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**UNITED STATESSECURITIES 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 ENDEDJUNE 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 suchfiles).  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 July 30, 2010was 122,210,223.

 

 

 

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**Table ofContents**

 
| **Part I—Financial  Information** |
|---------------------------------------------|
|                                        |   |   |
| Item 1.                                     |   | Financial  Statements |
|                                        |   | Condensed Consolidated Statements of Financial  Condition as of June 30, 2010 (unaudited) and December 31, 2009 |
|                                        |   | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2010 (unaudited) and June 30,  2009 (unaudited) |
|                                        |   | Condensed  Consolidated Statements of Comprehensive Income for the three and six months  ended June 30, 2010 (unaudited) and June 30, 2009 (unaudited) |
|                                        |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2010 (unaudited) and June 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 |

 

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**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.

 

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**PART I—FINANCIALINFORMATION**

 

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

 

**GFI GROUP INC. AND SUBSIDIARIES**

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

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

 
| ** **                                                                                                                                                                     | ** ** | **June 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                     |       |                          |       |                              |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                             | 318,080    |                              | $          | 342,379 |   |
| Deposits with clearing organizations                                                                                                                                           |       | 17,313                        |       | 11,065                            |       |
| Commissions receivable, net of allowance for  doubtful accounts of $1,805 and $4,099 at June 30, 2010 and  December 31, 2009, respectively                           |       | 94,309                        |       | 87,354                            |       |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                  |       | 293,986                       |       | 87,737                            |       |
| Property, equipment and leasehold improvements,  net of depreciation and amortization of $119,670 and $108,902 at  June 30, 2010 and December 31, 2009, respectively |       | 63,375                        |       | 65,334                            |       |
| Goodwill                                                                                                                                                                       |       | 213,798                       |       | 210,758                           |       |
| Intangible assets, net                                                                                                                                                         |       | 39,336                        |       | 40,123                            |       |
| Other assets                                                                                                                                                                   |       | 119,690                       |       | 107,344                           |       |
| TOTAL ASSETS                                                                                                                                                                   |       | $                             | 1,159,887  |                              | $          | 952,094 |   |
|                                                                                                                                                                           |       |                          |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                 |       |                          |       |                              |       |
| LIABILITIES                                                                                                                                                                    |       |                          |       |                              |       |
| Accrued compensation                                                                                                                                                           |       | $                             | 104,502    |                              | $          | 106,286 |   |
| Accounts payable and accrued expenses                                                                                                                                          |       | 38,894                        |       | 48,845                            |       |
| Payables to brokers, dealers and clearing  organizations                                                                                                                       |       | 274,479                       |       | 68,131                            |       |
| Short-term borrowings, net                                                                                                                                                     |       | 104,455                       |       | 114,069                           |       |
| Long-term obligations, net                                                                                                                                                     |       | 59,681                        |       | 59,619                            |       |
| Other liabilities                                                                                                                                                              |       | 74,648                        |       | 71,042                            |       |
| Total Liabilities                                                                                                                                                              |       | $                             | 656,659    |                              | $          | 467,992 |   |
| Commitments and contingencies                                                                                                                                                  |       |                          |       |                              |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                      |       |                          |       |                              |       |
| Preferred stock, $0.01 par value; 5,000,000 shares  authorized, none outstanding at June 30, 2010 and December 31, 2009                                              |       | —                        |       | —                            |       |
| Common stock, $0.01 par value; 400,000,000 shares  authorized; 123,109,445 and 120,860,100 shares issued at June 30, 2010  and December 31, 2009, respectively       |       | 1,231                         |       | 1,209                             |       |
| Additional paid in capital                                                                                                                                                     |       | 310,699                       |       | 296,430                           |       |
| Retained earnings                                                                                                                                                              |       | 223,975                       |       | 212,059                           |       |
| Treasury stock, 3,408,527 and 2,433,527 shares of  common stock at cost, at June 30, 2010 and December 31, 2009,  respectively                                       |       | (28,881                       | )          | (22,901                           | )          |
| Accumulated other comprehensive loss                                                                                                                                           |       | (3,796                        | )          | (2,695                            | )          |
| Total Stockholders’ Equity                                                                                                                                                |       | 503,228                       |       | 484,102                           |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                |       | $                             | 1,159,887  |                              | $          | 952,094 |   |

 

See notes to condensed consolidated financial statements

 

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**GFI GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME (UNAUDITED)**

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

 
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| REVENUES:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Brokerage revenues:                          |       |                                                |       |                                              |       |   |   |   |   |
| Agency commissions                           |       | $                                                   | 137,624    |                                              | $          | 121,488 |   | $ | 281,454 |   | $ | 246,887 |   |
| Principal transactions                       |       | 56,526                                              |       | 79,566                                            |       | 116,822 |   | 151,781 |   |
| Total brokerage revenues                     |       | 194,150                                             |       | 201,054                                           |       | 398,276 |   | 398,668 |   |
| Software, analytics and market data          |       | 14,519                                              |       | 13,019                                            |       | 29,419 |   | 26,071 |   |
| Interest income                              |       | 77                                                  |       | 226                                               |       | 317 |   | 723 |   |
| Other income                                 |       | 842                                                 |       | 10,367                                            |       | 2,351 |   | 15,439 |   |
| Total revenues                               |       | 209,588                                             |       | 224,666                                           |       | 430,363 |   | 440,901 |   |
| EXPENSES:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and employee benefits           |       | 141,109                                             |       | 146,575                                           |       | 285,772 |   | 292,123 |   |
| Communications and market data               |       | 10,695                                              |       | 11,240                                            |       | 22,581 |   | 22,738 |   |
| Travel and promotion                         |       | 9,341                                               |       | 8,550                                             |       | 18,234 |   | 16,030 |   |
| Rent and occupancy (1)                       |       | 5,255                                               |       | 4,778                                             |       | 10,686 |   | 9,512 |   |
| Depreciation and amortization                |       | 7,844                                               |       | 8,015                                             |       | 16,028 |   | 15,854 |   |
| Professional fees                            |       | 6,247                                               |       | 4,129                                             |       | 12,844 |   | 9,220 |   |
| Clearing fees                                |       | 7,554                                               |       | 8,106                                             |       | 14,978 |   | 16,213 |   |
| Interest                                     |       | 2,730                                               |       | 2,657                                             |       | 5,305 |   | 5,126 |   |
| Other expenses (1)                           |       | 4,434                                               |       | 4,366                                             |       | 9,442 |   | 9,710 |   |
| Total expenses                               |       | 195,209                                             |       | 198,416                                           |       | 395,870 |   | 396,526 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES     |       | 14,379                                              |       | 26,250                                            |       | 34,493 |   | 44,375 |   |
| PROVISION FOR INCOME TAXES                   |       | 3,955                                               |       | 9,894                                             |       | 10,693 |   | 16,419 |   |
| NET INCOME                                   |       | $                                                   | 10,424     |                                              | $          | 16,356 |   | $ | 23,800 |   | $ | 27,956 |   |
| EARNINGS PER SHARE                           |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                        |       | $                                                   | 0.09       |                                              | $          | 0.14 |   | $ | 0.20 |   | $ | 0.24 |   |
| Diluted                                      |       | $                                                   | 0.08       |                                              | $          | 0.13 |   | $ | 0.19 |   | $ | 0.23 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING          |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                        |       | 119,593,107                                         |       | 117,928,484                                       |       | 119,102,754 |   | 118,145,154 |   |
| Diluted                                      |       | 123,750,775                                         |       | 121,169,884                                       |       | 123,308,715 |   | 120,787,335 |   |
|                                         |       |                                                |       |                                              |       |   |   |   |   |
| Dividends declared per share of common stock |       | $                                                   | 0.05       |                                              | $          | 0.05 |   | $ | 0.10 |   | $ | 0.10 |   |

 

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(1) As adjusted — see Note 2

 

See notes to condensed consolidated financial statements

 

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**GFI GROUP INC. ANDSUBSIDIARIES**

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

**(In thousands)**

 
| ** **                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| NET INCOME                                                           |       | $                                               | 10,424     |                                          | $          | 16,356 |   | $ | 23,800 |   | $ | 27,956 |   |
| OTHER COMPREHENSIVE INCOME (LOSS):                                   |       |                                            |       |                                          |       |   |   |   |   |
| Foreign currency translation adjustment, net of  tax                 |       | (409                                            | )          | 1,590                                         |       | (821 | ) | 1,123 |   |
| Unrealized gain (loss) on available for sale  securities, net of tax |       | 61                                              |       | 547                                           |       | (280 | ) | 145 |   |
| COMPREHENSIVE INCOME                                                 |       | $                                               | 10,076     |                                          | $          | 18,493 |   | $ | 22,699 |   | $ | 29,224 |   |

 

See notes to condensed consolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIES**

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

**(In thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 23,800     |   | $ | 27,956 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 16,030                                            |       | 15,854 |   |
| Amortization of loan fees                                                          |       | 466                                               |       | 312 |   |
| Provision for doubtful accounts                                                    |       | (117                                              | )          | 1,775 |   |
| Deferred compensation                                                              |       | 13,295                                            |       | 12,225 |   |
| Provision for deferred taxes                                                       |       | 8,128                                             |       | 5,308 |   |
| Gains on foreign exchange derivative contracts,  net                               |       | (10,823                                           | )          | (9,963 | ) |
| Gains from equity method investments, net                                          |       | (8                                                | )          | (1,147 | ) |
| Tax expense related to share-based compensation                                    |       | 930                                               |       | 1,862 |   |
| Other non-cash charges, net                                                        |       | 17                                                |       | (605 | ) |
| (Increase) decrease in operating assets:                                           |       |                                              |       |   |   |
| Deposits with clearing organizations                                               |       | (6,249                                            | )          | 281 |   |
| Commissions receivable                                                             |       | (6,837                                            | )          | 8,084 |   |
| Receivables from brokers, dealers and clearing  organizations                      |       | (206,249                                          | )          | (217,473 | ) |
| Other assets                                                                       |       | (13,635                                           | )          | 27,131 |   |
| (Decrease) increase in operating liabilities:                                      |       |                                              |       |   |   |
| Accrued compensation                                                               |       | (1,785                                            | )          | (5,178 | ) |
| Accounts payable and accrued expenses                                              |       | (9,951                                            | )          | (1,960 | ) |
| Payables to brokers, dealers and clearing  organizations                           |       | 206,347                                           |       | 216,477 |   |
| Other liabilities                                                                  |       | 3,863                                             |       | (26,055 | ) |
| Cash provided by operating activities                                              |       | 17,222                                            |       | 54,884 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                              |       |   |   |
| Issuance of notes receivable                                                       |       | (800                                              | )          | — |   |
| Proceeds from notes receivable                                                     |       | 1,000                                             |       | — |   |
| Proceeds from other investments                                                    |       | 789                                               |       | 1,982 |   |
| Purchases of other investments                                                     |       | (8,554                                            | )          | (583 | ) |
| Purchase of property, equipment and leasehold  improvements                        |       | (8,781                                            | )          | (6,473 | ) |
| Proceeds (payments) on foreign exchange derivative  contracts, net                 |       | 8,551                                             |       | (11,331 | ) |
| Cash used in investing activities                                                  |       | (7,795                                            | )          | (16,405 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                              |       |   |   |
| Repayment of short-term borrowings                                                 |       | (10,000                                           | )          | (29,000 | ) |
| Repurchases of common stock                                                        |       | (5,980                                            | )          | (2,970 | ) |
| Cash dividends paid                                                                |       | (11,884                                           | )          | (11,774 | ) |
| Payment of loan fees                                                               |       | (306                                              | )          | (747 | ) |
| Proceeds from exercise of stock options                                            |       | 501                                               |       | 37 |   |
| Cash paid for taxes on vested restricted stock  units                              |       | (5,042                                            | )          | (1,090 | ) |
| Tax expense related to share-based compensation                                    |       | (930                                              | )          | (1,862 | ) |
| Cash used in financing activities                                                  |       | (33,641                                           | )          | (47,406 | ) |
| Effects of exchange rate changes on cash and cash  equivalents                     |       | (85                                               | )          | 1,388 |   |
| DECREASE IN CASH AND CASH EQUIVALENTS                                              |       | (24,299                                           | )          | (7,539 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 342,379                                           |       | 342,375 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                                 | 318,080    |   | $ | 334,836 |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                              |       |   |   |
| Interest paid                                                                      |       | $                                                 | 4,851      |   | $ | 4,951 |   |
| Income taxes paid, net of refunds                                                  |       | $                                                 | 5,164      |   | $ | 7,477 |   |

 

Non-Cash Investing Activities:

 

Duringthe six months ended June 30, 2010, the Company recorded $5,080 within other assets, which included theissuance of 681,433 shares of the Company’s common stock and $1,000 withinOther liabilities in connection with the business combination described in Note4 and $2,286 within Other assets 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

 

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**GFI GROUP INC. AND SUBSIDIARIESNOTES 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, the “Company”). TheCompany, through its subsidiaries, provides brokerage services, trading systemsoftware and market data and analytical software products to institutionalclients in markets for a range of fixed income, financial, equity and commodityinstruments. The Company complements its brokerage capabilities withvalue-added services, such as market data and software systems and products fordecision support, which it licenses primarily to companies in the financialservices industry. The Company’s principal operating subsidiaries include: GFISecurities LLC, GFI Brokers LLC, GFI Group LLC, GFI SecuritiesLimited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK)Brokers Ltd., GFI Group Pte. Ltd., GFI Korea Money Brokerage Limited,Amerex Brokers LLC, Fenics Limited (“Fenics”) and Trayport Limited (“Trayport”).As of June 30, 2010, Jersey Partners, Inc. (“JPI”) ownedapproximately 43% of the Company’s outstanding shares of common stock. TheCompany’s chief executive officer, Michael Gooch, is the controllingshareholder of JPI.

 

**2.****             ****SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation****—*The Company’s condensedconsolidated financial statements (unaudited) are prepared in accordance withaccounting principles generally accepted in the United States of America, whichrequire management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, revenues and expenses, and the disclosure ofcontingencies in the consolidated financial statements. Certain estimates andassumptions relate to the accounting for acquired goodwill and intangibleassets, fair value measurements, compensation accruals, tax liabilities and thepotential outcome of litigation matters. Management believes that the estimates utilized in the preparation ofthe consolidated financial statements are reasonable and prudent. Actualresults could differ materially from these estimates.

 

All intercompany transactions and balances have beeneliminated.

 

Certainamounts totaling $519 and $935 related to insurance expense were previouslypresented in the “Rent and occupancy” line item in the Condensed ConsolidatedStatements of Income for the three and six months ended June 30, 2009,respectively, but should have been presented in “Other expenses” in theCondensed Consolidated Statements of Income for these periods. These amountshave 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 simultaneouslyagrees to buy instruments from one customer and sell them to another customer.

 

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.

 

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

 

***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 is recognized ratably over the term of the subscription period, whichranges from one to five years. Analytics revenue consists primarily of softwarelicense fees for Fenics pricing tools which are typically billed on asubscription basis, and is 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.

