Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2010**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIOD FROM                TO                 **

 

**Commission File No: 000-51103**

 

**GFI GROUP INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **80-0006224**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
| ** **                               | ** ** | ** **          |
| **55 Water Street, New York, NY**        | ** ** | **10041**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

Registrant’stelephone number, including area code: **(212) 968-4100**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.    YES x     NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   YES o     NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). YES o  NO x

 

Thenumber of shares of registrant’s common stock outstanding on October 29,2010 was 121,455,286.

 

 

 

----

Table ofContents

 

**Table of Contents**

 
| **Part I—Financial  Information** |
|---------------------------------------------|
|                                        |   |   |
| Item 1.                                     | Financial  Statements |   |
|                                        | Condensed  Consolidated Statements of Financial Condition as of September 30, 2010  (unaudited) and December 31, 2009 |   |
|                                        | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2010 (unaudited) and September 30, 2009 (unaudited) |   |
|                                        | Condensed  Consolidated Statements of Comprehensive Income for the three and nine months  ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited) |   |
|                                        | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2010 (unaudited) and September 30, 2009 (unaudited) |   |
|                                        | Notes to Condensed  Consolidated Financial Statements (unaudited) |   |
| Item 2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                     | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                                     | Controls and  Procedures |   |
|                                        |   |   |
| **Part II—Other  Information**    |
|                                        |   |   |
| Item 1.                                     | Legal Proceedings |   |
| Item 1A.                                    | Risk Factors |   |
| Item 2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
| Item 6.                                     | Exhibits |   |

 

2

----

Table ofContents

 

**AvailableInformation**

 

OurInternet website address is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the Securities and Exchange Commission (the “SEC”):our annual reports on Form 10-K; our proxy statements for our annual andspecial stockholder meetings; our quarterly reports on Form 10-Q; ourcurrent reports on Form 8-K; Forms 3, 4 and 5 filed on behalf ofdirectors and executive officers; and amendments to those reports filed orfurnished pursuant to Section 13(a) of the Securities Exchange Act of1934, as amended (the ‘‘Exchange Act’’).

 

Informationrelating to the corporate governance of the Company is also available on ourwebsite, including information concerning our directors, board committees,including committee charters, our code of business conduct and ethics for allemployees and for senior financial officers and our compliance procedures foraccounting and auditing matters.  Inaddition, the Investor Relations page of our website includes certainsupplemental financial information that we make available from time to time.

 

OurInternet website and the information contained therein or connected thereto arenot incorporated into this Quarterly Report on Form 10-Q.

 

3

----

Table ofContents

 

**PART I—FINANCIALINFORMATION**

 

**ITEM 1.****                   ****FINANCIALSTATEMENTS**

 

**GFI GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF FINANCIAL CONDITION (UNAUDITED)**

**(In thousands, except share and per share amounts)**

 
| ** **                                                                                                                                                                          | ** ** | **September 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                          |       |                               |       |                              |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                                  | 318,026    |                              | $          | 342,379 |   |
| Cash segregated under federal and other  regulations                                                                                                                                |       | 12,131                             |       | —                            |       |
| Deposits with clearing organizations                                                                                                                                                |       | 38,908                             |       | 11,065                            |       |
| Commissions receivable, net of allowance for  doubtful accounts of $2,077 and $4,099 at September 30, 2010 and  December 31, 2009, respectively                           |       | 112,068                            |       | 87,354                            |       |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                       |       | 401,792                            |       | 87,737                            |       |
| Property, equipment and leasehold improvements,  net of depreciation and amortization of $134,483 and $108,902 at  September 30, 2010 and December 31, 2009, respectively |       | 64,243                             |       | 65,334                            |       |
| Goodwill                                                                                                                                                                            |       | 261,606                            |       | 210,758                           |       |
| Intangible assets, net                                                                                                                                                              |       | 55,471                             |       | 40,123                            |       |
| Other assets                                                                                                                                                                        |       | 157,858                            |       | 107,344                           |       |
| TOTAL ASSETS                                                                                                                                                                        |       | $                                  | 1,422,103  |                              | $          | 952,094 |   |
|                                                                                                                                                                                |       |                               |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                      |       |                               |       |                              |       |
| LIABILITIES                                                                                                                                                                         |       |                               |       |                              |       |
| Accrued compensation                                                                                                                                                                |       | $                                  | 91,807     |                              | $          | 106,286 |   |
| Accounts payable and accrued expenses                                                                                                                                               |       | 58,591                             |       | 48,845                            |       |
| Payables to brokers, dealers and clearing  organizations                                                                                                                            |       | 256,821                            |       | 68,131                            |       |
| Payables to clearing services customers                                                                                                                                             |       | 165,207                            |       | —                            |       |
| Short-term borrowings, net                                                                                                                                                          |       | 129,649                            |       | 114,069                           |       |
| Long-term obligations, net                                                                                                                                                          |       | 59,712                             |       | 59,619                            |       |
| Other liabilities                                                                                                                                                                   |       | 137,701                            |       | 71,042                            |       |
| Total Liabilities                                                                                                                                                                   |       | $                                  | 899,488    |                              | $          | 467,992 |   |
| Commitments and contingencies                                                                                                                                                       |       |                               |       |                              |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                           |       |                               |       |                              |       |
| Preferred stock, $0.01 par value; 5,000,000 shares  authorized, none outstanding at September 30, 2010 and December 31,  2009                                             |       | —                             |       | —                            |       |
| Common stock, $0.01 par value; 400,000,000 shares  authorized; 126,264,485 and 120,860,100 shares issued at September 30,  2010 and December 31, 2009, respectively       |       | 1,263                              |       | 1,209                             |       |
| Additional paid in capital                                                                                                                                                          |       | 339,189                            |       | 296,430                           |       |
| Retained earnings                                                                                                                                                                   |       | 215,401                            |       | 212,059                           |       |
| Treasury stock, 4,461,767 and 2,433,527 shares of  common stock at cost, at September 30, 2010 and December 31, 2009,  respectively                                       |       | (34,531                            | )          | (22,901                           | )          |
| Accumulated other comprehensive income (loss)                                                                                                                                       |       | 229                                |       | (2,695                            | )          |
| Total Stockholders’ Equity                                                                                                                                                     |       | 521,551                            |       | 484,102                           |       |
| Non-controlling interests                                                                                                                                                           |       | 1,064                              |       | —                            |       |
| Total Equity                                                                                                                                                                        |       | 522,615                            |       | 484,102                           |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                     |       | $                                  | 1,422,103  |                              | $          | 952,094 |   |

 

See notes to condensed consolidated financial statements

 

4

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS(UNAUDITED)**

**(In thousands, except share andper share amounts)**

 
| ** **                                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| REVENUES:                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Brokerage revenues:                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Agency commissions                                                    |       | $                                                        | 125,011    |                                                    | $          | 119,396 |   | $ | 406,465 |   | $ | 366,283 |   |
| Principal transactions                                                |       | 49,677                                                   |       | 64,989                                                  |       | 166,499 |   | 216,770 |   |
| Total brokerage revenues                                              |       | 174,688                                                  |       | 184,385                                                 |       | 572,964 |   | 583,053 |   |
| Clearing services revenues                                            |       | 21,553                                                   |       | —                                                  |       | 21,553 |   | — |   |
| Equity in earnings of unconsolidated brokerage  businesses            |       | 1,632                                                    |       | —                                                  |       | 1,632 |   | — |   |
| Software, analytics and market data                                   |       | 14,905                                                   |       | 13,627                                                  |       | 44,324 |   | 39,698 |   |
| Interest income                                                       |       | 914                                                      |       | 172                                                     |       | 1,231 |   | 895 |   |
| Other (loss) income                                                   |       | (3,945                                                   | )          | (5,938                                                  | )          | (1,594 | ) | 9,501 |   |
| Total revenues                                                        |       | 209,747                                                  |       | 192,246                                                 |       | 640,110 |   | 633,147 |   |
| EXPENSES:                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation and employee benefits                                    |       | 133,345                                                  |       | 135,139                                                 |       | 419,117 |   | 427,262 |   |
| Execution, clearing and settlement fees                               |       | 26,616                                                   |       | 7,153                                                   |       | 41,594 |   | 23,366 |   |
| Communications and market data                                        |       | 13,788                                                   |       | 11,661                                                  |       | 36,369 |   | 34,399 |   |
| Travel and promotion                                                  |       | 8,665                                                    |       | 8,280                                                   |       | 26,899 |   | 24,310 |   |
| Rent and occupancy (1)                                                |       | 5,867                                                    |       | 5,470                                                   |       | 16,553 |   | 14,982 |   |
| Depreciation and amortization                                         |       | 8,851                                                    |       | 7,680                                                   |       | 24,879 |   | 23,534 |   |
| Professional fees                                                     |       | 7,055                                                    |       | 4,508                                                   |       | 19,899 |   | 13,728 |   |
| Interest                                                              |       | 3,204                                                    |       | 2,769                                                   |       | 8,509 |   | 7,895 |   |
| Other expenses (1)                                                    |       | 5,741                                                    |       | 5,170                                                   |       | 15,183 |   | 14,880 |   |
| Total expenses                                                        |       | 213,132                                                  |       | 187,830                                                 |       | 609,002 |   | 584,356 |   |
| (LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION FOR  INCOME TAXES       |       | (3,385                                                   | )          | 4,416                                                   |       | 31,108 |   | 48,791 |   |
| (BENEFIT FROM) PROVISION FOR INCOME TAXES                             |       | (1,050                                                   | )          | 1,633                                                   |       | 9,643 |   | 18,052 |   |
| NET (LOSS) INCOME BEFORE ATTRIBUTION TO  NON-CONTROLLING SHAREHOLDERS |       | (2,335                                                   | )          | 2,783                                                   |       | 21,465 |   | 30,739 |   |
| Less: Net income attributable to non-controlling  interests           |       | 151                                                      |       | —                                                  |       | 151 |   | — |   |
| GFI’s NET (LOSS) INCOME                                          |       | $                                                        | (2,486     | )                                                       | $          | 2,783 |   | $ | 21,314 |   | $ | 30,739 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic (loss) earnings per share available to  common shareholders     |       | $                                                        | (0.02      | )                                                       | $          | 0.02 |   | $ | 0.18 |   | $ | 0.26 |   |
| Diluted (loss) earnings per share available to  common shareholders   |       | $                                                        | (0.02      | )                                                       | $          | 0.02 |   | $ | 0.17 |   | $ | 0.25 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                 |       | 121,943,158                                              |       | 118,062,749                                             |       | 120,059,960 |   | 118,117,384 |   |
| Diluted                                                               |       | 121,943,158                                              |       | 122,552,882                                             |       | 124,665,379 |   | 121,382,317 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Dividends declared per share of common stock                          |       | $                                                        | 0.05       |                                                    | $          | 0.05 |   | $ | 0.15 |   | $ | 0.15 |   |

 

----

(1)As adjusted — see Note 2

 

See notes to condensed consolidated financial statements

 

5

----

Table ofContents

 

**GFI GROUP INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**

**(In thousands)**

 
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| NET (LOSS) INCOME BEFORE ATTRIBUTION TO  NON-CONTROLLING SHAREHOLDERS |       | $                                                    | (2,335     | )                                                   | $          | 2,783 |   | $ | 21,465 |   | $ | 30,739 |   |
| OTHER COMPREHENSIVE INCOME (LOSS):                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Foreign currency translation adjustment, net of  tax                  |       | 3,872                                                |       | 222                                                 |       | 3,051 |   | 1,345 |   |
| Unrealized gain (loss) on available for sale  securities, net of tax  |       | 153                                                  |       | 388                                                 |       | (127 | ) | 533 |   |
| COMPREHENSIVE INCOME                                                  |       | $                                                    | 1,690      |                                                | $          | 3,393 |   | $ | 24,389 |   | $ | 32,617 |   |
| Net income attributable to non-controlling  interests                 |       | 151                                                  |       | —                                              |       | 151 |   | — |   |
| GFI’S COMPREHENSIVE INCOME                                       |       | $                                                    | 1,539      |                                                | $          | 3,393 |   | $ | 24,238 |   | $ | 32,617 |   |

 

See notes to condensed consolidated financial statements

 

6

----

Table of Contents

 

**GFIGROUP INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Net income before attribution to non-controlling  shareholders                     |       | $                                                       | 21,465     |   | $ | 30,739 |   |
| Less net income attributable to non-controlling  interests                         |       | 151                                                     |       | — |   |
| GFI’s net income                                                              |       | 21,314                                                  |       | 30,739 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                      |       | 24,879                                                  |       | 23,534 |   |
| Amortization of loan fees                                                          |       | 701                                                     |       | 529 |   |
| Provision for doubtful accounts                                                    |       | (276                                                    | )          | 2,992 |   |
| Deferred compensation                                                              |       | 20,189                                                  |       | 19,564 |   |
| Provision for deferred taxes                                                       |       | (9,886                                                  | )          | 20,279 |   |
| Gains on foreign exchange derivative contracts,  net                               |       | (2,659                                                  | )          | (1,221 | ) |
| Gains from equity method investments, net                                          |       | (181                                                    | )          | (1,131 | ) |
| Tax expense related to share-based compensation                                    |       | 1,679                                                   |       | 1,150 |   |
| Other non-cash charges, net                                                        |       | 116                                                     |       | (580 | ) |
| (Increase) decrease in operating assets:                                           |       |                                                    |       |   |   |
| Cash segregated under federal and other  regulations                               |       | (4,045                                                  | )          | — |   |
| Deposits with clearing organizations                                               |       | (11,110                                                 | )          | (2,491 | ) |
| Commissions receivable                                                             |       | (5,402                                                  | )          | 8,195 |   |
| Receivables from brokers, dealers and clearing  organizations                      |       | (219,206                                                | )          | (253,543 | ) |
| Other assets                                                                       |       | (20,410                                                 | )          | 9,698 |   |
| (Decrease) increase in operating liabilities:                                      |       |                                                    |       |   |   |
| Accrued compensation                                                               |       | (14,659                                                 | )          | (40,955 | ) |
| Accounts payable and accrued expenses                                              |       | (15,000                                                 | )          | (6,310 | ) |
| Payables to brokers, dealers and clearing  organizations                           |       | 188,690                                                 |       | 251,864 |   |
| Payables to clearing services customers                                            |       | 48,584                                                  |       | — |   |
| Other liabilities                                                                  |       | 31,304                                                  |       | (7,094 | ) |
| Cash provided by operating activities                                              |       | 34,622                                                  |       | 55,219 |   |
|                                                                               |       |                                                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Business acquisitions, net of cash acquired                                        |       | (12,508                                                 | )          | — |   |
| Issuance of notes receivable                                                       |       | (800                                                    | )          | — |   |
| Proceeds from notes receivable                                                     |       | 1,000                                                   |       | — |   |
| Proceeds from other investments                                                    |       | 789                                                     |       | 1,982 |   |
| Purchases of other investments                                                     |       | (19,985                                                 | )          | (583 | ) |
| Purchase of property, equipment and leasehold  improvements                        |       | (11,790                                                 | )          | (10,263 | ) |
| Proceeds (payments) on foreign exchange derivative  contracts, net                 |       | 5,170                                                   |       | (13,632 | ) |
| Cash used in investing activities                                                  |       | (38,124                                                 | )          | (22,496 | ) |
|                                                                               |       |                                                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Proceeds from short-term borrowings                                                |       | 40,000                                                  |       | — |   |
| Repayment of short-term borrowings                                                 |       | (25,000                                                 | )          | (35,000 | ) |
| Repurchases of common stock                                                        |       | (11,630                                                 | )          | (2,970 | ) |
| Cash dividends paid                                                                |       | (17,972                                                 | )          | (17,673 | ) |
| Payment of loan fees                                                               |       | (449                                                    | )          | (796 | ) |
| Proceeds from exercise of stock options                                            |       | 511                                                     |       | 58 |   |
| Cash paid for taxes on vested restricted stock  units                              |       | (6,317                                                  | )          | (3,088 | ) |
| Tax expense related to share-based compensation                                    |       | (1,679                                                  | )          | (1,150 | ) |
| Cash used in financing activities                                                  |       | (22,536                                                 | )          | (60,619 | ) |
| Effects of exchange rate changes on cash and cash  equivalents                     |       | 1,685                                                   |       | 1,816 |   |
|                                                                               |       |                                                    |       |   |   |
| DECREASE IN CASH AND CASH EQUIVALENTS                                              |       | (24,353                                                 | )          | (26,080 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 342,379                                                 |       | 342,375 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                                       | 318,026    |   | $ | 316,295 |   |
|                                                                               |       |                                                    |       |   |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                                    |       |   |   |
| Interest paid                                                                      |       | $                                                       | 9,260      |   | $ | 8,338 |   |
| Income taxes paid, net of refunds                                                  |       | $                                                       | 13,546     |   | $ | 18,906 |   |

 

Non-Cash Investing and Financing Activities:

Duringthe nine months ended September 30, 2010, in connection with the businesscombinations described in Note 4, the Company recorded $27,314 within Otherliabilities and recorded the following items within Stockholders’ Equity: $20,088related to the issuance of 3,492,095 shares of the Company’s common stock and$7,620 related to 1,339,158 of contingently issuable shares of the Company’scommon stock.  Additionally, during the nine months ended September 30,2010 the Company recorded $2,286 with respect to the issuance of 414,938 sharesof the Company’s common stock in connection with the investment described inNote 5.

 

See notes to condensed consolidated financial statements

 

7

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

**(In thousands except share and per share amounts)**

 

**1.     ORGANIZATIONAND BUSINESS**

 

Thecondensed consolidated financial statements include the accounts of GFIGroup Inc. and its subsidiaries (collectively, “GFI” or the “Company”).The Company, through its subsidiaries, provides brokerage services, clearingservices, trading system software and market data and analytical softwareproducts to institutional clients in markets for a range of fixed income,financial, equity and commodity instruments. The Company complements itsbrokerage capabilities with value-added services, such as market data andsoftware systems and products for decision support, which it licenses primarilyto companies in the financial services industry. The Company’s principaloperating subsidiaries include: GFI Securities LLC, GFI Brokers LLC,GFI Group LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK)Securities LLC, GFI (HK) Brokers Ltd., GFI Group Pte. Ltd., GFIKorea Money Brokerage Limited, Amerex Brokers LLC, Fenics Limited (“Fenics”),Trayport Limited (“Trayport”), and The Kyte Group Limited and Kyte CapitalManagement Limited (collectively “Kyte”). As of September 30, 2010, JerseyPartners, Inc. (“JPI”) owned approximately 42% of the Company’s outstanding shares of common stock.The Company’s chief executive officer, Michael Gooch, is the controllingshareholder of JPI.

 

**2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation****—*The Company’scondensed consolidated financial statements (unaudited) are prepared inaccordance with accounting principles generally accepted in the United Statesof America, which require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, revenues and expenses,and the disclosure of contingencies in the consolidated financial statements.Certain estimates and assumptions relate to the accounting for acquiredgoodwill and intangible assets, fair value measurements, compensation accruals,tax liabilities and the potential outcome of litigation matters.  Management believes that the estimates utilizedin the preparation of the consolidated financial statements are reasonable andprudent. Actual results could differ materially from these estimates.

 

All intercompany transactions and balances have beeneliminated.

 

Certainamounts totaling $538 and $1,473 related to insurance expense were previouslypresented in the “Rent and occupancy” line item in the Condensed ConsolidatedStatements of Operations for the three and nine months ended September 30,2009, respectively, but should have been presented in “Other expenses” in theCondensed Consolidated Statements of Operations for these periods. Theseamounts have been properly reclassified to “Other expenses” for this period.

 

Thecondensed consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2009 (the “2009 Form 10-K”). The condensed consolidatedfinancial statements reflect all adjustments that are, in the opinion ofmanagement, necessary for the fair statement of the results for the interimperiod. The results of operations for interim periods are not necessarilyindicative of results for the entire year.

 

***Brokerage Transactions—***The Companyprovides brokerage services to its clients by executing transactions on eitheran agency or principal transaction basis.

 

*Agency Commissions—*In agencytransactions, the Company charges commissions for executing transactionsbetween buyers and sellers. Agency commissions revenues and related expensesare recognized on a trade date basis.

 

*Principal Transactions—*Principaltransactions revenue is primarily derived from matched principal and principaltrading transactions. Principal transactions revenues and related expenses arerecognized on a trade date basis. The Company earns revenue from principaltransactions on the spread between the buy and sell price of the security thatis brokered. In matched principal transactions, the Company simultaneously agreesto buy instruments from one customer and sell them to another customer.

 

8

----

Table of Contents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

In the normal course of its matched principal and principal tradingbusinesses, the Company holds securities positions overnight. These positionsare marked to market on a daily basis.

 

***Clearing Services******Revenues***—The Company charges fees to customersfor clearing services provided on cash and derivative transactions. Clearingservices revenues are recorded on a trade date basis as customer transactionsoccur and are presented net of any customer negotiated rebates.

 

***Software, Analytics and Market DataRevenue Recognition***—Software revenue consists primarily of fees charged for Trayportelectronic trading software, which are typically billed on a subscription basisand recognized ratably over the term of the subscription period, which rangesfrom one to five years. Analytics revenue consists primarily of softwarelicense fees for Fenics pricing tools which are typically billed on asubscription basis and recognized ratably over the term of the subscriptionperiod, which is generally three years. Market data revenue primarily consistsof subscription fees and fees from customized one-time sales. Market datasubscription fees are recognized on a straight-line basis over the term of thesubscription period, which ranges from one to two years. Market data revenuefrom customized one-time sales is recognized upon delivery of the data.

 

The Company markets itssoftware, analytics and market data products through its direct sales forceand, in some cases, indirectly through resellers. In general, the Company’slicense agreements for such products do not provide for a right of return.

 

***Cash segregated under federal andother regulations***—The Company may hold cash that belongs to our customers as support fortheir trading activities. As a result, certain of our subsidiaries are requiredto segregate or set aside such cash to satisfy regulations designed to protectcustomer assets.

 

***Goodwill and Intangible Assets***—Goodwillrepresents the excess of the purchase price allocation over the fair value oftangible and identifiable intangible net assets acquired. In accordance withASC 350, *Intangibles Goodwill and Other*(formerly Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Intangible Assets*), goodwilland intangible assets with indefinite lives are no longer amortized, butinstead are tested for impairment annually or more frequently if circumstancesindicate impairment may have occurred. In the event the Company determines thatthe value of goodwill has become impaired, it will incur a charge for theamount of impairment during the fiscal quarter in which such determination ismade. The Company has selected January 1st as the date to perform theannual impairment test. Intangible assets with definite lives are amortized ona straight-line basis over their estimated useful lives.

 

***Fair Value of Financial Instruments****—* In accordance with ASC 820-10, *Fair Value Measurements and Disclosures* (“ASC820-10”) (formerly SFAS No.157, *Fair ValueMeasurements*), the Company estimates fair values of financialinstruments using relevant market information and other assumptions.  Fair value estimates involve uncertaintiesand matters of significant judgment in interpreting market data andaccordingly, changes in assumptions or in market conditions could adverselyaffect the estimates.  The Company alsodiscloses the fair value of its financial instruments in accordance with thefair value hierarchy as set forth by ASC 820-10.

