ibkr2q10q2012.htm



  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-Q
 


(Mark One)
     
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended June 30, 2012.
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition  period from           to         

Commission File Number: 001-33440
 
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0390693
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
 
(203) 618-5800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x No  o.
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller
 
reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x.
 
As of August 31, 2012, there were 47,488,923 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.
 


 
 
 
 


INTERACTIVE BROKERS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2012
Table of Contents
 

   
Page
   
No.
     
  Explanatory Note 3
     
PART I:
FINANCIAL INFORMATION
 
     
Item 1:
Financial Statements (Unaudited As Restated)
5
     
 
Condensed Consolidated Statements of Financial Condition
6
     
 
Condensed Consolidated Statements of Comprehensive Income
7
     
 
Condensed Consolidated Statements of Cash Flows
8
     
 
Condensed Consolidated Statements of Changes in Equity
9
     
 
Notes to Condensed Consolidated Financial Statements
10
     
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
     
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
57
     
Item 4:
Controls and Procedures
60
     
PART II:
OTHER INFORMATION
 
     
Item 1:
Legal Proceedings
63
     
Item 1A:
Risk Factors
63
     
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
63
     
Item 3:
Defaults upon Senior Securities
63
     
Item 5:
Other Information
63
     
Item 6:
Exhibits
64
     
SIGNATURES
65
 
 
2

 

Explanatory Note
 
In May 2012, in connection with the review of the Company’s Quarterly Report of Form 10-Q for the quarter ended March 31, 2012, Deloitte & Touche LLP, the Company’s independent registered public accounting firm questioned the Company’s interpretation and application of accounting guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC or the “Codification”) 480-10-S99, Distinguishing Liabilities from Equity, SEC Materials, formerly FASB Emerging Issues Task Force Topic D-98, to cash redemption provisions regarding redeemable noncontrolling interests.  After reassessing its interpretation and application of this accounting guidance, including obtaining an interpretation from the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”), the Company concluded that its interpretation of this accounting guidance and its application of that guidance to these cash redemption provisions was incorrect, resulting in an error in its consolidated financial statements.  This error had no effect on reported net income attributable to common stockholders or cash flows, but did affect the classification of redeemable noncontrolling interests in IBG LLC (“LLC”) attributable to IBG Holdings LLC (“Holdings”) during the period from the Company’s May 3, 2007 initial public offering through June 6, 2012, as more fully described in Note 21 to the consolidated financial statements contained in Part 2, Item 8 of the Company’s Amended Annual Report on Form 10-K/A filed with the SEC on August 31, 2012.  As a result of this change in the classification of redeemable noncontrolling interests, the calculation of earnings per share was also affected.  On August 13, 2012, the Audit Committee of the Board of Directors of the Company and management concluded that the previously issued consolidated financial statements for the three years ended December 31, 2011 and for the quarter ended March 31, 2012 should no longer be relied upon and should be restated.
 
Also on August 15, 2012, the Company filed a Current Report on Form 8-K with the SEC in which it announced that the previously issued audited consolidated financial statements, report on internal controls, and the Reports of Independent Registered Public Accounting Firm thereon for the three years ended December 31, 2011 in the Company’s originally filed Annual Report for the year ended December 31, 2011 on Form 10-K, as well as the unaudited condensed consolidated financial statements for the quarters ended March 31, 2012 and 2011 in the Company’s originally filed Quarterly Report on Form 10-Q, should no longer be relied upon.
 
Internal Control Considerations
 
In conjunction with the restatement, management identified control deficiencies in its internal controls over financial reporting associated with the review and interpretation of complex accounting issues - specifically, redeemable noncontrolling interests in LLC attributable to Holdings and stock based compensation - that constitute a material weakness, as discussed in Part I, Item 4, “Controls and Procedures”, of Form 10-Q. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. For a discussion of management’s consideration of our disclosure controls and procedures, the material weakness identified and the remediation plan design efforts being made, see Part II, Item IA, “Risk Factors”, and Part I, Item 4 included in this filing on Form 10-Q.
 
Adjustments
 
In addition to the reclassifications relating to the reporting of redeemable noncontrolling interests attributable to Holdings as redeemable noncontrolling interests (temporary equity) outside of permanent equity described above, which was corrected in the Company’s 2011 Amended Annual Report on Form10-K/A and Amended Quarterly Report for the quarter ended March 31, 2012 on Form 10-Q/A, in connection with the original filings of the Company’s 2011 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, the Company had corrected other errors that had been previously identified that affected previously issued financial statements.  These items included errors in recording share issuances under stock compensation award plans which was corrected in connection with the preparation of the Company’s original filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and adjustments to record the timely recognition of the effect of equity award plan forfeiture provisions, which error was corrected in the original filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  Both of these corrections were disclosed as immaterial restatements in the respective original filings.
 
Additional information on the effect of these adjustments to our unaudited condensed consolidated financial statements is contained in Item 1, Note 17 - Restatement.
 
 
3

 
        As reported in the statement of changes in equity and further described in Note 4 to the unaudited condensed consolidated financial statements, subsequent to the June 6, 2012 amendment to the Exchange Agreement, Holdings’ noncontrolling interests have been reclassified, at book value, as a component of permanent equity.
 
 
        In accordance with applicable SEC rules, this filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

 
4

 


PART I.  FINANCIAL INFORMATION
 
Financial Statements Introductory Note
 
The Company is a holding company whose primary asset is its ownership of approximately 11.9% of the membership interests of LLC.  See Notes 1 and 4 to the unaudited condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.
 
We are an automated global electronic broker and market maker specializing in routing orders and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, Hong Kong, India, Australia, Japan and Brazil. At June 30, 2012 we had 893 employees worldwide.
 
As discussed in Note 17, the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2011 included herein have been restated for certain errors.
 