 

***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* (formerlyStatement 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 is made.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 income in the Condensed Consolidated Statements of Income.

 

***Income Taxes—*** In accordancewith ASC 740, *Income Taxes* (formerly SFASNo. 109, *Accounting for Income Taxes*), theCompany provides for income taxes using the asset and liability method underwhich deferred income taxes are recognized for the estimated future tax effectsattributable to temporary differences and carry-forwards that result fromevents that have been recognized either in the financial statements or theincome tax returns, but not both. The measurement of current and deferredincome tax liabilities and assets is based on provisions of enacted tax laws.Valuation allowances are recognized if, based on the weight of availableevidence, it is more likely than not that some portion of the deferred taxassets will not be realized. Effective January 1, 2007, the Companyadopted ASC 740-10 (formerly Financial Accounting Standards BoardInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of SFAS No. 109*). It is theCompany’s policy to provide for uncertain tax positions and the relatedinterest and penalties based upon management’s assessment of whether a taxbenefit 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 andexpenses are translated at the average rates of exchange for the period. Gainsor losses resulting from translating foreign currency financial statements arereflected in foreign currency translation adjustments and are reported as aseparate component of comprehensive income and included in accumulated othercomprehensive loss in stockholders’ equity. Gains or losses resulting from foreigncurrency transactions are included in Other income in the CondensedConsolidated Statements of Income.  Net(gains) losses resulting from remeasurement of foreign currency transactionsand balances were $7,042 and

 

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

 

($8,138),respectively, for the three months ended June 30, 2010 and 2009 and $9,336 and($2,913), respectively, for the six months ended June 30, 2010 and 2009 and areincluded in Other income.

 

***Share-Based Compensation****—*The Company’sshare-based compensation consists of stock options and restricted stock units (“RSUs”).The Company follows ASC 718, *Compensation-StockCompensation* (“ASC 718”) (formerly SFAS No. 123(R), *Share-Based Payment*), to account for itsstock-based compensation. ASC 718 revised the fair value-based method ofaccounting for share-based payment liabilities, forfeitures and modificationsof stock-based awards and clarified guidance in several areas, includingmeasuring fair value, classifying an award as equity or as a liability andattributing compensation cost to service periods. Additionally, under ASC 718,actual tax benefits recognized in excess of tax benefits previously establishedupon grant are reported as a financing cash flow, as opposed to operating cashflows.  In recent periods, the only formof share-based compensation issued by the Company has been RSUs. The Companydetermines the fair value of RSUs based the grant date fair value of theCompany’s common stock, measured as the closing price on the date of grant.

 

***Other Income—***Included within Other income on the Company’sCondensed Consolidated Statements of Income are revaluations of foreigncurrency derivative contracts, realized and unrealized transaction gains andlosses on certain foreign currency transactions and balances and gains andlosses on certain investments.

 

***Recent Accounting Pronouncements***

 

In May 2009, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 165, *Subsequent Event*s,which is now a sub-topic within ASC 855-10 *SubsequentEvents* (“ASC 855-10”). ASC 855-10 provides guidance for accountingfor and disclosure of subsequent events that are not addressed in otherapplicable generally accepted accounting principles. ASC 855-10 was effectivefor interim and annual reporting periods ending after June 15, 2009, andhas been applied prospectively by the Company. In February 2010, the FASBamended ASC 855-10 through the issuance of Accounting Standards UpdateNo. 2010-09 (“ASU 2010-09”), *Amendmentsto Certain Recognition and Disclosure Requirements*. ASU 2010-09removed the requirement for an SEC filer to disclose the date of final reviewfor disclosure of subsequent events and was effective upon issuance. SeeNote 16 for disclosures on Subsequent Events.

 

In June 2009, the FASB issued SFAS No. 167, *Amendments to FASB Interpretation No. 46(R)*(“SFAS 167”). SFAS 167 amends certain requirements of FASBInterpretation No. 46(R), *Consolidationof Variable Interest Entities*, which is now a sub-topic within ASC810 *Consolidation.* This guidancewas codified by the FASB in December 2009 through the issuance of AccountingStandards Update No. 2009-17 (“ASU 2009-17”) *Consolidations (Topic 810) Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities*. ASU 2009-17was issued to improve financial reporting by enterprises involved with variableinterest entities and to provide more relevant and reliable information tousers of financial statements. ASU 2009-17 requires an enterprise to perform ananalysis to determine whether the enterprise’s variable interest or interestsprovide a controlling financial interest in a variable interest entity. Thedetermination is based on, among other things, the other entity’s purpose anddesign and the reporting entity’s ability to direct the activities of avariable interest entity that most significantly impact the entity’s economicperformance. ASU 2009-17 was effective as of the beginning of the first annualreporting period that begins after November 15, 2009, for interim periodswithin the first annual reporting period and for interim and annual reportingperiods thereafter. The adoption of ASU 2009-17 did not have a material impacton the Company’s consolidated financial statements.

 

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.

 

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

 

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 and reportingactivity in the reconciliation of Level 3 fair value measurements on agross 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 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.****             ****RECEIVABLESFROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS**

 

Amounts receivable from and payable to brokers,dealers and clearing organizations consisted of the following:

 
| ** **                                                                 | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| Receivables from brokers, dealers and clearing  organizations:             |       |               |       |                        |       |
| Contract value of fails to deliver                                         |       | $                  | 282,681    |                        | $          | 65,651 |   |
| Balance receivable from clearing organizations and  financial institutions |       | 11,305             |       | 22,086                      |       |
| Total                                                                      |       | $                  | 293,986    |                        | $          | 87,737 |   |
| Payables to brokers, dealers and clearing  organizations:                  |       |               |       |                        |       |
| Contract value of fails to receive                                         |       | $                  | 268,066    |                        | $          | 67,554 |   |
| Balance payable to clearing organizations                                  |       | 6,246              |       | —                      |       |
| Payable to financial institutions                                          |       | 167                |       | 577                         |       |
| Total                                                                      |       | $                  | 274,479    |                        | $          | 68,131 |   |

 

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

 

**4.****             ****GOODWILLAND 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

 

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

 

wasallocated among intangible assets as follows: customer relationships of $1,010with an estimated useful life of 6 years, non compete agreement of $139with an estimated useful life of 4 years and goodwill of $1,251. The weightedaverage amortization for the intangible 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.

 

Changesin the carrying amount of the Company’s goodwill for the six months endedJune 30, 2010 were as follows:

 
| ** **                           | ** ** | **Americas  Brokerage** | ** ** | **EMEA  Brokerage** | ** ** | **All Other** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------------|------------|---------------------|------------|---------------|------------|-----------|------------|
| Balance as of December 31, 2009 |       | $                       | 80,249     |                | $          | 1,818         |       | $         | 128,691    |   | $ | 210,758 |   |
| Goodwill acquired during the period  |       | 3,040                   |       | —              |       | —        |       | 3,040     |       |
| Balance as of June 30, 2010          |       | $                       | 83,289     |                | $          | 1,818         |       | $         | 128,691    |   | $ | 213,798 |   |

 

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 and changesin circumstances indicate that there may be a potential impairment.  Subsequent to January 1, 2010, no events orchanges in circumstances occurred which would indicate any goodwill impairment.

 

Intangibleassets consisted of the following:

 
| ** **                         | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Gross amount**       | ** ** | **Accumulated  amortization**   | ** ** | **Net  carrying  value** | ** ** | **Gross amount** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| **Amortized intangible assets:**   | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer base/relationships        |       | $                           | 48,991     |                            | $          | 14,279 |   | $ | 34,712 |   | $ | 47,292 |   | $ | 12,064 |   | $ | 35,228 |   |
| Trade name                         |       | 7,771                       |       | 4,418                           |       | 3,353 |   | 7,771 |   | 4,003 |   | 3,768 |   |
| Core technology                    |       | 3,230                       |       | 3,230                           |       | — |   | 3,230 |   | 3,230 |   | — |   |
| Covenants not to compete           |       | 3,663                       |       | 2,838                           |       | 825 |   | 3,323 |   | 2,683 |   | 640 |   |
| Favorable lease agreements         |       | 620                         |       | 300                             |       | 320 |   | 620 |   | 260 |   | 360 |   |
| Patent                             |       | 34                          |       | 18                              |       | 16 |   | 31 |   | 14 |   | 17 |   |
| **Unamortized intangible assets:** |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Proprietary knowledge              |       | 110                         |       | —                          |       | 110 |   | 110 |   | — |   | 110 |   |
| Total                              |       | $                           | 64,419     |                            | $          | 25,083 |   | $ | 39,336 |   | $ | 62,377 |   | $ | 22,254 |   | $ | 40,123 |   |

 

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**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 June 30, 2010 and 2009 was $1,432 and$1,356, respectively, and $2,829 and $2,729 for the six months ended June 30,2010 and 2009, respectively.

 

AtJune 30, 2010, expected amortization expense for the definite lived intangibleassets is as follows:

 
| 2010 (remaining six months) |   | $      | 2,982  |   |
|-----------------------------|--------|--------|--------|--------|
| 2011                        |   | 5,763  |   |
| 2012                        |   | 4,603  |   |
| 2013                        |   | 3,236  |   |
| 2014                        |   | 3,076  |   |
| Thereafter                  |   | 19,566 |   |
| Total                       |   | $      | 39,226 |   |

 

**5.****             ****OTHERASSETS**

 

OnFebruary 28, 2010, the Company completed an acquisition of 40% of theoutstanding membership interests of an independent brokerage firm with aproprietary trading platform. The aggregate purchase price was comprised of$8,000 in cash and 414,938 shares of the Company’s common stock. The targetretained $6,000 of the cash portion of the purchase for working capital. Thisinvestment is included within Other assets and accounted for under the equitymethod. Additionally, the Company committed to purchase the remainingmembership interests in increments of 20% over the next 3 years, subjectto customary closing conditions. The purchase price for the remainingmembership interests will be paid in cash and established by a formula based onthe target’s future results of operations. Included in Other assets atDecember 31, 2009 was a note receivable from the target in the amount of$1,000 which was forgiven by the Company and credited against the purchaseprice described above at closing.

 

**6.****             ****SHORT-TERMBORROWINGS AND LONG-TERM OBLIGATIONS**

 

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 at8.17%, including a premium of 100 basis points due to a change in the riskbased capital factor attributed to the Senior Notes by one of the purchaserspursuant to generally applicable insurance regulations for U.S. insurance companies.The premium interest will cease to accrue if the risk based capital factorattributed to the Senior Notes is subsequently reduced.  Interest is payable semi-annually in arrearson the 30th of January and July.  The Company’s obligations under the SeniorNotes are secured by substantially all of the assets of the Company and certainassets of the Company’s subsidiaries. The 2008 Note Purchase Agreement includes operational covenants withwhich the Company is required to comply, including among others, maintenance ofcertain financial ratios and restrictions on additional indebtedness, liens anddispositions.  At June 30, 2010, theSenior Notes were recorded net of unamortized deferred financing fees of $319and the Company was in compliance with all applicable covenants at June 30,2010 and December 31, 2009.

 

The Company maintains a credit agreement with Bank of America, N.A. andcertain other lenders (as amended, the “Credit Agreement”). The CreditAgreement provides for maximum borrowings of $175,000, which includes up to$50,000 for letters of credit, and has an expiration date of February 24,2011.  Revolving loans may be either baserate loans or currency rate loans. Currency rate loans and the letters ofcredit bear interest at the annual rate of LIBOR plus the applicable

 

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marginin effect for that interest period. Base rate loans bear interest at a rate perannum equal to a base rate plus the applicable margin in effect for thatinterest period. As long as no default has occurred under the Credit Agreement,the applicable margin for both the base rate and currency rate loans is basedon a matrix that varies with a ratio of outstanding debt to EBITDA, as definedin the Credit Agreement. At June 30, 2010, the applicable margin was 2.5%and the one-month LIBOR was 0.3%. Amounts outstanding under the CreditAgreement are secured by substantially all the assets of the Company andcertain assets of the Company’s subsidiaries. The Credit Agreement provides forthe Senior Notes to rank pari passu with the commitments under the CreditAgreement, in relation to the security provided.

 

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

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------|------------|------------------|------------|
| ** **                    | ** ** | **2010**     | ** ** | **2009**         | ** ** |
| Loan Available (1)            |       | $            | 175,000    |             | $          | 175,000 |   |
| Loans Outstanding             |       | $            | 105,000    |             | $          | 115,000 |   |
| Letters of Credit Outstanding |       | $            | —     |             | $          | 7,172 |   |

 

----

(1)                                  Amountsavailable include up to $50,000 for letters of credit as of June 30, 2010 andDecember 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 2.85% and 2.73% atJune 30, 2010 and December 31, 2009.  AtJune 30, 2010 and December 31, 2009, short-term borrowings under the CreditAgreement were recorded net of unamortized deferred financing fees of $545 and$931, respectively.

 

TheCredit Agreement contains certain financial and other covenants. The Companywas in compliance with all applicable covenants at June 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, however, such amounts are not to exceed, during anycalendar year, the number of shares issued upon the exercise of stock optionsplus the number of shares underlying grants of RSUs that are granted or whichmanagement reasonably anticipates will be granted in such calendar year. During the three and six months ended June30, 2010, the Company repurchased 975,000 shares of its common stock on theopen market at an average price of $6.10 per share for a total cost of $5,980,including sales commissions. During the three months ended June 30, 2009, theCompany repurchased 109,300 shares of its common stock on the open market at anaverage price of $3.55 per share for a total cost of $388, including salescommissions. During the six months ended June 30, 2009, the Company repurchased1,115,922 shares of its common stock on the open market at an average price of$2.66 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.

 

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

 

Oneach of March 29 and May 28, 2010, the Company paid a cash dividend of $0.05per share, which, based upon the number of shares outstanding on the recorddate for such dividends, totaled $5,928 and $5,956, respectively. On each ofMarch 31 and May 30, 2009, the Company paid a cash dividend of $0.05 per share,which, based upon the number of shares outstanding on the record date for suchdividends, totaled $5,883 and $5,891, respectively. The dividends werereflected as reductions of retained earnings in the Condensed ConsolidatedStatements of Financial Condition.