 

In addition, the Company usesforeign exchange derivative contracts to reduce the effects of fluctuations incertain receivables and payables denominated in foreign currencies. Derivativecontracts that are not designated as foreign currency cash flow hedges arerecorded at fair value and all realized and unrealized gains and losses areincluded in Other (loss) income in the Condensed Consolidated Statements ofOperations.

 

***Payables toclearing services customers****—*Payables to clearing services customers include amounts due on cash andmargin transactions, including futures contracts transacted on behalf ofcustomers.

 

***Income Taxes—*** In accordancewith ASC 740, *Income Taxes*(formerly SFAS No. 109, *Accounting for IncomeTaxes*), the Company provides for income taxes using the asset andliability method under which deferred income taxes are recognized for theestimated future tax effects attributable to temporary differences andcarry-forwards that result from events that have been recognized either in thefinancial statements or the income tax returns, but not both. The measurementof current and deferred income tax liabilities and assets is based on provisionsof enacted tax laws. Valuation allowances are 

 

9

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

recognizedif, based on the weight of available evidence, it is more likely than not thatsome portion of the deferred tax assets will not be realized. EffectiveJanuary 1, 2007, the Company adopted ASC 740-10 (formerly FinancialAccounting Standards Board Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes, an interpretation of SFAS No. 109*).It is the Company’s policy to provide for uncertain tax positions and therelated interest and penalties based upon management’s assessment of whether atax benefit is more likely than not to be sustained upon examination by taxauthorities.

 

***Foreign Currency TranslationAdjustments and Transactions****—*Assets andliabilities of foreign subsidiaries having non-U.S. dollar functionalcurrencies are translated at the period end rates of  exchange, and revenue and expenses aretranslated at the average rates of exchange for the period. Gains or lossesresulting from translating foreign currency financial statements are reflectedin foreign currency translation adjustments and are reported as a separatecomponent of comprehensive income and included in accumulated othercomprehensive income (loss) in stockholders’ equity. Gains or losses resultingfrom foreign currency transactions are included in Other (loss) income in theCondensed Consolidated Statements of Operations.  Net (gains) losses resulting fromremeasurement of foreign currency transactions and balances were $(3,392) and$(2,307), respectively, for the three months ended September 30, 2010 and2009 and $5,944 and $(5,220), respectively, for the nine months ended September 30,2010 and 2009 and are included in Other (loss) income.

 

***Share-Based Compensation****—*The Company’sshare-based compensation consists of stock options and restricted stock units (“RSUs”).The Company accounts for stock-based compensation in accordance with ASC 718, *Compensation-Stock Compensation* (“ASC 718”) (formerly SFASNo. 123(R), *Share-Based Payment*).This accounting guidance requires measurement of compensation cost forequity-based awards at fair value and recognition of compensation cost over theservice period, net of estimated forfeitures. In recent periods, the onlyshare-based compensation issued by the Company has been RSUs. The Companydetermines the fair value of RSUs based on the number of units granted and thegrant date fair value of the Company’s common stock, measured as of the closingprice on the date of grant.

 

***Other (Loss) Income—***Included within Other (loss) income on theCompany’s Condensed Consolidated Statements of Operations are revaluations offoreign currency derivative contracts, realized and unrealized transactiongains and losses on certain foreign currency transactions and balances andgains and losses on certain investments.

 

***Recent Accounting Pronouncements***

 

In October 2009, the FASB issued Accounting Standards UpdateNo. 2009-13 (“ASU 2009-13”) *RevenueRecognition (Topic 605) Multiple-Deliverable Revenue Arrangements*.ASU 2009-13 establishes the accounting and reporting guidance for arrangementswith multiple-revenue generating activities. ASU 2009-13 addresses how toseparate deliverables and how to measure and allocate arrangement considerationto one or more units of accounting and provides a selling price hierarchy fordetermining the selling price of a deliverable. ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. Early adoption ispermitted but must be retrospectively applied to the beginning of the fiscalyear of adoption. The Company does not expect the adoption of ASU 2009-13 tohave a material impact on its consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards UpdateNo. 2009-14 (“ASU 2009-14”) *Software(Topic 985) Certain Revenue Arrangements That Include Software Elements*.ASU 2009-14 provides guidance on how to allocate arrangement consideration todeliverables in an arrangement that includes both tangible products andsoftware. ASU 2009-14 also provides additional guidance on how to determinewhich software, if any, relating to the tangible product would be excluded fromsoftware revenue recognition. ASU 2009-14 is effective for fiscal yearsbeginning on or after June 15, 2010. Early adoption is permitted but mustbe retrospectively applied to the beginning of the fiscal year of adoption. TheCompany does not expect the adoption of ASU 2009-14 to have a material impacton its consolidated financial statements.

 

In January 2010, the FASB issued Accounting Standards UpdateNo. 2010-06 (“ASU 2010-06”) *Fair ValueMeasurements and Disclosures (Topic 820) Improving Disclosures about Fair ValueMeasurements.* ASU 2010-06 provides amendments to Subtopic 820-10that require new disclosures, including the amounts of and reasons fortransfers in and out of Levels 1 and 2 fair value measurements andreporting activity in the reconciliation of Level 3 fair valuemeasurements on a gross basis. ASU 2010-06 provides amendments that clarifyexisting disclosures regarding the level of disaggregation for providing fairvalue measurement disclosures for each class of assets and liabilities. Inaddition, it clarifies existing disclosures about inputs and valuationtechniques used to measure fair value for both recurring and nonrecurring fairvalue   

 

10

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

measurementsthat are required for either Level 2 or Level 3. ASU 2010-06 waseffective for interim and annual reporting periods ending afterDecember 15, 2009 except for the disclosures about the roll forward ofactivity in Level 3 fair value measurements, which are effective forfiscal years beginning after December 31, 2010 and for interim periodswithin those fiscal years. The adoption of ASU 2010-06 did not have a materialimpact on the Company’s consolidated financial statements and the adoption ofASU 2010-06 with respect to disclosures of the roll forward of activity inLevel 3 fair value measurements is not expected to have a material impacton the Company’s consolidated financial statements.

 

**3.    RECEIVABLES FROM ANDPAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS**

 

Amountsreceivable from and payable to brokers, dealers and clearing organizationsconsisted of the following:

 
| ** **                                                                 | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables from brokers, dealers and clearing  organizations:             |       |                         |       |                        |       |
| Contract value of fails to deliver                                         |       | $                            | 239,788    |                        | $          | 65,651 |   |
| Balance receivable from clearing organizations and  financial institutions |       | 153,373                      |       | 22,086                      |       |
| Net pending trades                                                         |       | 8,631                        |       | —                      |       |
| Total                                                                      |       | $                            | 401,792    |                        | $          | 87,737 |   |
| Payables to brokers, dealers and clearing  organizations:                  |       |                         |       |                        |       |
| Contract value of fails to receive                                         |       | $                            | 222,557    |                        | $          | 63,831 |   |
| Balance payable to clearing organizations and  financial institutions      |       | 34,264                       |       | 577                         |       |
| Net pending trades                                                         |       | —                       |       | 3,723                       |       |
| Total                                                                      |       | $                            | 256,821    |                        | $          | 68,131 |   |

 

Substantiallyall fail to deliver and fail to receive balances at September 30, 2010 andDecember 31, 2009 have subsequently settled at the contracted amounts.

 

**4.    GOODWILL AND INTANGIBLE ASSETS**

 

OnNovember 1, 2009, the Company completed the acquisition of certain assetsof a retail energy brokerage and consulting business for contingentconsideration with an estimated present value of $2,400. The purchase pricewill be paid out of the future collections of accounts receivable of thebusiness over the next four years and such contingent payment has been recordedas a liability within Other liabilities. This contingent liability will beremeasured to fair value at each reporting date until the liability is settledand the change in fair value will be recognized in earnings. This acquisitionwas accounted for as a business combination under the acquisition method.Assets acquired were recorded at fair value and the results of the acquiredcompany have been included within the consolidated financial statements sincethe acquisition. The purchase price was allocated among intangible assets asfollows: customer relationships of $1,010 with an estimated useful life of6 years, non compete agreement of $139 with an estimated useful life of4 years and goodwill of $1,251. The weighted average amortization for theintangible assets is 5.8 years.

 

OnMay 27, 2010, the Company completed the acquisition of a mortgage-backedsecurity brokerage business for consideration of $5,095. The purchase price wascomprised of 681,433 shares of the Company’s common stock with a fair value of$4,095 and contingent consideration estimated at $1,000, which has beenrecorded as a liability within Other liabilities. This contingent liabilitywill be remeasured to fair value at each reporting date until the liability issettled and the change in fair value will be recognized in earnings. Thisacquisition was accounted for as a business combination under the acquisitionmethod. Assets acquired were recorded at fair value and the results of theacquired company have been included within the consolidated financialstatements since the acquisition. The purchase price was allocated amongtangible and intangible assets as follows: fixed assets of $15, customerrelationships of $1,700 with an estimated useful life of 6 years, noncompete agreements of $340 with an estimated useful life of 3.3 years andgoodwill of $3,040. The weighted average amortization for the intangible assetsis 5.6 years.

 

11

----

Table of Contents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

OnJuly 1, 2010, the Company acquired a 70% equity ownership interest in eachof The Kyte Group Limited and Kyte Capital Management Limited (collectively “Kyte”).The Company will acquire the residual 30% equity interest in Kyte for anadditional cash payment to be made in or about the third quarter of 2013 in anamount to be determined pursuant to a formula based on Kyte’s post-acquisition earnings.Kyte has been included in our consolidated financial statements as awholly-owned subsidiary since the acquisition date, with a liability recordedfor the future payment to be made in 2013. Included as part of the purchaseprice is £5,000 that was deposited into an escrow account with a third-partyescrow agent and 1,339,158 contingently issuable shares of the Company’s commonstock, all of which will be delivered to the selling shareholders of Kyte uponthe satisfaction of certain conditions related to one of Kyte’s investments ina third party.  Kyte, which is a memberof leading exchanges including NYSE Euronext, NYSE LIFFE and Eurex, providesclearing, brokerage, settlement and back-office services to proprietarytraders, brokers, market makers and hedge funds.  Kyte also provides capital to start-uptrading groups, small hedge funds, market-makers and individual traders. TheCompany acquired Kyte because of its expertise in listed derivative markets,its risk management platforms and its unique clearing, broking and investmentservices business model. The cash portion of the purchase price of thetransaction was financed from the Company’s internal cash resources. Thepurchase price consisted of the following (in thousands):

 
| *Fair value of consideration  transferred:*       |   |   |   |
|---------------------------------------------------|--------|--------|--------|
| Cash paid at closing                              |   | $      | 33,996 |   |
| Cash paid for surplus working capital             |   | 7,050  |   |
| Common stock issued at closing (2,810,662 shares) |   | 15,993 |   |
| Contingently issuable shares (1,339,158 shares)   |   | 7,620  |   |
| Estimated future purchase commitment              |   | 19,264 |   |
| Total                                             |   | $      | 83,923 |   |

 

Thefair value of the 4,149,820 common shares issued and issuable was determinedbased on the closing market price of the Company’s common shares on July 1,2010, the closing date of the acquisition.

 

Thefuture purchase commitment requires the Company to pay an additional cashpayment based on the performance of Kyte during the three year period ending June 30,2013. The Company elected the fair value option for this purchase commitment asof the date of acquisition and determined the fair value using the incomeapproach. Subsequent changes in the fair value of the future purchasecommitment are recorded in Other (loss) income in the Condensed Consolidated Statementof Operations.  The fair value of thefuture purchase commitment at the acquisition date was $19,264 which has beenrecorded as a liability within Other liabilities. The key assumptions in applyingthe income approach are as follows: 17.7% discount rate and forecasted financial information for Kyte for thethree year period ending June 30, 2013. As of September 30, 2010,there were no significant changes to the assumptions used to develop the estimatesand the amount accrued in the financial statements increased by $1,500 due toan increase in the net present value of the liability due to the passage oftime and foreign currency translation.

 

12

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Thisacquisition was accounted for as a business combination under the acquisitionmethod. Assets acquired and liabilities assumed were recorded at their fairvalues as of July 1, 2010.  Management determined the fair value of the identifiable intangible assetsacquired based upon an independent valuation performed by a third-partyspecialist. The purchase price allocation, as presented below, was translatedinto U.S. dollars based on the foreign exchange rate on July 1, 2010:

 
| ** **                                                    | ** ** | ** ** | ** ** | **Useful Life** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------|------------|
| *Assets:*                                                     |       |       |       |                 |       |
| Cash                                                          |       | $          | 21,488     |                 |       |   |
| Cash segregated under federal and other  regulations          |       | 8,086      |       |                 |       |
| Deposits at clearing organizations                            |       | 16,734     |       |                 |       |
| Commissions receivable                                        |       | 19,035     |       |                 |       |
| Receivables from brokers, dealers and clearing  organizations |       | 94,849     |       |                 |       |
|                                                          |       |       |       |                 |       |
| Intangible assets subject to amortization-                    |       |       |       |                 |       |
| Customer relationships                                        |       | 14,485     |       | 6 Years              |       |
| Trade name                                                    |       | 1,020      |       | 10 Years             |       |
| Internally developed software                                 |       | 3,170      |       | 3 Years              |       |
| Non compete agreements                                        |       | 211        |       | 5 Years              |       |
| Unfavorable contracts                                         |       | (1,219     | )          | 3 Years              |       |
| Goodwill                                                      |       | 46,210     |       |                 |       |
| Other assets                                                  |       | 14,678     |       |                 |       |
| Total assets acquired                                         |       | 238,747    |       |                 |       |
|                                                          |       |       |       |                 |       |
| *Liabilities and non-controlling  interests:*                 |       |       |       |                 |       |
| Accounts payable and accrued expenses                         |       | 24,925     |       |                 |       |
| Payables to clearing services customers                       |       | 116,623    |       |                 |       |
| Other liabilities                                             |       | 12,539     |       |                 |       |
| Non-controlling interests                                     |       | 737        |       |                 |       |
| Total liabilities and non-controlling interests  assumed      |       | 154,824    |       |                 |       |
|                                                          |       |       |       |                 |       |
| Net assets acquired                                           |       | $          | 83,923     |                 |       |   |

 

Totalintangible assets acquired in the Kyte transaction that are subject toamortization totaled $17,667 and have a weighted-average useful life ofapproximately 6 years.

 

Allof the goodwill acquired was assigned to our Clearing, Execution and Tradingsegment. None of the goodwill is expected to be deductible for income taxpurposes.

 

Inconnection with the Kyte acquisition, we recognized $2,301 of acquisitionrelated costs that were expensed in the current period and are included inProfessional fees and Other expenses in our Condensed Consolidated Statementsof Operations for the nine months ended September 30, 2010.

 

13

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Theamounts of revenue and net loss of Kyte included in the Company’s Condensed ConsolidatedStatement of Operations from the acquisition date to the period ending September 30,2010 are as follows:

 

Revenueand net loss included in the Condensed Consolidated Statement of Operationsfrom July 1, 2010 to September 30, 2010

 
| Revenue  |   | $ | 26,383 |   |
|----------|--------|---|--------|--------|
| Net loss |   | $ | (1,582 | )      |

 

Goodwillactivity for the nine months ended September 30, 2010 is as follows:

 
| ** **                      | ** ** | **December 31,  2009** | ** ** | **Goodwill  acquired** | ** ** | **Foreign  currency  translation** | ** ** | **September 30,  2010** | ** ** |
|---------------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------------|------------|
| **Goodwill**                    |       |                        |       |                   |       |                               |       |                         |       |
| Americas Brokerage              |       | $                           | 80,249     |                   | $          | 3,040                              |       | $                            | —     |   | $ | 83,289 |   |
| EMEA Brokerage                  |       | 1,818                       |       | —                 |       | —                             |       | 1,818                        |       |
| Asia Brokerage                  |       | —                      |       | —                 |       | —                             |       | —                       |       |
| Clearing, Execution and Trading |       | —                      |       | 46,210                 |       | 1,598                              |       | 47,808                       |       |
| All Other                       |       | 128,691                     |       | —                 |       | —                             |       | 128,691                      |       |
|                            |       | $                           | 210,758    |                   | $          | 49,250                             |       | $                            | 1,598      |   | $ | 261,606 |   |

 

Basedon the results of the annual impairment tests that are required by ASC 350, theCompany determined that no impairment of goodwill existed as of January 1,2010. ASC 350 prescribes a two step process for impairment testing wherebymanagement first compares the fair value of each reporting unit with recordedgoodwill to that reporting unit’s book value. If management determines, as a result of this first step, that the fairvalue of the reporting unit is less than its carrying value, a second step inthe impairment test process would require that the recorded goodwill at thatbusiness unit be written down to the value implied by the reporting unit’srecent valuation. The Company will continue to evaluate goodwill on an annualbasis as of the beginning of each new fiscal year, and whenever events andchanges in circumstances indicate that there may be a potential impairment.  Subsequent to January 1, 2010, no eventsor changes in circumstances occurred which would indicate any goodwillimpairment.

 

Intangibleassets consisted of the following:

 
| ** **                               | ** ** | **September 30, 2010** | ** ** | **December 31, 2009**                                             | ** ** |
|------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Gross amount**       | ** ** | **Accumulated  amortization  and foreign  currency  translation** | ** ** | **Net  carrying  value** | ** ** | **Gross amount** | ** ** | **Accumulated  amortization  and foreign  currency  translation** | ** ** | **Net  carrying  value** | ** ** |
| **Amortized Intangible assets:**         | ** ** |                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Customer base/relationships              | ** ** | $                      | 63,477     |                                                              | $          | 15,461 |   | $ | 48,016 |   | $ | 47,292 |   | $ | 12,064 |   | $ | 35,228 |   |
| Trade names                              | ** ** | 8,791                  |       | 4,612                                                             |       | 4,179 |   | 7,771 |   | 4,003 |   | 3,768 |   |
| Core technology                          | ** ** | 6,400                  |       | 3,329                                                             |       | 3,071 |   | 3,230 |   | 3,230 |   | — |   |
| Non compete agreements                   | ** ** | 3,874                  |       | 2,939                                                             |       | 935 |   | 3,323 |   | 2,683 |   | 640 |   |
| Favorable (unfavorable) lease agreements | ** ** | (599                   | )          | 257                                                               |       | (856 | ) | 620 |   | 260 |   | 360 |   |
| Patents                                  | ** ** | 31                     |       | 15                                                                |       | 16 |   | 31 |   | 14 |   | 17 |   |
| **Unamortized intangible assets:**       | ** ** |                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Proprietary knowledge                    | ** ** | 110                    |       | —                                                            |       | 110 |   | 110 |   | — |   | 110 |   |
| Total                                    | ** ** | $                      | 82,084     |                                                              | $          | 26,613 |   | $ | 55,471 |   | $ | 62,377 |   | $ | 22,254 |   | $ | 40,123 |   |

 

14

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Amortizationexpense for the three months ended September 30, 2010 and 2009 was $2,114and $1,356, respectively, and $4,941 and $4,084 for the nine months ended September 30,2010 and 2009, respectively.

 

AtSeptember 30, 2010, expected amortization expense for the definite livedintangible assets is as follows:

 
| 2010 (remaining three months) |   | $      | 2,496  |   |
|-------------------------------|--------|--------|--------|--------|
| 2011                          |   | 9,083  |   |
| 2012                          |   | 7,925  |   |
| 2013                          |   | 6,219  |   |
| 2014                          |   | 5,723  |   |
| Thereafter                    |   | 23,915 |   |
| Total                         |   | $      | 55,361 |   |

 

**5.    OTHER ASSETS**

 

OnFebruary 28, 2010, the Company purchased a 40% interest in the outstandingmembership interests of an independent brokerage firm with a proprietarytrading platform. The aggregate purchase price was comprised of $8,000 in cashand 414,938 shares of the Company’s common stock. The target retained $6,000 ofthe cash portion of the purchase for working capital. This investment isincluded within Other assets and accounted for under the equity method.Additionally, the Company committed to purchase the remaining membershipinterests in increments of 20% over the next 3 years, subject to customaryclosing conditions. The purchase price for the remaining membership interestswill be paid in cash and established by a formula based on the target’s futureresults of operations. Included in Other assets at December 31, 2009 was anote receivable from the target in the amount of $1,000 which was forgiven bythe Company and credited against the purchase price described above at closing.

 

OnAugust 1, 2010, the Company purchased a 33% interest in the outstandingmembership interests of an independent CFTC-registered Futures CommissionMerchant for $11,000 in cash. The firm is also a Foreign Exchange Dealer memberof the National Futures Association and provides direct market access incertain foreign exchange markets. This investment will be accounted for underthe equity method.

 

**6.    SHORT-TERM BORROWINGS AND LONG-TERMOBLIGATIONS**

 

InJanuary 2008, pursuant to a note purchase agreement with certaininstitutional investors (the “2008 Note Purchase Agreement”), the Companyissued $60,000 in aggregate principal amount of senior secured notes due inJanuary 2013 (the “Senior Notes”) in a private placement.  The Senior Notes currently bear interest at7.17%.  From June 2008 until June 2010,the Senior Notes bore interest at 8.17% due to a change in the risk basedcapital factor attributed to the Senior Notes by one of the purchasers pursuantto generally applicable insurance regulations for U.S. insurance companies. TheSenior Notes ceased to accrue this premium interest in June 2010, when therisk based capital factor attributed to the Senior Notes was subsequentlyreduced.  Interest is payablesemi-annually in arrears on the 30th of January andJuly.  The Company’s obligations underthe Senior Notes are secured by substantially all of the assets of the Companyand certain assets of the Company’s subsidiaries.  The 2008 Note Purchase Agreement includesoperational covenants with which the Company is required to comply, includingamong others, maintenance of certain financial ratios and restrictions onadditional indebtedness, liens and dispositions.  At September 30, 2010, the Senior Noteswere recorded net of unamortized deferred financing fees of $288 and theCompany was in compliance with all applicable covenants at September 30,2010 and December 31, 2009.

 

TheCompany maintains a credit agreement with Bank of America, N.A. and certainother lenders (as amended, the “Credit Agreement”). The Credit Agreementprovides for maximum borrowings of $175,000, which includes up to $50,000 forletters of credit, and has an expiration date of February 24, 2011.  Revolving loans may be either base rate loansor currency rate loans. Currency rate loans bear interest at the annualizedrate of one-month LIBOR plus the application margin, letter of credit fees perannum are equal to the applicable margin times the outstanding amount drawnunder such letter of credit and base rate loans bear interest at a rate perannum equal to a base rate plus the applicable margin in effect for that 

 

15

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

interestperiod. As long as no default has occurred under the Credit Agreement, theapplicable margin for both the base rate and currency rate loans is based on amatrix that varies with a ratio of outstanding debt to EBITDA, as defined inthe Credit Agreement. At September 30, 2010, in relation to currency rateloans, the applicable margin was 2.50% and the one-month LIBOR was 0.26% and,in relation to base rate loans, the applicable margin was 1.25% and the primerate was 3.25%. Amounts outstanding under the Credit Agreement are secured bysubstantially all the assets of the Company and certain assets of the Company’ssubsidiaries. The Credit Agreement ranks pari passu with the Senior Notes inrelation to the security provided by the Company in support of bothobligations.