 
 
5

 
Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Financial Condition
 
(Unaudited)
 
     
June 30,
     
December 31,
 
(in thousands, except share data)
   
2012
     
2011
 
Assets
               
Cash and cash equivalents
  $
      2,003,505
    $
       1,695,495
 
Cash and securities - segregated for regulatory purposes
   
       11,030,651
     
       10,069,938
 
Securities borrowed
   
         2,638,992
     
         2,661,671
 
Securities purchased under agreements to resell
   
            377,861
     
            375,366
 
Trading assets, at fair value:
               
 
Financial instruments owned    
         4,125,971
     
         5,069,271
 
 
Financial instruments owned and pledged as collateral
   
         2,035,806
     
         1,545,807
 
         
         6,161,777
     
         6,615,078
 
Other receivables:
               
 
Customers, less allowance for doubtful accounts of $3,648 and
             
 
 
$3,332 at June 30, 2012 and December 31, 2011
   
         8,503,173
     
         7,024,792
 
 
Brokers, dealers and clearing organizations
   
         1,079,882
     
         1,397,772
 
 
Receivable from affiliate
   
                   593
     
                   595
 
 
Interest
   
              21,266
     
              20,540
 
         
         9,604,914
     
         8,443,699
 
Other assets
   
            566,011
     
            543,118
 
Total assets
  $
     32,383,711
    $
     30,404,365
 
                     
Liabilities and equity
               
Liabilities:
               
Trading liabilities - financial instruments sold but not yet purchased,
         
 
at fair value    $
       5,359,268
    $
       6,156,148
 
Securities loaned
   
         1,858,742
     
         1,386,059
 
Short-term borrowings
   
              13,349
     
                6,538
 
Other payables:
               
 
Customers
   
       19,237,660
     
       17,300,105
 
 
Brokers, dealers and clearing organizations
   
            513,011
     
            247,360
 
 
Payable to affiliate
   
            271,602
     
            271,602
 
 
Accounts payable, accrued expenses and other liabilities
   
            127,887
     
            116,771
 
 
Interest
   
                5,527
     
                6,416
 
         
       20,155,687
     
       17,942,254
 
                     
Senior notes payable
   
                        -
     
            101,411
 
Senior secured credit facility
   
                        -
     
                        -
 
         
       27,387,046
     
       25,592,410
 
                     
Redeemable noncontrolling interests      -        5,269,619  
                 
Commitments, contingencies and guarantees
               
                     
Equity:
               
Stockholders’ equity:
               
 
Common stock, $0.01 par value per share:
               
 
Class A – Authorized - 1,000,000,000, Issued - 47,788,659 and
               
 
 
46,061,256 shares, Outstanding – 47,488,353 and 45,576,791 shares
         
 
at June 30, 2012 and December 31, 2011
   
                   477
     
                   460
 
 
Class B – Authorized, Issued and Outstanding – 100 shares
               
 
at June 30, 2012 and December 31, 2011
   
                        -
     
                        -
 
 
Additional paid-in capital
   
            490,025
     
            -
 
 
Retained earnings (accumulated deficit)
   
            117,464
     
           (465,138
)  
 
Accumulated other comprehensive income, net of income taxes of
         
  
  $9,843 and $10,454 at June 30, 2012 and December 31, 2011                
 
Treasury stock, at cost, 300,306 and 484,465 shares
   
              17,407
     
              18,487
 
 
 
at June 30, 2012 and December 31, 2011
   
               (7,784
)    
             (13,310
)
Total stockholders’ equity
   
            617,589
     
            (459,501
Noncontrolling interests
   
         4,379,076
     
         1,837
 
Total equity
   
         4,996,665
     
         (457,664
Total liabilities and stockholders’ equity
  $
     32,383,711
    $
     30,404,365
 
                     
See accompanying notes to the unaudited condensed consolidated financial statements.

 
6

 


   
Interactive Brokers Group, Inc. and Subsidiaries
 
   
Condensed Consolidated Statements of Comprehensive Income
 
   
(Unaudited)
 
                                     
         
Three months ended
     
Six months ended
 
        June 30,   June 30,
   
(in thousands, except for shares or per share amounts)
 
 
2012
     
2011
     
2012
     
2011
 
                                     
              (As Restated)               (As Restated)  
Revenues:                                
  Trading gains   $
                85,007
    $
         120,569
    $
             222,287
    $
         320,907
 
  Commissions and execution fees    
                108,071
     
           106,432
     
                208,956
     
           215,631
 
  Interest income    
                  68,621
     
             79,400
     
                135,197
     
           138,063
 
  Other income    
                  15,322
     
             14,976
     
                  33,646
     
             32,411
 
   
Total revenues
   
                277,021
     
           321,377
     
                600,086
     
           707,012
 
                                     
Interest expense    
                  16,133
     
             24,437
     
                  35,276
     
             42,184
 
                                     
   
Total net revenues
   
                260,888
     
           296,940
     
                564,810
     
           664,828
 
                                     
Non-interest expenses:                                
  Execution and clearing    
                  66,171
     
             66,074
     
                130,795
     
           132,311
 
  Employee compensation and benefits    
                  59,801
     
             52,651
     
                122,526
     
           105,010
 
  Occupancy, depreciation and amortization    
                    9,957
     
               9,059
     
                  19,891
     
             18,305
 
  Communications    
                    5,486
     
               6,665
     
                  11,160
     
             12,113
 
  General and administrative    
                  10,966
     
             13,347
     
                  22,254
     
             25,973
 
   
Total non-interest expenses
   
                152,381
     
           147,796
     
                306,626
     
           293,712
 
                                     
Income before income taxes    
                108,507
     
           149,144
     
                258,184
     
           371,116
 
                                     
Income tax expense    
                  10,977
     
             12,496
     
                  19,711
     
             31,228
 
Net income    
                  97,530
     
           136,648
     
                238,473
     
           339,888
 
  Less net income attributable to noncontrolling interests  
                  89,546
     
           127,087
     
                219,405
     
           314,076
 
Net income available for common stockholders   $
                  7,984
    $
             9,561
     $
                19,068
    $
          25,812
 
                                     
Earnings per share:                                
  Basic   $
                    0.17
    $
               0.22
    $
                    0.44
    $
               0.62
 
  Diluted   $
                    0.17
    $
               0.22
     $
                    0.43
    $
               0.61
 
                                     
Weighted average common shares outstanding:                                
  Basic    
46,686,269
     
43,018,095
     
46,131,813
     
42,627,045
 
  Diluted    
46,957,081
     
43,470,928
     
46,452,941
     
43,133,155
 
                                     
                                     
Comprehensive income:                                
Net income attributable to common stockholders   $
                  7,984
    $
            9,561
    $
               19,068
    $
          25,812
 
  Other comprehensive income:                                
   
Cumulative translation adjustment, before income taxes
 
                   (5,801
)    
               6,067
     
                   (1,691
)    
               8,072
 
   
Income taxes related to items of other comprehensive income
 
                   (2,095
)    
               2,230
     
                      (611
)    
               2,967
 
  Other comprehensive income (loss), net of tax    
                   (3,706
)    
               3,837
     
                   (1,080
)    
               5,105
 
Comprehensive income attributable to common stockholders $
                  4,278
    $
           13,398
    $
                17,988
    $
           30,917
 
                                     
                                     
Comprehensive income attributable to noncontrolling interests:                  
  Net income attributable to noncontrolling interests $
                89,546
    $
         127,087
    $
              219,405
    $
         314,076
 
  Other comprehensive income (loss) - cumulative translation adjustment  
                 (43,609
)    
             50,144
     
                 (12,058
)    
             66,761
 
Comprehensive income attributable to noncontrolling interests $
               45,937
    $
         177,231
    $
              207,347
    $
         380,837
 
                                     
See accompanying notes to the unaudited condensed consolidated financial statements.