 

**8.****             ****EARNINGSPER SHARE**

 

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

 
| ** **                                                        | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic earnings per share**                                      | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                                     | 10,424     |                                                | $          |  16,356 |   | $ | 23,800 |   | $ |  27,956 |   |
| Weighted average common shares outstanding                        |       | 119,593,107                                           |       | 117,928,484                                         |       | 119,102,754 |   | 118,145,154 |   |
| Basic earnings per share                                          |       | $                                                     | 0.09       |                                                | $          |  0.14 |   | $ | 0.20 |   | $ |  0.24 |   |
|                                                              |       |                                                  |       |                                                |       |   |   |   |   |
| **Diluted earnings per share**                                    | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income applicable to stockholders                             |       | $                                                     | 10,424     |                                                | $          |  16,356 |   | $ | 23,800 |   | $ |  27,956 |   |
| Weighted average common shares outstanding                        |       | 119,593,107                                           |       | 117,928,484                                         |       | 119,102,754 |   | 118,145,154 |   |
| Effect of dilutive shares:                                        |       |                                                  |       |                                                |       |   |   |   |   |
| Options, RSUs and Restricted stock                                |       | 4,157,668                                             |       | 3,241,400                                           |       | 4,205,961 |   | 2,642,181 |   |
| Weighted average shares outstanding and common  stock equivalents |       | 123,750,775                                           |       | 121,169,884                                         |       | 123,308,715 |   | 120,787,335 |   |
| Diluted earnings per share                                        |       | $                                                     | 0.08       |                                                | $          |  0.13 |   | $ | 0.19 |   | $ |  0.23 |   |

 

Excludedfrom the computation of diluted earnings per share because their effect wouldbe anti-dilutive were the following: 1,048,356 RSUs for the three months ended June 30, 2010; 1,840,858 RSUsand 15,256 stock options for the three months ended June 30, 2009; 1,493,741RSUs and 7,377 stock options for the six months ended June 30, 2010; 2,609,654RSUs and 111,503 stock options for the six months ended June 30, 2009.

 

**9.****             ****SHARE-BASEDCOMPENSATION**

 

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, 2009and June 10, 2010 (as amended, the “2008 Equity Incentive Plan”). Prior to June11, 2008, the Company issued RSUs under the GFI Group Inc. 2004 EquityIncentive 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 June 30, 2010, there were 8,990,397shares of our common stock available for future grants of awards under this plan,which amount, pursuant to the terms of the 2008 Equity Incentive Plan, may beincreased for the number of shares subject to awards under the 2004 EquityIncentive Plan that are ultimately not delivered to employees. The fair valueof RSUs is based on the closing price of the Company’s common stock on the dateof grant and is recorded as deferred compensation and amortized to compensationexpense over the vesting period of the grants, which is generally three years.

 

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**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 six months ended June 30,2010:

 
| ** **                                   | ** ** | **RSUs**   | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Outstanding December 31, 2009 |       | 10,208,185 |       | $                                                        |  5.57 |   |
| Granted                                      |       | 6,139,749  |       | 5.75                                                     |       |
| Vested                                       |       | (2,309,990 | )          | 6.60                                                     |       |
| Cancelled                                    |       | (384,101   | )          | 6.20                                                     |       |
| Outstanding June 30, 2010                    |       | 13,653,843 |       | $                                                        | 5.46       |   |

 

Theweighted average grant-date fair value of RSUs granted for the six months endedJune 30, 2010 was $5.75 per unit, compared with $3.57 per unit for the sameperiod in the prior year. Total compensation expense and related incometax benefits recognized in relation to RSUs are as follows:

 
| ** **           | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|----------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Compensation expense |       | $                                                     | 6,529      |                                                | $          | 6,468 |   | $ | 13,295 |   | $ | 12,220 |   |
| Income tax benefits  |       | 1,854                                                 |       | 2,438                                               |       | 4,121 |   | 4,521 |   |
|                      |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |

 

AtJune 30, 2010, total unrecognized compensation cost related to the RSUs priorto the consideration of expected forfeitures was approximately $61,708 and isexpected to be recognized over a weighted-average period of 1.91 years.  The total fair value of RSUs vested duringthe six months ended June 30, 2010 and 2009 was $15,246 and $12,128,respectively.

 

Asof June 30, 2010, the Company had stock options outstanding under the GFI GroupInc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) and the GFInet inc.2000 Stock Option Plan (the “GFInet 2000 Plan”). No additional grants will bemade under these plans. For stock options previously granted or modified, thefair value was estimated on the date of grant or modification using theBlack-Scholes option pricing model.

 

Thefollowing is a summary of stock option transactions during the six months endedJune 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                                       |       | (169,656 | ) | 2.42 |   |
| Cancelled                          |       | —                                 |       | —                                     |       | (844 | ) | 2.38 |   |
| Outstanding June 30, 2010          |       | 611,016                                |       | $                                          | 3.33       |   | 143,072 |   | $ | 4.11 |   |

 

Duringthe six months ended June 30, 2009, there were 6,000 stock options exercisedunder the GFI Group 2002 Plan and 2,104 stock options exercised under theGFInet 2000 Plan.

 

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**10.****           ****COMMITMENTSAND 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 June 30, 2010, the Company had totalpurchase commitments for market data of approximately $23,903 with $18,299 duewithin the next twelve months and $5,604 due between one to three years.Additionally, the Company has purchase commitments for capital expenditures of$2,053, primarily related to network implementations in the U.S and U.K, and$814 for hosting and software license agreements. Of these purchasecommitments, capital expenditures of approximately $1,254 and fees for hostingand software licensing agreements of approximately $412 are due within the nexttwelve 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.

 

**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. Anaccrual is made when it is probable that a liability has been incurred or anasset has been impaired and the amount of loss can be reasonably estimated. TheCompany accrues a liability for the estimated costs of adjudication orsettlement of asserted and unasserted claims existing as of the reportingperiod.

 

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. GFISecurities LLC has been cooperating with the Staff in this inquiry byresponding to requests for documents, testimony and other information. InJanuary 2009, the Staff advised GFI Securities LLC that it has made apreliminary determination to recommend disciplinary action in connection withallegedly improper communications between certain of GFI Securities LLC’sbrokers and those at other interdealer brokers, purportedly inconsistent withjust and equitable principles of trade and certain antifraud and supervisoryrequirements under FINRA rules and the federal securities laws. All but one ofthese brokers who made the allegedly improper communications resigned in April2008 to become employed by affiliates of Compagnie Financiere Tradition. Duringthe past few months, certain of the other inter-dealer brokerage firms thatwere the subject of the same inquiry have settled the matter. In the event thatGFI Securities LLC and FINRA are unable to reach a

 

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settlementsoon on this matter, FINRA has indicated that it will file a complaint againstGFI Securities LLC based on these allegations which, if brought and/or settled,could result in a censure, fine or other sanction. GFI Securities LLCintends to vigorously contest any such disciplinary action which, if broughtand/or settled, could result in a censure, fine or other sanction.

 

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.****           ****FINANCIALINSTRUMENTS WITH MARKET AND CREDIT 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 six months ended June30, 2010.

 

**12.****           ****FINANCIALINSTRUMENTS**

 

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. These receivables and payables areshort-term in nature, and following June 30, 2010, substantially allreceivables and payables 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 $64,559 at June 30, 2010.  The fair value of the Company’s short-termborrowings outstanding under the Credit Agreement approximated the carryingvalue at June 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

 

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liabilitiesin an active market that the company has the ability to access at themeasurement date (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 inputs includethe 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. As of and for the six months ended June 30, 2010 and forthe year ended December 31, 2009, the Company did not have any Level 3financial assets or liabilities.

 

*Valuation Techniques*

 

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

 

The Company has determined certain of its investments in marketablesecurities should be classified as trading securities or available-for-salesecurities and reported at fair value at June 30, 2010 and December 31,2009.  To the extent that the values ofthe Company’s trading and available-for-sale marketable securities are based onquoted market prices in active markets, these securities were categorized asLevel 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 June 30,2010 and December 31, 2009, the Company’s foreign exchange derivative contractshave 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, which tradingsecurities are primarily categorized as Level 1, or (ii) a modified BlackScholes model using observable market inputs, which trading securities arecategorized as Level 2.

 

FinancialAssets and Liabilities measured at fair value on a recurring basis as of June30, 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** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------|------------|-----------|------------|
| Assets:                               |       |                                                                                       |       |                                                       |       |                                                  |       |            |       |      |       |
| Equity securities                     |       | $                                                                                          | 4,622      |                                                       | $          | 162                                                   |       | $               | —     |      | $          | — |   | $ | 4,784 |   |
| Corporate bonds                       |       | —                                                                                     |       | 2,885                                                      |       | —                                                |       | —          |       | 2,885     |       |
| Foreign exchange derivative contracts |       | —                                                                                     |       | 105,858                                                    |       | —                                                |       | (103,372        | )          | 2,486     |       |
| Commodity derivative contracts        |       | 1,254                                                                                      |       | —                                                     |       | —                                                |       | (930            | )          | 324       |       |
| Liabilities:                          |       |                                                                                       |       |                                                       |       |                                                  |       |            |       |      |       |
| Equity securities                     |       | $                                                                                          | 347        |                                                       | $          | —                                                |       | $               | —     |      | $          | — |   | $ | 347 |   |
| Corporate bonds                       |       | —                                                                                     |       | 2,030                                                      |       | —                                                |       | —          |       | 2,030     |       |
| Foreign exchange derivative contracts |       | —                                                                                     |       | 103,585                                                    |       | —                                                |       | (103,372        | )          | 213       |       |
| Commodity derivative contracts        |       | 1,320                                                                                      |       | —                                                     |       | —                                                |       | (930            | )          | 390       |       |

 

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

 

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TheCompany’s financial instruments at fair value are included within Other assetsand Other liabilities with the exception of long and short futures contracts of$324 and $390, which are included within Receivables from and Payables tobrokers, dealers and clearing organizations, respectively.

 

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 |   |

 

*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 six months ended June30, 2010 and year ended December 31, 2009, none of these contracts weredesignated as foreign currency cash flow hedges under ASC 815-10, *Derivatives and Hedging* (“ASC 815-10”) (formerly SFASNo. 133,*Accounting for DerivativeInstruments and Hedging Activities*, as amended). Contracts that arenot designated as foreign currency cash flow hedges are recorded at fair valueand all realized and unrealized gains and losses are included in Other incomein the Condensed Consolidated Statements of Income.

 

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.

 

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

 
| **Derivatives not designated as hedging instruments under** | ** ** | **June 30, 2010**          | ** ** | **December 31, 2009**           | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| **ASC 815-10**                                                                       | ** ** | **Derivative Assets** | ** ** | **Derivative Liabilities** | ** ** | **Derivative Assets** | ** ** | **Derivative Liabilities** | ** ** |
| ** **                                                                                | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign Exchange Contracts (1)                                                            |       | $                          | 105,858    |                            | $          | 103,585 |   | $ | 818 |   | $ | 804 |   |
|                                                                                      |       |                       |       |                            |       |   |   |   |   |
| Commodity Contracts (2)                                                                   |       | $                          | 1,254      |                            | $          | 1,320 |   | $ | — |   | $ | — |   |

 

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(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 June 30, 2010, the Company had outstanding forward foreign exchangecontracts with a combined notional value of $112,680.  Approximately $48,916 of these forwardforeign exchange contracts represents a hedge of euro-denominated balance sheetpositions at June 30, 2010.  Theremaining contracts are hedges of anticipated future cash flows. In addition,the Company had outstanding long and short foreign exchange spot and optionscontracts of approximately $5,410,924 and approximately $5,410,924,respectively. The Company also had outstanding long and short futures andforwards commodity contracts with notional values of approximately $71,069 andapproximately $133,201, 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 Income for the three and six months ended June 30,2010 and 2009:

 
| ** **                                                   | ** ** | ** **                                                                         | ** ** | **Amount of Gain (Loss) Recognized  in Income on Derivatives** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Derivatives  not designated as hedging instruments under** | ** ** | **Location of Gain (Loss)  Recognized in Income on** | ** ** | **For the Three  Months Ended  June 30,**                                     | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
| **ASC  815-10**                                              | ** ** | **Derivatives**                                                                    | ** ** | **2010**                                                                                          | ** ** | **2010** | ** ** |
| ** **                                                   | ** ** | ** **                                                                         | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** |
| Foreign Exchange Contracts                                   |       | (1)                                                                                |       | $                                                                                                 | 9,217      |   | $ | 12,398 |   |
| Commodity Contracts                                          |       | Principal transactions                                                             |       | 2,701                                                                                             |       | 3,841 |   |
|                                                              |            |                                                                                    |            |                                                                                                   |            |  |  |  |  |

 

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(1)For the three months ended June 30, 2010, approximately $7,744 of gains onforeign exchange derivative contracts were included within Other income andapproximately $1,473 of gains on foreign currency options were included withinPrincipal transactions.  For the sixmonths ended June 30, 2010, approximately $10,823 of gains on foreign exchangederivative contracts were included within Other income and approximately $1,575of gains on foreign currency options were included within Principaltransactions.

 

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| ** **                                                                                | ** ** | ** **                                                                         | ** ** | **Amount of Gain (Loss) Recognized  in Income on Derivatives** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Derivatives not designated as hedging instruments under** | ** ** | **Location of Gain (Loss)  Recognized in Income on** | ** ** | **For the Three  Months Ended  June 30,**                                     | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
| **ASC 815-10**                                                                       | ** ** | **Derivatives**                                                                    | ** ** | **2009**                                                                                          | ** ** | **2009** | ** ** |
| ** **                                                                                | ** ** | ** **                                                                         | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** |
| Foreign Exchange Contracts                                                                |       | Other income                                                                       |       | $                                                                                                 | 1,296      |   | $ | 9,963 |   |
|                                                                                           |            |                                                                                    |            |                                                                                                   |            |  |  |  |  |

 

**13.****           ****REGULATORYREQUIREMENTS**

 

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 and GFI Securities Limited are subject to the capitalrequirements of the Financial Services 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”), which require that GFI (HK)Securities LLC maintain minimum capital, as defined by applicable regulations,of approximately $385.

 

Thefollowing table sets forth information about the minimum regulatory capitalthat certain of the Company’s subsidiaries were required to maintain as of June30, 2010:

 
| ** **                          | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Regulatory capital                  |       | $                            | 24,808     |                          | $          | 68,843                           |       | $                                      | 61,026     |   | $ | 2,008 |   |
| Minimum regulatory capital required |       | 250                          |       | 24,024                        |       | 33,165                           |       | 385                                    |       |
| Excess regulatory capital           |       | $                            | 24,558     |                          | $          | 44,819                           |       | $                                      | 27,861     |   | $ | 1,623 |   |

 

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 $566), 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 June 30, 2010,GFI Securities Limited’s Japanese branch was in compliance with thesecapital 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$642).  At June 30, 2010, GFI (HK)Brokers Ltd. had stockholders’ equity of 21,019 Hong Kong dollars (orapproximately $2,699), which exceeded the minimum requirement by 16,019 HongKong dollars (or approximately $2,057).

 

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 (or

 

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approximately$2,132), measured annually.  At December 31, 2009, GFI Group Pte. Ltd.exceeded the minimum requirement by approximately 14,464 Singapore dollars (orapproximately $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 $4,087). At June 30,2010, GFI Korea Money Brokerage Limitedmet the minimum requirement for paid-in-capital of 5,000,000 Korean Won.

 

**14.****           ****SEGMENTAND GEOGRAPHIC INFORMATION**

 

The Company has three operating segments: AmericasBrokerage, Europe, Middle East and Africa (“EMEA”) Brokerage and AsiaBrokerage.  Additionally, the Companypresents its operating segments as four reportable segments: AmericasBrokerage, EMEA Brokerage, Asia Brokerage and All Other.  The All Other segment captures costs that arenot directly assignable to one of the operating business segments, primarilyconsisting of the Company’s corporate business activities and operations fromsoftware, analytics and market data.

