By Brian Graney (TMF Panic)
June 13, 2000

Trading at $34 9/16 as of June 9, 2000

Hey, Dad. This Father's Day, I thought I'd offer you a stock idea that meshes well with your personality. You were always one to go against the grain and be skeptical of the status quo. You married Mom, for instance. In keeping with your wonderful contrarian bent, I thought it only appropriate to suggest an e-commerce marketplace exchange company for you this year.

I know what you're thinking -- weren't the share prices of all those newfangled B2B e-commerce hucksters taken out and shot recently? That's right, they were. And the little-known company I have in mind for you, eSpeed (Nasdaq: ESPD), was no exception. During the e-commerce stock buildup this past March, the company got up to as high as $89 7/8 per share. But recently, eSpeed has been trading within a stone's throw of last December's $22 per share initial public offering price. The company hasn't turned a profit yet and is just getting started in its business life, so some may feel that this is too much risk for your retired, grandfatherly stomach to bear. But, I won't tell Mom if you won't.

eSpeed's mission is to provide real-time global marketplaces for financial and non-financial products alike. The company got its start catering to the trading markets for fixed income securities -- principally U.S. Treasury securities as well as municipal and agency debt. In short, the company is basically the Nasdaq of the bond market. Recently, eSpeed added electronic marketplaces for mortgage-backed securities; eurobonds; power-related instruments such as electricity, coal, and natural gas; and even something called weather derivatives, whatever they are. The plan is to offer electronic trading in nearly all markets under the sun except stocks, since the Nasdaq already does that pretty well.

Unlike the electronic markets for car fenders and 20-gauge hypodermic needles that are still in the works by the other more-familiar B2B e-commerce platform companies, eSpeed's electronic marketplaces already exist and are producing revenues. The company booked $6.3 million in fully electronic transaction revenues in last year's Q4, a total that was easily doubled by the $14.5 million in electronic transaction revenues recorded in Q1 of this year. With that kind of growth, analysts believe the company may be able to do more than $75 million in fully electronic transaction revenues this year and turn profitable in a year or two.

In essence, eSpeed offers the chance to benefit economically from the convergence of many factors. We're hoping for lollapalooza effects to take hold such that the value of eSpeed's offerings greatly exceeds the company's present $1.5 billion market valuation. As it stands right now, the probability for a favorable outcome of this kind seems fairly good. Here are the main advantages and factors working in eSpeed's favor:

Liquidity -- For any marketplace to work, there must be enough buyers to meet the demands of the sellers, and vice versa. eSpeed has a tremendous advantage in this area over its rivals since its parent is Cantor Fitzgerald, the operator of the world's largest wholesale market for fixed-income products. The powers-that-be at Cantor realized long ago that they needed to cannibalize the firm's traditional bond brokerage business, or the electronic marketplaces of the future would do it for them. Eventually, all of Cantor's wholesale liquidity will be transferred to the eSpeed system... and there's a lot of liquidity to be transferred. For instance, Cantor has market shares approaching 90% for certain securities, such as the 30-year U.S. Treasury bond.

Volume -- If liquidity is the lifeblood of a marketplace, then trading volume is the heart. The most successful electronic marketplaces of tomorrow will be ones that can pump up the volume. In U.S. Treasuries alone, Cantor averages $40 to $50 billion in daily volume, or more than 30 times the average daily volume of the entire Nasdaq stock market. Analysts estimate that eSpeed is currently only seeing about 4% of that volume. There is plenty of room for further volume growth -- and that's just from Cantor in U.S. Treasuries.

Ubiquity -- "Of networks, there shall be few," economist Brian Arthur has stated. The long-run success of eSpeed depends on the company's ability to become the technological standard for as many financial and non-financial marketplaces as it can. In networks, success begets success. eSpeed has a big head start in this race, as Cantor stated that it put some $200 million in technology spending into the eSpeed system in the past few years. With a decent chunk of the high fixed costs related to setting up the network already out of the way, eSpeed can focus more energy and available cash on growing its networks faster than its rivals.

Of course, there are plenty of risks that eSpeed will not be able to fully benefit from these advantages. The inefficient non-stock financial markets of today, with their outdated open-outcry structure and centralized trading pits, must embrace the lower costs and better execution offered by an electronic marketplace. That may be a tougher challenge than it sounds, since brokers and other players make a lot of their money by taking advantage of market inefficiencies.

Also, the nature of an efficient network is to push transaction fees -- eSpeed's prime revenue source -- down, although the enormous volume of the markets being targeted should help offset some of that pain. Furthermore, eSpeed must be wary of the fact that harnessing cutting-edge technologies for exponential growth runs the risk of upsetting higher powers, such as the major financial market governing bodies or even monopolistic power-averse national governments (See Microsoft.) But, as you taught me, nothing in life is a given. The promise of eSpeed is worthy of a few moments of your investigational time this Father's Day.

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