 
7

 

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
             
Six months ended June 30,
 
(in thousands)    
2012
     
2011
 
  Cash flows from operating activities:               (As Restated)  
    Net income   $
            238,473
    $
            339,888
 
    Adjustments to reconcile net income to net cash provided by                
    operating activities:                
      Translation losses    
                  8,333
     
                20,185
 
      Deferred income taxes    
                  9,924
     
                  9,246
 
      Depreciation and amortization    
                  9,750
     
                  9,360
 
      Employee stock plan compensation    
                37,048
     
                21,310
 
      Losses (gains) on non-market making investments, net    
                  2,098
     
                (3,768
)
      Bad debt expense and other    
                     441
     
                  2,695
 
    Change in operating assets and liabilities:                
      Increase in cash and securities - segregated for regulatory purposes    
            (961,824
   
            (919,777
)
      Decrease in securities borrowed    
                22,762
     
                81,963
 
      (Increase) decrease in securities purchased under agreements to resell    
                (2,459
)    
                32,008
 
      Decrease in trading assets    
              445,317
     
           1,337,548
 
      Increase in receivables from customers    
         (1,478,510
)    
         (2,348,938
      Decrease (increase) in other receivables    
              315,804
     
            (213,533
      (Increase) decrease in other assets    
                (5,372
)    
                         1
 
      Decrease in trading liabilities    
            (799,339
)    
         (1,172,320
)
      Increase in securities loaned    
              472,843
     
              100,884
 
      Increase in payable to customers    
           1,937,261
     
           3,094,694
 
      Increase in other payables    
              267,008
     
                24,760
 
       
Net cash provided by operating activities
   
              519,558
     
              416,206
 
  Cash flows from investing activities:                
      Purchases of non-market making investments    
            (166,315
)    
              (35,390
)
      Sales of non-market making investments    
              144,269
     
                18,683
 
      Distribution received from equity investment    
                  1,567
     
                         -
 
      Purchase of property and equipment    
                (9,729
)    
                (6,991
       
Net cash used in investing activities
   
              (30,208
)    
              (23,698
)
  Cash flows from financing activities:                
      Dividends paid to shareholders    
                (9,306
)    
                (4,358
)
      Dividends paid to noncontrolling interests    
              (70,129
)    
              (70,930
      Redemption of former member interest    
                         -
     
                   (815
)
      Issuance of senior notes    
                         -
     
              264,680
 
      Redemptions of senior notes    
            (101,411
)    
            (280,983
      Repayments of senior secured credit facility    
                         -
     
            (100,000
)
      Increase (decrease) in short-term borrowings, net    
                  6,587
     
            (155,200
)
        Net cash used in financing activities    
            (174,259
)    
            (347,606
  Effect of exchange rate changes on cash and cash equivalents    
                (7,081
)    
                23,814
 
  Net increase in cash and cash equivalents    
              308,010
     
                68,716
 
  Cash and cash equivalents at beginning of period    
           1,695,495
     
           1,354,219
 
  Cash and cash equivalents at end of period   $
         2,003,505
    $
         1,422,935
 
                         
Supplemental disclosures of cash flow information:                
  Cash paid for interest   $
              36,166
    $
              40,759
 
  Cash paid for taxes   $
              18,462
    $
              54,558
 
                         
Non-cash financing activities:                
  Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC   $
              13,763
    $
           (13,108
)
  Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC   $
            (13,763
)   $
              13,108
 
  Changes in redemption value of redeemable noncontrolling interests     $   (5,269,619    $  (769,710 )
  Changes to total equity (deficit) for the change in the redemption value of redeemable noncontrolling interests     $  5,269,619      $  769,710  
                         
See accompanying notes to the unaudited condensed consolidated financial statements.

 


 
 
8

 
Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Changes in Equity
 
Six months ended June 30, 2012 and 2011 (2011 Restated)
 
(Unaudited)
 
(in thousands, except for share amounts)                                                          
                                                                     
   
Common Stock
                                                               
                      Retained       Accumulated       Total                          
              Additional           Earnings       Other       Stockholders'       Non-       Total       Redeemable  
     Issued     Par     Paid-In        Treasury       (Accumulated       Comprehensive       Equity       controlling       Equity        Noncontrolling   
    Shares     Value      Capital       Stock       Deficit)       Income       (Deficit)       Interests       (Deficit)       Interests  
Balance, January 1, 2012
 
    46,061,256
  $
 460
  $
                  -
    $
    (13,310
  $
         (465,138
   
 $              18,487
     
 $       (459,501)
     
 $           1,837
     
 $    (457,664
   
 $                  5,269,619
 
                                                                           
Adjustment of redeemable noncontrolling interests
                                                                     
   from temporary to permanent equity
 
   
          472,409
             
             572,840
             
         1,045,249
     
       4,322,304
     
      5,367,553
     
                   (5,269,619)
 
Common Stock distributed pursuant to stock plans
     1,727,403
   
                    17
   
                 (17
   
            5,526
                     
                5,526
             
             5,526
         
Compensation for stock grants vesting in the future
         
              3,870
                             
                3,870
     
4,286
     
             8,156
         
Dividends paid to shareholders
                           
               (9,306
           
              (9,306)
             
           (9,306
       
Dividends paid by IBG LLC to noncontrolling interests
 
                                   
                        -
     
          (35,136)
     
         (35,136
       
Adjustments for changes in proportionate ownership in IBG LLC
 
 
            13,763
                             
              13,763
     
                 (22)
     
           13,741
         
Comprehensive income, net of tax
                             
               19,068
     
                 (1,080
   
              17,988
     
            85,807
     
         103,795
         
Balance, June 30, 2012
 
    47,788,659
  $
477
  $
       490,025
    $
      (7,784
  $
          117,464
     
 $              17,407
     
 $         617,589
     
 $    4,379,076
     
 $   4,996,665
     
 $                                -
 
                                                                           
(in thousands, except for share amounts)
                                                         
                                                                     
   
