialize. Our data products are derived from the trade data compiled from our brokerage services in our key markets. Our analytics products benefit from the reputation of the Fenics® brand for reliability, ease of use and independence from any large dealer. Our Fenics® tools are used, not only by our traditional brokerage clients, but also by their clients, such as national and regional financial institutions and large corporations worldwide. These products are designed to serve the needs of certain markets for reliable data and trusted analytics tools and are leveraged to enhance our brokerage revenues across market products. We believe that our ability to offer these products helps to support our leadership in our key markets.

Experienced Senior Management and Skilled Brokers and Technology Developers. We have a senior management team that is experienced in identifying and exploiting markets for evolving, innovative financial instruments. Our founder and chief executive officer, Michael Gooch, has over 20 years of experience in the derivatives markets and our president, Colin Heffron, has been with our Company since 1988 and, prior to becoming our president, was instrumental in developing a number of brokerage desks and leading the growth of our European operations. Reporting to them is an experienced management team that includes senior market specialists in each of our product categories. We also employed 880 skilled and specialized brokers at December 31, 2007, many of whom have extensive product and industry experience. Although the competition for brokers is intense, we have historically experienced relatively low broker turnover, and have been able to effectively hire new brokers and establish new brokerage desks in areas in which we seek to expand our operations. In addition, our in-house technology developers are experienced at developing electronic trading platforms and commercial quality software that are tailored to the needs of certain select markets in which we focus. Our brokers utilize this technology and market information to provide their clients with enhanced services. We believe that the combination of our experienced senior management, skilled brokers and technology developers gives us a competitive advantage in executing our business strategy.


CEO BACKGROUND

From 1998 until February 2004, Mr. Heffron was head of all of our operations in the U.K. and joint-head of Asian operations.
John W. Ward. Director, joined our Board in April 2004. Mr. Ward has been a principal of Transition International, Inc., an independent consulting firm, since its formation in 1992. He joined the board of Fenics Limited in 1999 and served until our acquisition of that company in 2001. Mr. Ward was also a director of Ameritrade Holdings Corporation from 1997 until 2002 and served as chairman of its compensation committee until 2001. He was also a director of AHL Services Inc. from 2000 until 2003 and was formerly Chairman of the Merrill Lynch International Banking Group.
MANAGEMENT DISCUSSION FROM LATEST 10K

Business Environment

As an inter-dealer broker, our results of operations are impacted by a number of external market factors, including market volatility, organic growth of the derivative and other markets in which we provide our brokerage services, the particular mix of transactional activity in our various products and the competitive environment in which we operate. Outlined below are management's observations of these external market factors during the most recent fiscal period. The factors outlined below are not the only factors that have impacted our results of operations for the most recent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods.

Market Volatility

As a general rule, our business benefits from volatility in the markets that we serve, as periods of increased volatility typically coincide with more robust trading by our clients and a higher volume of transactions. Market volatility is driven by a range of external factors, some of which are market specific and some of which are correlated to general macro-economic conditions. During 2007, the credit and equity markets experienced heightened volatility due to the substantial decline of the U.S. subprime mortgage market and U.S. housing markets, the prospects of a slowing U.S. economy and a reduction in the availability of credit in the later half of the year.

The bond market experienced significant volatility in 2007 as the subprime market turmoil caused the prices of many bonds and loans to plunge despite corporate defaults remaining low. The revaluing of debt securities led to many banks writing down substantial amounts of mortgage backed and collateralized debt in the second half of 2007. Credit spreads, which were at near historical lows at the beginning of 2007, widened during the year as investors became more cautious.

The global equity markets experienced considerable volatility throughout the year as demonstrated by historical price volatility on the Chicago Board Options Exchange SPX and Dow Jones Industrial Average ("DJIA") volatility indices. However, despite the credit market turmoil and the resulting global economic concerns, many global equity markets posted gains for the year. The DJIA advanced 6.4% for the year, while the Dow Jones World Index, excluding the U.S., advanced 12%. Equities performed particularly well in emerging markets in Asia and Latin America, while Europe saw mixed results. The resilient nature of the global equity markets were witnessed throughout 2007 as various credit events precipitated large drops in global equity markets, which were followed, in many cases, by significant stock price gains.

Interest rate and foreign exchange markets experienced moderate to heightened volatility during the year resulting from inflationary and economic uncertainty, as well as the divergence of world monetary policy. The commodity markets continued to be strong as emerging market demand, particularly from China, pushed up commodity prices to record or near-record levels in 2007, with crude oil futures on the New York Mercantile Exchange ending the year at $95.98 a barrel, up over 57% for the year

Growth in Underlying Markets and New Product Offerings

Our business has historically benefited from growth in the OTC derivatives markets due to either the expansion of existing markets, including increased notional amounts outstanding or increased transaction volumes, or the development of new products or classes of products. The level of growth in these markets is difficult to measure on a quarterly basis as there are only a few independent, objective measures of growth in outstanding notional amount of OTC derivatives, all of which are published retrospectively and do not measure transactional volumes. Therefore, to help gauge growth in any particular quarter, management also looks to the published results of large OTC derivatives dealers and certain futures exchanges as potential indicators of transactional activity in the related OTC derivative markets.

The ISDA released the results of a survey in the third quarter of 2007 on notional amounts outstanding in global OTC markets as of June 2007. The survey results showed that the OTC derivative markets continued to experience strong growth in notional amounts outstanding with credit derivatives growing 75% from $26.0 trillion in June 2006 to $45.5 trillion in June 2007. Notional amounts outstanding of interest rate and currency derivatives grew by 38% over the same period from $250.8 trillion to $347.1 trillion, while equity derivatives notional outstanding growth amounted to 57% from $6.4 trillion to $10.0 trillion.

For several years, exchange traded derivatives have exhibited generally similar growth rates to those of related OTC derivative markets. CME, the New York Mercantile Exchange, IntercontinentalExchange and International Securities Exchange all reported solid growth in transactional volumes during 2007. These exchanges offer trading in futures and other products in several categories, including financial, equity and commodity products. Nevertheless, because there is currently minimal or no exchange-based trading activity of credit futures, exchange-traded volumes are not necessarily an indicator of activity levels of credit products, our largest product segment.