 

TheCompany had outstanding borrowings under its Credit Agreement as of September 30,2010 and December 31, 2009 as follows:

 
| ** **                    | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                    | ** ** | **2010**               | ** **    | **2009**              | ** ** |
| Loan Available (1)            |       | $                      |  175,000 |                  | $          |  175,000 |   |
| Loans Outstanding             |       | $                      |  130,000 |                  | $          |  115,000 |   |
| Letters of Credit Outstanding |       | $                      | —        |                  | $          |  7,172 |   |

 

----

(1)         Amounts available include up to $50,000 for letters of credit as of September 30,2010 and December 31, 2009.

 

TheCompany’s commitments for outstanding letters of credit relate to potentialcollateral requirements associated with our matched principal business.  Since commitments associated with theseoutstanding letters of credit may expire unused, the amounts shown above do notnecessarily reflect actual future cash funding requirements.

 

Theweighted average interest rate of the outstanding loans was 2.82% at September 30,2010 and 2.73% at December 31, 2009. At September 30, 2010 and December 31, 2009, short-termborrowings under the Credit Agreement were recorded net of unamortized deferredfinancing fees of $351 and $931, respectively.

 

TheCredit Agreement contains certain financial and other covenants. The Companywas in compliance with all applicable covenants at September 30, 2010 andDecember 31, 2009, respectively.

 

**7.    STOCKHOLDERS’ EQUITY**

 

InAugust 2007, the Company’s Board of Directors authorized the Company toimplement a stock repurchase program to repurchase a limited number of sharesof the Company’s common stock. Under the repurchase plan, the Board ofDirectors authorized the Company to repurchase shares of the Company’s commonstock on the open market in such amounts as determined by the Company’smanagement provided that such amounts do not exceed, during any calendar year,the number of shares issued upon exercise of stock options plus the number ofshares underlying grants of RSUs that are granted during such calendar year, orwhich  management reasonably anticipateswill be granted in such calendar year.During the three months ended September 30, 2010, the Company repurchased 1,053,240shares of its common stock on the openmarket at an average price of $5.33 per share for a total cost of $5,650, including sales commissions. During the nine months ended September 30,2010, the Company repurchased 2,028,240 shares of its common stock on the open market at an average price of $5.70 per share for a total cost of $11,630, including sales commissions. During thethree months ended September 30, 2009, the Company did not repurchase anyof its common stock. During the nine months ended September 30, 2009, theCompany repurchased 1,115,922 sharesof its common stock on the open market at an average price of $2.63 per share for a total cost of $2,970, including sales commissions. Theserepurchased shares were recorded at cost as treasury stock in the CondensedConsolidated Statements of Financial Condition.

 

Oneach of March 29, May 28, and August 31, 2010, the Company paida cash dividend of $0.05 per share, which, based upon the number of sharesoutstanding on the record date for such dividends, totaled $5,928, $5,956 and$6,088, respectively. On each of March 31, May 30, and August 28,2009, the Company paid a cash dividend of $0.05 per share, which, based uponthe number of shares outstanding on the record date for such dividends, totaled$5,883, $5,891, and $5,899, respectively. The dividends were reflected asreductions of retained earnings in the Condensed Consolidated Statements ofFinancial Condition.

 

16

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

**8.    EARNINGS PER SHARE**

 

Basicand diluted earnings per share for thethree and nine months ended September 30, 2010 and 2009 were as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine Months Ended******** September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic earnings per share**                                                               | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| GFI’s net (loss) income                                                               |       | $                                                                | (2,486     | )                                                               | $          |  2,783 |   | $ | 21,314 |   | $ |  30,739 |   |
| Weighted average common shares outstanding                                                 |       | 121,943,158                                                      |       | 118,062,749                                                     |       | 120,059,960 |   | 118,117,384 |   |
| Basic (loss) earnings per share                                                            |       | $                                                                | (0.02      | )                                                               | $          |  0.02 |   | $ | 0.18 |   | $ |  0.26 |   |
| ** **                                                                                 | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted earnings per share**                                                             | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| GFI’s net (loss) income                                                               |       | $                                                                | (2,486     | )                                                               | $          |  2,783 |   | $ | 21,314 |   | $ |  30,739 |   |
| Weighted average common shares outstanding                                                 |       | 121,943,158                                                      |       | 118,062,749                                                     |       | 120,059,960 |   | 118,117,384 |   |
| Effect of dilutive options, RSUs, restricted stock  and other contingently issuable shares |       | —                                                           |       | 4,490,133                                                       |       | 4,605,419 |   | 3,264,933 |   |
| Weighted average shares outstanding and common  stock equivalents                          |       | 121,943,158                                                      |       | 122,552,882                                                     |       | 124,665,379 |   | 121,382,317 |   |
| Diluted (loss) earnings per share                                                          |       | $                                                                | (0.02      | )                                                               | $          |  0.02 |   | $ | 0.17 |   | $ |  0.25 |   |

 

Excludedfrom the computation of diluted earnings per share because their effect wouldbe anti-dilutive were the following: 1,767,927 RSUs and 109,156 options for the three months ended September 30,2010; 1,086,671 RSUs for the three months ended September 30, 2009;1,586,140 RSUs and 41,676 stock options for the nine months ended September 30,2010; and 2,096,355 RSUs and 73,927 stock options for the nine months ended September 30,2009.

 

Asa result of the net loss for the three months ended September 30, 2010,common shares underlying options to purchase 183,162 shares of common stock and3,454,053 RSUs, along with 1,754,096 shares that are contingently issuable,were excluded from the computation of diluted loss per share for that period.

 

**9.    SHARE-BASED COMPENSATION**

 

TheCompany issues RSUs to its employees under the GFI Group Inc. 2008 EquityIncentive Plan, which was approved by the Company’s stockholders on June 11,2008, and subsequently amended by the Company’s stockholders on June 11,2009 and June 10, 2010 (as amended, the “2008 Equity Incentive Plan”).Prior to June 11, 2008, the Company issued RSUs under the GFI Group Inc.2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”).

 

The2008 Equity Incentive Plan permits the grant of non-qualified stock options,stock appreciation rights, shares of restricted stock, restricted stock unitsand performance units to employees, non-employee directors or consultants. TheCompany issues shares from authorized but unissued shares, and in certaincases, from treasury shares, which are reserved for issuance upon the vestingof RSUs granted pursuant to the 2008 Equity Incentive Plan.  As of September 30, 2010, there were8,480,526 shares of our common stock available for future grants of awardsunder this plan, which amount, pursuant to the terms of the 2008 EquityIncentive Plan, may be increased by the number of shares subject to awardsunder the 2004 Equity Incentive Plan that are ultimately not delivered toemployees. The fair value of RSUs is based on the closing price of the Company’scommon stock on the date of grant and is recorded as deferred compensation andamortized to compensation expense over the vesting period of the grants, whichis generally three years.

 

17

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Modified RSUs are reflected as cancellations andgrants in the summary of RSUs below.

 

Thefollowing is a summary of RSU transactions under both the 2008 Equity IncentivePlan and the 2004 Equity Incentive Plan during the nine months ended September 30,2010:

 
| ** **                                   | ** ** | **RSUs**   | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Outstanding December 31, 2009 |       | 10,208,185 |       | $                                                        |  5.57 |   |
| Granted                                      |       | 7,164,289  |       | 5.60                                                     |       |
| Vested                                       |       | (2,828,373 | )          | 7.31                                                     |       |
| Cancelled                                    |       | (666,419   | )          | 5.54                                                     |       |
| Outstanding September 30, 2010          |       | 13,877,682 |       | 5.24                                                     |       |
|                                              |            |            |            |                                                          |            |  |

 

Theweighted average grant-date fair value of RSUs granted for the nine monthsended September 30, 2010 was $5.60 per unit, compared with $3.97 per unitfor the same period in the prior year. Total compensation expense and  related income tax benefits recognized inrelation to RSUs are as follows:

 
| ** **           | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine Months Ended******** September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Compensation expense |       | $                                                                | 6,894      |                                                            | $          | 7,324 |   | $ | 20,189 |   | $ | 19,544 |   |
| Income tax benefits  |       | 2,138                                                            |       | 2,710                                                           |       | 6,259 |   | 7,231 |   |
|                      |            |                                                                  |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

AtSeptember 30, 2010, total unrecognized compensation cost related to theRSUs prior to the consideration of expected forfeitures was approximately$58,207 and is expected to be recognized over a weighted-average period of 1.96years.  The total fair value of RSUsvested during the nine months ended September 30, 2010 and 2009 was$20,675 and $21,743, respectively.

 

Asof September 30, 2010, the Company had stock options outstanding under theGFI Group Inc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) and theGFInet inc. 2000 Stock Option Plan (the “GFInet 2000 Plan”). No additional grantswill be made under these plans. For stock options previously granted ormodified, the fair value was estimated on the date of grant or modificationusing the Black-Scholes option pricing model.

 

Thefollowing is a summary of stock option transactions during the nine monthsended September 30, 2010:

 
| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding December 31, 2009  |       | 641,436                                |       | $                                          | 3.31       |   | 313,572 |   | $ | 3.19 |   |
| Exercised                           |       | (30,420                                | )          | 2.97                                       |       | (171,656 | ) | 2.45 |   |
| Cancelled                           |       | (4,212                                 | )          | 2.97                                       |       | (844 | ) | 2.38 |   |
| Outstanding September 30, 2010 |       | 606,804                                |       | $                                          | 3.33       |   | 141,072 |   | $ | 4.10 |   |

 

Duringthe nine months ended September 30, 2009, there were 6,000 stock optionsexercised under the GFI Group 2002 Plan and 10,836 stock options exercisedunder the GFInet 2000 Plan.

 

18

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

**10.    COMMITMENTS AND CONTINGENCIES**

 

**Purchase Obligations—**The Company hasvarious unconditional purchase obligations. These obligations are for thepurchase of market data from a number of information service providers duringthe normal course of business. As of September 30, 2010, the Company hadtotal purchase commitments for market data of approximately $24,028 with$19,189 due within the next twelve months and $4,839 due between one to threeyears. Additionally, the Company has purchase commitments for capitalexpenditures of $2,294, primarily related to network implementations in theU.S. and U.K., and $1,060 for hosting and software license agreements. Of thesepurchase commitments, capital expenditures of approximately $1,483 and fees forhosting and software licensing agreements of approximately $618 are due withinthe next twelve months.

 

Inconnection with the acquisition of 40% of the outstanding membership interestsof an independent brokerage firm, the Company has committed to purchase theremaining membership interests in increments of 20% over the next 3 years,subject to customary closing conditions. The purchase price for the remaining membership interests will be paidin cash and established by a formula based on the target’s future results ofoperations.

 

Inconnection with the acquisition of 70% of the equity ownership interests inKyte, the Company agreed to purchase the residual 30% equity interest in Kytefor an additional cash payment in an amount to be determined pursuant to aformula based on Kyte’s earnings, such payment to be made following June 30,2013. See Note 4 to the Condensed Consolidated Financial Statements forfurther information.

 

**Contingencies*****—***In the normal course of business, the Company andcertain subsidiaries included in the consolidated financial statements are, andhave been in the past, named as defendants in various lawsuits and proceedingsand are, and have been in the past, involved in certain regulatoryexaminations. Additional actions, investigations or proceedings may be broughtfrom time to time in the future. The Company is subject to the possibility oflosses from these various contingencies. Considerable judgment is necessary toestimate the probability and amount of any loss from such contingencies. An accrualis made when it is probable that a liability has been incurred or an asset hasbeen impaired and the amount of loss can be reasonably estimated. The Companyaccrues a liability for the estimated costs of adjudication or settlement ofasserted and unasserted claims existing as of the reporting period.

 

TheCompany is subject to regular examinations by various tax authorities injurisdictions in which the Company has significant business operations.  The Company regularly assesses the likelihoodof additional tax assessments that may result from these examinations in eachof the tax jurisdictions.  A tax accrualhas been established, which the Company believes to be adequate in relation tothe potential for additional tax assessments. Once established, the accrual may be adjusted based on new informationor events.  The imposition of additionaltax assessments, penalties or fines by a tax authority could have a materialimpact on the Company’s effective tax rate.

 

Additionally,the Company has recorded reserves for certain contingencies to which it mayhave exposure, such as reserves for contingencies related to the employerportion of National Insurance Contributions in the U.K.

 

The staff of the Market Regulation Department of the Financial IndustryRegulatory Authority Inc. (“FINRA”) (the “Staff”) has been conducting aninquiry into the activities of interdealer brokerage firms in connection withthe determination of the commission rates paid to them in 2005 and 2006 bycertain dealers for brokering transactions in credit default swaps. In October2010, the Staff commenced a disciplinary proceeding by filing a complaintagainst GFI Securities LLC and four of its former employees in connectionwith allegedly improper communications between certain of these formeremployees and those at other interdealer brokerage firms, purportedlyinconsistent with just and equitable principles of trade and certain antifraudand supervisory requirements under FINRA rules and the federal securities laws.All of the former employees of GFI Securities LLC who were named in thecomplaint resigned in April 2008 to become employed by affiliates of CompagnieFinanciere Tradition. None of the Company’s current employees were named in thecomplaint. GFI Securities LLC intends to vigorously contest thisdisciplinary action which could result in a censure, fine or other sanction.

 

19

----

Table of Contents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Based on currently available information, the outcome of the Company’soutstanding matters are not expected to have a material adverse impact on theCompany’s financial position. However, the outcome of any such matters may bematerial to the Company’s results of operations or cash flows in a givenperiod. It is not presently possible to determine the Company’s ultimateexposure to these matters and there is no assurance that the resolution of theCompany’s outstanding matters will not significantly exceed any reservesaccrued by the Company.

 

***Risks and Uncertainties—***The Company primarily generatesits revenues by executing and facilitating transactions for third parties.Revenues for these services are transaction based. As a result, the Company’srevenues vary based upon, among other things, the volume of transactions invarious securities, commodities, foreign exchange and derivative markets inwhich the Company provides services.

 

***Guarantees—***The Company,through its subsidiaries, is a member of certain exchanges and clearing houses.Under the membership agreements, members are generally required to guaranteecertain obligations.  To mitigate theperformance risks of its members, the exchanges and clearing houses may, fromtime to time, require members to post collateral, as well as meet certainminimum financial standards. The Company’s maximum potential liability underthese arrangements cannot be quantified. However, management believes that thepotential for the Company to be required to make payments under thesearrangements is not likely. Accordingly, no contingent liability is recorded inthe Condensed Consolidated Statements of Financial Condition for thesearrangements.

 

**11.    FINANCIAL INSTRUMENTS WITH MARKET ANDCREDIT RISKS**

 

Disclosureregarding the Company’s financial instruments with off-balance sheet risk isdescribed in “Note 16—Financial Instruments with Market and Credit Risks”of the Notes to the Consolidated Financial Statements contained in the Company’s2009 Form 10-K.  There have been nomaterial changes to our off-balance sheet risk during the nine months endedSeptember 30, 2010.

 

**12.    FINANCIAL INSTRUMENTS**

 

Substantiallyall of the Company’s assets and liabilities are carried at fair value orcontracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amountsapproximating fair value consist primarily of receivables from and payables tobrokers, dealers and clearing organizations and payables to clearing servicescustomers. These receivables and payables to brokers, dealers and clearingorganizations are short-term in nature, and following September 30, 2010,substantially all have settled at the contracted amounts.  The Company’s marketable equity securitiesare recorded at fair value based on their quoted market price.  The Company’s investments that are accountedfor under the cost and equity methods are investments in companies that are notpublicly traded and for which no established market for their securitiesexists.  The fair value of theseinvestments is not estimated if there are no identified events or changes incircumstances that may have a significant adverse effect on the fair value ofthe investment.  The Company’s debtobligations are carried at historical amounts. The fair value of the Company’s Senior Notes was estimated using marketrates of interest available to the Company for debt obligations of similartypes and was approximately $61,910 at September 30, 2010.  The fair value of the Company’s short-termborrowings outstanding under the Credit Agreement approximated the carryingvalue on each of September 30, 2010 and December 31, 2009.

 

TheCompany’s financial assets and liabilities recorded at fair value have beencategorized based upon a fair value hierarchy in accordance with ASC820-10.  In accordance with ASC 820-10,the Company has categorized its financial assets and liabilities, based on thepriority of the inputs to the valuation technique, into a three-level fairvalue hierarchy as set forth below.

 

*Level 1 —* Financial assets and liabilities whose values arebased on unadjusted quoted prices for identifiable assets or liabilities in anactive market that the company has the ability to access at the measurementdate (examples include active exchange-traded equity securities, listed derivatives,and most U.S. Government and agency securities).

 

*Level 2 —* Financial assets and liabilities whose values arebased on quoted prices in markets where trading occurs infrequently or whosevalues are based on quoted prices of instruments with similar attributes inactive markets.  Level 2 

 

20

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

inputsinclude the following:

 

·                  Quoted prices for identifiable or similarassets or liabilities in non-active markets (examples include corporate andmunicipal bonds which trade infrequently); and

 

·                  Inputs other than quoted prices that areobservable for substantially the full term of the asset or liability (examplesinclude interest rate and currency swaps).

 

*Level 3* — Financial assets and liabilities whose values arebased on prices or valuation techniques that require inputs that are bothunobservable and significant to the overall fair value measurement.  These inputs reflect management’s ownassumptions about the assumptions a market participant would use in pricing theasset or liability.

 

*Valuation Techniques*

 

The Company uses the following valuation techniques in valuing thefinancial instruments at September 30, 2010 and December 31, 2009:

 

The Company has determined certain of its investments in marketable securitiesshould be classified as trading securities or available-for-sale securities andreported at fair value at September 30, 2010 and December 31, 2009.  To the extent that the values of the Company’strading and available-for-sale marketable securities are based on quoted marketprices in active markets, these securities were categorized as Level 1.

 

Fair value of the Company’s foreign exchange derivative contracts isbased on the indicative prices obtained from the banks that are counter-partiesto these foreign exchange derivative contracts and management’s owncalculations and analyses.  At September30, 2010 and December 31, 2009, the Company’s foreign exchange derivativecontracts have been categorized in Level 2.

 

The fair value of trading securities owned as a result of matchedprincipal transactions and principal trading business is estimated using either(i) recently executed transactions and market price quotations in activemarkets, which trading securities are primarily categorized as Level 1, or (ii)a modified Black Scholes model using observable market inputs, which tradingsecurities are categorized as Level 2.

 

Thefair value of the Company’s future purchase commitment and contingentconsideration liabilities reflect inputs that are both unobservable andsignificant to the overall fair value measurement of these liabilities. These liabilitiesare categorized as Level 3.

 

Inthe three and nine months ended September 30, 2010 and 2009, we did not haveany transfers amongst Level 1, Level 2 and Level 3.

 

21

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

FinancialAssets and Liabilities measured at fair value on a recurring basis as ofSeptember 30, 2010:

 
| ** **                                                           | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets  (Level 1)** | ** **   | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Netting (1)** | ** **   | **Total as of  September 30,**

**2010** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------|--------------|---------------------------------------------------------|------------|
| **Assets**                                                           |       |                                                                                            |         |                                                       |       |                                                  |       |                 |         |                                                    |       |
| Equity securities                                                    |       | $                                                                                               |  10,880 |                                                       | $          |  162                                             |       | $                    |  — |                                                    | $          |  — |   | $ |  11,042 |   |
| Corporate bonds                                                      |       | —                                                                                          |         | 3,031                                                      |       | —                                                |       | —               |         | 3,031                                                   |       |
| Foreign exchange derivative contracts                                |       | —                                                                                          |         | 115,808                                                    |       | —                                                |       | (114,346             | )            | 1,462                                                   |       |
| Commodity derivative contracts                                       |       | 1,890                                                                                           |         | —                                                     |       | —                                                |       | (1,890               | )            | —                                                  |       |
| Fixed income derivative contracts                                    |       | 2,453                                                                                           |         | —                                                     |       | —                                                |       | —               |         | 2,453                                                   |       |
| Equity derivative contracts                                          |       | 1,082                                                                                           |         | —                                                     |       | —                                                |       | —               |         | 1,082                                                   |       |
| **Liabilities**                                                      |       |                                                                                            |         |                                                       |       |                                                  |       |                 |         |                                                    |       |
| Equity securities                                                    |       | $                                                                                               |  2,767  |                                                       | $          |                                                  |       | $                    |  — |                                                    | $          |  — |   | $ |  2,767 |   |
| Corporate bonds                                                      |       | —                                                                                          |         | 5,015                                                      |       | —                                                |       | —               |         | 5,015                                                   |       |
| Foreign exchange derivative contracts                                |       | —                                                                                          |         | 118,321                                                    |       | —                                                |       | (114,361             | )            | 3,960                                                   |       |
| Commodity derivative contracts                                       |       | 2,069                                                                                           |         | —                                                     |       | —                                                |       | (1,890               | )            | 179                                                     |       |
| Fixed income derivative contracts                                    |       | 3,817                                                                                           |         | —                                                     |       | —                                                |       | —               |         | 3,817                                                   |       |
| Equity derivative contracts                                          |       | 1,293                                                                                           |         | —                                                     |       | —                                                |       | —               |         | 1,293                                                   |       |
| Future purchase commitment and contingent  consideration liabilities |       | —                                                                                          |         | —                                                     |       | 23,754                                                |       | —               |         | 23,754                                                  |       |

 

----

(1)          Represents the impact of netting on anet-by-counterparty basis.

 

TheCompany’s financial instruments at fair value are included within Other assetsand Other liabilities with the exception of futures derivative contracts of$179, which are included within Payables to brokers, dealers and clearingorganizations.

 

Financial Assets and Liabilities measured at fairvalue on a recurring basis as of December 31, 2009:

 
| ** **                            | ** ** | **Quoted Prices in**                          | ** ** | **Significant Other** | ** ** | ** **                             | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **Active Markets for  Identical Assets** | ** ** | **Observable  Inputs**     | ** ** | **Balance at  December 31,** | ** ** |
| ** **                            | ** ** | **(Level 1)**                                      | ** ** | **(Level 2)**         | ** ** | **2009**                               | ** ** |
| Included within Other assets:         |       |                                                    |       |                       |       |                                   |       |
| Equity securities                     |       | $                                                       | 5,110      |                       | $          | 154                                    |       | $ | 5,264 |   |
| Corporate bonds                       |       | —                                                  |       | 3,152                      |       | 3,152                                  |       |
| Foreign exchange derivative contracts |       | —                                                  |       | 818                        |       | 818                                    |       |
|                                  |       |                                                    |       |                       |       |                                   |       |
| Included within Other liabilities:    |       |                                                    |       |                       |       |                                   |       |
| Foreign exchange derivative contracts |       | $                                                       | —     |                       | $          | 804                                    |       | $ | 804 |   |

 

TheCompany had no level 3 assets or liabilities as of December 31, 2009.