Common Stock
                                                               
                          Retained     Accumulated     Total                           
              Additional           Earnings     Other      Stockholders'      
Non-
      Total        Redeemable   
     Issued     Par     Paid-In     Treasury     (Accumulated      Comprehensive     Equity       controlling       Equity         Noncontrolling  
 
  Shares     Value     Capital       Stock       Deficit)       Income      (Deficit)       Interests       (Deficit)        Interests   
Balance, January 1, 2011
 
    42,903,718
  $
      429
  $
                -
    $
     (19,132
  $
   (2,031,656
)   $
              21,137
    $
     (2,029,222
  $
            1,458
    $
 (2,027,764
  $
                 6,320,849
 
                                                                           
Adjustment of redeemable noncontrolling interests
                                                                     
   to redemption value
             
            13,209
             
          1,029,886
             
         1,043,095
             
      1,043,095
     
                      (769,710
Common Stock distributed pursuant to stock plans
      1,166,400
   
                    12
   
                 (12
   
            5,519
                     
                5,519
             
             5,519
         
Redemption of former member interest
             
                 (88
                           
                   (88
           
                (88
       
Dividends paid to shareholders
                             
               (4,358
           
              (4,358
           
           (4,358
       
Dividends paid to other noncontrolling interests
                                         
                        -
     
                   (8
   
                  (8
       
Adjustments for changes in proportionate ownership in IBG LLC
 
 
          (13,109)
                             
            (13,109
           
         (13,109
       
Comprehensive income, net of tax
                             
               25,812
     
                   5,105
     
              30,917
     
                   200
     
           30,931
         
Balance, June 30, 2011
 
    44,070,118
  $
             441
  $
              -
    $
    (13,613
  $
      (980,316
  $
             26,242
    $
        (967,246
  $
  1,650
    $
   (965,596
   $
                 5,551,139
 
                                                                           
See accompanying notes to the unaudited condensed consolidated financial statements.
 
9

 

Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

1. Organization and Nature of Business
 
Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a Delaware holding company whose primary asset is its ownership of approximately 11.9% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “LLC” or the “Group”).  The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in LLC for all periods presented (Note 4).  LLC is an automated global electronic broker and market maker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.
 
LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”): Timber Hill LLC (“TH LLC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiary, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), IB Brasil Participações Ltda (“IBBH”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).
 
IBG, Inc. operates in two business segments, electronic brokerage and market making.  IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide.  The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.
 
Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (Note 14).  IB LLC, IBUK, IBC, IBI and IBSJ carry securities accounts for customers or perform custodial functions relating to customer securities.
 
2. Significant Accounting Policies
 
 
Basis of Presentation
 
These unaudited condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the FASB Accounting Standards Codification (“ASC” or the “Codification”).  These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of June 30, 2012 and December 31, 2011, the results of operations and comprehensive income for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s Amended Annual Report on Form 10-K/A filed with the SEC on August 31, 2012 and IBG, Inc.’s Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2012 filed August 31, 2012. The condensed consolidated financial statement information as of December 31, 2011 has been derived from the 2011 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.
 
Gains and losses from foreign currency transactions are included in trading gains and losses where related to market making activities or in interest income where related to the investment of customer funds as part of electronic brokerage activities in the unaudited condensed consolidated statements of comprehensive income.  Non-U.S. subsidiaries have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar.  Such subsidiaries’ assets and liabilities are translated to U.S. dollars at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the year.  Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S. dollar are reported as a component of other comprehensive income.

 
10

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


Principles of Consolidation, including Noncontrolling Interests
 
The unaudited condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries.  As sole managing member of LLC, IBG, Inc. exerts control over the Group’s operations.  In accordance with ASC 810, Consolidation, the Company consolidates the Group’s unaudited condensed consolidated financial statements and records as noncontrolling interest the interests in the Group that IBG, Inc. does not own.
 
Prior to the June 6, 2012 amendment to the Exchange Agreement (Note 4), the Company was required to report IBG Holdings LLC's (“Holdings”) ownership as redeemable noncontrolling interests (i.e., temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A (formerly FASB Emerging Issues Task Force Topic D-98), outside of total equity (Note 17) in the unaudited condensed consolidated financial statements.  Redemption value of these redeemable noncontrolling interests is measured as the number of equivalent shares of member interests in LLC owned by Holdings multiplied by the then current market price per share of the Company’s common stock.  The excess of the redemption value over the book value of these interests, which does not affect net income attributable to common stockholders or cash flows, is required to be accounted for as a reduction of the Company’s stockholders’ equity in the consolidated statement of financial condition.
 
The Company has elected to recognize changes in redemption value in each reporting period immediately as they occur as if the end of each reporting period was also the redemption date for the entire redeemable noncontrolling interest under paragraph 15(b) of ASC 480-10-S99-3A, notwithstanding that the redeemable noncontrolling interests are redeemable over a period of time pursuant to a redemption schedule (Note 4).
 
The Company’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control.  All inter-company balances and transactions have been eliminated.  IBG, Inc. would also consolidate any Variable Interest Entities (“VIEs”) pursuant to ASC 860, Transfers and Servicing and ASC 810 of which it is the primary beneficiary.  IBG, Inc. currently is not the primary beneficiary of any such entities and therefore no VIEs are included in the unaudited condensed consolidated financial statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements and accompanying notes.  Estimates, by their nature, are based on judgment and available information.  Therefore, actual results could differ materially from those estimates.  Such estimates include the estimated fair values of IBG LLC and the Company in connection with accounting for redeemable noncontrolling interests, value of investments accounted for under the equity method of accounting, the estimated useful lives of property and equipment, including capitalized internally developed software, the allowance for doubtful accounts, compensation accruals, tax liabilities and estimated contingency reserves.
 
Fair Value
 
At June 30, 2012 and December 31, 2011, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and are marked to market daily, or were assets which are short-term in nature (such as U.S. government treasury bills or spot foreign exchange) and were carried at amounts that approximate fair value.
 
IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurement, to prioritize the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.  The three levels of the fair value hierarchy are:
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable
 

                 Financial instruments owned and financial instruments sold, but not yet purchased, except forward currency contracts, over-the-counter (“OTC”) currency options and certain corporate and municipal debt securities, which are classified as Level 2 financial instruments, are classified within Level 1 of the fair value hierarchy.  The Company’s financial instruments are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt

 
 
11

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

 

 
securities.  IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.
 
Currency forward contracts and OTC currency options are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded.  Corporate and municipal debt securities, including Federal Deposit Insurance Corporation insured corporate bonds held as securities segregated for regulatory purposes, that are not actively traded are also classified in Level 2.
 