 

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

 
| ** **                                            | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue**                                           | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                     | 72,894     |                                                | $          | 89,083 |   | $ | 150,731 |   | $ | 178,995 |   |
| EMEA Brokerage                                        |       | 101,465                                               |       | 95,904                                              |       | 209,347 |   | 189,211 |   |
| Asia Brokerage                                        |       | 20,207                                                |       | 16,640                                              |       | 39,053 |   | 31,423 |   |
| All Other                                             |       | 15,022                                                |       | 23,039                                              |       | 31,232 |   | 41,272 |   |
| Total Consolidated Revenue                            |       | $                                                     | 209,588    |                                                | $          | 224,666 |   | $ | 430,363 |   | $ | 440,901 |   |
| ** **                                            | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Income:**                                  | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                     | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| EMEA Brokerage                                        |       | —                                                |       | 1                                                   |       | — |   | 1 |   |
| Asia Brokerage                                        |       | —                                                |       | —                                              |       | — |   | — |   |
| All Other                                             |       | 77                                                    |       | 225                                                 |       | 317 |   | 722 |   |
| Total Consolidated Interest Income                    |       | $                                                     | 77         |                                                | $          | 226 |   | $ | 317 |   | $ | 723 |   |
| ** **                                            | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Expense:**                                 | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                     | 10         |                                                | $          | 3 |   | $ | 10 |   | $ | 12 |   |
| EMEA Brokerage                                        |       | 239                                                   |       | 105                                                 |       | 342 |   | 271 |   |
| Asia Brokerage                                        |       | 22                                                    |       | 2                                                   |       | 38 |   | 4 |   |
| All Other                                             |       | 2,459                                                 |       | 2,547                                               |       | 4,915 |   | 4,839 |   |
| Total Consolidated Interest Expense                   |       | $                                                     | 2,730      |                                                | $          | 2,657 |   | $ | 5,305 |   | $ | 5,126 |   |
|                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| **Depreciation and Amortization:**                    | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | $                                                     | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| EMEA Brokerage                                        |       | —                                                |       | —                                              |       | — |   | — |   |
| Asia Brokerage                                        |       | —                                                |       | —                                              |       | — |   | — |   |
| All Other                                             |       | 7,844                                                 |       | 8,015                                               |       | 16,028 |   | 15,854 |   |
| Total Consolidated Depreciation and Amortization      |       | $                                                     | 7,844      |                                                | $          | 8,015 |   | $ | 16,028 |   | $ | 15,854 |   |
|                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| **Income (Loss) before Income  Taxes:**               | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage                                    |       | 15,313                                                |       | $                                                   | 20,514     |   | $ | 33,430 |   | $ | 41,636 |   |
| EMEA Brokerage                                        |       | 32,778                                                |       | 31,582                                              |       | 69,829 |   | 61,695 |   |
| Asia Brokerage                                        |       | 4,472                                                 |       | 1,774                                               |       | 8,770 |   | (112 | ) |
| All Other                                             |       | (38,184                                               | )          | (27,620                                             | )          | (77,536 | ) | (58,844 | ) |
| Total Consolidated Income/(Loss) before Income  Taxes |       | $                                                     | 14,379     |                                                | $          | 26,250 |   | $ | 34,493 |   | $ | 44,375 |   |

 

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**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 six months ended June 30, 2010 and 2009, respectively, andinformation regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in each geographic area as ofJune 30, 2010 and December 31, 2009, respectively, are as follows:

 
| ** **     | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:      |       |                                                  |       |                                                |       |   |   |   |   |
| United States  |       | $                                                     | 71,370     |                                                | $          | 89,567 |   | $ | 149,023 |   | $ | 180,108 |   |
| United Kingdom |       | 87,647                                                |       | 96,747                                              |       | 189,369 |   | 184,136 |   |
| Other          |       | 50,571                                                |       | 38,352                                              |       | 91,971 |   | 76,657 |   |
| Total          |       | $                                                     | 209,588    |                                                | $          | 224,666 |   | $ | 430,363 |   | $ | 440,901 |   |

 
| ** **                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------------|------------|
| Long-lived Assets, as defined: |       |               |       |                        |       |
| United States                  |       | $                  | 54,502     |                        | $          | 56,348 |   |
| United Kingdom                 |       | 12,863             |       | 14,139                      |       |
| Other                          |       | 4,112              |       | 4,489                       |       |
| Total                          |       | $                  | 71,477     |                        | $          | 74,976 |   |

 

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

 

**15.****           ****OTHERCOMPREHENSIVE INCOME (LOSS)**

 
| ** **                                                   | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Unrealized gain (loss) on  available for sale securities** | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                            |       | $                                                     | 85         |                                                | $          | 759 |   | $ | (389 | ) | $ | 200 |   |
| Tax (Expense) Benefit                                        |       | (24                                                   | )          | (212                                                | )          | 109 |   | (55 | ) |
| After Tax Amount                                             |       | $                                                     | 61         |                                                | $          | 547 |   | $ | (280 | ) | $ | 145 |   |
| **Foreign currency translation  adjustment**                 | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                            |       | $                                                     | (700       | )                                                   | $          | 2,807 |   | $ | (1,408 | ) | $ | 1,985 |   |
| Tax Benefit (Expense)                                        |       | 291                                                   |       | (1,217                                              | )          | 587 |   | (862 | ) |
| After Tax Amount                                             |       | $                                                     | (409       | )                                                   | $          | 1,590 |   | $ | (821 | ) | $ | 1,123 |   |

 

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

 

**16.****           ****SUBSEQUENTEVENTS**

 

InJuly 2010, the Board of Directors declared a quarterly cash dividend of $0.05per share payable on August 31, 2010 to shareholders of record on August 17,2010.

 

OnJuly 1, 2010, the Company acquired a 70% equity ownership interest in The KyteGroup Limited and Kyte Capital Management Limited (collectively “Kyte”).  Kyte, which is a member of leading exchangesincluding NYSE Euronext, NYSE LIFFE and Eurex, provides clearing, broking,settlement and back-office services to proprietary traders, brokers, marketmakers and hedge funds.  Kyte alsoprovides capital to start-up trading groups, small hedge funds, market-makersand individual traders.

 

TheCompany paid approximately £37,958 (or $57,609), subject to certainadjustments, to acquire the 70% equity ownership.  The purchase price is comprised of £22,400(or $33,996) in cash and 4,149,820 shares of the Company’s common stock, ofwhich 2,810,662 shares have been issued, with a fair value of $23,613. Thefinal purchase price will be subject to various adjustments, including theamount of Kyte’s surplus working capital at closing and the satisfaction ofcertain legal, financial and other criteria. The Company will acquire the residual 30% equity interest in Kyte for anadditional cash payment, which will be calculated based on the performance ofKyte during the three year period ending June 30, 2013.

 

TheCompany is in the process of completing the purchase price allocation relatedto this transaction. The acquired assets and assumed liabilities will berecorded by the Company at their estimated fair values which will be determinedwith the assistance of third party specialists.

 

OnAugust 1, 2010, the Company completed the acquisition of 33% of 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.

 

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

 

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** **

**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 June 30, 2010, the relatedcondensed consolidated statements of income and comprehensive income for thethree-month and six-month periods ended June 30, 2010 and 2009, and thecondensed consolidated statements of cash flows for the six-month periods endedJune 30, 2010 and 2009.  These interimfinancial statements are the responsibility of the Company’s management.

 

We conducted our reviewsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do not express such an opinion.

 

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 in conformitywith accounting principles generally accepted in the United States of 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 related consolidatedstatements of income, comprehensive income, cash flows and changes instockholders’ equity for the year then ended (not presented herein); and in ourreport dated March 15, 2010, we expressed an unqualified opinion on thoseconsolidated financial statements.  Inour opinion, the information set forth in the accompanying condensedconsolidated statement of financial condition as of December 31, 2009 is fairlystated, in all material respects, in relation to the consolidated statement offinancial condition from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

 

New York, New YorkAugust 9, 2010

 

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| **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 orachievements, and may contain the words ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’‘‘estimate,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘will be,’’ ‘‘will likely continue,’’ ‘‘willlikely result,’’ 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 underthe heading “Risk Factors” and elsewhere in our 2009 Form 10-K;

 

·                  market conditions, including trading volumeand volatility;

 

·                  our ability to attract and retain keypersonnel, 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 principaland principal trading business, including risks arising from specific brokeragetransactions, or series of brokerage transactions, such as credit risk andmarket risk;

 

·                  the extensive regulation of the Company’sbusiness, changes in laws and regulations governing our business and operationsor permissible activities and our ability to comply with such laws andregulations;

 

·                  our ability to keep up with rapidtechnological change and to continue to develop and support our electronic brokeragesystems in a cost-effective manner;

 

·                  future results of operations and financialcondition and the success of our business strategies;

 

·                  economic, political and market factorsaffecting trading volumes, securities prices, or demand for our brokerageservices, including recent conditions in the world economy and financialmarkets in which we provide our services;

 

·                  financial difficulties experienced by ourcustomers or key participants in the markets in which we focus our brokerageservices;

 

·                  risks associated with our ability to assessand integrate potential acquisitions of businesses or technologies;

 

·                  the maturing of key markets and any resultingcontraction in commissions;

 

·                  risks associated with the expansion andgrowth of our operations generally or of specific products or services, including,in particular, our ability to manage our international operations;

 

·                  uncertainties associated with currencyfluctuations;

 

·                  our failure to protect or enforce ourintellectual property rights;

 

·                  uncertainties relating to litigation;

 

·                  liquidity and clearing capital requirementsand the impact of the recent conditions in the world economy and the financialmarkets in which we provide our services on the availability and terms ofadditional or future capital; and

 

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·                  the effectiveness of our risk managementpolicies 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’’ and ‘‘Item 3—Quantitative and QualitativeDisclosures About Market Risk’’ and elsewhere in this Quarterly Report, maycause actual results to differ materially from the forward-looking statements.The information included herein is given as of the filing date of thisForm 10-Q with the SEC and future events or circumstances could differsignificantly from these forward-looking statements. The Company does notundertake to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

**BusinessEnvironment**

 

Asa wholesale broker, our results of operations are impacted by a number ofexternal market factors, including market volatility, 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 which we operate andthe financial condition of the dealers, hedge funds and other marketparticipants to whom we provide our services.  Outlined below aremanagement’s observations of these external market factors during the mostrecent fiscal period. The factors outlined below are not the only factors thatimpacted our results of operations for the most recent fiscal period, andadditional or other factors may impact, or have different degrees of impact, onour results of operations in future periods.

 

*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 marketdislocations that can also lead certain clients to reduce their tradingactivity.

 

Marketvolatility is driven by a range of external factors, some of which are marketspecific and some of which are correlated to general macro-economicconditions.  During the second quarter of 2010, many of the markets inwhich we operate experienced a brief period of increased volatility driven bythe European sovereign debt crisis and signs of a slower than expected economicrecovery in the U.S. This brief period of increased volatility subsided in Juneand market trading volumes decreased considerably from the first two months ofthe quarter. During the second quarter of 2010, our cash fixed income businesssuffered from narrower credit spreads, on average, lower bond issuance globallyin the first half of 2010 and competitive pressures, all of which led to ourdecision to reduce our corporate fixed income presence in the U.S. during thequarter. The combination of these and other factors led to brokerage revenuesbeing down slightly year-over-year in the second 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, objectivemeasures of growth in outstanding notional amount of OTC derivatives, all ofwhich 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.

 

TheBank of International Settlements (“BIS”) released its Year-End2009 Market Survey in May 2010 detailing growth in global notional amountsoutstanding in various OTC markets. Notional amounts outstanding included new transactions and those fromprevious periods.  The BIS statisticsindicated that there was an increase in the notional amounts outstanding formany derivative categories over the previous year-end and mid-yearresults.  Interest rate contracts, thelargest category, were up 16.6% year-over-year and 2.9% sequentially, whileforeign exchange contracts and equity-linked contracts were up 11.3% and 7.1%,respectively, year-over-year and up slightly sequentially. Credit default swapswere down 21.9% year over year and 9.3% sequentially, while commodity contractswere down 32.5% year-over-year and 21.1% sequentially.  BIS

 

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attributedthe lower notional value in credit default swaps to a combination of factors,including reduced spreads and ongoing netting of these contracts.

 

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.  However, asthe economy and markets showed signs of recovery in 2010, the year-over-yearcomparisons returned to growth in many cases. In the second quarter of 2010, the CME Group, Inc., reported a 31%increase in average overall daily volumes. IntercontinentalExchange, Inc. (“ICE”)reported a 36% increase in futures average daily volumes and a 26% increase inOTC energy average daily commissions year-over-year for the secondquarter.  Revenues from ICE’s creditdefault swap trade execution, processing and clearing businesses were down 3%when compared to the second quarter of 2009.

 

Inaddition, newer products and our expansion into growing markets and newgeographical areas historically contributed to the growth in our brokeragerevenues. For example, we recently invested in new businesses in ethanol,mortgage-backed securities, and soft and agricultural commodities in the U.S.In the U.K, we completed the acquisition of The Kyte Group Limited and KyteCapital Management Limited on July 1, 2010 and invested in our natural gas andiron ore businesses.

 

*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 brokeragepersonnel with extensive experience in the specialized markets we serve.Competition for the services of productive brokers remained intense in thesecond quarter of 2010.  Theconsolidation and personnel layoffs by dealers, hedge funds and other marketparticipants during the last few years also led to increased competition toprovide brokerage services to a smaller number of market participants in thenear term. Additionally, many of the large dealer firms recently began tocommit additional resources, including hiring additional brokerage personneland committing additional capital in the cash markets, which led us to reduceour corporate fixed income presence in the U.S. Despite these factors, therewere indications in the first half of 2010 that trading activity by ourcustomers increased year-over-year in certain derivative markets.

 

Duringthe last year, we believe that the legislative and regulatory proposals forincreased transparency, position limits and collateral or capital requirementscaused increased uncertainty in the markets and led investors and banks tocommit less capital to many OTC markets. During the second quarter of 2010, theU.S. Congress completed work on the Dodd-Frank Wall Street Reform and ConsumerProtection Act, which was enacted in July 2010. We are optimistic that the regulatory solutions, including centralizedclearing, increased transparency and centralized trade reporting, will begenerally beneficial to the long-term health of the broader financial markets.The legislation in the U.S. requires certain OTC derivatives to be executedthrough a registered exchange or “swap execution facility”. We believe that wewill be able to qualify as a swap execution facility and we believe that our productexpertise, proven technology, depth of liquidity and long-standingrelationships position us well to capture any newly created opportunities inthese 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 endedJune 30, 2010:

 

Our revenues decreased 6.7%to $209.6 million for the three months ended June 30, 2010 from$224.7 million for the three months ended June 30, 2009. The main factorscontributing to this decrease in our revenues were:

 

·                  Increased competition in certain cash fixedincome markets, which led us to reduce our corporate fixed income presence inthe U.S;

·                  Narrower credit spreads, on average, andlower debt issuances globally, as it relates to our cash fixed income business;

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

·                  A net decrease of $15.1 million related toremeasurement of foreign currency transactions and balances partially offset bya net increase of $6.4 million in realized and unrealized gains on foreigncurrency hedges; and

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

 

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

 

·                  The stabilization of economic conditions inkey markets in which we provide our brokerage services;

·                  Improved global economic and marketconditions in emerging markets and Asia;

·                  Increased trading activity in certainfinancial and commodity product markets in which we have a leading marketshare;

·                  Higher share and commodity values, on average,which positively affected our equities and commodities revenues, respectively,in Europe;

·                  Volatility centered on the European sovereigndebt crisis and its effect on fixed income derivative and equity volumes inEurope;

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

·                  Strong performance of our Trayportsubsidiary; and

·                  New brokerage desks and new brokers hiredacross all product categories.