 

22

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Changesin Level 3 Financial Assets and Liabilities measured at fair value on arecurring basis for the three months and nine months ended September 30, 2010and 2009:

 
| ** **                                                                                                                                                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Beginning balance                                                                                                                                                                                                |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| Total (gains) losses (realized/unrealized)                                                                                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Included in earnings (or change in net assets)                                                                                                                                                                   |       | 809                                                  |       | —                                              |       | 809 |   | — |   |
| Included in other comprehensive income                                                                                                                                                                           |       | 691                                                  |       | —                                              |       | 691 |   | — |   |
| Purchases, issuances, and settlements                                                                                                                                                                            |       | 22,254                                               |       | —                                              |       | 22,254 |   | — |   |
| Transfers in and/or out of level 3                                                                                                                                                                               |       | —                                               |       | —                                              |       | — |   | — |   |
| Ending balance                                                                                                                                                                                                   |       | $                                                    | 23,754     |                                                | $          | — |   | $ | 23,754 |   | $ | — |   |
|                                                                                                                                                                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| The amount of total gains or losses for the period  included in earnings (or changes in net assets) attributable to the change in  unrealized (gains) losses relating to assets still held at the reporting date |       | $                                                    | 809        |                                                | $          | — |   | $ | 809 |   | $ | — |   |

* *

*Derivative Financial Instruments*

 

The Company usesforeign exchange derivative contracts, including forward contracts and foreigncurrency swaps, to reduce the effects of fluctuations in certain assets andliabilities denominated in foreign currencies. The Company also hedges aportion of its foreign currency exposures on anticipated foreign currencydenominated revenues and expenses by entering into forward foreign exchangecontracts.  For the nine months endedSeptember 30, 2010 and the year ended December 31, 2009, none of thesecontracts were designated as foreign currency cash flow hedges under ASC815-10, *Derivatives and Hedging* (“ASC 815-10”)(formerly SFAS No. 133,*Accounting forDerivative Instruments and Hedging Activities*, as amended).Contracts that are not designated as foreign currency cash flow hedges arerecorded at fair value and all realized and unrealized gains and losses areincluded in Other (loss) income in the Condensed Consolidated Statements ofOperations.

 

TheCompany provides brokerage services to its customers for exchange traded andover-the-counter derivative products, which include futures, forwards andoptions contracts.  The Company may enterinto principal transactions for exchange traded and over-the-counter derivativeproducts to facilitate customer trading activities or to engage in principaltrading for the Company’s own account.

 

TheCompany monitors market risk exposure from its matched principal business andprincipal trading business by regularly monitoring its concentration of marketrisk to financial instruments, countries or counterparties and regularlymonitoring trades that have not settled within prescribed settlement periods orvolume thresholds.  Additionally, marketrisks are monitored and mitigated by the use of the Company’s proprietary,electronic risk monitoring system, which provides daily credit reports in eachof the Company’s geographic regions that analyze credit concentration andfacilitates the regular monitoring of transactions against key risk indicators.

 

Forcertain derivative contracts, the Company has entered into agreements withcounterparties that allow for netting. The Company reports these derivative contracts on a net-by-counterpartybasis when management believes that a legal and enforceable right of offsetexists under these agreements.

 

23

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Fairvalues of derivative contracts on a gross basis as of September 30, 2010 andDecember 31, 2009 are as follows:

 
| **Derivatives not designated as hedging instruments under** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASC 815-10**                                                                       | ** ** | **Derivative Assets**       | ** ** | **Derivative Liabilities** | ** ** | **Derivative Assets** | ** ** | **Derivative Liabilities** | ** ** |
| Foreign exchange contracts (1)                                                            |       | $                                | 115,808    |                            | $          | 118,321 |   | $ | 818 |   | $ | 804 |   |
| Commodity contracts (2)                                                                   |       | $                                | 1,890      |                            | $          | 2,069 |   | $ | — |   | $ | — |   |
| Fixed income contracts (1)                                                                |       | $                                | 2,453      |                            | $          | 3,817 |   | $ | — |   | $ | — |   |
| Equity contracts (1)                                                                      |       | $                                | 1,082      |                            | $          | 1,293 |   | $ | — |   | $ | — |   |

 

----

(1)                  Included within Other assetsand Other liabilities.

(2)                  Included within Receivablesfrom brokers, dealers and clearing organizations, and Payables to brokers,dealers and clearing organizations.

 

Asof September 30, 2010, the Company had outstanding forward foreign exchangecontracts with a combined notional value of $124,799.  Approximately $54,536****ofthese forward foreign exchange contracts represents a hedge of euro-denominatedbalance sheet positions at September 30, 2010. The remaining contracts are hedges of anticipated future cash flows. Inaddition, the Company had outstanding long and short foreign exchange spot andoptions contracts of approximately $6,477,041****and$6,477,041, respectively. As of September 30, 2010, the Company also hadoutstanding long and short futures and forwards commodity contracts withnotional values of approximately $899,409****and$1,021,819, respectively, long and short futures and options fixed incomecontracts with notional values of approximately $80,706 and $206,721,respectively, and long and short futures and options equity contracts withnotional values of approximately $17,541 and $12,207, respectively.

 

Asof December 31, 2009, the Company had outstanding forward foreign exchangecontracts with a combined notional value of approximately $126,251.  Approximately $64,422 of these forwardforeign exchange contracts represents a hedge of euro-denominated balance sheetpositions at December 31, 2009.  Theremaining contracts are hedges of anticipated future cash flows.

 

Thefollowing is a summary of the effect of derivative contracts on the CondensedConsolidated Statements of Operations for the three and nine months endedSeptember 30, 2010 and 2009:

 
| ** **                                                                                                 | ** ** | ** **                                                                                      | ** ** | **Amount of Gain (Loss) Recognized  in Income on Derivatives** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Derivatives not designated as hedging instruments under  ASC 815-10** | ** ** | **Location of Gain (Loss)  Recognized in Income on  Derivatives** | ** ** | **For the Three**

**Months Ended  September 30,  2010**                      | ** ** | **For the Nine  Months Ended  September 30,  2010** | ** ** |
| Foreign exchange contracts                                                                                 |       | (1)                                                                                             |       | $                                                                                                 | (5,913     | ) | $ | 6,485 |   |
| Commodity contracts                                                                                        |       | Principal transactions                                                                          |       | 1,707                                                                                             |       | 5,547 |   |
| Fixed income contracts                                                                                     |       | Principal transactions                                                                          |       | 1,127                                                                                             |       | 1,127 |   |
| Equity contracts                                                                                           |       | Principal transactions                                                                          |       | 445                                                                                               |       | 445 |   |
|                                                                                                            |            |                                                                                                 |            |                                                                                                   |            |  |  |  |  |

 

----

(1)For the three months ended September 30, 2010, approximately $8,170 of losseson foreign exchange derivative contracts were included within Other (loss)income and approximately $2,257 of gains on foreign currency options wereincluded within Principal transactions. For the nine months ended September 30,2010, approximately $2,653 of gains on foreign exchange derivative contractswere included within Other (loss) income and approximately $3,832 of gains onforeign currency options were included within Principal transactions.

 

24

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 
| ** **                                                                                                       | ** ** | ** **                                                                                                  | ** ** | **Amount of Gain (Loss) Recognized   in Income on Derivatives** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Derivatives not designated as hedging instruments under   ASC 815-10** | ** ** | **Location of Gain (Loss)   Recognized in Income on   Derivatives** | ** ** | **For the Three   Months Ended   September 30,   2009**              | ** ** | **For the Nine   Months Ended   September 30,   2009** | ** ** |
| Foreign exchange contracts                                                                                       |       | Other income                                                                                                |       | $                                                                                                       | (8,742     | ) | $ | 1,221 |   |
|                                                                                                                  |            |                                                                                                             |            |                                                                                                         |            |  |  |  |  |

 

**13.    REGULATORY REQUIREMENTS**

 

GFISecurities LLC is a registered broker-dealer with the SEC and FINRA. GFISecurities LLC is also a registered introducing broker with the NationalFutures Association and the Commodity Futures Trading Commission. Accordingly,GFI Securities LLC is subject to the net capital rules under the ExchangeAct and the Commodity Exchange Act. Under these rules, GFI Securities LLC isrequired to maintain minimum Net Capital, as defined by applicable regulations,of not less than the greater of $250 or 2% of aggregate debits, as defined byapplicable regulations.

 

GFIBrokers Limited, GFI Securities Limited, The Kyte Group Limited and KyteBroking Limited are subject to the capital requirements of the FinancialServices Authority in the United Kingdom (“FSA”).

 

GFI(HK) Securities LLC is subject to the capital requirements of the Securitiesand Futures Commission in Hong Kong (the “SFC”).

 

Thefollowing table sets forth information about the minimum regulatory capitalthat certain of the Company’s subsidiaries were required to maintain as of September 30,2010:

 
| ** **                          | ** ** | **GFI  Securities LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **The Kyte   Group   Limited** | ** ** | **Kyte   Broking   Limited** | ** ** | **GFI (HK)   Securities   L.L.C.** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|
| Regulatory capital                  |       | $                            | 23,744     |                          | $          | 68,843                           |       | $                                             | 62,968     |                                   | $          | 13,926                                            |       | $ | 3,339 |   | $ | 2,411 |   |
| Minimum regulatory capital required |       | 250                          |       | 24,024                        |       | 32,913                           |       | 6,759                                         |       | 2,209                                  |       | 387                                               |       |
| Excess regulatory capital           |       | $                            | 23,494     |                          | $          | 44,819                           |       | $                                             | 30,055     |                                   | $          | 7,167                                             |       | $ | 1,130 |   | $ | 2,024 |   |

 

Inaddition to the minimum regulatory capital requirements outlined above, certainof the Company’s subsidiaries are subject to additional regulatoryrequirements.

 

GFISecurities Limited’s Japanese branch is subject to certain licensingrequirements established by the Financial Instruments and Exchange Law (the “FIEL”)in Japan. As part of the licensing requirements, GFI Securities Limited’sJapanese branch is required to maintain minimum “brought-in” capital andstockholders’ equity of 50,000 Japanese Yen each (or approximately $599), asdefined under the FIEL.  In addition, GFISecurities Limited’s Japanese branch is also subject to the net capitalrule promulgated by the FIEL, which requires that net worth, including “brought-in”capital, exceed a ratio of 120.0% of the risk equivalent amount includingrelevant expenditure.  At September 30,2010, GFI Securities Limited’s Japanese branch was in compliance withthese capital requirements.

 

GFI(HK) Brokers Ltd. is registered with and regulated by the Hong Kong MonetaryAuthority. As part of this registration, GFI (HK) Brokers Ltd. is required tomaintain stockholders’ equity of 5,000 Hong Kong dollars (or approximately$644).  At September 30, 2010, GFI(HK) Brokers Ltd. had stockholders’ equity of 22,453 Hong Kong dollars (orapproximately $2,894), which exceeded the minimum requirement by 17,453 HongKong dollars (or approximately $2,250).

 

25

----

Table of Contents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

GFIGroup Pte. Ltd. is subject to the compliance requirements of the MonetaryAuthority of Singapore (“MAS”), which requires that GFI Group Pte. Ltd., amongother things, maintain stockholders’ equity of 3,000 Singapore dollars (orapproximately $2,279), measured annually. At December 31, 2009, GFI GroupPte. Ltd. exceeded the minimum requirement by approximately 14,464 Singaporedollars (or approximately $10,295).

 

GFI Korea Money Brokerage Limited is licensed andregulated by the Ministry of Finance and Economy to engage in foreign exchangebrokerage business, and is subject to certain regulatory requirements under theForeign Exchange Transaction Act and regulations thereunder.  As alicensed foreign exchange brokerage company, GFI Korea Money Brokerage Limitedis required to maintain minimum paid-in capital of 5,000,000 Korean Won (orapproximately $4,385). At September 30,2010, GFI Korea Money Brokerage Limitedmet the minimum requirement for paid-in-capital of 5,000,000 Korean Won.

 

**14.    SEGMENT AND GEOGRAPHIC INFORMATION**

 

Following the acquisition of Kyte on July 1,2010, the Company created a new operating segment called “Clearing, Executionand Trading”. In this segment, the Company provides clearing, risk management, settlement and other back-officeservices as well as capital to start-up trading groups, small hedge funds,market-makers and individual traders. The Company believes the addition of thisnew segment is appropriate as it best reflects how the Company is managed andthe manner in which the Company’s performance is evaluated by the Company’schief operating decision makers. As of July 1, 2010, the Company has fouroperating segments: (i) Americas Brokerage, (ii) Europe, Middle Eastand Africa (“EMEA”) Brokerage, (iii) Asia Brokerage, and (iv) Clearing,Execution and Trading. Additionally, the Company presents its operatingsegments as five reportable segments: the four operating segments describedabove plus All Other.  The All Othersegment captures costs that are not directly assignable to one of the operatingbusiness segments, primarily consisting of the Company’s corporate businessactivities and operations from software, analytics and market data.

 

26

----

Table of Contents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

Selected financial information for the Company’sreportable segments is presented below for periods indicated:

 
| ** **                                            | ** ** | **Three Months Ended**** ****September 30,** | ** ** | **Nine Months Ended**** ****September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue**                                           | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                                | 71,546     |                                                            | $          | 75,421 |   | $ | 222,277 |   | $ | 254,416 |   |
| EMEA Brokerage                                        |       | 83,833                                                           |       | 93,411                                                          |       | 293,180 |   | 282,622 |   |
| Asia Brokerage                                        |       | 18,067                                                           |       | 15,991                                                          |       | 57,120 |   | 47,414 |   |
| Clearing, Execution and Trading                       |       | 26,383                                                           |       | —                                                          |       | 26,383 |   | — |   |
| All Other                                             |       | 9,918                                                            |       | 7,423                                                           |       | 41,150 |   | 48,695 |   |
| Total Consolidated Revenue                            |       | $                                                                | 209,747    |                                                            | $          | 192,246 |   | $ | 640,110 |   | $ | 633,147 |   |
| ** **                                            | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Income:**                                  | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                                | —     |                                                            | $          | — |   | $ | — |   | $ | — |   |
| EMEA Brokerage                                        |       | 1                                                                |       | —                                                          |       | 3 |   | 1 |   |
| Asia Brokerage                                        |       | —                                                           |       | —                                                          |       | — |   | — |   |
| Clearing, Execution and Trading                       |       | 754                                                              |       | —                                                          |       | 754 |   | — |   |
| All Other                                             |       | 159                                                              |       | 172                                                             |       | 474 |   | 894 |   |
| Total Consolidated Interest Income                    |       | $                                                                | 914        |                                                            | $          | 172 |   | $ | 1,231 |   | $ | 895 |   |
| ** **                                            | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Expense:**                                 | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                                | 3          |                                                            | $          | 13 |   | $ | 13 |   | $ | 25 |   |
| EMEA Brokerage                                        |       | 213                                                              |       | 160                                                             |       | 555 |   | 431 |   |
| Asia Brokerage                                        |       | 43                                                               |       | 1                                                               |       | 81 |   | 5 |   |
| Clearing, Execution and Trading                       |       | 723                                                              |       | —                                                          |       | 723 |   | — |   |
| All Other                                             |       | 2,222                                                            |       | 2,595                                                           |       | 7,137 |   | 7,434 |   |
| Total Consolidated Interest Expense                   |       | $                                                                | 3,204      |                                                            | $          | 2,769 |   | $ | 8,509 |   | $ | 7,895 |   |
| ** **                                            | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Depreciation and Amortization:**                    | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                                | —     |                                                            | $          | — |   | $ | — |   | $ | — |   |
| EMEA Brokerage                                        |       | —                                                           |       | —                                                          |       | — |   | — |   |
| Asia Brokerage                                        |       | —                                                           |       | —                                                          |       | — |   | — |   |
| Clearing, Execution and Trading                       |       | 932                                                              |       | —                                                          |       | 932 |   | — |   |
| All Other                                             |       | 7,919                                                            |       | 7,680                                                           |       | 23,947 |   | 23,534 |   |
| Total Consolidated Depreciation and Amortization      |       | $                                                                | 8,851      |                                                            | $          | 7,680 |   | $ | 24,879 |   | $ | 23,534 |   |
| ** **                                            | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Loss) Income before Income  Taxes:**               | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                                | 16,804     |                                                            | $          | 15,594 |   | $ | 50,234 |   | $ | 57,230 |   |
| EMEA Brokerage                                        |       | 22,617                                                           |       | 29,959                                                          |       | 92,445 |   | 91,654 |   |
| Asia Brokerage                                        |       | 3,500                                                            |       | 1,768                                                           |       | 12,321 |   | 1,656 |   |
| Clearing, Execution and Trading                       |       | (1,988                                                           | )          | —                                                          |       | (1,988 | ) | — |   |
| All Other                                             |       | (44,318                                                          | )          | (42,905                                                         | )          | (121,904 | ) | (101,749 | ) |
| Total Consolidated (Loss)/Income before Income  Taxes |       | $                                                                | (3,385     | )                                                               | $          | 4,416 |   | $ | 31,108 |   | $ | 48,791 |   |

 

27

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

In addition, with the exception of goodwill, theCompany does not identify or allocate assets by operating segment, nor does itschief operating decision maker evaluate operating segments using discrete assetinformation.  See Note 4 for goodwill byreportable segment.

 

Geographic information regarding revenues for thethree and nine months ended September 30, 2010 and 2009, respectively, andinformation regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in each geographic area as of September 30,2010 and December 31, 2009, respectively, are as follows:

 
| ** **     | ** ** | **Three Months Ended**** ****September 30,** | ** ** | **Nine Months Ended******** September 30,** | ** ** |
|----------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **     | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:      |       |                                                             |       |                                                            |       |   |   |   |   |
| United States  |       | $                                                                | 71,493     |                                                            | $          | 75,388 |   | $ | 220,516 |   | $ | 255,496 |   |
| United Kingdom |       | 96,112                                                           |       | 77,890                                                          |       | 285,481 |   | 262,026 |   |
| Other          |       | 42,142                                                           |       | 38,968                                                          |       | 134,113 |   | 115,625 |   |
| Total          |       | $                                                                | 209,747    |                                                            | $          | 192,246 |   | $ | 640,110 |   | $ | 633,147 |   |

 
| ** **                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived Assets, as defined: |       |                         |       |                        |       |
| United States                  |       | $                            | 53,081     |                        | $          | 56,348 |   |
| United Kingdom                 |       | 15,084                       |       | 14,139                      |       |
| Other                          |       | 4,830                        |       | 4,489                       |       |
| Total                          |       | $                            | 72,995     |                        | $          | 74,976 |   |

 

Revenuesare attributed to geographic areas based on the location of the Company’srelevant subsidiary.

 

**15.    OTHER COMPREHENSIVE INCOME (LOSS)**

 
| ** **                                                   | ** ** | **Three Months Ended**** ****September 30,** | ** ** | **Nine Months Ended**** ****September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Unrealized gain (loss) on  available for sale securities** | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                            |       | $                                                                | 212        |                                                            | $          | 504 |   | $ | (177 | ) | $ | 704 |   |
| Tax (Expense) Benefit                                        |       | (59                                                              | )          | (116                                                            | )          | 50 |   | (171 | ) |
| After Tax Amount                                             |       | $                                                                | 153        |                                                            | $          | 388 |   | $ | (127 | ) | $ | 533 |   |
| **Foreign currency translation  adjustment**                 | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                            |       | $                                                                | 6,756      |                                                            | $          | 381 |   | $ | 5,348 |   | $ | 2,366 |   |
| Tax Benefit (Expense)                                        |       | (2,884                                                           | )          | (159                                                            | )          | (2,297 | ) | (1,021 | ) |
| After Tax Amount                                             |       | $                                                                | 3,872      |                                                            | $          | 222 |   | $ | 3,051 |   | $ | 1,345 |   |

 

28

----

Table ofContents

 

**GFI GROUP INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)(In thousands except share and per share amounts)**

 

**16.    SUBSEQUENT EVENTS**

 

InOctober 2010, the Board of Directors declared a quarterly cash dividend of$0.05 per share payable on  November 30,2010 to shareholders of record on November 15, 2010.

 

OnNovember 1, 2010, the Company purchased the remaining 67% of the shares ofan over-the-counter brokerage business in the U.K. The aggregate purchaseprice was primarily comprised of £7,000 (or $11,229) in cash and 2,343,758 sharesof the Company’s common stock, with a fair value of $11,156. The Company is inthe process of completing the purchase price allocation related to thistransaction. The acquired assets and assumed liabilities will be recorded bythe Company at their estimated fair values which will be determined with theassistance of third party specialists.

 

Subsequentevents have been evaluated for recording and disclosure in the notes to theCondensed Consolidated Financial Statements through the filing date of this Form 10-Q.

 

29

----

 

Table of Contents

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of

GFIGroup Inc.

NewYork, New York

 

We have reviewed theaccompanying condensed consolidated statement of financial condition of GFIGroup Inc. and subsidiaries (the “Company”) as of September 30, 2010, therelated condensed consolidated statements of operations and comprehensiveincome for the three-month and nine-month periods ended September 30, 2010and 2009, and the condensed consolidated statements of cash flows for thenine-month periods ended September 30, 2010 and 2009.  These interim financial statements are theresponsibility of the Company’s management.

 

We conducted ourreviews in accordance with the standards of the Public Company AccountingOversight Board (United States).  A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters.  Itis substantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on ourreviews, we are not aware of any material modifications that should be made tosuch condensed consolidated interim financial statements for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated statement of financialcondition of the Company as of December 31, 2009, and the relatedconsolidated statements of income, comprehensive income, cash flows and changesin stockholders’ equity for the year then ended (not presented herein); and inour report dated March 15, 2010, we expressed an unqualified opinion onthose consolidated financial statements. In our opinion, the information set forth in the accompanying condensedconsolidated statement of financial condition as of December 31, 2009 isfairly stated, in all material respects, in relation to the consolidatedstatement of financial condition from which it has been derived.