In addition, newer products and our expansion into growing markets have also contributed to the growth in our brokerage revenues in 2007. Transactions in later generation credit products, such as index exotic, asset backed and loan credit derivatives, have been a driver of growth in the overall credit derivative market during the year. New products have also developed in certain wet and dry freight and property derivative markets in 2007, while the currency and interest rate derivative markets have grown, in part, due to the growth of emerging markets in Eastern Europe and Asia.

Competitive Environment

Another major external market factor affecting our business and results of operations is competition, which may take the form of competitive pressure on the commissions we charge for our brokerage services or competition for brokerage personnel with extensive experience in the specialized markets we serve. Competition for the services of productive brokers was intense throughout 2007, especially in the second half of the year, as other inter-dealer brokers sought to bolster their derivative brokerage capabilities by hiring, or attempting to hire several key brokerage personnel. As a result, compensation and employee benefits as a percentage of revenues will be under pressure, and may increase, in the short term.

Financial Overview

As more fully discussed below, our results of operations are significantly impacted by our revenue growth and the amount of compensation and benefits we provide to our employees. The following factors had a significant impact on our revenues and employee costs during the three year period ended December 31, 2007:

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Our revenues have grown from $533.6 million for the year ended December 31, 2005 to $970.5 million for the year ended December 31, 2007. The main factors contributing to our revenue growth were:

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the increase in our brokerage personnel (consisting of brokers, trainees and clerks) from 560 at January 1, 2005 to 1,037 at December 31, 2007;

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a continued focus on, and investment in, growing and higher margin product areas;

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overall volume growth in the markets in which we provide brokerage services;

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the introduction and continued development and expansion of our hybrid brokerage capabilities, including the successful introduction of CreditMatch® in Europe;

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the continued development, marketing and sale of our data and analytical products;

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the opening of new offices, including our Paris and Seoul offices; and

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the acquisitions of the North American operations of Starsupply Petroleum in September 2005 and Amerex Energy in October 2006.

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The most significant component of our cost structure is employee compensation and benefits, which includes salaries, sign-on bonuses, incentive compensation and related employee benefits and taxes. Our employee compensation and benefits have grown from $327.3 million for the year ended December 31, 2005 to $604.8 million for the year ended December 31, 2007. The main factors contributing to the growth in the amount of employee compensation and benefits were an increase in bonuses for brokerage personnel and sign-on bonuses for certain newly-hired brokers or for certain of our existing brokers who agree to long-term employment agreements.

Our compensation and employee benefits for all employees have both a fixed and variable component. Base salaries and benefit costs are primarily fixed for all employees while bonuses constitute the variable portion of our compensation and employee benefits. Within this overall compensation and employee benefits, employment costs of our brokerage personnel are the key component. Bonuses for brokerage personnel are primarily based on the operating results of their related brokerage desk as well as their individual performance. For many of our brokerage employees, their bonus constitutes a significant component of their overall compensation. Broker performance bonuses increased from $158.8 million for the year ended December 31, 2005 to $303.5 million for the year ended December 31, 2007. Additionally, a portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period.

Further, we grant sign-on bonuses for certain newly-hired brokers or for certain of our existing brokers who agree to long-term employment agreements. Sign-on bonuses increased from $14.3 million for the year ended December 31, 2005 to $25.3 million for the year ended December 31, 2007. These sign-on bonuses may be paid in the form of cash, RSUs or forgivable loans and are typically amortized over the term of the related employment agreement, which is generally two to four years. These employment agreements typically contain repayment or forfeiture provisions for unvested RSUs or all or a portion of the sign-on bonus and forgivable



loan should the employee voluntarily terminate his or her employment or if the employee's employment is terminated for cause during the initial term of the agreement.

Results of Consolidated Operations

Year ended December 31, 2007 Compared to the Year Ended December 31, 2006

Net income for the year ended December 31, 2007 was $94.9 million as compared to net income of $61.1 million for the year ended December 31, 2006, an increase of $33.8 million or approximately 55.3%. Total revenues increased by $223.3 million, or 29.9%, to $970.5 million for the year ended December 31, 2007 from $747.2 million for the prior year. Our increased revenues were primarily due to increased brokerage revenues across each of our product categories. Total expenses increased by $174.4 million, or 27.0%, to $819.8 million for the year ended December 31, 2007 from $645.4 million for the prior year. Expenses increased primarily because of increased compensation expense for the year ended December 31, 2007, which was attributable to an increase in performance-based bonus expense as a result of higher revenues, as well as higher sign-on bonus expense.

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Brokerage Revenues —We offer our brokerage services in four broad product categories: credit, equity, financial and commodity. Below is a discussion on our brokerage revenues by product category.

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Broker productivity (defined as total brokerage revenues during the period divided by average monthly brokerage personnel headcount for the period) increased by approximately 11.7% in 2007 compared to 2006.

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The increase in credit product brokerage revenues of $64.9 million in 2007 was due to a number of factors, including credit market volatility related to U.S. subprime mortgage market turmoil and inflationary and economic concerns, the continued overall growth in the credit derivatives market, the continued success in Europe of CreditMatch®, our credit derivatives and cash bond trading platform, and increased headcount. Our credit product brokerage personnel headcount increased by 41 to 273 employees at December 31, 2007 from 232 employees at December 31, 2006.

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The increase in equity product brokerage revenues of $65.6 million in 2007 was primarily due to equity market volatility related to U.S. subprime mortgage turmoil and inflationary and economic concerns, the continued growth of our Paris office, which specializes in cash equities and equity derivatives, strength in our equity derivatives business in the U.K. and Asia, strength in our cash equities business in the U.S. and increased headcount. Our equity

product brokerage personnel headcount increased by 35 to 208 employees at December 31, 2007 from 173 employees at December 31, 2006.

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The increase in financial product brokerage revenues of $28.4 million in 2007 was primarily attributable to the growth in emerging market and interest rate derivatives in Asia and Europe and the continued global introduction of GFI ForexMatch™, our currency derivatives electronic trading platform, to our financial product brokerage businesses. In March 2007, we opened an office in Korea which contributed to the growth of our financial product brokerage businesses in Asia. Our financial product brokerage personnel headcount increased by 12 to 274 employees at December 31, 2007 from 262 employees at December 31, 2006.

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The increase in commodity product brokerage revenues of $69.4 million in 2007 was primarily attributable to the full year impact of the acquisition of our Amerex brokerage business in October 2006. In addition, growth in European dry physical freight and dry freight derivatives and U.K. and European electricity also contributed to the increase in overall commodity revenues. Our commodity product brokerage personnel headcount increased by 18 to 283 employees at December 31, 2007 from 265 employees at December 31, 2006.