 

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 3.7% to $141.1 million for the three months ended June 30,2010 from $146.6 million for the three months ended June 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 this overall compensation and employeebenefits, employment costs of our brokerage personnel are the key component.  Bonuses for brokerage personnel are primarilybased on the operating results of their related brokerage desk as well as theirindividual performance.  For many of ourbrokerage employees, their bonus constitutes a significant component of theiroverall compensation.  Broker performancebonuses decreased to $59.6 million for the three months ended June 30,2010 from $68.5 million for the three months ended June 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 $10.1 million for the three months ended June 30,2010 from $10.8 million for the three months ended June 30, 2009.  These sign-on bonuses may be paid in the formof cash, restricted stock units (“RSUs”) or forgivable loans and are typicallyamortized over the term of the related employment agreement, which is generallytwo to four years.  These employmentagreements typically contain repayment or forfeiture provisions for unvestedRSUs or all or a portion of the sign-on bonus and forgivable loan should theemployee voluntarily terminate his or her employment or if the employee’semployment is terminated for cause during the initial term of the agreement.

 

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**Results of Consolidated Operations**

 

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

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **2010**                         | ** ** | **2009**                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**       | ** ** |
| REVENUES:                                |       |                             |       |                                     |       |   |   |   |   |
| Brokerage revenues:                      |       |                             |       |                                     |       |   |   |   |   |
| Agency commissions                       |       | $                                | 137,624    |                                     | $          | 121,488 |   | $ | 281,454 |   | $ | 246,887 |   |
| Principal transactions                   |       | 56,526                           |       | 79,566                                   |       | 116,822 |   | 151,781 |   |
| Total brokerage revenues                 |       | 194,150                          |       | 201,054                                  |       | 398,276 |   | 398,668 |   |
| Software, analytics and market data      |       | 14,519                           |       | 13,019                                   |       | 29,419 |   | 26,071 |   |
| Interest income                          |       | 77                               |       | 226                                      |       | 317 |   | 723 |   |
| Other income                             |       | 842                              |       | 10,367                                   |       | 2,351 |   | 15,439 |   |
| Total revenues                           |       | 209,588                          |       | 224,666                                  |       | 430,363 |   | 440,901 |   |
| EXPENSES:                                |       |                             |       |                                     |       |   |   |   |   |
| Compensation and employee benefits       |       | 141,109                          |       | 146,575                                  |       | 285,772 |   | 292,123 |   |
| Communications and market data           |       | 10,695                           |       | 11,240                                   |       | 22,581 |   | 22,738 |   |
| Travel and promotion                     |       | 9,341                            |       | 8,550                                    |       | 18,234 |   | 16,030 |   |
| Rent and occupancy                       |       | 5,255                            |       | 4,778                                    |       | 10,686 |   | 9,512 |   |
| Depreciation and amortization            |       | 7,844                            |       | 8,015                                    |       | 16,028 |   | 15,854 |   |
| Professional fees                        |       | 6,247                            |       | 4,129                                    |       | 12,844 |   | 9,220 |   |
| Clearing fees                            |       | 7,554                            |       | 8,106                                    |       | 14,978 |   | 16,213 |   |
| Interest                                 |       | 2,730                            |       | 2,657                                    |       | 5,305 |   | 5,126 |   |
| Other expenses                           |       | 4,434                            |       | 4,366                                    |       | 9,442 |   | 9,710 |   |
| Total expenses                           |       | 195,209                          |       | 198,416                                  |       | 395,870 |   | 396,526 |   |
| Income before provision for income taxes |       | 14,379                           |       | 26,250                                   |       | 34,493 |   | 44,375 |   |
| Provision for income taxes               |       | 3,955                            |       | 9,894                                    |       | 10,693 |   | 16,419 |   |
| Net income                               |       | $                                | 10,424     |                                     | $          | 16,356 |   | $ | 23,800 |   | $ | 27,956 |   |

 

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Thefollowing table sets forth our condensed consolidated results of income as apercentage of our total revenues for the periods indicated:

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **2010**                         | ** ** | **2009**                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                             |       |                                     |       |   |   |   |   |
| REVENUES:                                |       |                             |       |                                     |       |   |   |   |   |
| Brokerage revenues:                      |       |                             |       |                                     |       |   |   |   |   |
| Agency commissions                       |       | 65.7                             | %          | 54.1                                     | %          | 65.4 | % | 56.0 | % |
| Principal transactions                   |       | 27.0                             |       | 35.4                                     |       | 27.1 |   | 34.4 |   |
| Total brokerage revenues                 |       | 92.7                             |       | 89.5                                     |       | 92.5 |   | 90.4 |   |
| Software, analytics and market data      |       | 6.9                              |       | 5.8                                      |       | 6.8 |   | 5.9 |   |
| Interest income                          |       | 0.0                              |       | 0.1                                      |       | 0.1 |   | 0.2 |   |
| Other income                             |       | 0.4                              |       | 4.6                                      |       | 0.6 |   | 3.5 |   |
| Total revenues                           |       | 100.0                            | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| EXPENSES:                                |       |                             |       |                                     |       |   |   |   |   |
| Compensation and employee benefits       |       | 67.3                             |       | 65.2                                     |       | 66.4 |   | 66.3 |   |
| Communications and market data           |       | 5.1                              |       | 5.0                                      |       | 5.2 |   | 5.2 |   |
| Travel and promotion                     |       | 4.5                              |       | 3.8                                      |       | 4.2 |   | 3.6 |   |
| Rent and occupancy                       |       | 2.5                              |       | 2.1                                      |       | 2.5 |   | 2.2 |   |
| Depreciation and amortization            |       | 3.7                              |       | 3.6                                      |       | 3.7 |   | 3.6 |   |
| Professional fees                        |       | 3.0                              |       | 1.8                                      |       | 3.0 |   | 2.1 |   |
| Clearing fees                            |       | 3.6                              |       | 3.6                                      |       | 3.5 |   | 3.7 |   |
| Interest                                 |       | 1.3                              |       | 1.2                                      |       | 1.2 |   | 1.2 |   |
| Other expenses                           |       | 2.1                              |       | 2.0                                      |       | 2.2 |   | 2.2 |   |
| Total expenses                           |       | 93.1                             | %          | 88.3                                     | %          | 91.9 | % | 90.1 | % |
| Income before provision for income taxes |       | 6.9                              |       | 11.7                                     |       | 8.1 |   | 9.9 |   |
| Provision for income taxes               |       | 1.9                              |       | 4.4                                      |       | 2.5 |   | 3.7 |   |
| Net income                               |       | 5.0                              | %          | 7.3                                      | %          | 5.6 | % | 6.2 | % |

 

**Three Months Ended June 30, 2010 Compared to theThree Months Ended June 30, 2009**

 

Netincome for the three months ended June 30, 2010 was $10.4 million ascompared to net income of $16.4 million for the three months endedJune 30, 2009, a decrease of $6.0 million or approximately 36.3%. Totalrevenues decreased by $15.1 million, or 6.7%, to $209.6 million for the threemonths ended June 30, 2010 from $224.7 million for the prior year. Ourdecreased revenues were primarily due to the reasons set forth above under “FinancialOverview”, including weakness in our

 

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U.S.equities and global cash fixed income businesses. Our revenues were positivelyimpacted by growth in our fixed income derivatives, commodities, and financialbusinesses, as well as growth in our software and analytics productofferings.  We were adversely affected byforeign exchange rates in the second quarter of 2010 to the extent we earnedrevenues denominated in Euros and the British Pound as these currencies wereweaker, on average, relative to the U.S. Dollar than in the second quarter of2009.  Total expenses decreased by $3.2million, or 1.6%, to $195.2 million for the three months ended June 30,2010 from $198.4 million for the prior year. Expenses decreased primarilybecause of decreased compensation expense for the three months ended June 30,2010, and were partially offset by higher professional fees associated withbusiness development activity in the quarter, as well as higher travel andpromotion expenses.

 

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

 
| ** **               | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **               | ** ** | **2010**                                                              | ** ** | **%*** | ** ** | **2009** | ** ** | **%*** | ** ** | **Increase  (Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**             |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:      |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Fixed Income             |       | $                                                                     | 60,810     |   | 29.0 | % | $ | 81,088 |   | 36.1 | % | $ | (20,278 | ) | (25.0 | )% |
| Equity                   |       | 46,587                                                                |       | 22.2 |   | 48,853 |   | 21.7 |   | (2,266 | ) | (4.6 | ) |
| Financial                |       | 39,123                                                                |       | 18.7 |   | 33,405 |   | 14.9 |   | 5,718 |   | 17.1 |   |
| Commodity                |       | 47,630                                                                |       | 22.7 |   | 37,708 |   | 16.8 |   | 9,922 |   | 26.3 |   |
| Total brokerage revenues |       | 194,150                                                               |       | 92.6 |   | 201,054 |   | 89.5 |   | (6,904 | ) | (3.4 | ) |
| Other revenues           |       | 15,438                                                                |       | 7.4 |   | 23,612 |   | 10.5 |   | (8,174 | ) | (34.6 | ) |
| Total Revenues           |       | $                                                                     | 209,588    |   | 100.0 | % | $ | 224,666 |   | 100.0 | % | $ | (15,078 | ) | (6.7 | )% |

 

----

*                 Denotes % oftotal revenues.

**          Denotes %change in the three months ended June 30, 2010 as compared to the three monthsended June 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.

 

·                  Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) decreased by approximately 7.9% for thethree months ended June 30, 2010, as compared to the same period from the prioryear.

 

·                  The decrease infixed income product brokerage revenues of $20.3 million in 2010 was due to adecline in U.S. and European cash fixed income revenues partially offset bysignificant growth in fixed income derivative revenues.  Narrower credit spreads, on average, andincreased competition adversely affected our U.S. cash fixed income business,while our fixed income derivative revenues increased in the U.S. and Europe dueto an improved business environment, increased electronic trading on ourCreditMatch® platform and heightened volatility from European sovereign debtconcerns.  Our fixed income productbrokerage personnel headcount increased by 30 to 317 employees at June 30,2010 from 287 employees at June 30, 2009.

 

·                  The decrease inequity product brokerage revenues of $2.3 million in 2010 was primarily due tolower revenues in the U.S., which was impacted by lower trading volumes.  This decrease was partially offset bystronger revenues in Europe aided by volatility related to the Europeansovereign debt crisis and by higher share values, on average, as compared tothe second quarter of 2009.  Our equityproduct brokerage personnel headcount was 237 employees at June 30, 2010and at June 30, 2009.

 

·                  The increase infinancial product brokerage revenues of $5.7 million in 2010 was primarilyattributable to

 

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improvedeconomic conditions and growth in emerging markets and Asia as well as theperformance of new brokerage desks.  Ouremerging market foreign exchange and interest rate derivative productsexhibited strong growth year-over-year. Our financial product headcount increased by 5 to 269 employees at June 30,2010 from 264 employees at June 30, 2009.

 

·                  The increase incommodity product brokerage revenues of $9.9 million in 2010 was primarilyattributable to improved economic conditions reflected in higher commodityprices and increased demand for certain commodity products, including shipping,electricity and natural gas.  We alsobenefited from new hires in our energy and commodities product area in the U.S.and Europe and increased electronic trading activity in Europe and in the U.S.on our EnergyMatch® hybrid brokerage platforms. Our commodity product brokeragepersonnel headcount increased by 12 to 293 employees at June 30, 2010 from281 employees at June 30, 2009.

 

·                  **Other Revenues**

 

Other revenues was comprised of the following:

 
| ** **                                                      | ** ** | **For the Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                                                      | ** ** | **(dollars in thousands)**                    | ** ** |
| Software, analytics and market data                             |       | $                                             | 14,519     |   | $ | 13,019 |   |
| Remeasurement of foreign currency transactions and  balances    |       | (7,042                                        | )          | 8,138 |   |
| Net realized and unrealized gains from foreign  currency hedges |       | 7,744                                         |       | 1,296 |   |
| Interest income                                                 |       | 77                                            |       | 226 |   |
| Other                                                           |       | 140                                           |       | 933 |   |
| Total other revenues                                            |       | $                                             | 15,438     |   | $ | 23,612 |   |

 

The $8.2 million netdecrease in other revenues in the second quarter of 2010 to $15.4 million from$23.6 million in the same period in 2009 was largely related to a net decreaseof $15.1 million related to the remeasurement of foreign currency transactionsand balances. We recognized realized and unrealized losses on foreign currencytransactions and balances of $7.0 million in the three months ended June 30,2010, as compared to realized and unrealized gains of $8.1 million in thecomparable period in 2009. Foreign currency remeasurement gains and lossesresult from the remeasurement of asset and liability balances that aredenominated in currencies other than the functional currency of the businessunit undertaking such transactions. Offsetting this loss was a net increase of$6.4 million in mark-to-market gains on our foreign currency derivative hedges,as well as an increase in software, analytics and market data of $1.5 millionattributable to growth in software revenues at our Trayport subsidiary.

 

**Expenses**

 

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

 
| ** **                         | ** ** | **For the Three Month Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **June 30,**                                 | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2010**                                          | ** ** | **%***       | ** ** | **2009**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                       |       |                                              |       |         |       |       |       |   |   |   |   |   |   |
| Compensation and employee benefits |       | $                                                 | 141,109    |         | 67.3       | %          | $          | 146,575 |   | 65.2 | % | $ | (5,466 | ) | (3.7 | )% |
| Communications and market data     |       | 10,695                                            |       | 5.1          |       | 11,240     |       | 5.0 |   | (545 | ) | (4.8 | ) |
| Travel and promotion               |       | 9,341                                             |       | 4.5          |       | 8,550      |       | 3.8 |   | 791 |   | 9.3 |   |
| Rent and occupancy                 |       | 5,255                                             |       | 2.5          |       | 4,778      |       | 2.1 |   | 477 |   | 10.0 |   |
| Depreciation and amortization      |       | 7,844                                             |       | 3.7          |       | 8,015      |       | 3.6 |   | (171 | ) | (2.1 | ) |
| Professional fees                  |       | 6,247                                             |       | 3.0          |       | 4,129      |       | 1.8 |   | 2,118 |   | 51.3 |   |
| Clearing fees                      |       | 7,554                                             |       | 3.6          |       | 8,106      |       | 3.6 |   | (552 | ) | (6.8 | ) |
| Interest                           |       | 2,730                                             |       | 1.3          |       | 2,657      |       | 1.2 |   | 73 |   | 2.7 |   |
| Other expenses                     |       | 4,434                                             |       | 2.1          |       | 4,366      |       | 2.0 |   | 68 |   | 1.6 |   |
| **Total Expenses**                 |       | $                                                 | 195,209    |         | 93.1       | %          | $          | 198,416 |   | 88.3 | % | $ | (3,207 | ) | (1.6 | )% |

 

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----

*            Denotes % of total revenues

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

 

·          **Compensationand Employee Benefits**

 

·                  The decrease incompensation and employee benefits expenses of $5.5 million in the secondquarter of 2010 was primarily attributable to lower broker performance bonusand sign-on bonus expense due to our restructuring efforts in 2009, offsetpartially by higher broker salaries, payroll taxes and benefits from increasedbroker headcount.