 

 
| /s/ Deloitte & Touche LLP |
|------------------------------------|
| New York, New York                 |
| November 9,  2010             |

 

30

----

Table of Contents

 
| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains ‘‘forward-lookingstatements’’ within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include, without limitation, any statementthat may predict, forecast, indicate or imply future results, performance or achievements,and may contain the words ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’ ‘‘estimate,’’‘‘intend,’’ ‘‘project,’’ ‘‘will be,’’ ‘‘will likely continue,’’ ‘‘will likelyresult,’’ or words or phrases of similar meaning. These forward-lookingstatements are based largely on the expectations of management and are subjectto a number of risks and uncertainties including, but not limited to, thefollowing:

 
| · | the  risks and other factors described under the heading “Risk Factors” and  elsewhere in this Form 10-Q and in our 2009 Form 10-K;                                                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                             |
| · | economic,  political and market factors affecting trading volumes and volatility,  securities prices, or demand for our brokerage, clearing, and execution  services, including current conditions in the world economy and financial  markets in which we provide our services;                 |
|   |                                                                                                                                                                                                                                                                                             |
| · | the  extensive regulation of the Company’s business, changes in laws and  regulations governing our business and operations or permissible activities  and our ability to comply with such laws and regulations, including the Dodd-  Frank Wall Street Reform and Consumer Protection Act; |
|   |                                                                                                                                                                                                                                                                                             |
| · | our  ability to attract and retain key personnel, including highly qualified  brokerage personnel;                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                             |
| · | our  entrance into new brokerage markets, including investments in establishing  new brokerage desks;                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                             |
| · | competition  from current and new competitors;                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                             |
| · | risks  associated with our matched principal and principal trading business, such as  credit and market risks, including risks arising from specific brokerage  transactions or series of brokerage transactions;                                                                                |
|   |                                                                                                                                                                                                                                                                                             |
| · | our  ability to keep up with rapid technological change and to continue to develop  and support our electronic brokerage, clearing and execution systems in a  cost-effective manner;                                                                                                            |
|   |                                                                                                                                                                                                                                                                                             |
| · | future  results of operations and financial condition and the success of our business  strategies;                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                             |
| · | economic,  political and market factors affecting trading volumes, securities prices, or  demand for our brokerage, clearing, and execution services, including current  conditions in the world economy and financial markets in which we provide our  services;                                |
|   |                                                                                                                                                                                                                                                                                             |
| · | financial  difficulties experienced by our customers or key participants in the markets  in which we provide our brokerage, clearing and execution services;                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                             |
| · | risks  associated with our ability to assess and integrate potential acquisitions of  businesses or technologies;                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                             |
| · | the  maturing of key markets and any resulting contraction in commissions;                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                             |
| · | risks  associated with the expansion and growth of our operations generally or of  specific products or services, including, in particular, our ability to  manage our international operations;                                                                                                 |
|   |                                                                                                                                                                                                                                                                                             |
| · | uncertainties  associated with currency fluctuations;                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                             |
| · | our  failure to protect or enforce our intellectual property rights;                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                             |
| · | uncertainties  relating to litigation;                                                                                                                                                                                                                                                           |

 

31

----

Table of Contents

 
| · | risks  associated with our ability to meet liquidity and clearing capital  requirements due to a range of factors, including the impact of the recent  conditions in the world economy and the financial markets in which we provide  our services; and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                    |
| · | the  effectiveness of our risk management policies and procedures.                                                                                                                                                                                      |

 

Theforegoing risks and uncertainties, as well as those risks discussed under theheadings ‘‘Item 2—Management’s Discussion and Analysis of Financial Conditionand Results of Operations’’, ‘‘Item 3—Quantitative and Qualitative DisclosuresAbout Market Risk’’ and “Part II, Item 1A Risk Factors” and elsewherein this Form 10-Q, may cause actual results to differ materially from theforward-looking statements. The information included herein is given as of thefiling date of this Form 10-Q with the SEC and future events orcircumstances could differ significantly from these forward-looking statements.The Company does not undertake to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**BusinessEnvironment**

 

Asa leading provider of wholesale brokerage, clearing services, electronicexecution and trading support services for global financial markets, ourresults of operations are impacted by a number of external market factors,including market volatility and transactional volumes, the organic growth orcontraction of the derivative and cash markets in which we provide ourbrokerage services, the particular mix of transactional activity in our variousproducts, the competitive and regulatory environment in the variousjurisdictions and markets in which we operate and the financial condition ofthe dealers, hedge funds, traders and other market participants to whom weprovide our services.  Outlined below are management’s observations ofthese external market factors during the most recent fiscal period. The factorsoutlined below are not the only factors that impacted our results of operationsfor the most recent fiscal period, and additional or other factors may impact,or have different degrees of impact, on our results of operations in futureperiods.

 

*Market Volatility and General Business Environment*

 

Asa general rule, our business typically benefits from volatility in the marketsthat we serve, as periods of increased volatility often coincide with morerobust trading by our clients and a higher volume of transactions. However, periods of extreme volatility may result in significant market dislocationsthat can also lead certain clients to reduce their trading activity.

 

Marketvolatility is driven by a range of external factors, some of which are marketspecific and some of which are correlated to general macro-economicconditions.  Despite slightly higher volatility year-over-year in thethird quarter of 2010, dealers, hedge funds and other market participants inmany of the markets in which we operate, specifically in the fixed income andequity markets, curtailed their trading activity in the third quarter. Ourfixed income business continued to suffer from narrower credit spreads, onaverage, and competitive pressures. The U.S. economy continued to concerninvestors, as high unemployment and lower than expected GDP growth raisedconcerns of a slower than expected economic recovery during the quarter. Inaddition to the uncertainty around the direction of the global economy, webelieve similar investor sentiment around derivatives regulation and marketstructure also contributed to depressed trading activity. The combination ofthese and other factors led to brokerage revenues being down slightlyyear-over-year in the third quarter of 2010.

 

*Growth in Underlying Markets and New Product Offerings*

 

Ourbusiness has historically benefited from growth in the OTC derivatives marketsdue to either the expansion of existing markets, including increased notionalamounts outstanding or increased transaction volumes, or the development of newproducts or classes of products.  The level of growth in these markets isdifficult 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 transactionalvolumes.  Therefore, to help gauge growth in any particular quarter,management also looks to the published results of large OTC derivatives dealersand certain futures exchanges as potential indicators of transactional activityin the related OTC derivative markets.

 

TheInternational Swaps and Derivatives Association (“ISDA”) released its Mid-Year2010 Market Survey in October 2010 detailing the changes in globalnotional amounts outstanding in various OTC markets.  Notional amounts outstanding included newtransactions and those from previous periods. The ISDA statistics indicated that there was a decline in the notionalamounts outstanding for two of the three derivative categories reported overthe previous year-end and mid-year 

 

32

----

Table of Contents

 

resultsas follows: (i) equity derivatives were down 27.3% year-over-year and5.7%, sequentially (ii) credit default swaps were down 15.9% year overyear and 13.7% sequentially, and (iii) interest rate derivatives, whichinclude interest rate swaps and options and cross currency swaps, were up 4.8%year-over-year and 1.7% sequentially.

 

ManyOTC derivatives products trended toward lower trading volumes in 2009 as marketparticipants deployed less trading capital due to investor redemptions andreduced borrowing capacity.  Evidence ofthis trend was seen in the reduced transaction volumes of certain productstraded on futures exchanges in 2009. However, as the economy and markets showed signs of recovery in thefirst half of 2010, the year-over-year comparisons on futures exchangesreturned to growth in many cases. For example, in the third quarter of 2010,the CME Group, Inc. reported a 14% increase in average overall dailyvolumes and the average daily OTC volume cleared through CME ClearPort was up3% from the third quarter of 2009. In addition, IntercontinentalExchange, Inc.(“ICE”) reported a 20% increase in the average daily volume of its futuresproducts and a 9% increase in the average daily commissions from its OTC energyproducts year-over-year for the third quarter. However, revenues from ICE’s credit default swap trade execution,processing and clearing businesses were down 2% compared to the third quarterof 2009.

 

Ourexpansion into new products and geographical areas has historically contributedto growth in our brokerage revenues. For example, we recently invested in newbrokerage businesses in ethanol and mortgage-backed securities in the U.S. Inthe U.K, we completed the acquisition of The Kyte Group Limited and KyteCapital Management Limited (collectively “Kyte”) on July 1, 2010, which,together, provide clearing, brokerage, settlement and back-office services toproprietary traders, brokers, market makers and hedge funds.  Kyte also provides capital to start-uptrading groups, small hedge funds, market-makers and individual traders.

 

*Competitive and Regulatory Environment*

 

Anothermajor external market factor affecting our business and results of operationsis competition, which may take the form of competitive pressure on thecommissions we charge for our brokerage services or competition for brokerageand technology development personnel with extensive experience in the specializedmarkets we serve. Competition for the services of productive brokers remainedintense in the third quarter of 2010. The consolidation and personnel layoffs by dealers, hedge funds andother market participants over the last few years also led to increasedcompetition to provide brokerage services to a smaller number of marketparticipants in the near term. Additionally, many of the large dealer firmscontinue to commit additional resources, including hiring additional brokeragepersonnel and committing additional capital in the cash markets, which led usto reduce our corporate fixed income presence in the U.S. Despite thesefactors, there were indications in the first nine months of 2010 that tradingactivity by our customers increased year-over-year in certain derivativemarkets.

 

Duringthe last two years, we believe that the legislative and regulatory proposalsfor increased transparency, position limits and collateral or capitalrequirements caused increased uncertainty in the markets and led investors andbanks to commit less capital to many OTC markets. In the second quarter of2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the “Act”) and the CFTC and SEC began the process of proposing rules toimplement the new statutory provisions of the Act.  We are optimistic that the regulatorysolutions, including centralized clearing, increased transparency andcentralized trade reporting, will be generally beneficial to the long-termhealth of the broader financial markets, although we believe that it willcontinue to depress near-term volumes in certain derivative markets as thedetails behind the regulations are agreed upon and put in place. Thelegislation in the U.S. requires certain OTC derivatives to be executed througha registered exchange or “swap execution facility”.  We believe that we will be able to qualify asa swap execution facility and we believe that our product expertise, proventechnology, depth of liquidity and long-standing relationships position us wellto capture any newly created opportunities in these markets.

 

**FinancialOverview**

 

Asmore fully discussed below, our results of operations are significantlyimpacted by our ability to generate revenue growth and the amount ofcompensation and benefits we provide to our employees.  The following factors had a significantimpact on our revenues and employee costs during the three month period ended September 30,2010:

 

Our revenues increased 9.1%to $209.7 million for the three months ended September 30, 2010 from$192.2 million for the three months ended September 30, 2009. The mainfactors contributing to this increase in our revenues were:

 

·                  $26.4 million in revenues contributed fromKyte, which was acquired on July 1, 2010;

·                  Improved economic and market conditions incertain emerging markets and Asia;

 

33

----

Table of Contents

 

·                  Increased trading activity in certain financialand commodity product markets in which we have a leading market share;

·                  Higher share and commodity values, onaverage, as they relate directly to the commissions revenue we receive incertain equity and commodity products, respectively, in Europe;

·                  Increased electronic trading activity inEurope and the U.S. on our hybrid brokerage platforms;

·                  Contributions from new brokerage desks andnew brokers hired across all product categories; and

·                  The strong performance of our Trayportsubsidiary.

 

Partially offsetting thesefactors were several negative factors that affected our brokerage and otherrevenues, including:

 

·                  Increased competition in certain cash fixedincome markets globally, which led us to reduce our corporate fixed incomepresence in the U.S;

·                  Slower market conditions in Europe resultingfrom the European debt crisis the previous quarter;

·                  Lower cash equity and equity derivativetrading volumes in the U.S. and Europe;

·                  Regulatory andgovernmental uncertainty as it relates to market structure and operations inOTC derivative markets; and

·                  Narrower creditspreads, on average, as they relate directly to certain cash fixed income deskrevenues.

 

The most significant component of our cost structure is employeecompensation and benefits, which includes salaries, sign-on bonuses, incentivecompensation and related employee benefits and taxes.  Our employee compensation and benefitsexpense decreased 1.3% to $133.3 million for the three months endedSeptember 30, 2010 from $135.1 million for the three months endedSeptember 30, 2009.

 

Our compensation andemployee benefits for all employees have both a fixed and variablecomponent.  Base salaries and benefitcosts are primarily fixed for all employees while bonuses constitute thevariable portion of our compensation and employee benefits.  Within overall compensation and employeebenefits, the employment costs of our brokerage personnel are the keycomponent.  Bonuses for brokeragepersonnel are primarily based on the operating results of their relatedbrokerage desk as well as their individual performance.  For many of our brokerage employees, theirbonus constitutes a significant component of their overall compensation.  Broker performance bonuses decreased to $53.4 million for the three months endedSeptember 30, 2010 from $56.1 million for the three months ended September 30, 2009.  A portion of our bonus expense is subject tocontractual guarantees that may require us to make bonus payments to brokersregardless of their performance in any particular period.

 

Further, we grant sign-onbonuses for certain newly-hired brokers or for certain of our existing brokerswho agree to long-term employment agreements. Expenses relating to sign-onbonuses decreased to $6.9 millionfor the three months ended September 30, 2010 from $11.3 million for the three months endedSeptember 30, 2009.  These sign-onbonuses may be paid in the form of cash or restricted stock units (“RSUs”) andare typically amortized over the term of the related employment agreement,which is generally two to four years. These employment agreements typically contain forfeiture provisions forunvested RSUs or repayment of all or a portion of the sign-on bonus should theemployee voluntarily terminate his or her employment or if the employee’semployment is terminated for cause during the initial term of the agreement.

 

34

----

Table of Contents

 

**Results of Consolidated Operations**

 

The following table sets forth our condensedconsolidated results of operations for the periods indicated:

 
| ** **                                                            | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**               | ** ** | **September 30,**          | ** ** |
| ** **                                                            | ** ** | **2010**                             | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                            | ** ** | **(dollars in thousands)** | ** ** |
| REVENUES:                                                             |       |                                 |       |                            |       |   |   |   |   |
| Brokerage revenues:                                                   |       |                                 |       |                            |       |   |   |   |   |
| Agency commissions                                                    |       | $                                    | 125,011    |                            | $          | 119,396 |   | $ | 406,465 |   | $ | 366,283 |   |
| Principal transactions                                                |       | 49,677                               |       | 64,989                          |       | 166,499 |   | 216,770 |   |
| Total brokerage revenues                                              |       | 174,688                              |       | 184,385                         |       | 572,964 |   | 583,053 |   |
| Clearing services revenues                                            |       | 21,553                               |       | —                          |       | 21,553 |   | — |   |
| Equity in earnings of unconsolidated brokerage  businesses            |       | 1,632                                |       | —                          |       | 1,632 |   | — |   |
| Software, analytics and market data                                   |       | 14,905                               |       | 13,627                          |       | 44,324 |   | 39,698 |   |
| Interest income                                                       |       | 914                                  |       | 172                             |       | 1,231 |   | 895 |   |
| Other (loss) income                                                   |       | (3,945                               | )          | (5,938                          | )          | (1,594 | ) | 9,501 |   |
| Total revenues                                                        |       | 209,747                              |       | 192,246                         |       | 640,110 |   | 633,147 |   |
| EXPENSES:                                                             |       |                                 |       |                            |       |   |   |   |   |
| Compensation and employee benefits                                    |       | 133,345                              |       | 135,139                         |       | 419,117 |   | 427,262 |   |
| Execution, clearing and settlement fees                               |       | 26,616                               |       | 7,153                           |       | 41,594 |   | 23,366 |   |
| Communications and market data                                        |       | 13,788                               |       | 11,661                          |       | 36,369 |   | 34,399 |   |
| Travel and promotion                                                  |       | 8,665                                |       | 8,280                           |       | 26,899 |   | 24,310 |   |
| Rent and occupancy                                                    |       | 5,867                                |       | 5,470                           |       | 16,553 |   | 14,982 |   |
| Depreciation and amortization                                         |       | 8,851                                |       | 7,680                           |       | 24,879 |   | 23,534 |   |
| Professional fees                                                     |       | 7,055                                |       | 4,508                           |       | 19,899 |   | 13,728 |   |
| Interest                                                              |       | 3,204                                |       | 2,769                           |       | 8,509 |   | 7,895 |   |
| Other expenses                                                        |       | 5,741                                |       | 5,170                           |       | 15,183 |   | 14,880 |   |
| Total expenses                                                        |       | 213,132                              |       | 187,830                         |       | 609,002 |   | 584,356 |   |
| (Loss) income before (benefit from) provision for  income taxes       |       | (3,385                               | )          | 4,416                           |       | 31,108 |   | 48,791 |   |
| (Benefit from) provision for income taxes                             |       | (1,050                               | )          | 1,633                           |       | 9,643 |   | 18,052 |   |
| Net (loss) income before attribution to  non-controlling shareholders |       | (2,335                               | )          | 2,783                           |       | 21,465 |   | 30,739 |   |
| Net income attributable to non-controlling  interests                 |       | 151                                  |       | —                          |       | 151 |   | — |   |
| GFI’s net (loss) income                                          |       | $                                    | (2,486     | )                               | $          | 2,783 |   | $ | 21,314 |   | $ | 30,739 |   |

 

35

----

Table of Contents

 

Thefollowing table sets forth our condensed consolidated results of operations asa percentage of our total revenues for the periods indicated:

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| REVENUES:                                                             |       |                             |       |                            |       |   |   |   |   |
| Brokerage revenues:                                                   |       |                             |       |                            |       |   |   |   |   |
| Agency commissions                                                    |       | 59.6                             | %          | 62.1                            | %          | 63.5 | % | 57.9 | % |
| Principal transactions                                                |       | 23.7                             |       | 33.8                            |       | 26.0 |   | 34.2 |   |
| Total brokerage revenues                                              |       | 83.3                             |       | 95.9                            |       | 89.5 |   | 92.1 |   |
| Clearing services revenues                                            |       | 10.3                             |       | —                          |       | 3.4 |   | — |   |
| Equity in earnings of unconsolidated brokerage  businesses            |       | 0.8                              |       | —                          |       | 0.3 |   | — |   |
| Software, analytics and market data                                   |       | 7.1                              |       | 7.1                             |       | 6.9 |   | 6.3 |   |
| Interest income                                                       |       | 0.4                              |       | 0.1                             |       | 0.2 |   | 0.1 |   |
| Other (loss) income                                                   |       | (1.9                             | )          | (3.1                            | )          | (0.3 | ) | 1.5 |   |
| Total revenues                                                        |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| EXPENSES:                                                             |       |                             |       |                            |       |   |   |   |   |
| Compensation and employee benefits                                    |       | 63.6                             |       | 70.3                            |       | 65.5 |   | 67.5 |   |
| Execution, clearing and settlement fees                               |       | 12.7                             |       | 3.7                             |       | 6.5 |   | 3.7 |   |
| Communications and market data                                        |       | 6.6                              |       | 6.1                             |       | 5.7 |   | 5.4 |   |
| Travel and promotion                                                  |       | 4.1                              |       | 4.3                             |       | 4.2 |   | 3.8 |   |
| Rent and occupancy                                                    |       | 2.8                              |       | 2.8                             |       | 2.6 |   | 2.4 |   |
| Depreciation and amortization                                         |       | 4.2                              |       | 4.0                             |       | 3.9 |   | 3.7 |   |
| Professional fees                                                     |       | 3.4                              |       | 2.3                             |       | 3.1 |   | 2.2 |   |
| Interest                                                              |       | 1.5                              |       | 1.4                             |       | 1.3 |   | 1.2 |   |
| Other expenses                                                        |       | 2.7                              |       | 2.7                             |       | 2.4 |   | 2.4 |   |
| Total expenses                                                        |       | 101.6                            | %          | 97.6                            | %          | 95.2 | % | 92.3 | % |
| (Loss) income before (benefit from) provision for  income taxes       |       | (1.6                             | )          | 2.4                             |       | 4.8 |   | 7.7 |   |
| (Benefit from) provision for income taxes                             |       | (0.5                             | )          | 0.8                             |       | 1.5 |   | 2.9 |   |
| Net (loss) income before attribution to  non-controlling shareholders |       | (1.1                             | )          | 1.6                             |       | 3.3 |   | 4.8 |   |
| Net income attributable to non-controlling  interests                 |       | 0.1                              |       | —                          |       | 0.0 |   | — |   |
| GFI’s net (loss) income                                          |       | (1.2                             | )%         | 1.6                             | %          | 3.3 | % | 4.8 | % |

 

36

----

 

Table ofContents

 

**Three Months Ended September 30, 2010 Compared tothe Three Months Ended September 30, 2009**

 

GFI’snet loss for the three months ended September 30, 2010 was $2.5 millionas compared to net income of $2.8 million for the three months endedSeptember 30, 2009, a decrease of $5.3 million. Total revenues increasedby $17.5 million, or 9.1%, to $209.7 million for the three months endedSeptember 30, 2010 from $192.2 million for the same period in the prioryear. Our revenue for the three months ended September 30, 2010 increasedprimarily because of increased clearing services revenues attributable to Kyte,which we acquired on July 1, 2010, growth in our commodities and financialproduct businesses and the reasons set forth above under “Financial Overview”.However, we were adversely affected by foreign exchange rates in the thirdquarter of 2010 to the extent we earned revenues denominated in Euros and theBritish Pound as these currencies were weaker, on average, relative to the U.S.Dollar than in the third quarter of 2009. Total expenses increased by $25.3 million, or 13.5%, to $213.1 millionfor the three months ended September 30, 2010 from $187.8 million forthe prior year. Expenses for the three months ended September 30, 2010increased primarily because of increased execution, clearing and settlementfees related to Kyte, higher professional and other fees associated withbusiness development activity in the quarter also contributed to the increasein expenses, as did higher communications and market data. The increase intotal expenses was partially offset by a decrease in compensation expense.

 

Thefollowing table sets forth the changes in revenues for the three months endedSeptember 30, 2010 as compared to the same period in 2009 (dollars inthousands, except percentage data):

 
| ** **                 | ** ** | **For the Three Months Ended September 30,** | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **2010**                                                                   | ** ** | **%*** | ** ** | **2009** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**               |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:        |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Fixed Income               |       | $                                                                          | 52,975     |   | 25.3 | % | $ | 68,235 |   | 35.5 | % | $ | (15,260 | ) | (22.4 | )% |
| Equity                     |       | 37,172                                                                     |       | 17.7 |   | 44,673 |   | 23.2 |   | (7,501 | ) | (16.8 | ) |
| Financial                  |       | 39,731                                                                     |       | 18.9 |   | 33,166 |   | 17.3 |   | 6,565 |   | 19.8 |   |
| Commodity                  |       | 44,810                                                                     |       | 21.4 |   | 38,311 |   | 19.9 |   | 6,499 |   | 17.0 |   |
| Total brokerage revenues   |       | 174,688                                                                    |       | 83.3 |   | 184,385 |   | 95.9 |   | (9,697 | ) | (5.3 | ) |
| Clearing services revenues |       | 21,553                                                                     |       | 10.3 |   | — |   | — |   | 21,553 |   | 100.0 |   |
| Other revenues             |       | 13,506                                                                     |       | 6.4 |   | 7,861 |   | 4.1 |   | 5,645 |   | 71.8 |   |
| Total Revenues             |       | $                                                                          | 209,747    |   | 100.0 | % | $ | 192,246 |   | 100.0 | % | $ | 17,501 |   | 9.1 | % |

 

----

*    Denotes % of total revenues.

**     Denotes %change in the three months ended September 30, 2010 as compared to thethree months ended September 30, 2009.

 

·                  **Brokerage Revenues** — We offer ourbrokerage services in four broad product categories: fixed income, equity,financial and commodity.  During thesecond quarter of 2010 we changed the name of our “credit products” category to“fixed income products” in order to better describe the full range of productsit represents. Below is a discussion of our brokerage revenues by productcategory for the three months ended September 30, 2010 as compared to thesame period in 2009.

 

·                  Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) decreased by approximately 12.0% for thethree months ended September 30, 2010, as compared to the same period fromthe prior year.

 

·                  The decrease infixed income product brokerage revenues of $15.3 million in 2010 was due to adecline in U.S. and European cash fixed income revenues.  Narrower credit spreads, on average, andincreased competition adversely affected our cash fixed income business, whileour fixed income derivative revenues were up slightly compared to the thirdquarter of 2009 due to growth in U.S. and Asia. Our fixed income product brokerage personnel headcount increased by 23to 324 employees at September 30, 2010 from 301 employees atSeptember 30, 2009.

