The events of Sept. 11 hit the firm of Cantor Fitzgerald harder than any other company in the World Trade Center. Cantor lost some 730 of the 1,000 employees located on the top floors of the North Tower. Some 180 of those casualties belonged to eSpeed, Cantor Fitzgerald’s electronic trading subsidiary for fixed-income products. The loss included almost half of eSpeed’s management team, including president Frederick Varacchi, vice chairman Douglas Gardner, CFO Jeffrey Goldflam, corporate development head Jonathan Uman and product development head Glenn Kirwin.
By all expectations, eSpeed should have barely been functional. But with full backup facilities in New Jersey and London, the firm was operational just two days after the attack when the bond markets reopened. To say it has been a grueling ordeal for eSpeed is, of course, an understatement. Yet in spite of the tragedy, said CEO Howard Lutnick, the firm is somehow on track to become profitable as early as the fourth quarter of 2001.
This would be remarkable considering that Cantor Fitzgerald’s voice trading operations in the United States were destroyed and that it is shutting down offices in Paris and Frankfurt (other European and Asian offices will remain open). But as Lutnick has made clear in both private interviews and discussions with industry analysts, eSpeed is not going to give up-not with $150 million in the bank, new sources of funding and an enduring entrepreneurial spirit.
Among its business lines, eSpeed provided electronic trading to Cantor, which could not be marketed to competing firms. Now, after the WTC tragedy, with Cantor’s voice brokerage business lost, eSpeed is adjusting to a different reality.
“Because Cantor lost all those voice brokers, it’s no longer a competitor in the voice brokerage business in the United States,” Lutnick said. “So eSpeed can have discussions with other brokers because they will no longer perceive Cantor Fitzgerald as a user of those marketplaces.”
For example, eSpeed is not currently selling a U.S. corporate bond system, because Cantor Fitzgerald brokers were using it. “But we still have the system and connectivity to the customers,” Lutnick said. “We will introduce it and have customers start using it. We’re also rolling out zero-coupon U.S. treasuries. We have spoken to a number of customers who are anxious to start using the system electronically.”
ESpeed will not be able to offer a complete range of products, since Cantor has announced plans to rebuild portions of its voice business out of locations in Shrewsbury, N.J. and Darien, Conn. And if Cantor does restart its U.S. voice brokerage business in certain products, said EVP and CIO Joseph Noviello, eSpeed’s ability to offer those products to other brokers would be limited.
In the meantime, eSpeed’s resilience during the disaster is a strong selling point for the company’s expanded product offering, said Lutnick, who said many who called him to offer condolences would then immediately ask about eSpeed products.
“The world has seen the most dreadful thing happen to us and seen our software stay strong,” he said. “The major players know that if they rely on our software, it’s the only software that’s truly been battle-tested. eSpeed can take whatever they dish out and come back with resilience.”
For the record, not everyone in the industry shares Lutnick’s optimism about eSpeed’s immediate future. A recent analyst report from broker Robertson Stephens mentioned eSpeed’s amazing fortitude in the face of disaster but called into question the rosy picture of imminent profitability painted by the company. The report said there was strong concern about eSpeed’s loss of market share, its declining revenue even before Sept. 11 and its expense structure.
But Lutnick has said without the hybrid voice-and-electronic approach that previously characterized it, eSpeed will be a different company. And one with different challenges.
Before the disaster, Cantor Fitzgerald had the majority of the interdealer market for treasuries, among other products, said Dana Stiffler, an analyst at Boston-based AMR Research. When it launched eSpeed two-and-a-half years ago, it was able to access that liquidity, which other Internet-only trading platforms lacked, she said.
Indeed, eSpeed’s volumes before Sept. 11 had shown impressive growth. Second-quarter trading for the electronic platform increased 35 percent from 2000 to 2001, to more than 22 billion trades, according to the most recent figures provided by the company to Securities Industry News.
According to Lutnick, eSpeed will be able to find customers even without having the support of a voice brokerage behind it.
“In some respects, that was also a limitation,” he said. “We didn’t want to hurt our pipeline. Now, we can be much more plain. We don’t have anything to risk. We’re moving rapidly-we’re already in the door at all of these firms. They all know us.”
Market volatility should also help eSpeed, he said, noting that the more trading that takes place, the better it is for eSpeed. Volatility, however, is in itself difficult to predict or assume.
One optimistic sign for the company is a recent legal decision concerning its Wagner patent, which covers electronic futures trading. ESpeed had sued the Chicago Board of Trade and the Chicago Mercantile Exchange for infringement on its patent. “We received a favorable and final ruling with the regard to the scope and breadth of the Wagner patent,” said Lutnick, adding that the trial itself is expected to begin next summer. “We think it has enormous value and we are going to vigorously pursue bringing that value to our shareholders and our company.”
ESpeed also recently purchased the Lawrence patent, which covers the electronic trading of municipal bonds through online auctions. “We think it has a broad appeal to other online auctions,” he said. “As people come to learn the value of these patents, they will see extraordinary upside opportunities for us.”
However, eSpeed faces criticism when it comes to actually using these patents, which, some say, are just common-sense Internet-based extensions of what everybody has been doing all along with phones and faxes.
“If they’re very aggressive about it, it will stifle competition,” said Damon Kovelsky, an analyst at Newton, Mass.-based Meridien Research.
Although eSpeed lost 180 of its 486 employees-leaving 306, many of whom were based in London-Lutnick said that eSpeed doesn’t plan to restaff to pre-disaster levels. Instead, he said, headcount will probably stabilize at around 325 people. Several senior technology executives were off-site on Sept. 11, and while there were severe losses in its New York development teams, there were already plans under way to combine it with the team in London. There will still be significant development work in the U.S., said Noviello, but now it will be a collaborative effort with London. ESpeed lost its COO, but that position has been filled by Cantor Fitzgerald International CEO Lee Amaitis, who will now be doing both jobs. Lutnick, who has served as chairman and CEO of both Cantor and eSpeed, on Sept. 20 also assumed the post of president of both operations, taking over for Varacchi. As of press time, eSpeed was still looking for a new CFO-the last unfilled senior management position at the company.
ESpeed on Dec.7 reported that its total electronic volume fell 4 percent in the third quarter, to $7.5 trillion, vs. $7.4 trillion in 3Q00. However, CIO Noviello said the firm was satisfied with its volumes.”In fact, we have been stronger in some products than we have before Sept. 11.”
But so have competitors such as TradeWeb-a fact that Lutnick chalks up to industry factors rather than a reflection of a loss of market share at his firm. Another prominent player in the electronic fixed-income trading space, BondBook, closed its doors last month in part due to the hit the company took in the wake of Sept. 11.
The challenges to eSpeed remain. ESpeed is a company with a limited operating history and with no track record of profitability. There is also the potential for new competitors to spring up around it. But eSpeed suffered an unimaginable loss in the destruction of the World Trade Center, and when you mix in sheer will and determination you get, perhaps, a different picture and a different future than one that draws solely on an analyst’s craft of number crunching.