 

·                  Totalcompensation and employee benefits as a percentage of total revenues increasedto 67.3% for the three months ended June 30, 2010 as compared to 65.2% forthe same period in the prior year.  Thehigher compensation rate is largely the function of lower broker productivity,higher broker headcount and salary levels as well as the decrease in otherrevenues.

 

·                  Bonus expenserepresented 46.9% and 52.9% of total compensation and employee benefits expensefor the three months ended June 30, 2010 and 2009, respectively. A portionof our bonus expense is subject to contractual guarantees that may require usto make bonus payments to brokers regardless of their performance in anyparticular period. Additionally, sign-on bonus expense represented 8.1% and7.8% of total compensation and employee benefits for the three months endedJune 30, 2010 and 2009, respectively.

 

·          **AllOther Expenses**

 

·                  The increase intravel and promotion was primarily attributable to increased broker headcount,increased competition and the increased trading activity of many of ourcustomers.  Travel and promotion, as apercentage of our total brokerage revenues for the three months endedJune 30, 2010, increased to 4.8% from 4.3% for the same period from theprior year.

 

·                  The increase inrent and occupancy of $0.5 million was primarily due to an increase in rent andrelated costs due to our headcount and geographical expansion.

 

·                  The increase inprofessional fees of $2.1 million was primarily due to increased professionalfees relating to corporate transactions, such as the acquisition of The KyteGroup Limited and Kyte Capital Management Limited on July 1, 2010, as wellas consulting and professional fees related to strategic projects.

 

·                  The decrease inclearing fees was primarily due to the decline in our cash equities and cashfixed income volumes in the U.S. Clearing fees, as a percentage of our totalrevenues from principal transactions increased to 13.4% for the three monthsended June 30, 2010, from 10.2% for the same period from the prior year.This increase was primarily due to the change in product mix as our cash fixedincome business decreased relative to our cash equities business.  Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. We also use the services of stock exchanges and floor brokers, toassist in the execution of transactions. Fees paid to floor brokers andexecution fees paid to exchanges in these circumstances are included inclearing fees. In addition, clearing fees also includes fees incurred incertain equity transactions executed on an agency basis.

 

·                  Our effective tax rate was27.5% for the three months ended June 30, 2010 as compared to 37.7% forthe

 

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sameperiod in the prior year. The reduction in the effective tax rate was primarilydue to a shift in the geographic mix of our earnings in favor of jurisdictionswith lower tax rates as well as an adjustment in the quarter due to our loweryear-to-date effective tax rate.

 

**Six Months Ended June 30, 2010 Compared to theSix Months Ended June 30, 2009**

 

Netincome for the six months ended June 30, 2010 was $23.8 million ascompared to net income of $28.0 million for the six months ended June 30,2009, a decrease of $4.2 million or approximately 14.9%.  Total revenuesdecreased by $10.5 million, or 2.4%, to $430.4 million for the six months endedJune 30, 2010 from $440.9 million for the same period from the prior year.Our decreased revenues were driven by the weakness in U.S. equities and cashfixed income globally offset by growth in fixed income derivatives,commodities, and financial businesses as well as growth in our software andanalytics product offerings.  Our total brokeragepersonnel headcount increased by 47 to a total of 1,116 employees at June 30,2010 from 1,069 employees at June 30, 2009. Total expenses decreased by$0.6 million, or 0.2%, to $395.9 million for the six months ended June 30,2010 from $396.5 million for the same period from the prior year. Expensesdecreased primarily because of decreased compensation expense for the sixmonths ended June 30, 2010, which was attributable to a decrease inperformance-based bonus expense as a result of lower brokerage revenues, aswell as lower clearing fees attributable to the decline in cash equities andfixed income volumes. This decrease in expenses was partially offset by higherprofessional fees, which were primarily attributable to an increase in businessdevelopment costs, and higher travel and promotion costs.

 

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

 
| ** **               | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2010**                                                            | ** ** | **%*** | ** ** | **2009** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**             |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues:      |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Fixed Income             |       | $                                                                   | 132,294    |   | 30.7 | % | $ | 155,492 |   | 35.3 | % | $ | (23,198 | ) | (14.9 | )% |
| Equity                   |       | 94,153                                                              |       | 21.9 |   | 102,247 |   | 23.2 |   | (8,094 | ) | (7.9 | ) |
| Financial                |       | 77,233                                                              |       | 17.9 |   | 64,496 |   | 14.6 |   | 12,737 |   | 19.7 |   |
| Commodity                |       | 94,596                                                              |       | 22.0 |   | 76,433 |   | 17.3 |   | 18,163 |   | 23.8 |   |
| Total brokerage revenues |       | 398,276                                                             |       | 92.5 |   | 398,668 |   | 90.4 |   | (392 | ) | (0.1 | ) |
| Other revenues           |       | 32,087                                                              |       | 7.5 |   | 42,233 |   | 9.6 |   | (10,146 | ) | (24.0 | ) |
| Total Revenues           |       | $                                                                   | 430,363    |   | 100.0 | % | $ | 440,901 |   | 100.0 | % | $ | (10,538 | ) | (2.4 | )% |

 

----

*            Denotes % of total revenues.

**     Denotes %change in the six months ended June 30, 2010 as compared to the six monthsended June 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.

 

·                  Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) decreased by approximately 4.2% for the sixmonths ended June 30, 2010, as compared to the same period from the prioryear.

 

·                  The decrease in fixed income brokeragerevenues of $23.2 million for the six months ended June 30, 2010 was due toa decline in U.S. and European cash fixed income revenues partially offset bysignificant growth in fixed income derivative revenues.  Narrower credit spreads, on average, andincreased competition adversely affected our U.S. cash fixed income business leadingus to reduce our corporate fixed income presence in the U.S., while our fixedincome derivative revenues increased in the U.S. and Europe due to an improvedbusiness environment, increased electronic trading on our CreditMatch® platformand heightened volatility from European sovereign debt concerns. Our fixedincome product brokerage personnel headcount increased by 30 to 317 employeesat June 30, 2010 from 287 employees at June 30, 2009.

 

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·                  The decrease inequity product brokerage revenues of $8.1 million for the six months ended June 30,2010 compared to the same period in 2009 was primarily due to lower revenues inthe U.S., which was impacted by lower trading volumes.  This decrease was partially offset bystronger revenues in Europe aided by volatility related to the Europeansovereign debt crisis and by higher share values, on average, as compared tothe same period in 2009.  Our equityproduct brokerage personnel headcount was 237 employees at June 30, 2010and June 30, 2009.

 

·                  The increase infinancial product brokerage revenues of $12.7 million for the six months ended June 30,2010 compared to the same period in 2009 was primarily attributable to improvedeconomic conditions and growth in emerging markets and Asia.  Our financial product headcount increased by5 to 269 employees at June 30, 2010 from 264 employees at June 30,2009.

 

·                  The increase incommodity product brokerage revenues of $18.2 million for the six months ended June 30,2010 was primarily attributable to improved economic conditions reflected inhigher commodity prices and increased demand for certain commodity productsincluding shipping, electricity and natural gas.  We also benefited from new hires in ourenergy and commodities product area in the U.S. and Europe and increasedelectronic trading activity in Europe and the U.S. on our EnergyMatch® hybridbrokerage platforms. Our commodity product brokerage personnel headcountincreased by 12 to 293 employees at June 30, 2010 from 281 employees atJune 30, 2009.

 

·                  **Other Revenues**

 

Other revenues was comprisedof the following:

 
| ** **                                                        | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                                    | ** ** | **2009** | ** ** |
| ** **                                                        | ** ** | **(dollars in thousands)**                  | ** ** |
| Software, analytics and market data                               |       | $                                           | 29,419     |   | $ | 26,071 |   |
| Remeasurement of foreign currency transactions and  balances      |       | (9,336                                      | )          | 2,913 |   |
| Net realized/unrealized gain (loss) from foreign  currency hedges |       | 10,823                                      |       | 9,963 |   |
| Interest income                                                   |       | 317                                         |       | 723 |   |
| Other                                                             |       | 864                                         |       | 2,563 |   |
| Total other revenues                                              |       | $                                           | 32,087     |   | $ | 42,233 |   |

 

The $10.1 million netdecrease in other revenues for the six months ended June 30, 2010 to $32.1million from $42.2 million in the same period in 2009 was largely related to anet decrease of $12.2 million related to the remeasurement of foreign currencytransactions and balances. We recognized realized and unrealized losses onforeign currency transactions and balances of $9.3 million in the six monthsended June 30, 2010, as compared to realized and unrealized gains of $2.9million in the comparable period in 2009. Foreign currency remeasurement gainsand losses result from the remeasurement of asset and liability balances thatare denominated in currencies other than the functional currency of thebusiness unit undertaking such transactions. Partially offsetting this decrease, our software, analytics and marketdata revenue increased by $3.3 million attributable to growth in softwarerevenues at our Trayport subsidiary.

 

**Expenses**

 

The following table sets forth the changes inexpenses for the six months ended June 30, 2010 as compared to the sameperiod in 2009 (dollars in thousands, except percentage data):

 

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| ** **                         | ** ** | **For the Six Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **June 30,**                                | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2010**                                         | ** ** | **%***       | ** ** | **2009**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                       |       |                                             |       |         |       |       |       |   |   |   |   |   |   |
| Compensation and employee benefits |       | $                                                | 285,772    |         | 66.4       | %          | $          | 292,123 |   | 66.3 | % | $ | (6,351 | ) | (2.2 | )% |
| Communications and market data     |       | 22,581                                           |       | 5.2          |       | 22,738     |       | 5.2 |   | (157 | ) | (0.7 | ) |
| Travel and promotion               |       | 18,234                                           |       | 4.2          |       | 16,030     |       | 3.6 |   | 2,204 |   | 13.7 |   |
| Rent and occupancy                 |       | 10,686                                           |       | 2.5          |       | 9,512      |       | 2.2 |   | 1,174 |   | 12.3 |   |
| Depreciation and amortization      |       | 16,028                                           |       | 3.7          |       | 15,854     |       | 3.6 |   | 174 |   | 1.1 |   |
| Professional fees                  |       | 12,844                                           |       | 3.0          |       | 9,220      |       | 2.1 |   | 3,624 |   | 39.3 |   |
| Clearing fees                      |       | 14,978                                           |       | 3.5          |       | 16,213     |       | 3.7 |   | (1,235 | ) | (7.6 | ) |
| Interest                           |       | 5,305                                            |       | 1.2          |       | 5,126      |       | 1.2 |   | 179 |   | 3.5 |   |
| Other expenses                     |       | 9,442                                            |       | 2.2          |       | 9,710      |       | 2.2 |   | (268 | ) | (2.8 | ) |
| **Total Expenses**                 |       | $                                                | 395,870    |         | 91.9       | %          | $          | 396,526 |   | 90.1 | % | $ | (656 | ) | (0.2 | )% |

 

----

*            Denotes % of total revenues

**     Denotes %change in the six months ended June 30, 2010 as compared to the six monthsended June 30, 2009

 

·          **Compensationand Employee Benefits**

 

·                  The decrease incompensation and employee benefits expense of $6.4 million in the first sixmonths of 2010 was primarily attributable to a decrease in broker andnon-broker bonus expense and sign-on bonus expense, partially offset by higherbroker salaries expense from increased broker headcount.

 

·                  Totalcompensation and employee benefits expense as a percentage of total revenuesremained relatively level at 66.4% for the six months ended June 30, 2010as compared to 66.3% for the same period in the prior year.

 

·                  Bonus expenserepresented 48.2% and 51.9% of total compensation and employee benefits expensefor the six months ended June 30, 2010 and 2009, respectively. A portionof our bonus expense is subject to contractual guarantees that may require usto make bonus payments to brokers regardless of their performance in anyparticular period. Additionally, sign-on bonus expense represented 6.9% and7.7% of total compensation and employee benefits for the six months endedJune 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.

 

·          **AllOther Expenses**

 

·                  The increase intravel and promotion was primarily attributable to increased broker headcount,increased competition and the increased trading activity of many of ourcustomers Travel and promotion, as a percentage of our total brokerage revenuesfor the six months ended June 30, 2010, increased to 4.6% from 4.0% forthe same period from the prior year.

 

·                  The increase inrent and occupancy of $1.2 million was primarily due to an increase in rent andrelated costs due to our headcount and geographical expansion.

 

·                  The increase inprofessional fees of $3.6 million was primarily due to increased professionalfees relating to corporate transactions, such as the acquisition of The KyteGroup Limited and Kyte Capital Management Limited on July 1, 2010, as wellas consulting and professional fees related to strategic projects.

 

·                  The decrease inclearing fees was primarily due to the decline in our cash equities and cashfixed income volumes in the U.S. Clearing fees, as a percentage of our total revenues from principaltransactions increased to 12.8% for the three months ended June 30, 2010,from 10.7% for the same period from the prior year.  This increase was primarily due to the changein product mix as our cash fixed income business decreased relative to our cashequities business.  Principaltransactions are generally settled through third party clearing organizationsthat charge us a fee for their services. We also use the services of stock exchanges and floor brokers, to assistin the execution of transactions.  Feespaid to floor brokers and execution fees paid to exchanges in thesecircumstances are included in clearing fees. In addition, clearing

 

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feesalso include fees incurred in certain equity transactions executed on an agencybasis.

 

·                  Our effective tax rate was31.0% for the six months ended June 30, 2010 as compared to 37.0% for thesame period in 2009. The reduction in the effective tax rate was primarily dueto a shift in the geographic mix of our earnings in favor of jurisdictions withlower tax rates, resulting in a lower aggregate effective tax rate for the sixmonths ended June 30, 2010 as compared to the same period in 2009.

 

**Results of Segment Operations**

 

The Company has three operating segments: AmericasBrokerage, Europe, Middle East and Africa (“EMEA”) Brokerage and AsiaBrokerage.  Additionally, the Companypresents its operating segments as four reportable segments: AmericasBrokerage, EMEA Brokerage, Asia Brokerage and All Other.  The All Other segment captures costs that arenot directly assignable to one of the operating business segments, primarilyconsisting of the Company’s corporate business activities and its software,analytics and market data operations.