 

·                  The decrease inequity product brokerage revenues of $7.5 million in 2010 was primarily due tolower revenues in the U.S., which were impacted by lower volatility and tradingvolumes.  This decrease was partially offsetby higher share values, on average, which impact a portion of the revenues wegenerate in 

 

37

----

Table of Contents

 

Europe,as compared to the third quarter of 2009. Our equity product brokerage personnel headcount increased by 9 to 244employees at September 30, 2010 from 235 employees at September 30,2009.

 

·                  The increase infinancial product brokerage revenues of $6.6 million in 2010 was primarilyattributable to improved market and economic conditions in certain emergingmarkets and Asia as well as the performance of new brokerage desks.  Our emerging market foreign exchange andinterest rate derivative products exhibited strong growth year-over-year.  Our financial product headcount increased by23 to 289 employees at September 30, 2010 from 266 employees atSeptember 30, 2009.

 

·                  The increase incommodity product brokerage revenues of $6.5 million in 2010 was primarilyattributable to higher commodity prices, on average,  and strong demand for certain commodityproducts, such as electricity and natural gas. We also benefited from new hires in our energy and commodities productarea in the U.S. and Europe and increased electronic trading activity in theU.S. and Europe on our EnergyMatch® hybrid brokerage platforms. Our commodityproduct brokerage personnel headcount increased by 19 to 295 employees at September 30,2010 from 276 employees at September 30, 2009.

 

·                  **ClearingServices****Revenue**

 

·                  Clearingservices revenue was $21.6 million for the third quarter of 2010.  These revenues are entirely related to theoperations of Kyte, which we acquired on July 1, 2010. As a result, thereis no comparable revenue for clearing services in the third quarter of 2009.Kyte uses the services of third parties who act as general clearing members toclearing houses in order to clear cash and derivative products for its customers.Kyte charges a fee to its customers for clearing, settlement and other servicesagainst which customer negotiated rebates may be applied. Kyte also incursexchange, clearing and execution costs on behalf of its clients, which arefully reimbursed and are therefore included in both revenues and expenses.

 

·                  **Other Revenues**

 

Other revenues were comprised of the following:

 
| ** **                                                       | ** ** | **For the Three Months Ended   September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2010**                                                                     | ** ** | **2009** | ** ** |
| ** **                                                       | ** ** | **(dollars in thousands)**                                         | ** ** |
| Software, analytics and market data                              |       | $                                                                            | 14,905     |   | $ | 13,627 |   |
| Equity in earnings of unconsolidated brokerage  businesses       |       | 1,632                                                                        |       | — |   |
| Remeasurement of foreign currency transactions and  balances     |       | 3,392                                                                        |       | 2,307 |   |
| Net realized and unrealized losses from foreign  currency hedges |       | (8,170                                                                       | )          | (8,742 | ) |
| Interest income                                                  |       | 914                                                                          |       | 172 |   |
| Other                                                            |       | 833                                                                          |       | 497 |   |
| Total other revenues                                             |       | $                                                                            | 13,506     |   | $ | 7,861 |   |

 

Other revenues increased by$5.6 million in the third quarter of 2010 to $13.5 million from $7.9 million inthe same period in 2009. This increase was primarily driven by the $1.6 millionequity in earnings of unconsolidated brokerage businesses related to investmentsin certain Kyte brokerage operations acquired on July 1, 2010, for whichthere is no comparable amount in the prior period.  In addition, revenues from software, analyticsand market data increased by $1.3 million primarily due to growth at our Trayport subsidiary, as well a netincrease of $1.1 million related to the measurement of foreign currencytransactions and balances. These foreign currency remeasurement gains andlosses result from the remeasurement of asset and liability balances that aredenominated in currencies other than the functional currency of the businessunit undertaking such transactions. We experienced $0.6 million less in netrealized and unrealized foreign currency losses from foreign currency hedges inthe three months ended September 30, 2010 as compared to the same periodin 2009. Interest income in the quarter increased by $0.7 million due tointerest earned on deposits from Kyte’s clearing customers.

 

38

----

Table of Contents

** **

**Expenses**

 

Thefollowing table sets forth the changes in expenses for the three months endedSeptember 30, 2010 as compared to the same period in 2009 (dollars inthousands, except percentage data):

 
| ** **                              | ** ** | **For the Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                              | ** ** | **September 30,**                             | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **2010**                                           | ** ** | **%***       | ** ** | **2009**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                            |       |                                               |       |         |       |       |       |   |   |   |   |   |   |
| Compensation and employee benefits      |       | $                                                  | 133,345    |         | 63.6       | %          | $          | 135,139 |   | 70.3 | % | $ | (1,794 | ) | (1.3 | )% |
| Execution, clearing and settlement fees |       | 26,616                                             |       | 12.7         |       | 7,153      |       | 3.7 |   | 19,463 |   | 272.1 |   |
| Communications and market data          |       | 13,788                                             |       | 6.6          |       | 11,661     |       | 6.1 |   | 2,127 |   | 18.2 |   |
| Travel and promotion                    |       | 8,665                                              |       | 4.1          |       | 8,280      |       | 4.3 |   | 385 |   | 4.6 |   |
| Rent and occupancy                      |       | 5,867                                              |       | 2.8          |       | 5,470      |       | 2.8 |   | 397 |   | 7.3 |   |
| Depreciation and amortization           |       | 8,851                                              |       | 4.2          |       | 7,680      |       | 4.0 |   | 1,171 |   | 15.2 |   |
| Professional fees                       |       | 7,055                                              |       | 3.4          |       | 4,508      |       | 2.3 |   | 2,547 |   | 56.5 |   |
| Interest                                |       | 3,204                                              |       | 1.5          |       | 2,769      |       | 1.4 |   | 435 |   | 15.7 |   |
| Other expenses                          |       | 5,741                                              |       | 2.7          |       | 5,170      |       | 2.7 |   | 571 |   | 11.0 |   |
| **Total Expenses**                      |       | $                                                  | 213,132    |         | 101.6      | %          | $          | 187,830 |   | 97.6 | % | $ | 25,302 |   | 13.5 | % |

 

----

*    Denotes % of total revenues

**     Denotes %change in the three months ended September 30, 2010 as compared to thethree months ended September 30, 2009

 

·          **Compensationand Employee Benefits**

 

·                  The decrease incompensation and employee benefits expenses of $1.8 million in the thirdquarter of 2010 was primarily attributable to lower broker performance andsign-on bonus expenses, offset partially by higher broker salaries, payrolltaxes and benefits from increased broker headcount, as well as $2.9 millionrelated to Kyte.

 

·                  Totalcompensation and employee benefits as a percentage of total revenues decreasedto 63.6% for the three months ended September 30, 2010 as compared to70.3% for the same period in the prior year. The lower compensation rate is primarily due to the addition of Kyte’sclearing services revenues and the comparatively lower compensation levels thatsupport such revenues.

 

·                  Bonus expense represented44.1% and 46.1% of total compensation and employee benefits expense for thethree months ended September 30, 2010 and 2009, respectively. A portion ofour bonus expense is subject to contractual guarantees that may require us tomake bonus payments to brokers regardless of their performance in anyparticular period. Additionally, sign-on bonus expense represented 6.2% and9.0% of total compensation and employee benefits for the three months endedSeptember 30, 2010 and 2009, respectively.

 

·          **Execution,Clearing and Settlement Fees**

 

·                  Excluding the$21.0 million in fees related to Kyte, our execution, clearing and settlementfees, as a percentage of our total revenues from principal transactionsrevenues increased to 11.8% for the three months ended September 30, 2010,from 11.0% for the same period from the prior year. This increase was primarilydue to the change in revenue mix between cash equity and cash fixed incomeproducts.  Principal transactions are generally settled through third partyclearing organizations that charge us a fee for their services. We also use theservices of stock exchanges and floor brokers, to assist in the execution oftransactions. Fees paid to floor brokers and execution fees paid to exchangesin these circumstances are

 

39

----

Table of Contents

 

includedin clearing fees. In addition, clearing fees also includes fees incurred incertain equity transactions executed on an agency basis.

 

·                  The $21.0million in execution, clearing and settlement fees related to Kyte represent97.2% of clearing services revenue from Kyte in the quarter. Thedifference between clearing expenses and revenue will largely depend on theproduct and customer mix, offset partially by individually negotiated customerrebates.

 

·          **AllOther Expenses**

 

·                The increase incommunications and quotes expense of $2.1 million in the third quarter of 2010was primarily attributable to $1.8 million of such expenses related to Kyte.

 

·                The increase intravel and promotion was primarily attributable to increased broker headcount.Travel and promotion, as a percentage of our total brokerage revenues for thethree months ended September 30, 2010, increased to 5.0% from 4.5% for thesame period from the prior year.

 

·                  The increase inrent and occupancy of $0.4 million was primarily due to an increase in rent andrelated costs from Kyte.

 

·                  The increase inprofessional fees of $2.5 million was primarily due to increased professionalfees relating to the integration of Kyte as well as consulting and professionalfees related to strategic projects.

 

·                  Our effective tax rate was31.0% for the three months ended September 30, 2010 as compared to 37.0%for the same period in the prior year. The reduction in the effective tax ratewas primarily due to a shift in the geographic mix of our earnings in favor ofjurisdictions with lower tax rates.

 

**Nine Months Ended September 30, 2010 Compared tothe Nine Months Ended September 30, 2009**

 

GFI’snet income for the nine months ended September 30, 2010 was $21.3 millionas compared to GFI’s net income of $30.7 million for the nine months ended September 30,2009, a decrease of $9.4 million or approximately 30.6%.  Total revenuesincreased by $7.0 million, or 1.1%, to $640.1 million for the nine months endedSeptember 30, 2010 from $633.1 million for the same period from the prioryear. Our revenue for the three months ended September 30, 2010 increasedprimarily because of increased clearing services revenues attributable to Kyte,which we acquired on July 1, 2010. Revenues also increased due to growthin our revenues from our commodities, financial and fixed income derivativebrokerage businesses, as well as an increase in Trayport softwarerevenues.  Partially offsetting thisgrowth was weakness in U.S. equity and cash fixed income brokerage revenuesglobally. Our total brokerage personnel headcount increased by 74 to a total of1,152 employees at September 30, 2010 from 1,078 employees at September 30,2009. Total expenses increased by $24.6 million, or 4.2%, to $609.0 million forthe nine months ended September 30, 2010 from $584.4 million for thesame period from the prior year. Expenses increased primarily because of anincrease in execution, clearing and settlement fees and the addition of otheroperating expenses from Kyte as well as higher professional fees attributableto strategic business development activities. This increase was offsetpartially by decreased compensation expense attributable to lowerperformance-based bonus expense as well as lower execution, clearing andsettlement fees attributable to the decline in cash equities and fixed incomevolumes during the period.

 

40

----

Table ofContents

 

Thefollowing table sets forth the changes in revenues for the nine months ended September 30,2010 as compared to the same period in 2009 (dollars in thousands, exceptpercentage data):

 
| ** **                 | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **2010**                                                                  | ** ** | **%*** | ** ** | **2009** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**               |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:        |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Fixed Income               |       | $                                                                         | 185,269    |   | 28.9 | % | $ | 223,727 |   | 35.3 | % | $ | (38,458 | ) | (17.2 | )% |
| Equity                     |       | 131,325                                                                   |       | 20.5 |   | 146,920 |   | 23.2 |   | (15,595 | ) | (10.6 | ) |
| Financial                  |       | 116,964                                                                   |       | 18.3 |   | 97,662 |   | 15.5 |   | 19,302 |   | 19.8 |   |
| Commodity                  |       | 139,406                                                                   |       | 21.8 |   | 114,744 |   | 18.1 |   | 24,662 |   | 21.5 |   |
| Total brokerage revenues   |       | 572,964                                                                   |       | 89.5 |   | 583,053 |   | 92.1 |   | (10,089 | ) | (1.7 | ) |
| Clearing services revenues |       | 21,553                                                                    |       | 3.4 |   | — |   | — |   | 21,553 |   | 100.0 |   |
| Other revenues             |       | 45,593                                                                    |       | 7.1 |   | 50,094 |   | 7.9 |   | (4,501 | ) | (9.0 | ) |
| Total Revenues             |       | $                                                                         | 640,110    |   | 100.0 | % | $ | 633,147 |   | 100.0 | % | $ | 6,963 |   | 1.1 | % |

 

----

*    Denotes % of total revenues.

**     Denotes %change in the nine months ended September 30, 2010 as compared to the ninemonths ended September 30, 2009.

 

·                          **Brokerage Revenues** — We offer ourbrokerage services in four broad product categories: fixed income, equity,financial, and commodity. Below is adiscussion of our brokerage revenues by product category for the nine monthsended September 30, 2010 as compared to the same period in 2009.

 

·                  Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) decreased by approximately 6.6.% for thenine months ended September 30, 2010, as compared to the same period fromthe prior year.

 

·                  The decrease in fixed income brokeragerevenues of $38.5 million for the nine months ended September 30, 2010 wasdue to a decline in U.S. and European cash fixed income revenues partiallyoffset by growth in fixed income derivative revenues.  Narrower credit spreads, on average, andincreased competition adversely affected our cash fixed income businessglobally leading us to reduce our corporate fixed income presence in the U.S.in the first half of 2010, while our fixed income derivative revenues increasedin the U.S. and Europe due to an improved business environment, increasedelectronic trading on our CreditMatch® platform and heightened volatility fromEuropean sovereign debt concerns in the first half of 2010. Our fixed incomeproduct brokerage personnel headcount increased by 23 to 324 employees atSeptember 30, 2010 from 301 employees at September 30, 2009.

 

·                  The decrease inequity product brokerage revenues of $16.0 million for the nine months ended September 30,2010 compared to the same period in 2009 was primarily due to lower revenues inthe U.S., which were impacted by lower trading volumes.  This decrease was partially offset byslightly higher revenues in Europe aided by volatility related to the Europeansovereign debt crisis in the first half of 2010 and by higher share values, onaverage, as compared to the same period in 2009.  Our equity product brokerage personnelheadcount increased by 9 to 244 employees at September 30, 2010 from 235employees at September 30, 2009.

 

·                  The increase infinancial product brokerage revenues of $19.3 million for the nine months endedSeptember 30, 2010 compared to the same period in 2009 was primarilyattributable to improved market and economic conditions in emerging markets andAsia.  Our financial product headcountincreased by 23 to 289 employees at September 30, 2010 from 266 employeesat September 30, 2009.

 

·                  The increase incommodity product brokerage revenues of $24.7 million for the nine months endedSeptember 30, 2010 was primarily due to higher commodity prices andincreased demand for certain commodity products, including shipping,electricity and natural gas derivatives. We also benefited from 

 

41

----

Table of Contents

 

newhires in our energy and commodities product area in the U.S. and Europe andincreased electronic trading activity in the U.S and in Europe on ourEnergyMatch® hybrid brokerage platforms. Our commodity product brokeragepersonnel headcount increased by 19 to 295 employees at September 30, 2010from 276 employees at September 30, 2009.

 

·                  **Clearing Services Revenues**

 

·                  Clearingservices revenue was $21.6 million for the third quarter of 2010.  These revenues are entirely related to theoperations of Kyte, which we acquired on July 1, 2010. As a result, thereis no comparable revenue for clearing services in the third quarter of 2009.Kyte uses the services of third parties who act as general clearing members toclearing houses in order to clear cash and derivative products for itscustomers. Kyte charges a fee to its customers for clearing, settlement andother services against which customer negotiated rebates may be applied. Kytealso incurs exchange, clearing and execution costs on behalf of its clients,which are fully reimbursed and are therefore included in both revenues andexpenses.

 

·                  **Other Revenues**

 

Otherrevenues were comprised of the following:

 
| ** **                                                      | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2010**                                                              | ** ** | **2009** | ** ** |
| ** **                                                      | ** ** | **(dollars in thousands)**                                  | ** ** |
|                                                            |       |                                                                  |       |   |   |
| Software, analytics and market data                             |       | $                                                                     | 44,324     |   | $ | 39,698 |   |
| Equity in earnings of unconsolidated brokerage  businesses      |       | 1,632                                                                 |       | — |   |
| Remeasurement of foreign currency transactions and  balances    |       | (5,944                                                                | )          | 5,220 |   |
| Net realized and unrealized gains from foreign  currency hedges |       | 2,653                                                                 |       | 1,221 |   |
| Interest income                                                 |       | 1,231                                                                 |       | 895 |   |
| Other                                                           |       | 1,697                                                                 |       | 3,060 |   |
| Total other revenues                                            |       | $                                                                     | 45,593     |   | $ | 50,094 |   |

 

Other revenues decreased by$4.5 million for the nine months ended September 30, 2010 to $45.6 millionfrom $50.1 million in the same period in 2009. This decrease was largelyrelated to a net decrease of $11.2 million related to the remeasurement offoreign currency transactions and balances. Foreign currency remeasurement gains and losses result from theremeasurement of asset and liability balances that are denominated incurrencies other than the functional currency of the business unit undertakingsuch transactions.  Partially offsettingthis loss was an increase in our software, analytics and market data revenue of$4.6 million attributable to an increase in software revenues at our Trayportsubsidiary, $1.6 million equity in earnings of unconsolidated brokeragebusinesses related to investments in certain Kyte brokerage operations acquiredon July 1, 2010, for which there is no comparable amount in the prior periodand a net increase of $1.4 million in mark-to-market gains on our foreigncurrency hedges.

 

42

----

Table ofContents

 

**Expenses**

 

The following table sets forth the changes inexpenses for the nine months ended September 30, 2010 as compared to thesame period in 2009 (dollars in thousands, except percentage data):

 
| ** **                              | ** ** | **For the Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                              | ** ** | **September 30,**                            | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **2010**                                          | ** ** | **%***       | ** ** | **2009**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                            |       |                                              |       |         |       |       |       |   |   |   |   |   |   |
| Compensation and employee benefits      |       | $                                                 | 419,117    |         | 65.5       | %          | $          | 427,262 |   | 67.5 | % | $ | (8,145 | ) | (1.9 | )% |
| Execution, clearing and settlement fees |       | 41,594                                            |       | 6.5          |       | 23,366     |       | 3.7 |   | 18,228 |   | 78.0 |   |
| Communications and market data          |       | 36,369                                            |       | 5.7          |       | 34,399     |       | 5.4 |   | 1,970 |   | 5.7 |   |
| Travel and promotion                    |       | 26,899                                            |       | 4.2          |       | 24,310     |       | 3.8 |   | 2,589 |   | 10.6 |   |
| Rent and occupancy                      |       | 16,553                                            |       | 2.6          |       | 14,982     |       | 2.3 |   | 1,571 |   | 10.5 |   |
| Depreciation and amortization           |       | 24,879                                            |       | 3.9          |       | 23,534     |       | 3.7 |   | 1,345 |   | 5.7 |   |
| Professional fees                       |       | 19,899                                            |       | 3.1          |       | 13,728     |       | 2.2 |   | 6,171 |   | 45.0 |   |
| Interest                                |       | 8,509                                             |       | 1.3          |       | 7,895      |       | 1.2 |   | 614 |   | 7.8 |   |
| Other expenses                          |       | 15,183                                            |       | 2.4          |       | 14,880     |       | 2.4 |   | 303 |   | 2.0 |   |
| **Total Expenses**                      |       | $                                                 | 609,002    |         | 95.2       | %          | $          | 584,356 |   | 92.2 | % | $ | 24,646 |   | 4.2 | % |

 

----

*    Denotes % of total revenues

**     Denotes %change in the nine months ended September 30, 2010 as compared to the ninemonths ended September 30, 2009

 

·          **Compensationand Employee Benefits**

 

·                  The decrease incompensation and employee benefits expense of $8.1 million in the first ninemonths of 2010 was primarily attributable to a decrease in bonus expense andsign-on bonus expense, partially offset by higher broker salaries expense fromincreased broker headcount.

 

·                  Totalcompensation and employee benefits expense as a percentage of total revenuesdecreased to 65.5% for the nine months ended September 30, 2010 ascompared to 67.5% for the same period in the prior year.  This decline was mainly the result of theaddition of Kyte clearing services revenues in the third quarter of 2010.

 

·                  Bonus expenserepresented 46.9% and 50.0% of total compensation and employee benefits expensefor the nine months ended September 30, 2010 and 2009, respectively. Aportion of our bonus expense is subject to contractual guarantees that mayrequire us to make bonus payments to brokers regardless of their performance inany particular period. Additionally, sign-on bonus expense represented 6.7% and8.1% of total compensation and employee benefits for the nine months endedSeptember 30, 2010 and 2009, respectively.  This decrease was primarily theresult of $25.5 million in charges taken in the fourth quarter of 2009 relatedto the renegotiation of certain employee contracts.

 

·          **Execution,Clearing and Settlement Fees**

 

·                  Excluding the$21.0 million in fees related to Kyte, our execution, clearing and settlementfees, as a percentage of our total revenues from principal transactionsrevenues increased to 12.5% for the nine months ended September 30,2010, from 10.8% for the same period from the prior year. This increase wasprimarily due to the change in revenue mix between cash equity and cash fixedincome products.  Principal transactions are generally settled throughthird party clearing organizations that charge us a fee for their services. Wealso use the services of stock exchanges and floor brokers, to assist in theexecution of 

 

43

----

Table of Contents

 

transactions.Fees paid to floor brokers and execution fees paid to exchanges in thesecircumstances are included in clearing fees. In addition, clearing fees alsoincludes fees incurred in certain equity transactions executed on an agencybasis.

 

·                  The $21.0million in execution, clearing and settlement fees related to Kyte represent97.2% of clearing services revenue from Kyte in the quarter. Thedifferences between clearing expenses and revenue will largely depend on theproduct and customer mix, offset partially by individually negotiated customerrebates.

 

·          **AllOther Expenses**

 

·                The increase incommunications and quotes expense of $2.0 million in the nine months ended September 30,2010 was primarily related to costs incurred at Kyte, which was acquired in July 2010.

 

·                  The increase intravel and promotion was primarily attributable to increased broker headcountand sustained increase in competition. Travel and promotion, as a percentage of our total brokerage revenuesfor the nine months ended September 30, 2010, increased to 4.7% from 4.2%for the same period from the prior year.

 

·                The increase inrent and occupancy of $1.6 million was primarily due to an increase in rent andrelated costs due to our headcount and geographical expansion, as well as torent expense incurred by Kyte.

 

·                  The increase inprofessional fees of $6.2 million was primarily due to increased professionalfees relating to corporate transactions, such as the acquisition of Kyte, aswell as consulting and professional fees related to other strategic projects.

 

·                  Our effective tax rate was31.0% for the nine months ended September 30, 2010 as compared to 37.0%for the same period in 2009. The reduction in the effective tax rate wasprimarily due to a shift in the geographic mix of our earnings in favor ofjurisdictions with lower tax rates, resulting in a lower aggregate effectivetax rate for the nine months ended September 30, 2010 as compared to thesame period in 2009.