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Other Revenues

The decrease in other revenues in 2007 to $33.1 million from $38.1 million in 2006 was primarily related to a decrease in contract revenue of $6.8 million, which was offset by an increase in analytics and market data revenues of $0.9 million. Contract revenue consists primarily of revenues recognized under a long-term contract pursuant to which we developed an online foreign exchange currency trading system and customized it for a customer. During the second quarter of 2006, the project was substantially completed and consequently, we recorded $5.9 million in contract revenues.

Expenses

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Compensation and Employee Benefits

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The increase in compensation and employee benefits expenses of $139.3 million in 2007 was primarily attributable to an increase in the number of brokerage personnel from 932 at December 31, 2006 to 1,037 at December 31, 2007 and an increase in brokerage personnel performance bonuses of $72.2 million. The increased performance bonuses were due, in large part, to our overall higher total brokerage revenues.

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Total compensation and employee benefits as a percentage of total revenues remained consistent at 62.3% for each of the years ended December 31, 2007 and 2006. Our compensation and employee benefits as a percentage of our revenue are relatively stable. However, certain of our competitors have been offering significant compensation packages to attract our brokers. As a result, compensation and employee benefits as a percentage of revenues will be under pressure, and may increase, in the short term. We believe that an increase in the use of our hybrid electronic technology brokerage systems and pressure on our competitors to rationalize the increase in their compensation expense should eventually lessen the effect of the competitive pressure on compensation expense.

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Bonus expense represented 53.3% and 52.0% of total compensation and employee benefits expense for the year ended December 31, 2007 and 2006, respectively. A portion of our bonus expense is subject to contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period. Additionally, sign-on bonus expense represented 4.3% and 5.2% of total compensation and employee benefits for the years ended December 31, 2007 and 2006, respectively.

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All Other Expenses

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The increase in communications and market data was primarily attributable to the increase in brokerage personnel during 2007 in those areas, such as equities, that rely more heavily on market data systems.

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The increase in travel and promotion was primarily attributable to the increase in brokerage personnel during 2007. Travel and promotion, as a percentage of our total brokerage revenues for the year ended December 31, 2007, decreased slightly to 4.5% from 4.6% for the same period from the prior year.

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The increase in rent and occupancy was primarily due to an increase in rent expense relating to our new primary office space in New York and an increase in repairs and maintenance, which was offset by a decrease in insurance costs for our current leased facilities. We expect that rent and occupancy expense will continue to increase in the future as a result of new leases for office space, including the lease we entered into for our new office space in New York.

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The increase in depreciation and amortization was primarily due to the $2.9 million of accelerated depreciation related to certain long-lived assets to be abandoned at our current office space in New York and amortization expense of intangibles resulting from the acquisition of the Amerex brokerage business. We expect that depreciation and amortization will continue to increase in the future as a result of capital expenditures related to our new office space in New York, as well as our continued investment in software development.

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The increase in clearing fees was partially due to the growth of matched principal brokerage revenues from our Paris equities business. Clearing fees, as a percentage of our total revenues from principal transactions increased to 17.4% for the year ended December 31, 2007 from 16.2% from the same period from the prior year. This increase was partially due to the high cost of clearing fees as a result of the higher number and types of matched principal transactions executed in our Paris office. Principal transactions are generally settled through third party clearing organizations that charge us a fee for their services. We also use the services of stock exchanges and floor brokers, to assist in the execution of transactions. Fees paid to floor brokers and execution fees paid to exchanges in these circumstances are included in clearing fees. In addition, clearing fees also includes fees incurred in certain equity transaction executed on an agency basis.

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The increase in other expenses was due to an increase in irrecoverable Value Added Tax related to increased purchases for communications and market data in Europe and increased license fees to third-party software vendors. Additionally, in 2007, we recorded a termination fee of $1.7 million in connection with our decision to terminate a significant portion of our current office lease in New York. See Note 14 to the Consolidated Financial Statements for further discussion on the lease termination.

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The decrease in contract costs was due to the completion of a long-term contract in June 2006. See Other Revenues above for further discussion on the long-term contract.

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Our effective tax rate was 37.1% for the year ended December 31, 2007 as compared to 40.0% for the same period in the prior year. The reduction in the effective tax rate was primarily due to decreases in state and local taxes, as well as a decrease in taxes related to our foreign operations. The reduction in state and local taxes was due, in part, to lower state tax rates and the geographic mix of our earnings. In addition, in 2007, the tax rate was reduced due to the recognition of a $1.4 million previously unrecognized tax benefit due to the lapse in the relevant statute of limitations for the related tax return.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Our Business

Introduction

We are a leading global inter-dealer broker specializing in over-the-counter ("OTC") derivatives products and related securities. We founded our business in 1987 and were incorporated under the laws of the State of Delaware in 2001 to be a holding company for our subsidiaries. We provide brokerage services and data and analytics products to institutional clients in markets for a range of credit, financial, equity and commodity instruments. We function as an intermediary on behalf of our brokerage clients by matching their trading needs with counterparties having reciprocal interests. We focus primarily on the more complex, and often less commoditized, markets for sophisticated financial instruments, primarily OTC derivatives, that offer an opportunity for strong growth and higher commissions per transaction than the markets for more standardized financial instruments. We have been recognized by various industry publications as a leading provider of inter-dealer brokerage services for certain products in the credit, financial, equity and commodity markets on which we focus.

We offer our clients a hybrid brokerage approach, combining a range of telephonic and electronic trade execution services, depending on the needs of the individual markets. We complement our hybrid brokerage capabilities with decision support services, such as value-added data and analytics products, and post-transaction services, such as straight-through processing ("STP") and transaction confirmations. We earn revenues for our brokerage services and charge fees for certain of our data and analytics products.

At December 31, 2007, we employed 1,037 brokerage personnel (consisting of 880 brokers and 157 trainees and clerks) serving over 2,200 brokerage and data and analytics clients, including leading commercial and investment banks, corporations, insurance companies and hedge funds, through our principal offices in New York, London, Paris, Singapore, Seoul, Tokyo, Hong Kong, Sydney, Cape Town, Calgary, Sugar Land (TX) and Englewood (NJ).