Investments in listed common stock and investments in other non-market making securities, which investments are reported in other assets in the accompanying unaudited condensed consolidated statement of financial condition, are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are Level 1 financial instruments.  Investments in other non-market making securities include corporate, municipal and asset-backed debt securities, which are Level 2 financial instruments whose fair values are determined using broker and vendor prices.
 
Earnings Per Share
 
Earnings per share (“EPS”) are computed in accordance with ASC 260, Earnings per Share.  Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period.  Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.
 
        The Company has determined to reflect Topic D-98 measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common shareholders.  Furthermore, in accordance with footnote 17 of ASC 480-10-S99-3A, the Company has elected to treat only the portion of the periodic measurement adjustments that reflect a redemption in excess of fair value as being akin to a dividend, reducing net income available for common stockholders for purposes of applying the two-class method.  Decreases in the carrying amount of redeemable noncontrolling interests through Topic D-98 measurement adjustments are reflected in the application of the two-class method only to the extent they represent recoveries of amounts previously accounted for by applying the two-class method.
 
Stock-Based Compensation
 
IBG, Inc. follows ASC 718, Compensation—Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires all share-based payments to employees to be recognized in the financial statements using a fair value-based method. As a result, IBG, Inc. expenses the fair value of stock granted to employees, generally 50% in the year of grant in recognition of plan forfeiture provisions (described below) and the remaining 50% over the related vesting period utilizing the “graded vesting” method permitted under ASC 718-10.  In the case of “retirement eligible” employees (those employees older than 59), 100% of share awards are expensed when granted.
 
Awards granted under the ROI Unit Stock Plan and the Stock Incentive Plan are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested awards previously granted.
 
Cash and Cash Equivalents
 
IBG, Inc. defines cash equivalents as short-term, highly liquid securities and cash deposits with original maturities of three months or less, other than those used for trading purposes.
 
Cash and Securities—Segregated for Regulatory Purposes
 
        As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets.  In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash or securities are deposited as required to conduct day-to-day clearance activities.  Securities segregated for regulatory purposes consisted of Federal Deposit Insurance Corporation insured corporate bonds, which are recorded as Level 2 financial assets, in the amount of $80.0 million and $440.4 million at June 30, 2012 and December 31, 2011, U.S. Treasury Bills of $1,847.3 million and
 
 
12

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


$747.9 million at June 30, 2012 and December 31, 2011, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $3.5 billion and $3.8 billion as of June 30, 2012 and December 31, 2011, respectively, which amounts approximate fair value.
 
Securities Borrowed and Securities Loaned
 
Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received.  Securities borrowed transactions require IBG, Inc. to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities.  With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned.
 
IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually.  Receivables and payables with the same counterparty are not offset in the unaudited condensed consolidated statements of financial condition.  For these transactions, the fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the unaudited condensed consolidated statements of comprehensive income.
 
Securities Purchased Under Agreements to Resell
 
Securities purchased under agreements to resell are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value.  The Company’s policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements.  To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.
 
Financial Instruments Owned and Sold But Not Yet Purchased
 
Stocks, government, corporate and municipal bonds, futures and options transactions are reported in the unaudited condensed consolidated financial statements on a trade date basis.  The majority of financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices.  All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the unaudited condensed consolidated statements of financial condition.
 
IBG, Inc. also enters into currency forward contracts.  These transactions, which are also reported on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term.  Unrealized mark-to-market gains and losses on currency forward contracts are reported as components of financial instruments owned or financial instruments sold but not yet purchased in the unaudited condensed consolidated statements of financial condition.  Net earnings or losses are reported as components of interest income in the unaudited condensed consolidated statements of comprehensive income.
 
Customer Receivables and Payables
 
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis.  Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers.  Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the unaudited condensed consolidated statements of financial condition.  Amounts receivable from customers that are determined by management to be uncollectible are written off to general and administrative expense.
 
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
 
Receivables from brokers, dealers and clearing organizations include amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and margin deposits.  Payables to brokers, dealers and clearing organizations include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”).  Receivables and payables to brokers, dealers and clearing organizations also include amounts related to futures contracts executed on behalf of customers as well as net payables and receivables from unsettled trades.
 
Investments
 
        IBG, Inc. makes certain strategic investments in electronic exchange and investment banking platforms and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323,

 
13

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

Investments—Equity Method and Joint Ventures.  Investments are accounted for under the equity method of accounting when IBG, Inc. has significant influence over the investee.  Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s initial investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss.  IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the unaudited condensed consolidated statements of comprehensive income and the recorded amounts of IBG, Inc.’s equity investments, which are included in other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly.  Distributions received from equity investees are recorded as reductions to the respective investment balance.
 
A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred.  The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing.  None of IBG, Inc.’s equity investments have readily determinable market values.  All equity investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable.  If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made.  IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting.  Such investments are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management’s estimate of the impairment, and are included in other assets in the unaudited condensed consolidated statements of financial condition.  Dividends are recognized as a component of other income as such dividends are received.
 
The Company makes non-market making investments in listed common stock and corporate debt securities.  In addition, other non-market making investments are made to further diversify the Company’s holdings.  These investments are accounted for at fair value (Note 6), with gains and losses recorded as a component of other income.
 
Property and Equipment
 
Property and equipment, which is a component of other assets, consist of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment.  Property and equipment are recorded at historical cost, less accumulated depreciation and amortization.  Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred.  Depreciation and amortization are computed using the straight-line method.  Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease.  Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years.  Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.
 
Comprehensive Income and Foreign Currency Translation
 
The Company’s operating results are reported in the unaudited condensed consolidated statement of comprehensive income pursuant to Accounting Standards Update 2011-05, Comprehensive Income.
 
Comprehensive income consists of two components: net income and other comprehensive income (“OCI”).  OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income section of the statement of comprehensive income, but are excluded from reported net income.  IBG, Inc.’s OCI is comprised of foreign currency translation adjustments.
 
IBG, Inc.’s international Operating Companies have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar.  Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period.  Translation gains and losses from market making and electronic brokerage activities, respectively, are included in trading gains and in other income in the accompanying unaudited condensed consolidated statements of comprehensive income.  Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated other comprehensive income.
 
Revenue Recognition
                 
                 —Trading Gains
 
                 Trading gains and losses are recorded on trade date and are reported on a net basis.  Trading gains are comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses.  Dividends are integral

 
14

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

 

 to the valuation of stocks and interest is integral to the valuation of fixed income instruments.  Accordingly, both dividends and interest income and expense attributable to specific trading assets and liabilities are reported on a net basis as a component of trading gains in the accompanying unaudited condensed consolidated statements of comprehensive income.
 