 

**Results of Segment Operations**

 

We created a new operating segment called “Clearing,Execution and Trading” due to the acquisition of Kyte on July 1, 2010. Inthis segment, we provide clearing, risk management, settlement and otherback-office services, as well as capital to start-up trading groups, small hedgefunds, market-makers and individual traders. We believe the addition of thissegment best reflects how our company is managed and the manner in which ourperformance is evaluated. As of July 1, 2010, we have four operatingsegments: (i) Americas Brokerage, (ii) Europe, Middle East and Africa(“EMEA”) Brokerage, (iii) Asia Brokerage, and (iv) Clearing,Execution and Trading. Additionally, we present our operating segments as fivereportable segments, which includes the four operating segments plus All Other.The All Other segment captures costs that are not directly assignable to one ofthe operating business segments, primarily consisting of our corporate businessactivities and operations from software, analytics and market data.

 

44

----

Table ofContents

 

Thefollowing tables summarize our revenues, expenses and pre-tax (loss) income byreportable segment for the periods indicated:

 
| ** **                      | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine Months Ended******** September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                      | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**                             | ** ** |
| **Revenues:**                   | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage              |       | $                                                                | 71,546     |                                                            | $          | 75,421 |   | $ | 222,277 |   | $ | 254,416 |   |
| EMEA Brokerage                  |       | 83,833                                                           |       | 93,411                                                          |       | 293,180 |   | 282,622 |   |
| Asia Brokerage                  |       | 18,067                                                           |       | 15,991                                                          |       | 57,120 |   | 47,414 |   |
| Clearing, Execution and Trading |       | 26,383                                                           |       | —                                                          |       | 26,383 |   | — |   |
| All Other                       |       | 9,918                                                            |       | 7,423                                                           |       | 41,150 |   | 48,695 |   |
| Total Consolidated Revenue      |       | $                                                                | 209,747    |                                                            | $          | 192,246 |   | $ | 640,110 |   | $ | 633,147 |   |
| ** **                      | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Expenses:**                   | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage              |       | $                                                                | 54,743     |                                                            | $          | 59,827 |   | $ | 172,043 |   | $ | 197,186 |   |
| EMEA Brokerage                  |       | 61,216                                                           |       | 63,452                                                          |       | 200,735 |   | 190,968 |   |
| Asia Brokerage                  |       | 14,566                                                           |       | 14,223                                                          |       | 44,799 |   | 45,758 |   |
| Clearing, Execution and Trading |       | 28,371                                                           |       | —                                                          |       | 28,371 |   | — |   |
| All Other                       |       | 54,236                                                           |       | 50,328                                                          |       | 163,054 |   | 150,444 |   |
| Total Consolidated Expenses     |       | $                                                                | 213,132    |                                                            | $          | 187,830 |   | $ | 609,002 |   | $ | 584,356 |   |
| ** **                      | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Pre-tax Income/(Loss):**      | ** ** | ** **                                                       | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage              |       | $                                                                | 16,804     |                                                            | $          | 15,594 |   | $ | 50,234 |   | $ | 57,230 |   |
| EMEA Brokerage                  |       | 22,617                                                           |       | 29,959                                                          |       | 92,445 |   | 91,654 |   |
| Asia Brokerage                  |       | 3,500                                                            |       | 1,768                                                           |       | 12,321 |   | 1,656 |   |
| Clearing, Execution and Trading |       | (1,988                                                           | )          | —                                                          |       | (1,988 | ) | — |   |
| All Other                       |       | (44,318                                                          | )          | (42,905                                                         | )          | (121,904 | ) | (101,749 | ) |
| Total Pre-tax (Loss) Income     |       | $                                                                | (3,385     | )                                                               | $          | 4,416 |   | $ | 31,108 |   | $ | 48,791 |   |

 

**Segment Results for the Three Months Ended September 30,2010 Compared to the Three Months Ended September 30, 2009**

 

·                  **Revenues**

 

·                  Revenues forAmericas Brokerage decreased $3.9 million, or 5.2%, to $71.5 million for thethree months ended September 30, 2010 from $75.4 million for the threemonths ended September 30, 2009.  Revenues for EMEA Brokerage decreased $9.6 million, or 10.3%, to $83.8million for the three months ended September 30, 2010 from $93.4 millionfor the three months ended September 30, 2009. Revenues for Asia Brokerageincreased $2.1 million, or 13.1%, to $18.1 million for the three months ended September 30,2010 from $16.0 million for the three months ended September 30,2009.  Total revenues for our threebrokerage segments decreased by $11.4 million, or 6.2%, to $173.4 million forthe three months ended September 30, 2010 from $184.8 million for thethree months ended September 30, 2009. The decrease in revenues wasprimarily due to decreases in brokerage revenue in our equity and fixed incomeproduct categories partially offset by increased brokerage revenues in ourfinancial and commodity product categories resulting from the factors describedabove under “Three Months Ended September 30, 2010 Compared to the ThreeMonths Ended September 30, 2009”.

 

45

----

Table of Contents

 

·                  Revenues forClearing, Execution and Trading increased $26.4 million due to clearingservices revenues of $21.6 million, $1.6 million in brokerage revenues, $1.6million in equity in earnings of unconsolidated brokerage businesses, $0.7million in interest income and $0.9 million in other income. All of theserevenues were generated by Kyte following the acquisition on July 1, 2010.

 

·                  Revenues forAll Other primarily consisted of revenues generated from sales of software,analytics and market data.  Total revenues from All Other increased by$2.5 million, or 33.8%, to $9.9 million for the three months ended September 30,2010 from $7.4 million for the three months ended September 30,2009.  This increase was primarily related to a $1.3 million increase insoftware, analytics and market data revenues, an increase of $1.1 million inthe remeasurement of underlying foreign currency balances and transactions, anda decrease in net realized and unrealized losses on foreign currency hedges of$0.6 million.

 

·                  **Expenses**

 

·                  Expenses for AmericasBrokerage decreased $5.1 million, or 8.5%, to $54.7 million for the threemonths ended September 30, 2010 from $59.8 million for the three monthsended September 30, 2009.  Expensesfor EMEA Brokerage decreased $2.3 million, or 3.6%, to $61.2 million for thethree months ended September 30, 2010 from $63.5 million for the threemonths ended September 30, 2009. Expenses for Asia Brokerage increased $0.4 million, or 2.8%, to $14.6 millionfor the three months ended September 30, 2010 from $14.2 million for thethree months ended September 30, 2009. Total expenses for our threebrokerage segments decreased by $7.0 million, or 5.1%, to $130.5 million forthe three months ended September 30, 2010 from $137.5 million for thethree months ended September 30, 2009. The decrease was due to a decreasein compensation and employee benefits, partially offset by an increase incommunications and market data and travel and promotion expenses, as well asthe other factors described above under “Three Months Ended September 30,2010 Compared to the Three Months Ended September 30, 2009”.

 

·                  The Companyrecords certain direct expenses, including compensation and employee benefits,to the operating segments; however, the Company does not allocate certainexpenses that are managed separately at the corporate level to its operatingsegments.  The unallocated costsincluding rent and occupancy, depreciation and amortization, professional fees,interest and other expenses are included in the expenses for All Otherdescribed below.  Management does notbelieve that allocating these costs to our brokerage segments is optimal forevaluating the performance of its brokerage segments. Total expenses forClearing, Execution and Trading increased $28.4 million due to execution,clearing and settlement fees of $21.0 million, compensation and benefits expenseof $2.9 million, communications and quotes expense of $1.8 million, interestexpense of $0.7 million and all other expenses of $2.0 million.  All of these expenses were incurred by Kytefollowing the acquisition on July 1, 2010.

 

·                  Total expenses for All Otherincreased by $3.9 million, or 7.8%, to $54.2 million for the three months endedSeptember 30, 2010 from $50.3 million for the three months ended September 30,2009.  The increase was primarily due toan increase in travel and promotion and professional fees.

 

**Segment Results for the Nine Months EndedSeptember 30, 2010 Compared to the Nine Months Ended September 30,2009**

 

·                  **Revenues**

 

·                  Revenues forAmericas Brokerage decreased $32.1 million, or 12.6%, to $222.3 million for thenine months ended September 30, 2010 from $254.4 million for the ninemonths ended September 30, 2009.  Revenues for EMEA Brokerage increased $10.6 million, or 3.8%, to $293.2million for the nine months ended September 30, 2010 from $282.6 millionfor the nine months ended September 30, 2009. Revenues for Asia Brokerageincreased $9.7 million, or 20.5%, to $57.1 million for the nine months ended September 30,2010 from $47.4 million for the nine months ended September 30, 2009.  Total revenues for our three brokeragesegments decreased by $11.8 million, or 2.0%, to $572.6 million for the ninemonths ended September 30, 2010 from $584.4 million for the nine monthsended September 30, 2009. The decline in revenues was primarily due todecreased brokerage revenues in fixed income and equity products partiallyoffset by increases in financial and commodity products resulting from thefactors described above under “Nine Months Ended September 30, 2010Compared to the Nine Months Ended September 30, 2009”.

 

46

----

Table of Contents

 

·                  Revenues forClearing, Execution and Trading increased $26.4 million with clearing servicesrevenues of $21.6 million, $1.6 million in brokerage revenues, $1.6 million inequity in earnings of unconsolidated brokerage businesses, $0.7 million ininterest income and $0.9 million in other income. All of these revenues weregenerated by Kyte following the acquisition on July 1, 2010.

 

·                  Revenues for All Otherprimarily consisted of revenues generated from sales of software, analytics andmarket data.  Total revenues from All Other decreased by $7.5 million, or15.4%, to $41.2 million for the nine months ended September 30, 2010 from$48.7 million for the three months ended September 30, 2009.  Thisdecrease was primarily related to a net decrease of $11.2 million related toremeasurement of foreign currency transactions and balances. This decrease waspartially offset by a $4.6 million increase in software, analytics and marketdata revenues.

 

·                  **Expenses**

 

·                  Expenses for AmericasBrokerage decreased $25.2 million, or 12.8%, to $172.0 million for the ninemonths ended September 30, 2010 from $197.2 million for the nine monthsended September 30, 2009.  Expensesfor EMEA Brokerage increased $9.7 million, or 5.1%, to $200.7 million for thenine months ended September 30, 2010 from $191.0 million for the ninemonths ended September 30, 2009. Expenses for Asia Brokerage decreased $1.0 million, or 2.2%, to $44.8million for the nine months ended September 30, 2010 from $45.8 millionfor the nine months ended September 30, 2009. Total expenses for our threebrokerage segments decreased by $16.5 million, or 3.8%, to $ 417.5 million forthe nine months ended September 30, 2010 from $434.0 million for the ninemonths ended September 30, 2009.  The decrease was primarily due to a decrease in compensation andemployee benefits, partially offset by an increase in travel and promotionfees, as well as other factors described above under “Nine Months Ended September 30,2010 Compared to the Nine Months Ended September 30, 2009”.

 

·                  The Companyrecords certain direct expenses, including compensation and employee benefits,to the operating segments; however, the Company does not allocate certainexpenses that are managed separately at the corporate level to its operatingsegments.  The unallocated costsincluding rent and occupancy, depreciation and amortization, professional fees,interest and other expenses are included in the expenses for All Otherdescribed below.  Management does notbelieve that allocating these costs to our brokerage segments is optimal forevaluating the performance of its brokerage segments. Total expenses forClearing, Execution and Trading increased $28.4 million with execution,clearing and settlement fees of $21.0 million, compensation and benefits expenseof $2.9 million, communications and quotes expense of $1.8 million, interestexpense of $0.7 million and all other expenses of $2.0 million. All of theseexpenses were incurred by Kyte following the acquisition on July 1, 2010.

 

·                  Total expenses for All Otherincreased by $12.7 million, or 8.4%, to $163.1 million for the nine monthsended September 30, 2010 from $150.4 million for the nine months ended September 30,2009.  The increase was primarily due toan increase in compensation and employee benefits, travel and promotion,professional fees, and other expenses.

 

47

----

Table ofContents

 

**Quarterly Results of Operations**

 

Thefollowing table sets forth, by quarter, our unaudited statement of operationsdata for the period from October 1, 2008 to September 30, 2010.Results of any period are not necessarily indicative of results for a full yearand may, in certain periods, be affected by seasonal fluctuations in ourbusiness.

 
| ** **                                                            | ** ** | **Quarter Ended**               | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **September 30,********2010**   | ** ** | **June 30,********2010** | ** ** | **March 31,  2010** | ** ** | **December 31,********2009** | ** ** | **September 30,********2009** | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| ** **                                                            | ** ** | **(dollars in thousands)** | ** ** |
|                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                                                   |       | $                                    | 125,011    |   | $ | 137,624 |   | $ | 143,830 |   | $ | 115,043 |   | $ | 119,396 |   | $ | 121,488 |   | $ | 125,399 |   | $ | 143,556 |   |
| Principal  transactions                                               |       | 49,677                               |       | 56,526 |   | 60,296 |   | 53,608 |   | 64,989 |   | 79,566 |   | 72,215 |   | 50,272 |   |
| Total  brokerage revenues                                             |       | 174,688                              |       | 194,150 |   | 204,126 |   | 168,651 |   | 184,385 |   | 201,054 |   | 197,614 |   | 193,828 |   |
| Clearing  services revenues                                           |       | 21,553                               |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Equity  in earnings of unconsolidated brokerage businesses            |       | 1,632                                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Software,  analytics and market data                                  |       | 14,905                               |       | 14,519 |   | 14,900 |   | 14,649 |   | 13,627 |   | 13,019 |   | 13,052 |   | 12,800 |   |
| Interest  income                                                      |       | 914                                  |       | 77 |   | 240 |   | 148 |   | 172 |   | 226 |   | 497 |   | 1,669 |   |
| Other  (loss) income (1)                                              |       | (3,945                               | )          | 842 |   | 1,509 |   | 2,112 |   | (5,938 | ) | 10,367 |   | 5,072 |   | (12,061 | ) |
| Total  revenues                                                       |       | 209,747                              |       | 209,588 |   | 220,775 |   | 185,560 |   | 192,246 |   | 224,666 |   | 216,235 |   | 196,236 |   |
| **Expenses**                                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation  and employee benefits                                   |       | 133,345                              |       | 141,109 |   | 144,663 |   | 156,053 |   | 135,139 |   | 146,575 |   | 145,548 |   | 137,583 |   |
| Execution,  clearing and settlement fees                              |       | 26,616                               |       | 7,554 |   | 7,424 |   | 6,988 |   | 7,153 |   | 8,106 |   | 8,107 |   | 9,706 |   |
| Communications  and market data                                       |       | 13,788                               |       | 10,695 |   | 11,886 |   | 11,864 |   | 11,661 |   | 11,240 |   | 11,498 |   | 12,245 |   |
| Travel  and promotion                                                 |       | 8,665                                |       | 9,341 |   | 8,893 |   | 9,509 |   | 8,280 |   | 8,550 |   | 7,480 |   | 8,897 |   |
| Rent  and occupancy (2)                                               |       | 5,867                                |       | 5,255 |   | 5,431 |   | 5,343 |   | 5,470 |   | 4,778 |   | 4,734 |   | 4,811 |   |
| Depreciation  and amortization                                        |       | 8,851                                |       | 7,844 |   | 8,184 |   | 7,959 |   | 7,680 |   | 8,015 |   | 7,839 |   | 7,827 |   |
| Professional  fees                                                    |       | 7,055                                |       | 6,247 |   | 6,597 |   | 4,674 |   | 4,508 |   | 4,129 |   | 5,091 |   | 6,081 |   |
| Interest                                                              |       | 3,204                                |       | 2,730 |   | 2,575 |   | 2,645 |   | 2,769 |   | 2,657 |   | 2,469 |   | 3,993 |   |
| Other  expenses (1), (2)                                              |       | 5,741                                |       | 4,434 |   | 5,008 |   | 6,046 |   | 5,170 |   | 4,366 |   | 5,344 |   | 5,445 |   |
| Total  expenses                                                       |       | 213,132                              |       | 195,209 |   | 200,661 |   | 211,081 |   | 187,830 |   | 198,416 |   | 198,110 |   | 196,588 |   |
| (Loss)  income before (benefit from) provision for income taxes       |       | (3,385                               | )          | 14,379 |   | 20,114 |   | (25,521 | ) | 4,416 |   | 26,250 |   | 18,125 |   | (352 | ) |
| (Benefit  from) provision for income taxes                            |       | (1,050                               | )          | 3,955 |   | 6,738 |   | (11,070 | ) | 1,633 |   | 9,894 |   | 6,525 |   | (544 | ) |
| Net  (loss) income before attribution to non-controlling shareholders |       | (2,335                               | )          | 10,424 |   | 13,376 |   | (14,451 | ) | 2,783 |   | 16,356 |   | 11,600 |   | 192 |   |
| Net  income attributable to non-controlling interests                 |       | 151                                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| GFI’s  net (loss) income                                         |       | $                                    | (2,486     | ) | $ | 10,424 |   | $ | 13,376 |   | $ | (14,451 | ) | $ | 2,783 |   | $ | 16,356 |   | $ | 11,600 |   | $ | 192 |   |

 

----

(1) Certainsoftware development contract revenues were previously presented in a line itemcalled “Contract revenue” and have been combined into “Other income (loss)” toconform with the presentation for the three month period ended December 31,2009.  Certain expenses related to thesesoftware development contracts were presented as “Contract costs” in theconsolidated statements of income and have been combined into “Other expenses”to conform with the presentation for the three month period ended December 31,2009.  The amounts that were combined forthe respective revenue and costs for each period presented above were asfollows:

 
| ** **       | ** ** | **September 30,  2009**         | ** ** | **June 30,********2009** | ** ** | **March 31,********2009** | ** ** | **December 31,  2008** | ** ** |
|------------------|------------|--------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **(dollars in thousands)** | ** ** |
| Contract Revenue |       | $                                    | —     |                          | $          | 97                             |       | $                           | 5          |   | $ | 28 |   |
| Contract Costs   |       | $                                    | —     |                          | $          | 2                              |       | $                           | —     |   | $ | 46 |   |

 

48

----

 

Table ofContents

 

(2) Certain amountstotaling $538, $519 and $416 related to insurance expense were previouslypresented in the “Rent and occupancy” line item in the consolidated statementsof income for the three month periods ended September 30, June 30 andMarch 31, 2009, respectively, but should have been presented in “Otherexpenses” in the consolidated statements of income for those periods.  These amounts have been properly reclassifiedto “Other expenses” for those periods. Certain amounts totaling $552 for the three month periods ended December 31,2008 were also reclassified to conform to current year presentation.

 

Thefollowing table sets forth our quarterly results of operations as a percentageof our total revenues for the indicated periods:

 
| ** **                                                            | ** ** | **Quarter Ended**             | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                            | ** ** | **September 30,********2010** | ** ** | **June 30,********2010** | ** ** | **March 31,  2010** | ** ** | **December 31,********2009** | ** ** | **September 30,********2009** | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                                                   |       | 59.6                               | %          | 65.7 | % | 65.1 | % | 62.0 | % | 62.1 | % | 54.1 | % | 58.0 | % | 73.2 | % |
| Principal  transactions                                               |       | 23.7                               |       | 27.0 |   | 27.3 |   | 28.9 |   | 33.8 |   | 35.4 |   | 33.4 |   | 25.6 |   |
| Total  brokerage revenues                                             |       | 83.3                               |       | 92.7 |   | 92.4 |   | 90.9 |   | 95.9 |   | 89.5 |   | 91.4 |   | 98.8 |   |
| Clearing  services revenues                                           |       | 10.3                               |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Equity  in earnings of unconsolidated brokerage businesses            |       | 0.8                                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Software,  analytics and market data                                  |       | 7.1                                |       | 6.9 |   | 6.7 |   | 7.9 |   | 7.1 |   | 5.8 |   | 6.0 |   | 6.5 |   |
| Interest  income                                                      |       | 0.4                                |       | 0.0 |   | 0.1 |   | 0.1 |   | 0.1 |   | 0.1 |   | 0.2 |   | 0.9 |   |
| Other  (loss) income                                                  |       | (1.9                               | )          | 0.4 |   | 0.8 |   | 1.1 |   | (3.1 | ) | 4.6 |   | 2.4 |   | (6.1 | ) |
| Total  revenues                                                       |       | 100.0                              | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| **Expenses**                                                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation  and employee benefits                                   |       | 63.6                               | %          | 67.3 | % | 65.5 | % | 84.1 | % | 70.3 | % | 65.2 | % | 67.3 | % | 70.1 | % |
| Execution,  clearing and settlement fees                              |       | 12.7                               |       | 3.6 |   | 3.4 |   | 3.8 |   | 3.7 |   | 3.6 |   | 3.7 |   | 4.9 |   |
| Communications  and market data                                       |       | 6.6                                |       | 5.1 |   | 5.4 |   | 6.4 |   | 6.1 |   | 5.0 |   | 5.3 |   | 6.2 |   |
| Travel  and promotion                                                 |       | 4.1                                |       | 4.5 |   | 4.0 |   | 5.1 |   | 4.3 |   | 3.8 |   | 3.5 |   | 4.5 |   |
| Rent  and occupancy                                                   |       | 2.8                                |       | 2.5 |   | 2.5 |   | 2.9 |   | 2.8 |   | 2.1 |   | 2.2 |   | 2.5 |   |
| Depreciation  and amortization                                        |       | 4.2                                |       | 3.7 |   | 3.7 |   | 4.3 |   | 4.0 |   | 3.6 |   | 3.6 |   | 4.0 |   |
| Professional  fees                                                    |       | 3.4                                |       | 3.0 |   | 3.0 |   | 2.5 |   | 2.3 |   | 1.8 |   | 2.4 |   | 3.1 |   |
| Interest                                                              |       | 1.5                                |       | 1.3 |   | 1.2 |   | 1.4 |   | 1.4 |   | 1.2 |   | 1.1 |   | 2.0 |   |
| Other  expenses                                                       |       | 2.7                                |       | 2.1 |   | 2.3 |   | 3.3 |   | 2.7 |   | 2.0 |   | 2.5 |   | 2.8 |   |
| Total  expenses                                                       |       | 101.6                              | %          | 93.1 | % | 91.0 | % | 113.8 | % | 97.6 | % | 88.3 | % | 91.6 | % | 100.2 | % |
| (Loss)  income before (benefit from) provision for income taxes       |       | (1.6                               | )          | 6.9 |   | 9.0 |   | (13.8 | ) | 2.4 |   | 11.7 |   | 8.4 |   | (0.2 | ) |
| (Benefit  from) provision for income taxes                            |       | (0.5                               | )          | 1.9 |   | 3.1 |   | (6.0 | ) | 0.8 |   | 4.4 |   | 3.0 |   | (0.3 | ) |
| Net  (loss) income before attribution to non-controlling shareholders |       | (1.1                               | )          | 5.0 |   | 5.9 |   | (7.8 | ) | 1.6 |   | 7.3 |   | 5.4 |   | 0.1 |   |
| Net  income attributable to non-controlling interests                 |       | 0.1                                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| GFI’s  net (loss) income                                         |       | (1.2                               | )%         | 5.0 | % | 5.9 | % | (7.8 | )% | 1.6 | % | 7.3 | % | 5.4 | % | 0.1 | % |

 

49

----

 

Table ofContents

 

**Liquidity and Capital Resources**

 

Netcash provided by operating activities was $34.6 million for the nine monthsended September 30, 2010, compared with $55.2 million provided byoperating activities for the nine months ended September 30, 2009, adecrease of $20.6 million. This decrease is, in large part, attributable to adecrease in net income of $9.4 million from $30.7 million for the nine monthsended September 30, 2009 to $21.3 million for the nine months ended September 30,2010. The decrease was also due to a $30.6 million decrease in items whichreconcile net income to net cash used in operating activities such asdepreciation, amortization of deferred compensation, unrealized foreigncurrency gains and losses as compared to the nine months ended September 30,2009. Offsetting this decrease in net income and items which reconcile netincome to net cash used in operating activities was a decrease in working capitalemployed in the business of $19.4 million for the nine months ended September 30,2010 relative to the same period in 2009. The decrease in working capital wasprimarily related to an increase of $48.6 million in the change in payables toclearing service customers, an increase of $17.6 million in the change inaccrued compensation and accounts payable, a net increase in the change inother liabilities of $38.4 million and was offset by a net decrease in thechange in other assets of $30.1 million and a $28.8 million increase in thechange in net receivables from brokers, dealers and clearing organization.

