Founded in 1987, GFI Group (Nasdaq: GFIG) is one of the pioneers of the derivatives markets (derivatives are financial instruments that are based on underlying assets, such as stocks, bonds, commodities, and currencies). The firm provides interdealer broker services for over-the-counter derivatives products. The services include market data, analytics, and software.
Besides their speculative uses, derivatives allow financial institutions, hedge funds, and corporations to manage volatility in portfolios and currency translations. A study by the International Swaps and Derivatives Association shows that 90% of the world's largest 500 companies use derivative instruments.
GFI has more than 1,200 customers, with such biggies as Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JPMorganChase (NYSE: JPM), Merrill Lynch (NYSE: MER), and Morgan Stanley (NYSE: MWD).
Last week, the company reported its earnings. In the fourth quarter, the company posted revenues of $105.1 million, which was a 57.6% increase from the same period a year ago. Net income was $3.4 million, which was a 30.8% increase from the same period in 2003.
For 2004, revenues were $385 million, which was a 44.8% increase from 2003. Net income was $23.1 million, which was a 59.3% increase from the same period in 2003.
Drilling down into GFI's business shows that, although it's basically technologically based, the company doesn't rely solely on technology. For example, it has 560 brokers in offices in London, Hong Kong, Tokyo, Singapore, and Sydney. That is, GFI considers its model to be "hybrid" trading, as opposed to a technology-only based model. This mix of people and machines is especially helpful in complex markets, where it's important to have specialized brokers who understand the nuances of various trades and strategies. In GFI's own words, it uses "technology to enhance the service and productivity of its brokers, not as a replacement for their skills."
But despite doing what it can on its end, GFI is derivatives, which can be a volatile business. Recognizing that, the company has diversified across various areas: credit, equities, and commodities. So far, it has been a very effective strategy, and the company is capitalizing on its strength in the marketplace.
Fool contributor Tom Taulli does not own shares mentioned in this article.
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