Based on the nature of our operations in each geographic region, our products and services, production process, customers and regulatory environment, we concluded that we have three operating segments: North America Brokerage, Europe Brokerage and Asia Brokerage. Our brokerage operations provide brokerage services in four broad product categories: credit, financial, equity and commodity. We aggregated our operating segments into two reportable segments: Brokerage and "All Other". The Brokerage segment includes operations from North America and Europe. The All Other segment captures costs that are not directly assignable to one of the operating business segments, primarily consisting of our corporate business activities and operations from analytics and market data. In addition, the All Other segment includes our Asia-Pacific brokerage operations. See Note 19 to the Consolidated Financial Statements for further information on our revenues by segment and geographic region.

Website Access to Reports

Our Internet website address is www.gfigroup.com . Through our Internet website, we make available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; and our Current Reports on Form 8-K; our proxy statements on Schedule 14A, Forms 3, 4 and 5 filed on behalf of directors and executive officers; and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act").

In addition, you may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You also may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains our reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC at http://www.sec.gov.

Information relating to corporate governance of the Company is also available on our website, including information concerning our directors, board committees and committee charters, our Code of Business Conduct and Ethics for all employees and for senior financial officers and our compliance procedures for accounting and auditing matters. In addition, the Investor Relations page of our website includes supplemental financial information that we make available from time to time.

Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Our Industry

On most business days, trillions of dollars in securities, commodities, currencies and derivative instruments are traded around the world. These products range from standardized financial instruments, such as common equity securities and futures contracts, that are typically traded on exchanges, to more complex, less standardized instruments, such as OTC derivatives, that are typically traded between institutional dealers, which are primarily global investment and money center banks and hedge funds. Buyers and sellers of exchange-traded financial instruments benefit from the price transparency and enhanced liquidity provided by liquidity facilitators, such as market makers and specialists, who participate in those markets. Buyers and sellers of many OTC instruments, on the other hand, frequently rely on an inter-dealer broker to facilitate liquidity by gathering pricing information and identifying counterparties with reciprocal interests.

Market Evolution

We define a liquid financial market as one in which a financial instrument is easy to buy or sell quickly with minimal price disturbance. The liquidity of a market for a particular financial product or instrument depends on several factors, including: the presence of a number of market participants and facilitators of liquidity, the availability of pricing reference data, and the availability of standardized terms. Liquid markets are characterized by substantial price competition, efficient execution and high trading volume. While a market for an exchange-traded instrument is ordinarily liquid, some large OTC markets, such as the market for U.S. treasury securities, are also highly liquid. In such liquid, OTC markets, commissions are generally lower because there are often numerous, readily identifiable buyers and sellers causing the traditional telephonic brokerage services of inter-dealer brokers to be less essential and to command less of a premium.

Complex financial instruments that are traded OTC are often less commoditized and are traded primarily by more sophisticated institutional buyers and sellers. In these markets, an inter-dealer broker can provide greater value to the efficient execution of a trade by applying its market knowledge to locate a number of bids and offers so that buyers and sellers may find counterparties with which to trade, which can be especially helpful for large or non-standardized transactions. An inter-dealer broker ordinarily accomplishes this by contacting potential counterparties directly by telephone or electronic messaging and, in an increasing number of cases, market participants post prices and may execute transactions via proprietary trading technology provided by the inter-dealer broker. In addition, in a less liquid market with fewer participants, disclosure of the intention of a participant to buy or sell could disrupt the market and lead to poor pricing. By using an inter-dealer broker, the identities of the transaction parties are not disclosed in many transactions until the trade is consummated and, therefore, market participants better preserve their anonymity. For all these reasons, in a less commoditized market, an inter-dealer broker can offer important value to market participants.

As a market for a particular financial instrument develops and matures, more buyers and sellers enter the market, generally resulting in more transactions and more pricing information. In addition, the terms of such financial instruments tend to become more standardized, generally resulting in a more highly-liquid market. In this way, a relatively illiquid market for an instrument may evolve over a period of time into a more highly-liquid market. As this evolution occurs, the characteristics of trading, the preferred mode of execution and the size of commissions that inter-dealer brokers charge, may also change. In some cases, as the market matures, an inter-dealer broker may provide a client with an electronic screen or system that displays the most current pricing information. In addition, a market may have some characteristics of both more liquid and less liquid markets, which requires an inter-dealer broker to offer integrated telephonic and electronic brokering. We refer to this integrated service as hybrid brokerage. In some cases, hybrid brokerage involves coupling traditional telephonic brokerage-services with various electronic enhancements, such as electronic communications, price discovery tools and order entry. In other cases, hybrid brokerage involves full electronic execution supported by telephonic communication between the broker and their clients.

The Derivatives Market

Derivatives are increasingly being used by financial institutions, hedge funds and large corporations to manage risk or take advantage of an anticipated direction of a market by allowing holders to guard against gains or declines in the price of underlying financial assets, indices or other investments without having to buy or sell such underlying assets, indices or other investments. The underlying asset, index or other investment may be, among other things, a physical commodity, an interest rate, a stock, an index or a currency. Derivatives are commonly used to mitigate the risks associated with interest rate movements, equity ownership, changes in the value of foreign currency, credit defaults by large corporate and sovereign debtors and changes in the prices of commodity products. Common types of derivatives include futures, options and swaps. They derive their value based on the inherent value of the underlying asset.

Derivatives are traded both OTC and on exchanges. According to a recent report of the Bank for International Settlements, OTC derivatives accounted for over 84% of the total outstanding global derivatives transactions as of June 2007 (as measured by notional amount). The liquidity of markets for particular OTC derivative instruments varies from highly liquid, such as the market for Eurodollar interest rate derivatives, to illiquid, such as the market for certain customized credit derivatives which are structured to meet specific investor needs.

The International Swaps and Derivative Association, Inc. ("ISDA") also reported in a recent survey of its members that in the first half of 2007, among the derivative instruments surveyed, credit derivatives were the fastest growing segment of the derivatives market with notional amounts outstanding growing 32% over that six month period. The survey stated that at mid-year 2007, notional amounts outstanding of credit derivatives grew to approximately $45.5 trillion from approximately $26.0 trillion at mid-year 2006. This increase represented period-over-period growth of approximately 75.0%. Although several exchanges launched exchange-traded credit derivative products in 2007, credit derivatives are currently traded almost entirely in OTC transactions, either directly or through inter-dealer brokers and other financial institutions.