 

Thefollowing tables summarize our revenues, expenses and pre-tax income bysegment:

 
| ** **                  | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                    | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**                                  | ** ** |
| **Revenues:**               | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage          |       | $                                                           | 72,894     |                                                      | $          | 89,083 |   | $ | 150,731 |   | $ | 178,995 |   |
| EMEA Brokerage              |       | 101,465                                                     |       | 95,904                                                    |       | 209,347 |   | 189,211 |   |
| Asia Brokerage              |       | 20,207                                                      |       | 16,640                                                    |       | 39,053 |   | 31,423 |   |
| All Other                   |       | 15,022                                                      |       | 23,039                                                    |       | 31,232 |   | 41,272 |   |
| Total Consolidated Revenue  |       | $                                                           | 209,588    |                                                      | $          | 224,666 |   | $ | 430,363 |   | $ | 440,901 |   |
| ** **                  | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Expenses:**               | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage          |       | $                                                           | 57,581     |                                                      | $          | 68,569 |   | $ | 117,300 |   | $ | 137,359 |   |
| EMEA Brokerage              |       | 68,687                                                      |       | 64,322                                                    |       | 139,519 |   | 127,516 |   |
| Asia Brokerage              |       | 15,735                                                      |       | 14,866                                                    |       | 30,283 |   | 31,535 |   |
| All Other                   |       | 53,206                                                      |       | 50,659                                                    |       | 108,768 |   | 100,116 |   |
| Total Consolidated Expenses |       | $                                                           | 195,209    |                                                      | $          | 198,416 |   | $ | 395,870 |   | $ | 396,526 |   |
| ** **                  | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Pre-tax Income/(Loss):**  | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas Brokerage          |       | $                                                           | 15,313     |                                                      | $          | 20,514 |   | $ | 33,430 |   | $ | 41,636 |   |
| EMEA Brokerage              |       | 32,778                                                      |       | 31,582                                                    |       | 69,829 |   | 61,695 |   |
| Asia Brokerage              |       | 4,472                                                       |       | 1,774                                                     |       | 8,770 |   | (112 | ) |
| All Other                   |       | (38,184                                                     | )          | (27,620                                                   | )          | (77,536 | ) | (58,844 | ) |
| Total Pre-tax income/(loss) |       | $                                                           | 14,379     |                                                      | $          | 26,250 |   | $ | 34,493 |   | $ | 44,375 |   |

 

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** **

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

 

·                  **Revenues**

 

·                  Revenues forAmericas Brokerage decreased $16.2 million, or 18.2%, to $72.9 million for thethree months ended June 30, 2010 from $89.1 million for the three monthsended June 30, 2009.   Revenues forEMEA Brokerage increased $5.6 million, or 5.8%, to $101.5 million for the threemonths ended June 30, 2010 from $95.9 million for the three months ended June 30,2009. Revenues for Asia Brokerage increased $3.6 million, or 21.4%, to $20.2million for the three months ended June 30, 2010 from $16.6 million forthe three months ended June 30, 2009. Total revenues for our three brokerage segments decreased by $7.0million, or 3.5%, to $194.6 million for the three months ended June 30,2010 from $201.6 million for the three months ended June 30, 2009. Thedecrease in revenues was primarily due to decreases in brokerage revenue in ourequity and fixed income product categories partially offset by increasedbrokerage revenues in financial and commodity product categories resulting fromthe factors described above under “Three Months Ended June 30, 2010 Comparedto Three Months Ended June 30, 2009”.

 

·                  Revenues for All Otherprimarily consisted of revenues generated from sales of software, analytics andmarket data.  Total revenues from All Other decreased by $8.0 million, or34.8%, to $15.0 million for the three months ended June 30, 2010 from$23.0 million for the three months ended June 30, 2009.  Thisdecrease was primarily related to a $15.1 million decrease in the remeasurementof underlying foreign currency balances and transactions.  The decrease was partially offset by anincrease in net realized and unrealized gains on foreign currency hedges of$6.4 million. We experienced a $1.5 million increase in software, analytics andmarket data revenues, partially offsetting the decreases discussed above.

 

·                  **Expenses**

 

·                  Expenses for AmericasBrokerage decreased $11.0 million, or 16.0%, to $57.6 million for the threemonths ended June 30, 2010 from $68.6 million for the three months ended June 30,2009.  Expenses for EMEA Brokerageincreased $4.4 million, or 6.8%, to $68.7 million for the three months ended June 30,2010 from $64.3 million for the three months ended June 30, 2009.  Expenses for Asia Brokerage increased $0.8million, or 5.8%, to $15.7 million for the three months ended June 30,2010 from $14.9 million for the three months ended June 30, 2009. Totalexpenses for our three brokerage segments decreased by $5.8 million, or 3.9%,to $142.0 million for the three months ended June 30, 2010 from $147.8million for the three months ended June 30, 2009.   Thedecrease was primarily due to a decrease in compensation and employee benefits,clearing fees and other expenses, 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 June 30, 2010Compared to Three Months Ended June 30, 2009”.

 

TheCompany records certain direct expenses, including compensation and employeebenefits, to the operating segments; however, the Company does not allocate certainexpenses to its operating segments that are managed separately at the corporatelevel.  The unallocated costs includingrent and occupancy, depreciation and amortization, professional fees, interestand other expenses are included in the expenses for All Other describedbelow.  Management does not believe thatallocating these costs to our brokerage segments is optimal for evaluating theperformance of its brokerage segments.

 

·                  Total expenses for All Otherincreased by $2.5 million, or 5.0%, to $53.2 million for the three months endedJune 30, 2010 from $50.7 million for the three months ended June 30,2009.  The increase was primarily due toan increase in travel and promotion and professional fees.

 

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**Segment Results for the Six Months Ended June 30,2010 Compared to the Six Months Ended June 30, 2009**

 

·                  **Revenues**

 

·                  Revenues forAmericas Brokerage decreased $28.3 million, or 15.8%, to $150.7 million for thesix months ended June 30, 2010 from $179.0 million for the six monthsended June 30, 2009.   Revenues forEMEA Brokerage increased $20.1 million, or 10.6%, to $209.3 million for the sixmonths ended June 30, 2010 from $189.2 million for the six months ended June 30,2009. Revenues for Asia Brokerage increased $7.7 million, or 24.3%, to $39.1million for the six months ended June 30, 2010 from $31.4 million for thesix months ended June 30, 2009. Total revenues for our three brokerage segments decreased by $0.5million, or 0.1%, to $399.1 million for the six months ended June 30, 2010from $399.6 million for the six months ended June 30, 2009. The decline inrevenues was primarily due to decreased brokerage revenues in fixed income andequity products partially offset by increases in financial and commodityproducts resulting from the factors described above under “Six Months Ended June 30,2010 Compared to Six Months Ended June 30, 2009”.

 

·                  Revenues for All Otherprimarily consisted of revenues generated from sales of software, analytics andmarket data.  Total revenues from All Other decreased by $10.1 million, or24.3%, to $31.2 million for the six months ended June 30, 2010 from $41.3million for the three months ended June 30, 2009.  This decrease wasprimarily related to a net decrease of $12.2 million related to remeasurementof foreign currency transactions and balances. This decrease was partiallyoffset by a $3.3 million increase in software, analytics and market datarevenues.

 

·                  **Expenses**

 

·                  Expenses for AmericasBrokerage decreased $20.1 million, or 14.6%, to $117.3 million for the sixmonths ended June 30, 2010 from $137.4 million for the six months ended June 30,2009.  Expenses for EMEA Brokerageincreased $12.0 million, or 9.4%, to $139.5 million for the six months ended June 30,2010 from $127.5 million for the six months ended June 30, 2009.  Expenses for Asia Brokerage decreased $1.2million, or 4.0%, to $30.3 million for the six months ended June 30, 2010from $31.5 million for the six months ended June 30, 2009. Total expensesfor our three brokerage segments decreased by $9.3 million, or 3.1%, to $287.1million for the six months ended June 30, 2010 from $296.4 million for thesix months ended June 30, 2008.  The decrease was primarily due to a decrease in compensation andemployee benefits, travel and promotion and clearing fees, as well as otherfactors described above under “Six Months Ended June 30, 2010 Compared toSix Months Ended June 30, 2009”.

 

TheCompany records certain direct expenses, including compensation and employeebenefits, to the operating segments; however, the Company does not allocatecertain expenses to its operating segments that are managed separately at thecorporate level.  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 for All Otherincreased by $8.7 million, or 8.6%, to $108.8 million for the six months ended June 30,2010 from $100.1 million for the six months ended June 30, 2009.  The increase was primarily due to an increasein compensation and employee benefits, travel and promotion, professional fees,and other expenses.

 

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**Quarterly Results of Operations**

 

Thefollowing table sets forth, by quarter, our unaudited statement of operationsdata for the period from July 1, 2008 to June 30, 2010. Results ofany period are not necessarily indicative of results for a full year and may,in certain periods, be affected by seasonal fluctuations in our business.

 
| ** **                                 | ** ** | **Quarter  Ended**            | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **June 30,********2010** | ** ** | **March 31,  2010** | ** ** | **December 31,********2009** | ** ** | **September 30,********2009** | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December  31, 2008** | ** ** | **September  30, 2008** | ** ** |
| ** **                                 | ** ** | **(dollars  in thousands)**   | ** ** |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                        |       | $                             | 137,624    |   | $ | 143,830 |   | $ | 115,043 |   | $ | 119,396 |   | $ | 121,488 |   | $ | 125,399 |   | $ | 143,556 |   | $ | 182,591 |   |
| Principal  transactions                    |       | 56,526                        |       | 60,296 |   | 53,608 |   | 64,989 |   | 79,566 |   | 72,215 |   | 50,272 |   | 43,771 |   |
| Total  brokerage revenues                  |       | 194,150                       |       | 204,126 |   | 168,651 |   | 184,385 |   | 201,054 |   | 197,614 |   | 193,828 |   | 226,362 |   |
| Software,  analytics and market data       |       | 14,519                        |       | 14,900 |   | 14,649 |   | 13,627 |   | 13,019 |   | 13,052 |   | 12,800 |   | 14,034 |   |
| Interest  income                           |       | 77                            |       | 240 |   | 148 |   | 172 |   | 226 |   | 497 |   | 1,669 |   | 2,187 |   |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  income (loss) (1)                   |       | 842                           |       | 1,509 |   | 2,112 |   | (5,938 | ) | 10,367 |   | 5,072 |   | (12,061 | ) | 555 |   |
| Total  revenues                            |       | 209,588                       |       | 220,775 |   | 185,560 |   | 192,246 |   | 224,666 |   | 216,235 |   | 196,236 |   | 243,138 |   |
| **Expenses**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation  and employee benefits        |       | 141,109                       |       | 144,663 |   | 156,053 |   | 135,139 |   | 146,575 |   | 145,548 |   | 137,583 |   | 176,462 |   |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Communications  and market data            |       | 10,695                        |       | 11,886 |   | 11,864 |   | 11,661 |   | 11,240 |   | 11,498 |   | 12,245 |   | 12,640 |   |
| Travel  and promotion                      |       | 9,341                         |       | 8,893 |   | 9,509 |   | 8,280 |   | 8,550 |   | 7,480 |   | 8,897 |   | 11,845 |   |
| Rent  and occupancy (2)                    |       | 5,255                         |       | 5,431 |   | 5,343 |   | 5,470 |   | 4,778 |   | 4,734 |   | 4,811 |   | 14,399 |   |
| Depreciation  and amortization             |       | 7,844                         |       | 8,184 |   | 7,959 |   | 7,680 |   | 8,015 |   | 7,839 |   | 7,827 |   | 7,192 |   |
| Professional  fees                         |       | 6,247                         |       | 6,597 |   | 4,674 |   | 4,508 |   | 4,129 |   | 5,091 |   | 6,081 |   | 7,756 |   |
| Clearing  fees                             |       | 7,554                         |       | 7,424 |   | 6,988 |   | 7,153 |   | 8,106 |   | 8,107 |   | 9,706 |   | 12,026 |   |
| Interest                                   |       | 2,730                         |       | 2,575 |   | 2,645 |   | 2,769 |   | 2,657 |   | 2,469 |   | 3,993 |   | 3,508 |   |
| Other  expenses (1), (2)                   |       | 4,434                         |       | 5,008 |   | 6,046 |   | 5,170 |   | 4,366 |   | 5,344 |   | 5,445 |   | 7,887 |   |
| Total  expenses                            |       | 195,209                       |       | 200,661 |   | 211,081 |   | 187,830 |   | 198,416 |   | 198,110 |   | 196,588 |   | 253,715 |   |
|                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) before income taxes         |       | 14,379                        |       | 20,114 |   | (25,521 | ) | 4,416 |   | 26,250 |   | 18,125 |   | (352 | ) | (10,577 | ) |
| Provision  for (benefit from) income taxes |       | 3,955                         |       | 6,738 |   | (11,070 | ) | 1,633 |   | 9,894 |   | 6,525 |   | (544 | ) | (3,861 | ) |
| Net  income (loss)                         |       | $                             | 10,424     |   | $ | 13,376 |   | $ | (14,451 | ) | $ | 2,783 |   | $ | 16,356 |   | $ | 11,600 |   | $ | 192 |   | $ | (6,716 | ) |

 

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

 

