Online Extra: Q&A with CEO Howard Lutnick

Says eSpeed's boss: Anything commodity-like will be sold online. The world is going to trade commodities like it trades stocks

While most online marketplaces are in a financial death spiral, eSpeed has been gaining altitude. The company has become the de facto exchange for U.S. Treasury securities, with about half of the $300 billion in daily trades taking place on its system. In the second quarter, eSpeed saw revenues of $34.1 million, up 52% from a year ago. To spur future growth, eSpeed has created online marketplaces for 46 other products, ranging from foreign exchange to electricity. The most promising: TradeSpark, an exchange for natural gas and electricity formed by eSpeed and five energy companies.

Although the company continues to lose money -- $1 million in the second quarter --executives and analysts expect it to turn profitable in the current quarter. Next year, eSpeed is forecasted to earn $24 million on $195 million in revenues, says J.P. Morgan Chase & Co. analyst Greg Smith. BusinessWeek's Spencer E. Ante sat down with eSpeed's CEO Howard W. Lutnick to talk about himself, the company he founded, and the challenges it faces. Here are edited excerpts of their conversation:

Q: What was your first job on Wall Street?


I worked during summers on the foreign exchange desk as a dollar/yen broker for Noonan, Astley & Pierce. I used to write the chairman notes about how he could improve his business. And I met Bernie Cantor through this job.

Q: What did you do for Cantor Fitzgerald?


I started as a trainee. I worked 1 to 3 months in every division. After that, Cantor invited me to spend two weeks in his office. He never asked me to leave the room once.

My first real job was to resell our bond-trading strategies to outside clients such as Westinghouse's pension fund. I would basically harvest really good ideas that had not been maximized. Then I started moving up the ranks. Eventually, I ran the investment strategies group. It was a small, with 15 employees, but it was the third-most-profitable group of firm.

Q: When did you get the idea for eSpeed?


In this business, technology is life or death. And I realized that trading was going electronic. So I began investing $50 million a year in building new system that would let clients trade themselves. I made mistakes. I went down a lot of wrong roads. In January, 1996, the system went live: Clients still called the firm to place orders, but brokers would input trades in system.

In 1997, clients balked at self-ordering. They thought it was beneath them. But in 1998, a sea change in perception came, thanks to the rise of the Net and online trading. The concept of doing it yourself was not crazy.

Q: What's the future of online trading?


Anything commodity-like will be sold online. The world is going to trade commodities like it trades stocks. And eSpeed wants to be the place where that happens, leveraging our dominant position in the world's biggest market.

Q: Are you worried about any of your competitors?


[Bernie] gave me the greatest hand to play. You can't copy me because only I have these cards.

Q: Are you troubled by the amendments to your financial statements?


It was simply a presentation change. In fact, it highlights our margins. Our auditor and the SEC signed off on documents in September, 1999. The IPO business is a little slower. I guess the SEC has more time on their hands. We would have been happy to do it either way.

Q: Garban Intercapital CEO Michael Spencer admits eSpeed rules the Treasury securities market but says in all the less liquid markets you've achieved virtually no penetration. What do you think of that?


There's a whole host of other businesses that we're doing well in. Half of our business is in fact U.S. Treasuries. We are the market leader in European government bonds. And we are doing very well in other products such as repos and foreign exchange. Our municipal-bond market is doing very well.

Q: You have already created more than 40 online marketplaces. Do you plan to pull back from any e-markets?


No. We're leveraging the market position we have. You'll see a continuing growth of products.

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