Furthermore, the number of different derivative instruments is growing as companies and financial institutions develop new and innovative derivative instruments to meet industry demands for sophisticated risk management and complex financial arbitrage. In its 2007 annual survey, Risk magazine identified 119 categories of derivatives, excluding commodity derivatives. Novel derivative instruments often have distinct terms and little or no trading history with which to estimate a price. Markets for new derivative instruments therefore require market intelligence and the services of highly skilled and well-informed brokers and reliable market data and pricing tools.

An example of more novel, OTC derivative instruments would be credit default swaps on leveraged loans ("Loan CDS"). These instruments allow investors to take or offset the risk of default on senior secured debt of non-investment grade companies. The advent of the Loan CDS market is an example of how the overall credit derivatives market is expanding to different areas of the credit spectrum. Another example of an innovative and complex OTC derivative instrument is carbon emissions options, which allow trading houses and other market participants to take or offset their exposure in the fast growing European market for carbon dioxide emissions allowances under the European Union Emissions Trading Scheme, or ETS. The ETS permits European-based companies that exceed individual carbon dioxide emissions targets to purchase emissions allowances from other companies that emit less than their emissions targets.

Our Market Opportunity

We believe the markets for financial instruments, especially the markets for derivative instruments, present us with the following opportunities to provide value to our clients:

Need for efficient execution in both liquid and less liquid markets. While the use of execution technology is becoming more common in the inter-dealer brokerage industry, only certain highly liquid and standardized financial instruments may be fully traded electronically in an efficient manner. More complex OTC products, such as derivatives, typically require telephonic brokerage to provide market intelligence to clients and to aid the execution process. We believe that inter-dealer brokers who provide a combination of telephonic and electronic brokerage services are better positioned to meet the particular needs of the markets in which they operate than competitors that cannot offer this combination of services.

Need for expertise in the development of new markets. In order to better support their clients' evolving investment and risk management strategies, our dealer clients create new products, including new derivative instruments. Dealers also modify their trading techniques in order to better support their clients' needs, such as by integrating the trading of derivative instruments with the trading of related underlying or correlated financial assets, indices or other investments. We believe the markets for these new products and trading techniques create an opportunity for those inter-dealer brokers who, through market knowledge and extensive client relationships, are able to identify these new product opportunities and to focus their brokerage services appropriately.

Need for market intelligence. Inter-dealer brokers that execute a higher volume of trades of a particular financial product and have access to more market participants are better positioned to provide valuable pricing information than brokers who less frequently serve that market. In less commoditized financial markets, including markets for novel and complex financial instruments, market leadership becomes more important because reliable pricing information is difficult to obtain. Market participants in these less liquid markets utilize the services of the leading inter-dealer brokers in order to gain access to the most bids and offers for a particular product. Similarly, inter-dealer brokers who have a leading market share can offer superior market data and analytics tools based on their access to the broadest selection of transaction and pricing information. For example, some market participants pursue trading strategies that combine credit default swaps with convertible bonds or equity derivatives of the securities of a single issuer or a basket of issuers. Inter-dealer brokers that have high volumes of bids and offers in the credit derivative markets and have access to technology which allows them to track such market data against activity in the bond and equity markets are well positioned to provide such market participants with analytical insight into correlated movements in related securities of a single issuer or related issuers or indexes.

Increasing industry consolidation. Historically, the inter-dealer brokerage industry consisted of a number of small and mid-sized private firms that used traditional telephonic brokerage methods to serve their clients and to compete against each other in various product categories. The industry has begun to consolidate in recent years, in part, due to the increasing importance of technology, including electronic execution, integrated trade processing and analytics and market data. Through acquisitions, larger inter-dealer brokers with access to capital have been better positioned to make the investments necessary to supply their clients with this technology. We believe that inter-dealer brokers with developed technology resources which enhance brokerage execution and pre-and post-trade analysis and processing are better able to consistently meet the execution needs of their clients and recruit and retain the most capable brokers. As a result of these trends, smaller inter-dealer brokers may find it harder to compete and several have been acquired by larger inter-dealer brokers with developed technological capabilities and better access to capital. We believe that the continued consolidation of the industry provides an opportunity for these larger inter-dealer brokers to strategically expand their businesses to better serve evolving client demands.

Our Competitive Strengths

We believe our principal competitive strengths are the following.

Strong Brand and Leading Position in Key Markets. We believe that over our twenty year history, we have successfully created value in our brand that our clients associate with high quality services in the markets on which we focus. Our leadership in these markets, such as the markets for certain credit and equity derivatives, foreign exchange options and commodity products, has been recognized by rankings in industry publications such as Risk magazine, FX Week and Energy Risk magazine. In an annual survey of dealers and brokers conducted by Risk magazine, we have been ranked as the leading broker in more categories of credit derivatives than any other inter-dealer broker over the last nine years. In its 2007 annual survey, Risk magazine also ranked us as a leading broker in credit default swaps and numerous currency and equity derivative markets. Energy Risk magazine also listed GFI as #1 Energy Broker in 2007. In addition, GFI's Fenics® FX option analysis product is a leading analytic tool in the foreign exchange markets, and our electronic trading platforms, Creditmatch® and GFI ForexMatch™, were also recognized for excellence by Financial News and FX Week, respectively.

We believe our leading positions in these markets provide us with greater access to market and pricing information, including a broad selection of proprietary market data that we are able to provide to our clients. In addition, we believe that our leading market share in key OTC markets, such as credit derivatives, and our ability to use technology to track such market data, enables us to provide market participants with better analytical insight into correlated movements in related securities of a single issuer, related issuers or indexes in the credit derivative, bond and equity markets. In addition, we believe that, because of these leading market positions and differentiated technological capabilities, we are better positioned, compared to many of our inter-dealer competitors, to serve the growing needs of clients who are pursuing sophisticated capital structure arbitrage strategies and correlation-based trading.