                —Commissions and Execution Fees
 
Commissions charged for executing and clearing customer transactions are accrued on a trade date basis and are reported as commissions and execution fees in the unaudited condensed consolidated statements of comprehensive income, and the related expenses are reported as execution and clearing expenses, also on a trade date basis.
 
                 —Interest Income and Expense
 
The Company earns interest income and incurs interest expense primarily in connection with its Electronic Brokerage customer business and its securities lending activities.  Such interest is recorded on the accrual basis.
 
Income Taxes
 
IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes.  The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid.  We are subject to income taxes in both the United States and numerous foreign jurisdictions.  Determining unaudited condensed consolidated income tax expense requires significant judgments and estimates.
 
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
 
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations.  Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.  Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows, or financial position.
 
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.  ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
 
The Company records tax liabilities in accordance with ASC 740 and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available.  Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.  These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
 
IBG, Inc. recognizes interest related to income tax matters as interest income or expense and penalties related to income tax matters as income tax expense.
 
Recently Issued Accounting Pronouncements
 
        Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASUs”) as the means to add to or delete from, or otherwise amend the ASC.  In 2012, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASUs 2012-01 and 2012-02 have been issued.  Following is a summary of recently issued ASUs that affected or may affect the Company’s unaudited condensed consolidated financial statements:
 
 
15

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

 
Affects
 
Status
       
       
ASU 2011-03
Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements
 
Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.  Early application is not permitted.
       
ASU 2011-04
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
 
To be applied prospectively for interim and annual periods beginning after December 15, 2011.  Early adoption is not permitted for public entities.
       
ASU 2011-08
Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment
 
Effective for fiscal years beginning after December 15, 2011.  Early adoption is permitted.
       
ASU 2011-11
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
 
Effective for fiscal periods beginning on or after January 1, 2013.  Retrospective disclosures for comparative periods presented will be required.
       
ASU 2012-02
Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
 
Effective for fiscal years beginning after September 15, 2012.  Early adoption is permitted.
 
 
Adoption of those ASUs that became effective during 2012, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, did not have a material effect on those financial statements.  Management is assessing the potential impact on the Company’s financial statements of adopting ASUs that will become effective in the future.
 
ASC/IFRS Convergence
 
In February 2010, the SEC issued Commission Statement in Support of Convergence and Global Accounting Standards, a formal statement updating the status of its November 2008 Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers (“IFRS Roadmap”).  The statement supported convergence of accounting standards and the development of a single set of global accounting standards.  As directed in this statement, the SEC staff issued Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers (the “Work Plan”) in May 2010, and issued a follow-up Staff Paper, subtitled Exploring a Possible Method of Incorporation in May 2011.  The Work Plan outlines the steps to be taken to provide the SEC with information to be able to conclude whether IFRS should be adopted for U.S. registrants and the Staff Paper discusses alternative approaches (“Convergence” and “Endorsement”) to adoption that could be applied.  Within the Staff Paper, the SEC Staff has issued a Request for Comment on these alternatives.  The Comment period ended July 31, 2011 and the SEC Staff issued two Staff Papers, A Comparison of U.S. GAAP and IFRS and Analysis of IFRS in Practice on November 16, 2011.
 
In June 2012 the FASB and IASB issued a joint statement on their continuing deliberations regarding changes to lease accounting.  When issued, new lease accounting standards under the ASC and IFRS will require the reporting of lease assets and related liabilities on issuers’ statements of financial condition under a mutually agreed upon two-method approach.  Exposure Drafts detailing applicability and implementation considerations are expected to be issued during the second half of 2012, and final standards are expected to be issued in 2013.  Management will be assessing the potential effects of this change in lease accounting as the standard setting process moves forward.  Based on the scope of existing lease commitments (approximately 0.1% of total assets as of December 31 2011 – see Note 16 to the audited financial statements contained in the Company’s 2011 Annual Report on Form 10-K/A), the effect on the Company’s financial statements is not expected to be material.
 
On July 13, 2012, the SEC’s Office of the Chief Accountant issued its Final Staff Report on the Work Plan.  This report considered possible means of aligning IFRS with U.S. GAAP, and raised numerous concerns about the possible effects of adoption on registrants and investors.  The Staff Report did not reject some form of convergence between U.S. GAAP and IFRS, but also did not endorse adoption and did not commit to the extent or timing of adoption.  While a formal commitment regarding possible incorporation of IFRS into U.S. GAAP has not been determined, based on continuing joint efforts between the FASB and IASB, it is likely that convergence to some extent will occur in the future.  The Company applies versions of IFRS for the stand alone financial statements of several of the Operating Companies, where required, and continues to assess the potential impact of adopting IFRS on the Company’s unaudited condensed consolidated financial statements.
 
 
 
16

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

SEC Derivatives Regulation Roadmap
 
In June 2012, the SEC issued for comment a policy statement on its proposed plan that would sequence the phasing in of final rules to be adopted by the Commission regulating security-based swaps in order to comply with the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank” Act).  The policy statement provides a proposed “roadmap” for adoption of final rules, but does not mandate specific registrant compliance deadlines.  Management is monitoring this and other accounting and regulatory rulemaking developments for their potential effect on the Company’s financial statements and internal controls over financial reporting.
 
3. Trading Activities and Related Risks
 
 IBG, Inc.’s trading activities include providing securities market making and brokerage services.  Trading activities expose IBG, Inc. to market and credit risks.  These risks are managed in accordance with established risk management policies and procedures.  To accomplish this, management has established a risk management process that includes:
 
 
a regular review of the risk management process by executive management as part of its oversight role;
 
 
defined risk management policies and procedures supported by a rigorous analytic framework; and
 
 
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
 
Market Risk
 
IBG, Inc. is exposed to various market risks.  Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates.  IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities.  IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures.  The following discussion describes the types of market risk faced:
                
                Equity Price Risk
 
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index.  IBG, Inc. is subject to equity price risk primarily in financial instruments owned and sold but not yet purchased.  IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
 
Currency Risk
 
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments.  Exchange rate contracts may include cross-currency swaps and currency futures contracts.  Currency swaps are agreements to exchange future payments in one currency for payments in another currency.  These agreements are used to effectively convert assets or liabilities denominated in different currencies.  Currency futures are contracts for delayed delivery of currency at a specified future date.  IBG, Inc. uses currency swaps to manage the levels of its non-U.S. dollar currency balances and currency cash and futures to hedge its global exposure.
 
