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Cantor Fitzgerald’s CEO previously helped transform the bond market

Howard Lutnick became a billionaire by shaking up the clubby world of Wall Street bond trading. Now the chairman and CEO of Cantor Fitzgerald is taking on one of the biggest powerhouses in finance.

Regulators said Monday that they signed off on Lutnick’s plan to introduce a new market for interest-rate futures, which is dominated by exchange giant CME Group CME 0.60%increase; green up pointing triangle. The venture, FMX Futures Exchange, will launch in mid-2024, said Lutnick. FMX is a unit of Cantor’s brokerage affiliate BGC Group.

Trillions of dollars worth of CME’s interest-rate futures change hands each day. Traders use the contracts to hedge against swings in rates or bet on Federal Reserve policy.

CME, which runs futures markets on a variety of commodities, handles more than 99% of trading volume in U.S. interest-rate futures, according to industry group FIA. That lucrative franchise has helped make the Chicago-based company the world’s most valuable exchange operator, with a market cap of $73 billion.

The Commodity Futures Trading Commission released an order Monday approving FMX’s application to launch a new market. FMX plans to list futures linked to Treasury yields and the Secured Overnight Financing Rate, a benchmark short-term rate. Such futures will compete directly with contracts at CME.

Analysts say the 62-year-old Lutnick faces long odds. Previous attempts to break into the interest-rate futures business have fizzled—including one backed by Lutnick more than a decade ago.

“They’re not the first and they won’t be the last to challenge CME’s dominance,” said Kevin McPartland, senior analyst with Coalition Greenwich. “Breaking that up is going to be tremendously hard.”

Lutnick is perhaps best known for leading Cantor through the 9/11 terrorist attacks, which killed 658 of the firm’s 960 New York-based employees. Lutnick survived by chance—he was late to work that day—and spent the following years rebuilding Cantor.

In the 1990s, he helped transform the bond market with eSpeed. The electronic platform for trading Treasurys contributed to the demise of old-fashioned voice brokers who arranged government-bond deals by telephone.

Lutnick’s BGC sold the platform to Nasdaq in 2013. But Lutnick jumped back in four years later, just after the expiration of a noncompete clause that restricted his companies from offering fully electronic trading of Treasurys. BGC rolled out Fenics UST, another trading platform for government bonds.

Fenics has since gained market share at the expense of larger rivals, including BrokerTec, the Treasurys-trading platform owned by CME. In November, Fenics handled nearly 10% of the total electronically traded volume in Treasurys, or about $44 billion a day, according to Coalition Greenwich.

Lutnick said the banks and high-speed trading firms already plugged into Fenics are a natural user base for his new futures exchange. The cost of trading on FMX will be “wildly cheaper” than at CME, he said.

“We are ready and able to compete with anybody,” Terrence Duffy, CME’s chairman and CEO, said on an October earnings call when asked about FMX.

CME has a key advantage in fending off competition. In addition to running the market where traders buy and sell futures, CME runs the related clearinghouse—the underlying plumbing system that holds collateral for big trading firms and moves cash around to settle winning and losing trades.

Rival exchanges can’t use CME’s clearinghouse, and convincing traders to connect to a different one has historically been difficult for competitors. Trading firms would need to post collateral in two separate places to support a new futures exchange, since they are unlikely to abandon CME altogether for an untested startup.

Lutnick has tried to solve that dilemma by agreeing to clear FMX’s trades through LCH, owned by London Stock Exchange Group. LCH is one of the world’s major clearinghouses, used by many banks to clear trades in interest-rate swaps.

Among the unsuccessful challengers to CME in years past was NYSE Euronext, the old parent company of the New York Stock Exchange. Lutnick backed an interest-rate futures exchange that launched in 2009, but the venture, ELX Futures, struggled to gain traction. Lutnick blamed the failure on weaknesses in its clearing arrangements.

“If I had been wise, I wouldn’t have opened it,” he said.

The luxury conglomerate purchased 715-717 Fifth Avenue, which could eventually house some of its designer brands.

Kering is spending big to build its presence on Fifth Avenue.

The luxury conglomerate paid $963 million, or 885 million euros, for 715-717 Fifth Avenue, a prime piece of real estate on the southeast corner of 56th Street that currently houses Giorgio Armani and Dolce & Gabbana. The building includes a multilevel, 115,000-square-foot retail space.