Ability to Identify and Develop High Growth, Less Commoditized Markets. We focus primarily on complex and innovative financial markets where liquidity is harder to achieve and, therefore, our services are more valuable to market participants. We believe these markets offer an opportunity for growth to inter-dealer brokers that move early to foster liquidity. We seek to anticipate the development and growth of markets for evolving, innovative financial products in which we believe we can garner a leading market position and enjoy higher commissions. For example, we entered the credit derivatives market in 1996 at a time when we believed the market showed promise but had only modest activity. According to the British Bankers' Association, the size of the global credit derivatives market was only $180 billion in 1997 (measured by notional amount outstanding). According to ISDA, notional amounts outstanding of credit derivatives have grown to $45.5 trillion at mid-year 2007, a compounded annual growth rate of over 79% for that nine and a half year period. We believe our familiarity with the needs of such rapidly growing markets and our experience with complex product structures allow us to better serve clients in high-growth, less liquid markets than many of our competitors.

Hybrid Brokerage Platforms. We seek to tailor our use of electronic trading and other technology to the transactional nuances of each specific market. While the more complex, less commoditized markets on which we focus often require significant amounts of personal and attentive service from our brokers, some of our other markets may benefit from the introduction of electronic brokerage platforms. Depending on the needs of the individual markets, we offer a hybrid approach to our clients that combines a range of electronic and telephonic trade execution services. For example, our clients may choose between utilizing our CreditMatch®, GFI ForexMatch™ or EnergyMatch® electronic trading platforms to trade a range of credit derivatives, foreign exchange options or emission allowances entirely on screen or executing the same transaction over the telephone through our brokers. We also believe we add value for clients who trade in complex financial markets by offering data and Fenics® analytics products for decision support. We seek to establish data communication and STP connections with our clients' settlement, risk management and compliance operations in order to better serve their needs and to strengthen our relationships with them. STP generally involves the use of technology to automate the processing of financial transactions, from execution to settlement, in order to minimize human error, reduce operational costs and time, and enhance transaction information and reporting. We believe our hybrid brokerage approach provides us with a competitive advantage over competitors who do not offer this technology.

On January 31, 2008, we acquired Trayport Limited ("Trayport"), a provider of electronic trading software and services to the commodities, fixed income, currencies and equities markets. Trayport's GlobalVision products have an industry leading position in supplying software to the European OTC energy markets including electric power, natural gas, coal, emissions and freight. Its technology accommodates electronic trading, information sharing and STP capabilities in commodity and financial instruments. The acquisition of Trayport, with its leading position in the European OTC energy markets and its trading and processing capabilities further enhances our hybrid brokerage model.

Quality Data and Analytics Products. We are one of the few inter-dealer brokers that offer a broad array of data and analytics products to participants in the complex financial markets in which we specialize. Our data products are derived from the trade data compiled from our brokerage services in our key markets. Our analytics products benefit from the reputation of the Fenics® brand for reliability, ease of use and independence from any large dealer. Our Fenics® tools are used, not only by our traditional brokerage clients, but also by their clients, such as national and regional financial institutions and large corporations worldwide. These products are designed to serve the needs of certain markets for reliable data and trusted analytics tools and are leveraged to enhance our brokerage revenues across market products. We believe that our ability to offer these products helps to support our leadership in our key markets.

Experienced Senior Management and Skilled Brokers and Technology Developers. We have a senior management team that is experienced in identifying and exploiting markets for evolving, innovative financial instruments. Our founder and chief executive officer, Michael Gooch, has over 20 years of experience in the derivatives markets and our president, Colin Heffron, has been with our Company since 1988 and, prior to becoming our president, was instrumental in developing a number of brokerage desks and leading the growth of our European operations. Reporting to them is an experienced management team that includes senior market specialists in each of our product categories. We also employed 880 skilled and specialized brokers at December 31, 2007, many of whom have extensive product and industry experience. Although the competition for brokers is intense, we have historically experienced relatively low broker turnover, and have been able to effectively hire new brokers and establish new brokerage desks in areas in which we seek to expand our operations. In addition, our in-house technology developers are experienced at developing electronic trading platforms and commercial quality software that are tailored to the needs of certain select markets in which we focus. Our brokers utilize this technology and market information to provide their clients with enhanced services. We believe that the combination of our experienced senior management, skilled brokers and technology developers gives us a competitive advantage in executing our business strategy. Diverse Product and Service Offerings. We offer our products and services in a diverse array of financial markets and geographic regions. Historically, the markets on which we focus have volume and revenue cycles that are relatively distinct from each other and have generally not been correlated to the direction of broad equity indices. Further, our decision support products, including our market data and analytical tools, give us an opportunity to leverage and expand our client base, providing revenue sources beyond our traditional brokerage clients. We believe our diverse product and service offerings provide us with a competitive advantage over many of our competitors that may have more limited product and service offerings and, therefore, may be more susceptible to downturns in a particular market or geographic region.


CONF CALL


Chris Giancarlo

Good morning. Welcome to the GFI Group’s third quarter of 2008 earnings conference call. We issued a press release yesterday providing the financial results for our fiscal quarter ended September 30, 2008 which is available on our website at www.gfigroup.com. We have also posted monthly revenue information for the quarter on our website under Supplementary Financial Information.

To begin this morning’s call, Michael Gooch, GFI’s Chairman and Chief Executive Officer will review our business performance in the third quarter, address some recent developments and consider expectations for the current period. Next Jim Peers, our Chief Financial Officer, will review in greater detail the financial results for the quarter. Following Jim, Mr. Gooch will conclude with a few remarks. Thereafter we will open up the call for your questions.

Our discussions during this conference call will include certain forward-looking statements. These statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied from such forward-looking statements. More detailed information about the risks, uncertainties and other factors that may cause actual results to differ from such forward-looking statements are discussed in our filings with the SEC including our most recent annual report on form 10K.

Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with U.S. generally accepted accounting principles. Reconciliations of non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures were included in the company’s earnings press release which was furnished on a current report on form 8K dated September 30, 2008. These reports are available on our web site under the Investor Relations section.

I will now turn the call over Michael Gooch, Chairman and Chief Executive Officer of GFI Group.

Michael Gooch

Good morning. Thank you for joining us today. We are conducting this morning’s earnings call against a very different landscape than the one we just did on August 1, the date of our last call. The change began most dramatically in September has been marked by extreme market volatility, adverse market conditions, unprecedented government intervention in the markets, consolidation in the dealer market and hedge funds forced to de-leverage or in some cases to close.

Our business was both challenged by these disruptive conditions and in other ways benefited from them. In turbulent markets the leading inter-brokers become more valuable to the dealer community providing access to ready and deep pools of trading liquidity. In assisting our business situation in September and based on our experience with past market disruptions we determined the best way to position ourselves for immediate challenges and future opportunities was to restructure our brokerage operations by closing under-performing desks and reducing headcount by 55, primarily in the front office resulting in a pre-tax charge of $14.5 million.