 

Netcash used in investing activities for the nine months ended September 30,2010 was $38.1 million compared to $22.5 million used in the nine months ended September 30,2009. The increase in cash used for investing activities was primarilyattributable to $12.5 million in net cash used for the acquisition of Kyte. SeeNote 4 to the Condensed Consolidated Financial Statements for further detailsof the Kyte acquisition. Additionally, the increase in cash used in investingactivities was related to the purchase of certain investments of $19.3 million offsetby a change of $18.8 million in net proceeds due to the settlement of foreignexchange derivative hedge contracts.

 

Netcash used in financing activities for the nine months ended September 30,2010 was $22.5 million, compared to $60.6 million used in financing activitiesfor the nine months ended September 30, 2009.  The decrease in cash used in financingactivities as compared to the nine months ended September 30, 2009primarily related to net proceeds of $15.0 million under our Credit Agreementfor the nine months ended September 30, 2010 as compared to repayments of$35.0 million for the nine months ended September 30, 2009, offset byincreases of $8.7 million in repurchases of common stock and  $3.2 million in cash paid for taxes on thevesting of RSUs.  See Note 6 to theCondensed Consolidated Financial Statements for further discussion of ourshort-term borrowings and long-term obligations.

 

Ourliquidity and available cash resources are in part restricted by the regulatoryrequirements of our operating subsidiaries, including GFI Securities LLC, GFISecurities Limited, GFI Brokers Limited, The Kyte Group Limited, Kyte BrokingLimited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd., GFI Group Pte.Ltd. and GFI Korea Money Brokerage Limited. These subsidiaries are subject tothe regulatory capital and compliance requirements described in Note 13 to theCondensed Consolidated Financial Statements. At September 30, 2010, all of our regulated subsidiaries were incompliance with their respective regulatory capital requirements.  See Note 13 to the Condensed ConsolidatedFinancial Statements for a further discussion of these regulatoryrequirements.  In addition, our liquiditymay be impacted by the amount of capital that we maintain in clearing accountsand with exchanges to support our principal transactions business.

 

Itis our expectation that from time to time we may purchase additional shares ofour common stock on the open market in accordance with a stock repurchaseprogram authorized by the Board.  SeeNote 7 to our Condensed Consolidated Financial Statements for furtherdiscussion of the stock repurchase program.

 

Webelieve that, based on current levels of operations and anticipated growth, ourcash from operations, together with cash currently available and the availableborrowings under our Credit Agreement, will be sufficient to fund our operationsfor at least the next twelve months.  OurCredit Agreement expires on February 24, 2011 and we are in discussionswith lenders to amend the existing facility or replace it with a new creditagreement and we continue to evaluate alternative sources of capital. Poorfinancial results, unanticipated expenses, unanticipated acquisitions orunanticipated strategic investments could give rise to additional financingrequirements sooner than we expect. There can be no assurance that equity ordebt financing will be available when needed or, if available, that thefinancing will be on terms satisfactory to us and not dilutive to ourthen-current stockholders.

 

50

----

Table of Contents

 

**Contractual Obligations and Commitments**

 

Thefollowing table summarizes certain of our contractual obligations as of September 30,2010:

 
| ** **                        | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                        | ** ** | **(in thousands)**                   | ** ** |
| **Contractual Obligations**       | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                  |       | $                                         | 115,097    |   | $ | 14,281 |   | $ | 23,169 |   | $ | 15,861 |   | $ | 61,786 |   |
| Short-term borrowings (1)         |       | 130,000                                   |       | 130,000 |   | — |   | — |   | — |   |
| Interest on Long-term obligations |       | 10,755                                    |       | 4,302 |   | 6,453 |   | — |   | — |   |
| Long-term obligations             |       | 60,000                                    |       | — |   | 60,000 |   | — |   | — |   |
| Purchase obligations(2)           |       | 27,382                                    |       | 21,291 |   | 6,091 |   | — |   | — |   |
| **Total**                         |       | $                                         | 343,234    |   | $ | 169,874 |   | $ | 95,713 |   | $ | 15,861 |   | $ | 61,786 |   |

 

----

(1)           Amounts listed under Short-termborrowings represent outstanding borrowings under our Credit Agreement and varyfrom the Short-term borrowings reflected in our financial statements becauseour financial statements reflect the total debt net of unamortized deferredfinancing fees.   See Note 6 to theCondensed Consolidated Financial Statements for further information.

 

(2)           Amounts listed under PurchaseObligations include agreements for quotes with various information serviceproviders. Additionally, such amounts include purchase commitments for capitalexpenditures for the implementation of a redundant data and softwareapplication facility and other purchase commitments for capital expenditures,hosting and software licensing agreements. See Note 10 to our Condensed Consolidated Financial Statements forfurther discussion of these obligations.

 

Wehave unrecognized tax benefits of approximately $9.8 million determined inaccordance with ASC 740-10 (formerly Financial Accounting Standards BoardInterpretation No. 48, *Uncertainty in IncomeTaxes, an interpretation of SFAS No. 109*).  Due to the uncertainty of the amounts to beultimately paid as well as the timing of such payments, all such liabilitieswhich have not been paid are excluded from the Contractual Obligations andCommitments table.

 

**Off-Balance Sheet Arrangements**

 

Wedid not have any off-balance sheet arrangements at September 30, 2010.

 

**Critical Accounting Policies and Estimates**

 

Wehave disclosed in Note 2 to our Condensed Consolidated FinancialStatements and in “Item 7—Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in our 2009 Form 10-K thoseaccounting policies that we consider to be significant in determining ourresults of operations and financial condition. There have been no materialchanges to those policies that we consider to be significant since our 2009Form 10-K. The accounting principles utilized by us in preparing ourCondensed Consolidated Financial Statements conform in all material respects togenerally accepted accounting principles in the United States of America.

 

***Recent Accounting Pronouncements***

 

In October 2009, the FASB issued Accounting Standards UpdateNo. 2009-13 (“ASU 2009-13”) *RevenueRecognition (Topic 605) Multiple-Deliverable Revenue Arrangements*.ASU 2009-13 establishes the accounting and reporting guidance for arrangementswith multiple-revenue generating activities. ASU 2009-13 addresses how toseparate deliverables and how to measure and allocate arrangement considerationto one or more units of accounting and provides a selling price hierarchy fordetermining the selling price of a deliverable. ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. Early adoption ispermitted but must be retrospectively applied to the beginning of the fiscalyear of adoption. We do not expect the adoption of ASU 2009-13 to have amaterial impact on our consolidated financial statements.

 

51

----

Table of Contents

 

In October 2009, the FASB issued Accounting Standards UpdateNo. 2009-14 (“ASU 2009-14”) *Software(Topic 985) Certain Revenue Arrangements That Include Software Elements*.ASU 2009-14 provides guidance on how to allocate arrangement consideration todeliverables in an arrangement that includes both tangible products andsoftware. ASU 2009-14 also provides additional guidance on how to determinewhich software, if any, relating to the tangible product would be excluded fromsoftware revenue recognition. ASU 2009-14 is effective for fiscal yearsbeginning on or after June 15, 2010. Early adoption is permitted but mustbe retrospectively applied to the beginning of the fiscal year of adoption. Wedo not expect the adoption of ASU 2009-14 to have a material impact on ourconsolidated financial statements.

 

In January 2010, the FASB issued Accounting Standards UpdateNo. 2010-06 (“ASU 2010-06”) *Fair ValueMeasurements and Disclosures (Topic 820) Improving Disclosures about Fair ValueMeasurements.* ASU 2010-06 provides amendments to Subtopic 820-10that require new disclosures, including the amounts of and reasons fortransfers in and out of Levels 1 and 2 fair value measurements andreporting activity in the reconciliation of Level 3 fair value measurementson a gross basis. ASU 2010-06 provides amendments that clarify existingdisclosures regarding the level of disaggregation for providing fair valuemeasurement disclosures for each class of assets and liabilities. In addition,it clarifies existing disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring fair value measurementsthat are required for either Level 2 or Level 3. ASU 2010-06 waseffective for interim and annual reporting periods ending after December 15,2009 except for the disclosures about the roll forward of activity inLevel 3 fair value measurements, which are effective for fiscal yearsbeginning after December 31, 2010 and for interim periods within thosefiscal years. The adoption of ASU 2010-06 did not have a material impact on ourconsolidated financial statements and the adoption of ASU 2010-06 with respectto disclosures of the roll forward of activity in Level 3 fair valuemeasurements is not expected to have a material impact on our consolidatedfinancial statements.

 

**ITEM 3.****                   ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Ourquantitative and qualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2009Form 10-K. Except as described below in this Form 10-Q, there havebeen no material changes to those market risks during the nine months ended September 30,2010.

 

**Foreign Currency Exposure Risk**

 

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our risk managementpolicy during the nine months ended September 30, 2010.

 

Whileour international results of operations, as measured in U.S. Dollars, aresubject to foreign exchange rate fluctuations, we do not consider the relatedrisk to be material to our results of operations.  If the Euro strengthened against the U.S.Dollar by 10% and the British Pound Sterling weakened by 10% against the U.S.Dollar, the net impact to our net income would be a reduction of approximately$5.0 million as of September 30, 2010.

 

**ITEM 4.****                   ****CONTROLSAND PROCEDURES**

 

Asof the end of the period covered by this report, our management carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures. Based onthe foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) were effective as of the end of the period covered bythis report.

 

Inaddition, our management, including our Chief Executive Officer andChief Financial Officer, has evaluated our internal controls overfinancial reporting (as defined in Rule 13a-15(f) of the ExchangeAct) and determined that there have been no changes in our internal controlsover financial reporting during the most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

52

----

Table of Contents

 

**PART II—OTHERINFORMATION**

 

**ITEM 1.****                   ****LEGALPROCEEDINGS**

 

Inthe normal course of business, we are and have been party to, or otherwiseinvolved in, litigations, claims and arbitrations that involve claims forsubstantial amounts. These proceedings have generally involved eitherproceedings against our competitors in connection with employee hires, orclaims from former employees in connection with the termination of theiremployment from us. There is also potential for client claims alleging theoccurrence of errors in the execution of brokerage transactions. We are alsocurrently and will, in the future, be involved in examinations, investigationsor proceedings by government agencies and self-regulatory organizations. Theseexaminations or investigations could result in substantial fines oradministrative proceedings that could result in censure, the issuance of ceaseand desist orders, the suspension or expulsion of a broker-dealer and itsaffiliated persons, officers or employees or other similar consequences.

 

The staff of the Market Regulation Department of the Financial IndustryRegulatory Authority Inc. (“FINRA”) (the “Staff”) has been conducting aninquiry into the activities of interdealer brokerage firms in connection withthe determination of the commission rates paid to them in 2005 and 2006 bycertain dealers for brokering transactions in credit default swaps. In October 2010,the Staff commenced a disciplinary proceeding by filing a complaint against GFISecurities LLC and four of its former employees in connection withallegedly  improper communicationsbetween certain of these former employees and those at other interdealerbrokerage firms, purportedly inconsistent with just and equitable principles oftrade and certain antifraud and supervisory requirements under FINRA rules andthe federal securities laws. All of the former employees of GFI Securities LLCwho were named in the complaint resigned in April 2008 to become employedby affiliates of Compagnie Financiere Tradition. None of the Company’s currentemployees were named in the complaint. GFI Securities LLC intends to vigorouslycontest this disciplinary action which could result in a censure, fine or othersanction.

 

Basedon currently available information, the outcome of the Company’s outstandingmatters are not expected to have a material adverse impact on the Company’sfinancial position.  However, the outcomeof any such matters may be material to the Company’s results of operations orcash flows in a given period.  It is notpresently possible to determine the Company’s ultimate exposure to thesematters and there is no assurance that the resolution of the Company’soutstanding matters will not significantly exceed any reserves accrued by theCompany.

 

**ITEM 1A.****          ****RISKFACTORS**

 

**Risksrelated to our Kyte operations.**

 

In July 2010, weacquired seventy percent of each of Kyte Capital Management Limited and TheKyte Group Limited.  Through thesesubsidiaries, The Kyte Group Limited provides clearing and execution servicesto proprietary traders, brokers, market makers and hedge funds and Kyte CapitalManagement Limited makes investments in limited liability partnerships, backedtraders and funds whose primary business is proprietary trading.  These businesses and investments carry thefollowing risks. For a discussion of all other  risk factors affecting the Company, see “RiskFactors” in Part I, Item 1A of our 2009 Form 10-K.

 

***We have equity investments in limited liability partnerships and fundsand profit sharing interests in backed traders whose primary business isproprietary trading.  These investmentscould expose us to losses that would adversely affect our net income and thevalue of our assets.***

 

Wehave equity investments in certain limited liability partnerships and funds andprofit sharing interests in backed traders whose primary business isproprietary trading.  The accountingmethod we use for these investments varies depending on a number of factors,including, but not limited to, our percentage ownership or profit share andwhether we have any influence or control over the relevant entity.  Under certain of these accounting methods,any losses experienced by these entities on their investment activities wouldadversely impact our net income and the value of these assets.  In addition, if these entities were to failand cease operations, we may lose the entire value of this investment and/orthe stream of any shared profits from trading.

 

53

----

Table ofContents

 

***Our clearing and execution business exposesus to certain client and counterparty credit risks.***

 

Wehave credit and counterparty risk in certain situations where we provideclearing and execution services.  Weprovide agency clearing services though our relationships with general clearingmember firms and/or exchanges.  In theseinstances, our accounts at such institutions are used, in our name, to provideaccess to clearing services for our customers. Credit risk arises from the possibility that we may suffer losses due tothe failure of our customers or other counterparties to satisfy their financialobligations to us or in a timely manner. We may be materially and adversely affected in the event of asignificant default by our customers or counterparties. Credit risks we faceinclude, among others:

 

·                  exposure to a customer’s inability orunwillingness to meet obligations when adverse market movements result in atrading loss and the customer’s posted margin is insufficient to satisfy thedeficit. Such margin deficiencies may be caused by a failure to monitor clientpositions and accurately evaluate risk exposures, which may lead to our failureto require clients to post adequate initial margin or to increase variationmargin, as necessary, to keep pace with market movements and subsequent accountdeficits;

·                  exposure to counterparties with whom we placefunds, including those of our customers, such as when we post margin withexchanges and clearing members;

·                  market risk exposure due to delayed or failedsettlement, which, if not corrected, could become our responsibility as anagency clearing broker.

 

Customersand counterparties that owe us money or securities may default on theirobligations to us due to bankruptcy, lack of liquidity, operational failure orother reasons. Our reputation may be damaged if we are associated with acustomer or counterparty that defaults, even if we do not have any directlosses from such an event.

 

Althoughwe have procedures for reviewing the creditworthiness of our customers andcounterparties, the risk of default may arise from events or circumstances thatare difficult to detect or foresee. Some of our risk management methods dependupon the evaluation of information regarding customers and markets that isprovided to us by the customer or is publicly available or otherwise accessibleby us. That information may not, in all cases, be accurate, complete,up-to-date or properly evaluated.

 

Inaddition, concerns about, or a default by, one institution could lead tosignificant liquidity problems, losses or defaults by other institutions, whichin turn could adversely affect us. We may also be adversely affected ifsettlement, clearing or payment systems, become unavailable, fail or aresubject to systemic delays for any reason outside our control.

 

***In certain instances, we may extend creditto our clearing customers for margin requirements, which subjects us to creditrisks and if we are unable to liquidate a customer’s securities when the margincollateral becomes insufficient, we may suffer a loss.***

 

Incertain instances, we may provide credit for margin requirements to customers;therefore, we are subject to risks inherent in extending credit.  Our credit risks include the risk that thevalue of the collateral we hold could fall below the amount of a customer’sindebtedness.  This risk can be amplifiedin any situation where the market for the underlying security is rapidlydeclining.  Agreements with customersthat have margin accounts permit us to liquidate their securities in the eventthat the amount of margin collateral becomes insufficient. Despite thoseagreements and our risk management policies with respect to margin, we may beunable to liquidate the customers’ securities for various reasons, or at aprice sufficient to cover any deficiency in a customer’s account.  If we were unable to liquidate a position ata price sufficient to cover any deficiency or if a customer was unable to postadditional margin, we may suffer a loss.

 

***Certain of our clearing customers may chooseto obtain a direct relationship with a clearing member, an exchange or aclearinghouse as their operations grow, in which case we would lose therevenues generated by such customers.***

 

Wemarket our clearing services to our existing customers on the strength of ourrelationship with certain clearing members and exchanges and on our ability toperform related back-office functions at a lower cost than the customers couldperform these functions themselves. As our customers’ operations grow, they mayconsider the option of obtaining a direct relationship with a clearing member,clearinghouse or exchange themselves in an effort to save costs.  If our customers choose to obtain theirclearing services directly, we would lose their revenue and our business couldbe adversely affected.

 

54

----

Table ofContents

 

***We face substantial competition from otherexecution and clearing firms, which could harm our financial performance andreduce our market share.***

 

Themarket for execution and clearing services is rapidly evolving and highlycompetitive. We compete with a number of firms that provide similar productsand services to our market.  There can beno assurance that we will be able to compete effectively with current or futurecompetitors. If we fail to compete effectively, our market share could decreaseand our business, financial condition and operating results could be materiallyharmed.

 

Inaddition, increased competition has contributed to a decline in clearingrevenue per transaction in recent years and may continue to create downwardpressure on our clearing revenue per transaction in the future.  If thedecline in clearing revenue per transaction continues, we may not be able toincrease our overall clearing volume at a comparable rate. Our failure toincrease overall clearing comparably would reduce our overall clearing revenue.

 

**ITEM 2.****                   ****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

OnJuly 1, 2010, we acquired a 70% equity ownership interest in The KyteGroup Limited and Kyte Capital Management Limited (collectively “Kyte”). Inconnection with the acquisition, on July 1, 2010, we issued 2,810,663shares of our common stock, par value $.01, (“Common Stock”) as part of thepurchase price.

 

OnMay 27, 2010, we acquired a mortgage-backed securities brokerage firm. Inconnection with the acquisition, we issued 681,433 shares of our Common Stockas part of the purchase price.

 

55

----

Table ofContents

 

Theissuance of the shares of Common Stock pursuant to these acquisitions areexempt from the registration requirements under the Securities Act of 1933, asamended (the “Act”), pursuant to Section 4(2) of the Act as atransaction by an issuer not involving a public offering.

 

Thetable below sets forth the information with respect to purchases made by theCompany of its common stock during the quarterly period ended September 30,2010.

 

**IssuerPurchases of Equity Securities**

 
| **Period**                   | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased  As Part of Publicly  Announced Plans  or Programs** | ** ** | **Approximate  Number of Shares  that May Yet Be  Purchased Under  the Plans or  Programs (c)** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **July**                     |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| Stock Repurchase Program (a) |       | 325,000                                      |       | $                                            | 5.71       |                                                                                                                             | 325,000    |                                                                                                                                         | 6,087,192  |   |
| Employee Transactions (b)    |       | 48,819                                       |       | $                                            | 5.83       |                                                                                                                             | N/A        |                                                                                                                                         | N/A        |   |
|                         |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| **August**                   |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| Stock Repurchase Program (a) |       | 403,240                                      |       | $                                            | 5.50       |                                                                                                                             | 403,240    |                                                                                                                                         | 5,817,967  |   |
| Employee Transactions (b)    |       | 67,276                                       |       | $                                            | 4.74       |                                                                                                                             | N/A        |                                                                                                                                         | N/A        |   |
|                         |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| **September**                |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| Stock Repurchase Program (a) |       | 325,000                                      |       | $                                            | 4.75       |                                                                                                                             | 325,000    |                                                                                                                                         | 6,313,125  |   |
| Employee Transactions (b)    |       | 110,300                                      |       | $                                            | 4.77       |                                                                                                                             | N/A        |                                                                                                                                         | N/A        |   |
|                         |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| **Total**                    |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                         |       |
| Stock Repurchase Program (a) |       | 1,053,240                                    |       | $                                            | 5.33       |                                                                                                                             | 1,053,240  |                                                                                                                                         | 6,313,125  |   |
| Employee Transactions (b)    |       | 226,395                                      |       | $                                            | 4.99       |                                                                                                                             | N/A        |                                                                                                                                         | N/A        |   |

 

----

(a) In August 2007, theBoard of Directors authorized the Company to implement a stock repurchaseprogram to repurchase a limited numberof shares of the Company’s common stock on the open market. Under therepurchase plan, the Board of Directors authorized the Company to repurchaseshares of the Company’s common stock on the open market in such amounts asdetermined by the Company’s management, provided, however, such amounts are notto exceed, during any calendar year, the number of shares issued upon theexercise of stock options plus the number of shares underlying grants of RSUsthat are granted or which management reasonably anticipates will be granted insuch calendar year. Any repurchases are also subject to compliance with certaincovenants and limits under the Company’s Credit Agreement.

 

(b)  Under our 2008 Equity IncentivePlan, we allow employees to elect to have us withhold shares of common stock tosatisfy minimum statutory tax withholding obligations arising on thevesting and settlement of restricted stock units. When we withhold theseshares, we are required to remit to the appropriate taxing authorities themarket price of the shares withheld, which could be deemed a purchase of theshares of our common stock by us on the date of withholding.

 

(c)  Amounts disclosed in this columninclude the number of RSUs granted by the Company and the number of sharesissued upon the exercising of stock options less the number of sharesrepurchased by the Company on the open market for the current calendar yearthrough September 30, 2010.

 

56

----

Table ofContents

 

**ITEM 6.****                   ****EXHIBITS**

 

Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                              |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 15                   |       | Letter  re: Unaudited Interim Financial Information.                                                                                         |
| 31.1                 |       | Certification  of Principal Executive Officer.                                                                                               |
| 31.2                 |       | Certification  of Principal Financial Officer.                                                                                               |
| 32.1                 |       | Written  Statement of Chief Executive Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
| 32.2                 |       | Written  Statement of Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |

 

57

----

Table ofContents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2010 to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 9th day of November, 2010.

 

 
|     | GFI  GROUP INC. |
|----------|----------------------|
|     |                 |
|     |                 |
|     | By:                  | /s/  JAMES A. PEERS |
|     | Name:                | James  A. Peers |
|     | Title:               | *Chief  Financial Officer* |
| * * |                 | *(principal  financial and accounting officer)* |

 

58

----