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(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 and $570 for the three month periods endedDecember 31 and September 30, 2008 respectively, were alsoreclassified 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**                  | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **June 30,******** 2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,********2009** | ** ** | **June 30,********2009** | ** ** | **March 31,  2009** | ** ** | **December  31, 2008** | ** ** | **September  30, 2008** | ** ** |
| **Revenues**                               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                        |       | 65.7                                | %          | 65.1 | % | 62.0 | % | 62.1 | % | 54.1 | % | 58.0 | % | 73.2 | % | 75.1 | % |
| Principal  transactions                    |       | 27.0                                |       | 27.3 |   | 28.9 |   | 33.8 |   | 35.4 |   | 33.4 |   | 25.6 |   | 18.0 |   |
| Total  brokerage revenues                  |       | 92.7                                |       | 92.4 |   | 90.9 |   | 95.9 |   | 89.5 |   | 91.4 |   | 98.8 |   | 93.1 |   |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Software,  analytics and market data       |       | 6.9                                 |       | 6.7 |   | 7.9 |   | 7.1 |   | 5.8 |   | 6.0 |   | 6.5 |   | 5.8 |   |
| Interest  income                           |       | 0.0                                 |       | 0.1 |   | 0.1 |   | 0.1 |   | 0.1 |   | 0.2 |   | 0.9 |   | 0.9 |   |
| Other  income (loss)                       |       | 0.4                                 |       | 0.8 |   | 1.1 |   | (3.1 | ) | 4.6 |   | 2.4 |   | (6.1 | ) | 0.2 |   |
| Total  revenues                            |       | 100.0                               | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| **Expenses**                               |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation  and employee benefits        |       | 67.3                                | %          | 65.5 | % | 84.1 | % | 70.3 | % | 65.2 | % | 67.3 | % | 70.1 | % | 72.6 | % |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Communications  and market data            |       | 5.1                                 |       | 5.4 |   | 6.4 |   | 6.1 |   | 5.0 |   | 5.3 |   | 6.2 |   | 5.2 |   |
| Travel  and promotion                      |       | 4.5                                 |       | 4.0 |   | 5.1 |   | 4.3 |   | 3.8 |   | 3.5 |   | 4.5 |   | 4.9 |   |
| Rent  and occupancy                        |       | 2.5                                 |       | 2.5 |   | 2.9 |   | 2.8 |   | 2.1 |   | 2.2 |   | 2.5 |   | 5.9 |   |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation  and amortization             |       | 3.7                                 |       | 3.7 |   | 4.3 |   | 4.0 |   | 3.6 |   | 3.6 |   | 4.0 |   | 3.0 |   |
| Professional  fees                         |       | 3.0                                 |       | 3.0 |   | 2.5 |   | 2.3 |   | 1.8 |   | 2.4 |   | 3.1 |   | 3.2 |   |
| Clearing  fees                             |       | 3.6                                 |       | 3.4 |   | 3.8 |   | 3.7 |   | 3.6 |   | 3.7 |   | 4.9 |   | 4.9 |   |
| Interest                                   |       | 1.3                                 |       | 1.2 |   | 1.4 |   | 1.4 |   | 1.2 |   | 1.1 |   | 2.0 |   | 1.4 |   |
| Other  expenses                            |       | 2.1                                 |       | 2.3 |   | 3.3 |   | 2.7 |   | 2.0 |   | 2.5 |   | 2.8 |   | 3.2 |   |
| Total  expenses                            |       | 93.1                                | %          | 91.0 | % | 113.8 | % | 97.6 | % | 88.3 | % | 91.6 | % | 100.2 | % | 104.4 | % |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) before income taxes         |       | 6.9                                 |       | 9.0 |   | (13.8 | ) | 2.4 |   | 11.7 |   | 8.4 |   | (0.2 | ) | (4.4 | ) |
| Provision  for (benefit from) income taxes |       | 1.9                                 |       | 3.1 |   | (6.0 | ) | 0.8 |   | 4.4 |   | 3.0 |   | (0.3 | ) | (1.6 | ) |
| Net  income (loss)                         |       | 5.0                                 | %          | 5.9 | % | (7.8 | )% | 1.6 | % | 7.3 | % | 5.4 | % | 0.1 | % | (2.8 | )% |

 

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**Liquidity and Capital Resources**

 

Netcash provided by operating activities was $17.2 million for the six monthsended June 30, 2010, compared with $54.9 million provided by operatingactivities for the six months ended June 30, 2009, a decrease of $37.7million. This decrease is, in large part, attributable to an increase inworking capital employed in the business of $35.8 million for the six monthsended June 30, 2010 relative to the same period in 2009 and a decrease innet income of $4.2 million from $28.0 million for the six months ended June 30,2009 to $23.8 million for the six months ended June 30, 2010. The decreasein working capital was primarily related to an increase of $40.8 million in thechange in other assets, an increase of $6.5 million in the change in depositswith clearing organizations, an increase of $14.9 million in the change incommissions receivable, a decrease in the change in accrued compensation andaccounts payable of $4.6 million, and was offset by a $29.9 million increase inthe change in other liabilities. Offsetting the additional working capitaldeployed in the business and decrease in net income were items which reconcilenet income to net cash used in operating activities such as depreciation,amortization of deferred compensation, unrealized foreign currency gains andlosses, and other items which increased by $2.3 million as compared to the sixmonths ended June 30, 2009.

 

Netcash used in investing activities for the six months ended June 30, 2010was $7.8 million compared to $16.4 million used in the six months ended June 30,2009. The decrease in cash used for investing activities was primarilyattributable to a change of $19.9 million in net proceeds due to the settlementof foreign exchange derivative hedge contracts, partially offset by a netincrease of $10.0 million related to the purchases of certain investments and$2.3 million for capital expenditures.

 

Netcash used in financing activities for the six months ended June 30, 2010was $33.6 million, compared to $47.4 million used in financing activities forthe six months ended June 30, 2009. The decrease in cash used in financing activities as compared to the sixmonths ended June 30, 2009 primarily related to a reduction of $19.0million in repayments of borrowings under our Credit Agreement, offset byincreases of $3.0 million in repurchases of common stock and $4.0 million incash paid for taxes on the vesting of RSUs. See Note 6 to the Condensed Consolidated Financial Statements forfurther discussion of our short-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, GFI (HK) Securities LLC, GFI (HK)Brokers Ltd., GFI Group Pte. Ltd. and GFI Korea Money Brokerage Limited. Thesesubsidiaries are subject to the regulatory capital and compliance requirementsdescribed in Note 13 to the Condensed Consolidated Financial Statements.  At June 30, 2010, all of our regulatedsubsidiaries were in compliance with their respective regulatory capitalrequirements.  See Note 13 to the CondensedConsolidated Financial 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 ouroperations for at least the next twelve months. Our Credit Agreement expires on February 24, 2011 and we are in theprocess of evaluating our options to either renew the existing agreement,replace it with a new credit agreement or to seek alternative sources ofcapital.  Poor financial results,unanticipated expenses, unanticipated acquisitions or unanticipated strategicinvestments could give rise to additional financing requirements sooner than weexpect. There can be no assurance that equity or debt financing will beavailable when needed or, if available, that the financing will be on termssatisfactory to us and not dilutive to our then-current stockholders.

 

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**Contractual Obligations and Commitments**

 

Thefollowing table summarizes certain of our contractual obligations as of June 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                  |       | $                                         | 111,688    |   | $ | 12,998 |   | $ | 20,990 |   | $ | 15,019 |   | $ | 62,681 |   |
| Short-term borrowings (1)         |       | 105,000                                   |       | 105,000 |   | — |   | — |   | — |   |
| Interest on Long-term obligations |       | 14,706                                    |       | 4,902 |   | 9,804 |   | — |   | — |   |
| Long-term obligations             |       | 60,000                                    |       | — |   | 60,000 |   | — |   | — |   |
| Purchase obligations(2)           |       | 26,770                                    |       | 19,964 |   | 6,806 |   | — |   | — |   |
| **Total**                         |       | $                                         | 318,164    |   | $ | 142,864 |   | $ | 97,600 |   | $ | 15,019 |   | $ | 62,681 |   |

 

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(1)                                  Amounts listedunder Short-term borrowings represent outstanding borrowings under our CreditAgreement and vary from the Short-term borrowings reflected in our financialstatements because our financial statements reflect the total debt net ofunamortized deferred financing fees.  See Note 6 to the Condensed Consolidated Financial Statements forfurther information.

 

(2)                                  Amounts listedunder Purchase Obligations include agreements for quotes with variousinformation service providers. Additionally, such amounts include purchasecommitments for capital expenditures for the implementation of a redundant dataand software application facility and other purchase commitments for capitalexpenditures, hosting and software licensing agreements.  See Note 10 to our Condensed ConsolidatedFinancial Statements for further discussion of these obligations.

 

Wehave unrecognized tax benefits of approximately $8.9 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 June 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 ofFinancial Condition and Results of Operations” included in our 2009Form 10-K those accounting policies that we consider to be significant indetermining our results of operations and financial condition. There have beenno material changes to those policies that we consider to be significant sinceour 2009 Form 10-K. The accounting principles utilized by us in preparingour Condensed Consolidated Financial Statements conform in all materialrespects to generally accepted accounting principles in the United States ofAmerica.

 

***Recent Accounting Pronouncements***

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Event*s, which is now asub-topic within ASC 855-10 *SubsequentEvents* (“ASC 855-10”). ASC 855-10 provides guidance for accountingfor and disclosure of subsequent events that are not addressed in otherapplicable generally accepted accounting principles. ASC 855-10 was effectivefor interim and annual reporting periods ending after June 15, 2009, andhas been applied prospectively by us. In February 2010, the FASB amendedASC 855-10 through the issuance of Accounting Standards Update No. 2010-09(“ASU 2010-09”), *Amendments to CertainRecognition and Disclosure Requirements*. ASU 2010-09 removed therequirement for an SEC filer to disclose the date of final review fordisclosure of subsequent events and was effective upon issuance. SeeNote 16 for disclosures on

 

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SubsequentEvents.

 

In June 2009, the FASB issued SFAS No. 167, *Amendments to FASB Interpretation No. 46(R) *(“SFAS 167”).SFAS 167 amends certain requirements of FASB InterpretationNo. 46(R), *Consolidation of Variable InterestEntities*, which is now a sub-topic within ASC 810 *Consolidation.* This guidance was codifiedby the FASB in December 2009 through the issuance of Accounting StandardsUpdate No. 2009-17 (“ASU 2009-17”) *Consolidations(Topic 810) Improvements to Financial Reporting by Enterprises Involved withVariable Interest Entities*. ASU 2009-17 was issued to improvefinancial reporting by enterprises involved with variable interest entities andto provide more relevant and reliable information to users of financialstatements. ASU 2009-17 requires an enterprise to perform an analysis todetermine whether the enterprise’s variable interest or interests provide acontrolling financial interest in a variable interest entity. The determinationis based on, among other things, the other entity’s purpose and design and thereporting entity’s ability to direct the activities of a variable interestentity that most significantly impact the entity’s economic performance. ASU2009-17 was effective as of the beginning of the first annual reporting periodthat begins after November 15, 2009, for interim periods within the firstannual reporting period and for interim and annual reporting periodsthereafter. The adoption of ASU 2009-17 did not have a material impact on ourconsolidated financial statements.

 

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 for determiningthe selling price of a deliverable. ASU 2009-13 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 2009-13 to have a material impact on ourconsolidated 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. 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 valuemeasurements on a gross basis. ASU 2010-06 provides amendments thatclarify existing disclosures regarding the level of disaggregation forproviding fair value measurement disclosures for each class of assets andliabilities. In addition, it clarifies existing disclosures about inputs andvaluation techniques used to measure fair value for both recurring andnonrecurring fair value measurements that are required for either Level 2 orLevel 3. ASU 2010-06 was effective for interim and annual reportingperiods ending after December 15, 2009 except for the disclosures aboutthe roll forward of activity in Level 3 fair value measurements, which areeffective for fiscal years beginning after December 31, 2010 and forinterim periods within those fiscal years. The adoption of ASU 2010-06 did nothave a material impact on our consolidated financial statements and theadoption of ASU 2010-06 with respect to disclosures of the roll forward ofactivity in Level 3 fair value measurements is not expected to have amaterial impact on our consolidated financial 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 six months ended June 30,2010.

 

**Foreign Currency Exposure Risk**

 

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material

 

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changes to our risk management policy duringthe six months ended June 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$3.8 million as of June 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 on theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat 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.

 

**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. (or “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. GFISecurities LLC has been cooperating with the Staff in this inquiry byresponding to requests for documents, testimony and other information. In January 2009,the Staff advised GFI Securities LLC that it has made a preliminarydetermination to recommend disciplinary action in connection with allegedlyimproper communications between certain of GFI Securities LLC’s brokersand those at other interdealer brokers, purportedly inconsistent with just andequitable principles of trade and certain antifraud and supervisoryrequirements under FINRA rules and the federal securities laws. All butone of these brokers who made the allegedly improper communications resigned inApril 2008 to become employed by affiliates of Compagnie FinanciereTradition. During the past few months, certain of the other inter-dealerbrokerage firms that were the subject of the same inquiry have settled thematter. In the event that GFI Securities LLC and FINRA are unable to reach asettlement soon on this matter, FINRA has indicated that it will file acomplaint against GFI Securities LLC based on these allegations which, ifbrought and/or settled, could result in a censure, fine or other sanction. GFISecurities LLC intends to vigorously contest any such disciplinary actionwhich, if brought and/or settled, 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.

 

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

 

Therehave been no material changes in our risk factors from those disclosed in the2009 Form 10-K. For a discussion of the risk factors affecting theCompany, see “Risk Factors” in Part I, Item 1A of our 2009Form 10-K.

 

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

 

OnMay 27, 2010, GFI Group Inc. and GFI Group LLC (collectively “GFI”) and amortgage-backed securities brokerage firm entered into an equity purchaseagreement (the “Equity Purchase Agreement”) pursuant to which GFI acquired thefirm. In connection with the acquisition, on June 4, 2010, GFI Group, Inc.issued 681,433 shares of its common stock, par value $.01, (“Common Stock”) aspart of the purchase price.

 

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Theissuance of the shares of Common Stock pursuant to the Equity PurchaseAgreement is exempt from the registration requirements under the Securities Actof 1933, as amended (the “Act”), pursuant to Section 4(2) of the Actas a transaction 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 June 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)** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **April**                    |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| Stock Repurchase Program (a) |       | 325,000                                 |       | $                                       | 5.79       |                                                                                                         | 325,000    |                                                                                                      | 5,068,646  |   |
| Employee Transactions (b)    |       | 58,880                                  |       | $                                       | 6.00       |                                                                                                         | N/A        |                                                                                                      | N/A        |   |
|                         |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| **May**                      |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| Stock Repurchase Program (a) |       | 325,000                                 |       | $                                       | 6.39       |                                                                                                         | 325,000    |                                                                                                      | 5,315,578  |   |
| Employee Transactions (b)    |       | 8,564                                   |       | $                                       | 6.17       |                                                                                                         | N/A        |                                                                                                      | N/A        |   |
| ** **                   |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| **June**                     |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| Stock Repurchase Program (a) |       | 325,000                                 |       | $                                       | 6.13       |                                                                                                         | 325,000    |                                                                                                      | 5,364,825  |   |
| Employee Transactions (b)    |       | 21,308                                  |       | $                                       | 5.81       |                                                                                                         | N/A        |                                                                                                      | N/A        |   |
|                         |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| **Total**                    |       |                                    |       |                                    |       |                                                                                                         |       |                                                                                                      |       |
| Stock Repurchase Program (a) |       | 975,000                                 |       | $                                       | 6.10       |                                                                                                         | 975,000    |                                                                                                      | 5,364,825  |   |
| Employee Transactions (b)    |       | 88,752                                  |       | $                                       | 5.97       |                                                                                                         | N/A        |                                                                                                      | N/A        |   |

 

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(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 EquityIncentive Plan, we allow employees to elect to have us withhold shares ofcommon stock to satisfy minimum statutory tax withholding obligationsarising on the vesting and settlement of restricted stock units. When wewithhold these shares, we are required to remit to the appropriate taxingauthorities the market price of the shares withheld, which could be deemed apurchase of the shares 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 year throughJune 30, 2010.

 

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

 

Exhibits:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                              |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Second  Amendment to the GFI Group Inc. 2008 Equity Incentive Plan                                                                           |
| 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). |

 

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**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 endedJune 30, 2010 to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 9th day of August, 2010.

 

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

 

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