Several other non-recurring items are recorded in the third quarter which Jim Peers will discuss shortly. The charges resulted in a GAAP loss of $6.7 million or a loss of $0.06 per share for the third quarter. On a non-GAAP basis, however, net income and diluted EPS were $20 million or $0.17 per share.

Turning to my operations review, our total revenues in the third quarter 2008 were $243.1 million including the Lehman related charge. Our non-GAAP revenues were $252.7 million, a decrease of less than 1% from the same period last year. Trade port was a strong contributor to total revenues once again. Our brokerage revenues were 8% lower on a GAAP basis and 4% on a non-GAAP basis compared to the third quarter of 2007.

The third quarter 2007 marked the beginning of the sub-prime turmoil and led to record revenues for GFI at the time. The uneven flow of our revenues over the course of this year’s third quarter was described in our press release. It should be noted that the weakness in August revenues was also reported by several exchanges and we believe was not specific to GFI. That result was we had increased revenues from equity and commodity products that were offset by lower revenues from credit and financial products.

Nevertheless, in September our credit revenues were $33 million, up 41% over the prior September on a non-GAAP basis reflecting the high trading activity in credit in the eye of the storm. The largest change in the third quarter came from our credit product revenues which decreased 32% on a GAAP basis and 21% on a non-GAAP basis year-over-year compared with the third quarter of 2007.

In light of the strong performance in September and the extremely slow August was the major contributor to the declining credit revenues for the quarter versus the third quarter of 2007. This was partly due to the defection of a number of our New York credit brokers to a competitor in the second quarter, lower activity from counter-party de-leveraging and inter-trading in certain structure credit derivative markets in which we are a leading broker.

On the other hand, our cash fixed income business in Europe, especially our emerging market Euro bonds performed well in the quarter on a non-GAAP basis. Our bank and finance credit desk particularly benefited from the deep utilization of GFI’s credit match electronic trading platform.

Our revenues from equities products demonstrated the most significant growth in the third quarter and an increase of 18% year-over-year. That growth was driven in part by [un] volatility in global equity markets causing strong volumes in both cash equities and equity derivatives in Europe and North America. We believe that end-dealer brokers like GFI that can provide smart and effective execution to institutional market participants in the global equity markets become more valuable to their clients during periods of market turbulence.

Our commodity product revenues grew 5% year-over-year due mainly to the strength in Europe of wet freight, electric power, metals and emissions. Meanwhile we have rolled out our North American energy match electronic platform with contracts on ERCOT, the Texas Electricity grid at the end of July and the response, customer support and traction has exceeded expectations. In the next several weeks we will be launching similar electronic execution in additional energy markets. We expect these initiatives to be important contributors to our commodity product revenues going forward.

Our revenues from financial products were down 8% from the third quarter 2007 due to lower volume in various interest rate derivative products in the quarter. This was partly due to our disposal of our global U.S. dollar interest rate swaps business at the end of the first quarter 2008.

Looking at our performance in the third quarter 2008 by geography, brokerage revenues decreased 3% in Europe, 14% in North America and 5% in Asia Pacific compared with the third quarter 2007. On a non-GAAP basis, brokerage revenues were up 5% in Europe. Looking at our data, analytics and electric trading platform business I am pleased by the very strong performance of our new Trade Port subsidiary.

As you know Trade Port is the leading supplier of multi-asset class electronic trading and auto matching software for brokers, exchanges and traders worldwide. In just the past quarter Trade Port has signed long-term licensing deals with Bi-Cap Energy, Norway’s Renewable Energy Exchange (ECOMIX) and the Romanian Monetary Financial and Commodities Exchange (CYBEX). At the same time, the GFI Data and Analytics division has just signed a three year license for its Fenics FX derivatives pricing and risk management software to Bank of New York Mellon and extended its existing data agreement with Thomson Reuters to provide market participants with GFI credit derivatives FX options and energy market data for use in algorhythmic trading, risk managing, portfolio pricing and valuations. GFI and Thomson Reuters plan to extend this arrangement to equity derivatives and interest rate options early in 2009.

The new environment in financial derivatives is likely to make our data, analytics, valuation, risk management and trading platform services even more valuable on a go forward basis. The revenue from these products and services are likely to increase irrespective trading volumes in the underlying markets.

With my review of the third quarter complete, let me turn to current market conditions and GFI’s management plan. We are seeing across the board strength in equities, both cash and derivatives, and regional strength in commodities including energy, metals and shipping. We are also seeing particularly good activity in European cash bonds and CES.

Based on our revenues for October we currently expect the fourth quarter brokerage revenues will be approximately 4-7% below their level in the fourth quarter 2007 and total revenues will be down 1-4% compared to total revenues in the same quarter last year which also was record at the time.

Our restructuring initiative and the additional actions we took in the third quarter should assist us in achieving profits in an otherwise declining revenue environment. Longer term, we remain convinced the electronic trading platforms we have developed internally and will continue to develop in conjunction with Trade Port will help drive our future growth. We continue to see market automation as vitally important and plan to press forward with Credit Match in North America as well as our other electronic platforms in all regions.

We also support effective regulation to encourage greater market transparency in the OTC credit derivatives market in the U.S. and will continue our efforts to promote centralized OTC clearing of credit derivatives. The recently announced acquisition of the Clearing Corp. by ICE is actually an arrangement between ICE and the Clearing Corp. to form a New York Fed regulated bank and CDS clearing facility called ICE Trust. GFI is a shareholder in the Clearing Corp. and will be a preferred shareholder in the ICE Trust. GFI’s execution services will have open access to the ICE Trust clearinghouse.

We also believe other clearing mechanisms will also evolve as CDS in the European market where trading is far more automated and transparent than in the U.S. and GFI will certainly [inaudible] with these clearing solutions. As a leading independent, electronic alternative trading system provider for CDS, GFI welcome competition and transparency in the clearing of OTC credit derivatives.

If exchanges in listed credit futures develop, GFI intends to list those markets for execution alongside OTC credit derivatives on Credit Match, GFI’s ATS.