The site could eventually house certain of Kering’s luxury brands given that Dolce & Gabbana is expected to relocate its store to 695 Madison Avenue on 62nd Street, while Giorgio Armani is expected to leave the site upon the completion of the designer’s mixed-used project currently under construction at 760 Madison Avenue.

With the exception of Gucci in the Trump Tower, none of Kering’s luxury brands have stores along Fifth Avenue. Kering’s portfolio includes Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen, Brioni, Boucheron, Pomellato, DoDo, Qeelin, Ginori 1735 as well as eyewear and beauty lines.

Kering’s Fifth Avenue real estate deal, disclosed Monday, follows Prada’s acquisitions of 724 Fifth Avenue, which houses the Prada flagship store, and 720 Fifth Avenue next door for a combined $835 million.

“Prada, Kering and LVMH have cash on their balance sheets and are looking to make good use of their capital to control the destinies of their brands,” Gene Spiegelman, vice chairman and principle of Ripco Real Estate, told WWD. “Their global luxury brands have been located on Fifth Avenue and 57th Streets for decades and expect they will be here for decades more, so it makes sense for them to own their real estate, long term.

“From the seller’s perspective, particularly with the 715-717 Fifth Avenue building, clearly vacancies are coming up but also with the market for commercial debt being very expensive, the owner would not be able to refinance at current debt levels if debt was coming due, so it makes sense to sell the properties,” Spiegelman added.

Landlord Jeff Sutton sold the Fifth Avenue properties to Kering and Prada. Sutton has an extensive real estate holdings on Fifth Avenue, 34th Street, in Times Square, SoHo and other areas in the city.

“With this transaction, Kering acquires exceptional retail locations on one of the world’s most iconic avenues,” the company indicated in a statement Monday on the 715-717 Fifth Avenue purchase. “This investment represents a further step in Kering’s selective real estate strategy, aimed at securing key highly desirable locations for its houses. In addition to recently acquired prime properties on Avenue Montaigne and Rue de Castiglione in Paris, the group’s portfolio includes landmark assets in Tokyo’s Omotesando, and the Hôtel de Nocé housing Boucheron’s Paris flagship. In line with its longstanding financial strategy, Kering intends to execute a disciplined and flexible approach with regards to the management of its real estate portfolio.”

Another real estate source suggested that to rent 715-717 Fifth Avenue, rather than owning, would be cost prohibitive, at around an estimated $50 million a year, based on $3,000 per square foot for the ground level, and approximately $200 a square foot for the rest of the space in the 115,000-square-foot retail area.

Recent high-profile Fifth Avenue openings include Chopard, Swarovski, Citizen Watch and the reimagined Tiffany flagship. The former Abercrombie & Fitch site at 720 Fifth is vacant after A&F last summer relocated to 668 Fifth Avenue to a location formerly occupied by the company’s Hollister brand. The former Tommy Hilfiger space at 681 Fifth Avenue is also available, and the Banana Republic store at 626 Fifth Avenue in Rockefeller Center is available. Louis Vuitton will temporarily move into the former Niketown space on East 57th Street while it renovates its Fifth Avenue and 57th Street flagship; Chanel fine jewelry will soon open on the avenue. Rolex is constructing a new building on Fifth Avenue and 53rd Street, and the former Valentino space is temporarily leased to Burberry, among other changes happening on the avenue.

In 2023, Kering marked its 10th anniversary and had a string of deals, including taking beauty in-house; acquiring Creed; investing in Valentino and forging a strategic alliance with Qatari investment group Mayhoola. The company also recruited new designers for Gucci and McQueen; parted ways with longtime Gucci executive Marco Bizzarri, and entrusted Saint Laurent president and chief executive officer Francesca Bellettini with overseeing all the brands in the French group’s portfolio. In 2022, Kering had more than 47,000 employees and revenue of 20.4 billion euros.

• AI startups may struggle to hold on to valuations based on revenue
• Anthropic, others raised at a valuation of 50-100 times forward revenue
• Major cloud providers will influence AI startups’ margins

In the past year, artificial intelligence developer Anthropic has raised billions of dollars at a more than $15 billion valuation due to its fast revenue growth and big projections for future sales. But as Anthropic and scores of rivals mature, they’ll need to prioritize profit margins and cash flows if they want to build a sustainable business and have any hope of going public someday.