Interest Rate Risk
 
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments.  IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options and futures and on its debt obligations.  These risks are managed through investment policies and by entering into interest rate futures contracts.
 
Credit Risk
 
IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”).  Both cash instruments and derivatives expose IBG, Inc. to default risk.  IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
 
 
17

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources.  IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
 
In the normal course of business, IBG, Inc. executes, settles, and finances various customer securities transactions.  Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations.  In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties.  Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers.  In the case of aged securities fails to receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
 
For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations.  In accordance with industry practice, repos are collateralized by securities with a market value in excess of the obligation under the contract.  Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities.  IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.
 
Concentrations of Credit Risk
 
IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes.  Concentrations of credit risk can be affected by changes in political, industry, or economic factors.  To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions.  As of June 30, 2012 and December 31, 2011, respectively, the Company did not have any material concentrations of credit risk.
 
Off-Balance Sheet Risks
 
IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements for futures products, which represent obligations of IBG, Inc. to settle at contracted prices, which may require repurchase or sale in the market at prevailing prices.  Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such futures contracts may exceed the amounts reported in IBG, Inc.’s unaudited condensed consolidated statements of financial condition.
 

4. Equity and Earnings Per Share
 
In connection with its IPO in May 2007, IBG, Inc. purchased 10.0% of the membership interests in LLC from Holdings, became the sole managing member of LLC and began to consolidate LLC’s financial results into its financial statements. Holdings wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in LLC, approximately 88.1% as of June 30, 2012.  The unaudited condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in LLC, and Holdings’ interests in LLC, prior to the June 6, 2012 amendment to the Exchange Agreement, were accounted for and reported in the Company’s consolidated financial statements as redeemable noncontrolling interests (temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A (see Note 17 to the unaudited condensed consolidated financial statements).  For periods after the Amendment, beginning with the quarter ended June 30, 2012, the noncontrolling interests in LLC attributable to Holdings are reported as a component of permanent equity, as described below.
 
Recapitalization and Post-IPO Capital Structure
 
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, LLC and the members of LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of LLC received membership interests in Holdings in exchange for their membership interests in LLC.  Additionally, IBG, Inc. became the sole managing member of LLC.
 
        In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members’ interests in Holdings in proportion to their interests.  Immediately following the Recapitalization and IPO, Holdings owned approximately 90% of
 
 
18

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. proportionate to the extent of Holdings’ ownership of LLC.
 
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock.  All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation.  As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of Holdings’ ownership of LLC.  At June 30, 2012 and December 31, 2011, 1,000,000,000 shares of Class A common stock were authorized, of which 47,788,659 and 46,061,256 shares have been issued; and 47,488,353 and 45,576,791 shares were outstanding, respectively.  Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.  In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of June 30, 2012 and December 31, 2011, respectively.
 
As a result of a federal income tax election made by LLC applicable to the acquisition of LLC member interests by IBG, Inc., the income tax basis of the assets of LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests.  Deferred tax assets were recorded as of the IPO date and in connection with the 2011 redemption of Holdings’ member interests in exchange for Common Stock, which deferred tax assets are a component of Other Assets in the unaudited condensed consolidated statement of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the 2011 redemption date, respectively, as allowable under current tax law.  As of June 30, 2012 and December 31, 2011, the unamortized balance of these deferred tax assets was $288,233 and, $297,881, respectively.
 
IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to make payments to Holdings (for the benefit of the former members of LLC) equal to 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases.  These payables, net of payments made to Holdings, are reported as Payable to Affiliate in the unaudited condensed consolidated statement of financial condition.
 
The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the unaudited condensed consolidated statement of financial condition.
 
The deferred tax assets, payables to Holdings and credits to additional paid in capital arising from stock offerings through June 30, 2012 are:
 

    Deferred Tax Assets
 
  Payable to IBGH
 
 
Additional Paid In Capital
May 3, 2007 (IPO)
$
                       380,785
  $
           323,668
  $
              57,117
August 4, 2011
 
                             2,984
   
                 2,536
   
                     448
  $
                       383,769
  $
           326,204
  $
             57,565

 
Amounts received and payable under the Tax Receivable Agreement are payable to Holdings annually upon the filing of IBG, Inc.’s federal income tax return.  The Company has paid Holdings a total of $54.6 million through June 30, 2012 pursuant to the terms of the Tax Receivable Agreement.
 
The Exchange Agreement also provides for future redemptions of member interests and for the purchase of member interests in LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in LLC that it does not own.  On an annual basis, owners of Holdings member interests are able to request redemption of such member interests from Holdings over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
 
At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized Class A common stock were reserved for future sales and redemptions. From 2008 through 2010, redemptions totaling $114 million were funded using cash on hand at LLC. In 2011, the Company issued 1,983,624 shares of Class A common stock directly to Holdings in exchange for an equivalent number of shares of member interests in LLC.
 
As a consequence of these redemption transactions, and distribution of shares to employees (Note 10), IBG, Inc.’s interest in LLC has increased to approximately 11.9%, with Holdings owning the remaining 88.1% as of June 30, 2012.  The redemptions also resulted in an increase in the Holdings interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 86.3% at June 30, 2012.
 
        The Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the issuance of shares of common stock through a public offering in exchange


 
19

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


for the interests in LLC being redeemed by Holdings. The June 6, 2012 amendment (the “Amendment”) eliminated from the Exchange Agreement an alternative funding method, which provided that upon approval by the board of directors and by agreement of the Company, LLC and Holdings, redemptions could be made in cash.
 
Subsequent to the amendment to the Exchange Agreement on June 6, 2012, the Company recorded adjustments to report Holdings’ noncontrolling interests in LLC as permanent equity, reducing redeemable noncontrolling interests to zero and reversing the cumulative effect of adjustments to redemption value previously recorded to additional paid-in capital.  The effect of these adjustments, before the allocation of comprehensive income and other capital transactions to Holdings’ noncontrolling interests in LLC subsequent to June 6, 2012, and before the recording of capital transactions and comprehensive income attributable to the Company and to other noncontrolling interests for the six months ended June 30, 2012 was:
 
 
(in thousands)
  Adjustments as of June 6, 2012
       
Redeemable noncontrolling interests
   $
     (5,367,553)
       
Additional Paid in Capital
  $
         472,409
       
Retained earnings
  $
         572,840
       
Noncontrolling interests
  $
      4,322,304

Stock Repurchase Program
 
In September 2008, the Company’s Board of Directors approved the repurchase of up to eight (8) million shares of its Class A common stock by LLC.  Shares may be purchased from time to time in the open market and in private transactions if the Company deems the price appropriate.  In November 2008, 65,800 shares were repurchased at a cost of $866, and are being held as Treasury Stock.
 