Our experience with energy markets post-Enron and the emergence of multiple clearing venues in both OTC and listed energy markets gives us some insight as to how credit markets will evolve in a cleared environment. A significant amount of energy trades that end up cleared with LCH, NYMEX and ICE clear across an IDB streaks. For example, we estimate that greater than ¾ of all OTC energy contracts cleared by NYMEX are generated by IDB’s such as GFI. We execute trade in both OTC and listed energy markets side by side and have a broad customer base for these energy markets.

I expect that the cleared credit markets will evolve in a similar fashion. Listed futures will enable even greater participation in the markets than currently exists. Trading opportunities and basis spread trading will evolve. Credit markets both listed and OTC will grow hand in hand and the government managed transparency will benefit the IDB’s just as it has in energy and equity markets. It may take some time but once the current de-leveraging environment completes its cycle I expect trading activity to once again grow across our markets and GFI’s investment in technology will position us to benefit tremendously.

Before I hand it over to Jim Peers I want to note briefly that we also announced yesterday the stepping down of Jurgen Bruer, a senior executive with the firm. I want to publicly thank Jurgen for his 10 years of fine service to GFI and wish him all the best.

I would now like to turn it all over to Jim Peers, our CFO, before making my concluding remarks.

James Peers

Thank you. Good morning everyone. Revenues decreased in the third quarter of 2008 compared to third quarter of 2007 by $11.6 million to $243.1 million compared to $254.7 million for the prior year. A $9.6 million charge on the Lehman unsettled trades before related reduction and compensation expenses of $3.5 million is included in revenues.

Non-GAAP revenues for the third quarter are $252.7 million compared to $254.7 million in the same period last year. Our Q3 saw strong organic growth from equities along with revenues of $8.2 million from Trade Port.

On a year-to-date basis, revenues increased by $96.1 million or 13.3% compared to the same period last year.

On a GAAP basis, the third quarter net income was a loss of $6.7 million compared to $25.9 million income in the third quarter of 2007. After backing out the non-GAAP items, which I will discuss in more detail later, third quarter net income was $20 million compared to $27.6 million in the third quarter of 2007.

On a year-to-date basis net income grew by 13% to $84 million compared to $74.3 million for the same period in 2007 on a non-GAAP basis.

Diluted earnings per share for the third quarter of 2008 was a loss of $0.06 compared to $0.22 in the third quarter of 2007. On non-GAAP basis diluted earnings per share for the third quarter of 2008 was $0.17 versus $0.23 for the same quarter last year.

For the first three quarters of 2008 diluted earnings per share on a non-GAAP basis grew 11.1% to $0.70 compared to $0.63 for the same period 2007.

Non-brokerage revenues decreased by approximately $9 million or 3.6% in the third quarter of 2008 compared to the third quarter last year. Credit was down 21.4%, financials were down 7.6%, commodities were up 4.7% and equities were up 19.1%. Brokerage revenues increased by 80.5% or 11.5% on a year-to-date basis compared to last year. Credit was up 4.5%, financials are up 2.7%, commodities are up 10.9% and equities are up slightly a [1/3] %.

Brokerage sign on bonuses paid in the third quarter of this year were $16.3 million compared to $9.1 million in the third quarter of last year. Brokerage sign on bonus expense were $14.6 million in Q3 2008 compared to $6.2 million in the third quarter of last year.

Our brokerage personnel headcount at the end of the third quarter stands at 1,082, up 61 from the third quarter of 2007. This does not reflect the 50+ brokers leaving as part of our restructuring plan. Change in broker headcount from the end of 2007 is an increase of 45.

Our year-to-date broker productivity has increased 2.5% to $726,000 compared to $708,000 last year.

Pre-tax margin for the third quarter 2008 was negative 4.4% compared to 16.7% for the same quarter last year on a GAAP basis. On a non-GAAP basis pre-tax margin for the third quarter 2008 was 12.4% versus 17.8% for the same quarter last year.

On a year-to-date basis, pre-tax margin was 10.2% compared to 16% for 2007 on a GAAP basis and on a non-GAAP basis pre-tax margin for year-to-date was 16% versus 17% for the same period last year.

In summary, our key performance drivers on a non-GAAP basis are as follows: Revenues for the third quarter are down less than 1% from the third quarter 2007. Trade Port revenues for the third quarter were $8.2 million and are included in the software licensing revenue line. Our comp costs are at 62.9% for the third quarter this year compared to 62.4% for Q3 2007. On a year-to-date basis the comp costs are 61.6% compared to 62.6% for the same period last year. Non-compensation expenses in the third quarter as a percentage of revenues were 24.6% compared to 19.8% for the same period last year. Our non-comp ratio on a year-to-date basis was 22.4% compared to 20.3% for the same period last year. The increase was mainly attributed to increased legal costs, T&E expenses and clearing fees.

GFI’s effective tax rate is currently 36.5% compared to 38% for the full year 2007.

I would now like to highlight some other areas that will be of interest to you. The number of diluted shares for the quarter ended September were 119 million shares on a non-GAAP basis. The non-GAAP adjustments were made in the third quarter. Our move to New York to 55 Water Street is complete. Accordingly the company has excluded $850,000 in duplicate rent and charged $7.8 million in costs related to the move and the abandonment of its previous premise at 100 Wall Street.

Comp costs include $21 million related to desk closing and other restructuring costs. The net charge related to Lehman unsettled trades was $6.1 million before tax and we are carrying the unsettled bonds at $3.1 million on our balance sheet. Our accounts receivable written off were approximately $600,000. We have not reflected any future recoveries in these charges. We have also written off an investment in a small unconsolidated affiliate for approximately [inaudible]. The discontinued merger talks with Tullet Prebon would also expense $1.8 million and professional fees related to the talks.

That concludes my remarks. Now I will turn the presentation back to Michael for some closing comments.

Michael Gooch

In conclusion, despite the momentous market events of the third quarter and the substantial challenges we faced in the U.S. credit markets our balanced and diverse revenue stream across products and regions served us well as has our solid financial position. We have further strengthened our company through our restructuring initiative which will help us move forward in our continued effort to improve operating leverage. We also continue to execute our hybrid brokerage strategy of melding both man and machine for its benefits to our markets and our growth.

We believe GFI is now in a better position to face current challenges as well as seize future opportunities including those presented by any further market structure changes in the global credit markets. Our board remains committed to improving shareholder value. We are pleased to have been able to declare a cash dividend of $0.05 per share for the quarter. Thank you for your time and attention today.

We are now ready to take your questions.



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