New data show that profit margins for such startups may end up lower than for existing enterprise software firms. After paying the costs of customer support and servers to power its AI, Anthropic’s gross margin—gross profit as a percentage of revenue—was between 50% and 55% in December, according to two people with direct knowledge of the figures. That’s far lower than the average gross margin of 77% for cloud software stocks, according to Meritech Capital.

And it may not improve much over time: At least one major Anthropic shareholder expects the company’s long-term gross margin to be around 60%, one of these people said.

Notably, Anthropic’s gross margin doesn’t reflect the server costs of training AI models, which Anthropic includes in its research and development expenses. These costs can add up to as much as $100 million per model, according to Sam Altman, CEO of OpenAI. An Anthropic spokesperson declined to comment.

The data suggest that the current breed of hot AI startup could face challenges in attracting future capital at the same prices that existing investors paid for shares as a multiple of the companies’ revenue. As companies get older, their valuation typically reflects their ability to generate cash. Right now, though, investors are focusing more on revenue growth for Anthropic, OpenAI and other young AI startups developing or enabling large language models. (See our Generative AI Database.)

These startups have been raising capital at a valuation of 50 to 100 times next year’s revenue, often due to their upbeat revenue projections. The median for publicly traded software companies, by contrast, is 6 times forward revenue, according to Meritech Capital. Those revenue multiples will be increasingly difficult for the startups to maintain as they get older.

Anthropic’s biggest startup rival, OpenAI, may have even weaker gross margins because it runs a heavily used free tier of its flagship chatbot, ChatGPT. That drives up server costs without generating additional revenue, although the free version likely helps OpenAI sell more monthly subscriptions than it would otherwise. After generating less than $30 million in revenue in 2022, OpenAI surpassed an annualized revenue pace of $1.6 billion as of December—an eye-popping growth rate. An OpenAI spokesperson declined to comment.

Anthropic, meanwhile, recently projected annualized revenue of at least $850 million by the end of 2024, after previously telling investors it would be generating $500 million in annualized revenue by then. It isn’t clear how much revenue Anthropic booked in 2023, the first year it began to generate revenue. It also isn’t clear how much money OpenAI and Anthropic are losing overall.

Rubber Meets Road

As long as the AI startups keep up that sort of momentum, investors can overlook their losses. That will likely end when revenue growth inevitably slips to 30% to 40% someday, said Tomasz Tunguz, a general partner at Theory Ventures, whose prior software investments have included Looker and Kustomer.

At that point, if a company’s cash flow from operations is negative with no near-term path to convert at least 10% of its revenue into cash flows, it’ll likely be harder to attract new investors, Tunguz said.

The growth and profit margin prospects of these startups rely in part on the major cloud providers that power their servers. Google and Amazon, which have each committed billions of dollars to Anthropic, sell its software to their cloud customers. It isn’t clear what kind of cut those cloud providers take when making such sales, but Anthropic probably generates better margins from selling its models directly to customers.

The prices the two cloud providers charge Anthropic for renting their cloud servers also have an impact on the startup’s margins. These numbers couldn’t be learned.

Microsoft’s investment in OpenAI offers a clue. As a cloud provider, Microsoft rents cloud servers to OpenAI at a relatively low margin, compared to other Microsoft cloud customers, said a person with knowledge of the situation. That helps keep down OpenAI’s server costs. As part of their deal, though, OpenAI must give Microsoft a cut of its direct sales to customers. And when Microsoft sells OpenAI software to its own cloud customers, it keeps a majority of revenue from those sales for itself. That could potentially become a problem as Microsoft increasingly draws enterprise customers that would otherwise buy software directly from OpenAI. The trend is likely eating into the startup’s growth rate.

For AI developers, the billion-dollar question is how quickly computing costs will continue to fall. Already, AI firms such as OpenAI have said they’ve cut the cost of running their AI models substantially over the past year by implementing new techniques for structuring the models, for instance. AI developers may also find it easier to run their models on cheaper servers rather than pay a pretty penny for state-of-the-art Nvidia servers. At the same time, it’s hard to predict such cost drops, as emerging models that are more computationally efficient could replace OpenAI’s LLMs.