Earnings Per Share
 
The Company has determined to reflect measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common stockholders.
 

 
20

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period (2011 restated):
 
       
Three months ended
   
Six months ended
       
June 30,
   
June 30,
       
2012
     
2011
   
2012
   
2011
Basic earnings per share:                        
Net income attributable to common stockholders  $ 7,984     $ 9,561    $ 19,068   $ 25,812
  Add (deduct) net income attributable to non-fair value redemption rights     (132     5      1,108     411
  Net income available for common stockholders $
                7,852
    $
              9,566
  $
              20,176
  $
              26,223
                             
  Weighted average shares of common stock outstanding:                    
   
Class A
 
         46,686,169
     
         43,017,995
   
         46,131,713
   
         42,626,945
   
Class B
 
                     100
     
                     100
   
                     100
   
                     100
       
         46,686,269
     
         43,018,095
   
         46,131,813
   
         42,627,045
                             
  Basic earnings per share $
                  0.17
    $
                  0.22
  $
                  0.44
  $
                  0.62

Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares (2011 restated):
 

         
Three months ended
   
Six months ended
         
June 30,
   
June 30,
         
2012
   
2011
   
2012
   
2011
Diluted earnings per share:                      
  Net income available for common stockholders - basic $
                7,852
  $
                9,566
  $
              20,176
  $
              26,223
  Adjustments for potentially dilutive common shares  
                         -
   
                         -
   
                         -
   
                         -
                             
  Net income available for common stockholders $
                7,852
  $
                9,566
  $
              20,176
  $
              26,223
                             
  Weighted average shares of common stock outstanding:                  
    Class A:                      
     
Issued and outstanding
 
         46,686,169
   
         43,017,995
   
         46,131,713
   
         42,626,945
     
Potentially dilutive common shares:
                     
       
Issuable pursuant to 2007 ROI Unit Stock Plan
 
              270,812
   
              452,833
   
              321,128
   
              506,110
    Class B  
                     100
   
                     100
   
                     100
   
                     100
         
         46,957,081
   
         43,470,928
   
         46,452,941
   
         43,133,155
                             
  Diluted earnings per share $
                 0.17
  $
                  0.22
  $
                  0.43
  $
                  0.61

 
Potentially dilutive common shares could include unvested shares awarded under the SIP.  During the three and six months ended June 30, 2012 and 2011, the additional shares of common stock attributable to the SIP that would have been assumed to be issued, as calculated under the Treasury Stock method, were anti-dilutive and, accordingly, have been excluded from the calculation of diluted earnings per share.
 
Member and Stockholder Dividends
 
In March and June 2012, LLC paid dividends to its members totaling $79.4 million, of which IBG, Inc.’s proportionate share was $9.3 million.  Also in March and June 2012, the Company paid quarterly cash dividends of $0.10 per share of Common Stock, totaling $9.3 million.
 
On July 17, 2012, the Company declared a cash dividend of $0.10 per common share, payable September 14, 2012 to shareholders of record as of August 31, 2012.
 

 
21

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

5. Comprehensive Income
 
Comprehensive income is comprised of net income and other comprehensive income.  The Company’s OCI is comprised of foreign currency translation adjustments, which arise from changes in the U.S. dollar value of the net worth of the Company’s international Operating Companies during respective reporting periods.  The following table presents comprehensive income, net of income taxes, and earnings per share, calculated using the two-class method on comprehensive income (2011 restated):
 

 
         
Three months ended
   
Six months ended
         
June 30,
   
June 30,
         
2012
     
2011
   
2012
     
2011
                                 
  Net income available for common stockholders  $
                7,984
     $
                9,561
   $
              19,068
     $
              25,812
  Add (deduct) net income attributable to non-fair value redemption rights     (132      5      1,108        411
   Net income available for common stockholders     7,852        9,566      20,176        26,223
                                 
  Other comprehensive income:                          
    Cumulative translation adjustment, before income taxes  
                (5,801
)    
                  6,067
   
                (1,691
)    
                  8,072
    Income taxes related to items of other comprehensive income  
                (2,095
)    
                  2,230
   
                   (611
)    
                  2,967
  Other comprehensive income (loss), net of tax  
                (3,706
)    
                  3,837
   
                (1,080
)    
                  5,105
                                 
  Comprehensive income available for common stockholders $
                4,146
    $
              13,403
  $
              19,096
    $
             31,328
                                 
                                 
Earnings per share on comprehensive income:                          
  Basic $
                  0.09
    $
                  0.31
  $
                  0.41
    $
                  0.73
  Diluted $
                  0.09
    $
                  0.31
  $
                  0.41
    $
                  0.73
                                 
                                 
  Weighted average common shares outstanding:                          
  Basic  
46,686,269
     
43,018,095
   
46,131,813
     
42,627,045
  Diluted  
46,957,081
     
43,470,928
   
46,452,941
     
43,133,155
 

 
22

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


 
6. Fair Value
 
The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of June 30, 2012 and December 31, 2011.  As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

     
Financial Assets At Fair Value as of June 30, 2012
                         
     
Level 1
   
Level 2
   
Level 3
   
Total
                         
Securities segregated for regulatory purposes $
           1,847,310
  $
              79,976
  $
                       -
  $
      1,927,286
Financial instruments owned:                      
 
Stocks
 
                135,978
   
                         -
   
                         -
   
           135,978
 
Options
 
             3,649,549
   
                         -
   
                         -
   
        3,649,549
 
U.S. and foreign government obligations
 
                  32,277
   
                         -
   
                         -
   
             32,277
 
Warrants
 
                  59,635
   
                         -
   
                         -
   
             59,635
 
Corporate and municipal bonds
 
                  54,862
   
                74,947
   
                         -
   
           129,809
 
Discount certificates
 
                  93,743
   
                         -
   
                         -
   
             93,743
 
Currency forward contracts
 
                           -
   
                24,980
   
                         -
   
             24,980
     
             4,026,044
   
                99,927
   
                         -
   
        4,125,971
Financial instruments owned and pledged as collateral:                      
 
Stocks
 
             1,822,502
   
                         -
   
                         -
   
        1,822,502
 
Corporate and municipal bonds
 
                  11,754
   
                         -
   
                         -
   
             11,754
 
U.S. and foreign government obligations
 
                201,550
   
                         -
   
                         -
   
           201,550
     
             2,035,806
   
                         -
   
                         -
   
        2,035,806
     
             6,061,850
    <