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2014 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data
Item 9B. Other Information


Table of Contents

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



FORM 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

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 001-32722



INVESTMENT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State of incorporation)
  95-2848406
(IRS Employer Identification No.)

165 Broadway, New York, New York
(Address of principal executive offices)

 

10006
(Zip Code)
(212) 588-4000
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Common Stock, $0.01 par value
(Title of class)

 

New York Stock Exchange
(Name of exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None



         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act)

Yes o    No ý

Aggregate market value of the voting stock
held by non-affiliates of the
Registrant at June 30, 2014:
$573,475,988
  Number of shares outstanding of the
Registrant's Class of common stock
at February 19, 2015:
34,191,818

DOCUMENTS INCORPORATED BY REFERENCE:

         Proxy Statement relating to the 2015 Annual Meeting of Stockholders (incorporated, in part, in Form 10-K Part III)

   


Table of Contents


2014 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 
   
 
Page
 

  Forward Looking Statements     ii  

PART I

 

Item 1.

  Business     1  

Item 1A.

  Risk Factors     9  

Item 1B.

  Unresolved Staff Comments     20  

Item 2.

  Properties     20  

Item 3.

  Legal Proceedings     20  

Item 4

  Mine Safety Disclosures     20  

PART II

 

Item 5.

  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     21  

Item 6.

  Selected Financial Data     24  

Item 7.

  Management's Discussion and Analysis of Financial Condition and Results of Operations     24  

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk     45  

Item 8.

  Financial Statements and Supplementary Data     47  

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     92  

Item 9A.

  Controls and Procedures     92  

Item 9B.

  Other Information     94  

PART III

 

Item 10.

  Directors, Executive Officers and Corporate Governance     94  

Item 11.

  Executive Compensation     94  

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     94  

Item 13.

  Certain Relationships and Related Transactions, and Director Independence     94  

Item 14.

  Principal Accounting Fees and Services     94  

PART IV

 

Item 15.

  Exhibits, Financial Statement Schedules     94  

        Investment Technology Group, ITG, the ITG logo, AlterNet, ITG Algorithms, ITG List-Based Algorithms, ITG Net, ITG Position Manager, ITG Single-Stock Algorithms, ITG TCA, POSIT, POSIT Alert, POSIT Marketplace, RFQ-hub, Triton and MATCH Now are registered trademarks or service marks of the Investment Technology Group, Inc. companies. ITG Derivatives and ITG Smart Router are trademarks or service marks of the Investment Technology Group, Inc. companies.

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PRELIMINARY NOTES

        When we use the terms "ITG," the "Company," "we," "us" and "our," we mean Investment Technology Group, Inc. and its consolidated subsidiaries.


FORWARD-LOOKING STATEMENTS

        In addition to the historical information contained throughout this Annual Report on Form 10-K, there are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. All statements regarding our expectations related to our future financial position, results of operations, revenues, cash flows, dividends, financing plans, business and product strategies, competitive positions, as well as the plans and objectives of management for future operations, and all expectations concerning securities markets, client trading and economic trends are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "could," "should," "would," "expect," "plan," "anticipate," "believe," "estimate," "predict," "trend," "potential" or "continue" and the negative of these terms and other comparable terminology.

        Although we believe our expectations reflected in such forward-looking statements are based on reasonable assumptions and beliefs, and on information currently available to our management, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, general economic, business, credit and financial market conditions, both internationally and domestically, financial market volatility, fluctuations in market trading volumes, effects of inflation, adverse changes or volatility in interest rates, fluctuations in foreign exchange rates, evolving industry regulations and regulatory scrutiny, the volatility of our stock price, changes in tax policy or accounting rules, the actions of both current and potential new competitors, changes in commission pricing, rapid changes in technology, errors or malfunctions in our systems or technology, cash flows into or redemptions from equity mutual funds, ability to meet liquidity requirements related to the clearing of our customers' trades, customer trading patterns, the success of our products and service offerings, our ability to continue to innovate and meet the demands of our customers for new or enhanced products, our ability to successfully integrate companies we have acquired and our ability to attract and retain talented employees.

        Certain of these factors, and other factors, are more fully discussed in Item 1A, Risk Factors, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in this Annual Report which you are encouraged to read.

        We disclaim any duty to update any of these forward-looking statements after the filing of this report to conform our prior statements to actual results or revised expectations and we do not intend to do so. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the filing of this report.

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Item 1.    Business

        Investment Technology Group, Inc. was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc., AlterNet Securities, Inc. ("AlterNet") and ITG Derivatives LLC ("ITG Derivatives"), institutional broker-dealers in the United States ("U.S."), (2) ITG Canada Corp. ("ITG Canada"), an institutional broker-dealer in Canada, (3) Investment Technology Group Limited ("ITG Europe"), an institutional broker-dealer in Europe, (4) ITG Australia Limited ("ITG Australia"), an institutional broker-dealer in Australia, (5) ITG Hong Kong Limited ("ITG Hong Kong"), an institutional broker-dealer in Hong Kong, (6) ITG Software Solutions, Inc., our intangible property, software development and maintenance subsidiary in the U.S., and (7) ITG Solutions Network, Inc., a holding company for ITG Analytics, Inc., a provider of pre- and post-trade analysis, fair value and trade optimization services, ITG Investment Research, Inc. ("ITG Investment Research"), a provider of independent data-driven investment research, and ITG Platforms Inc., a provider of trade order and execution management technology and network connectivity services for the financial community.

        ITG is an independent execution and research broker that partners with global portfolio managers and traders to provide unique data-driven insights throughout the investment process. From investment decision through to settlement, ITG helps clients understand market trends, improve performance, mitigate risk and navigate increasingly complex markets. A leader in electronic trading since launching the POSIT crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools and proprietary research. The firm is headquartered in New York with offices in North America, Europe, and the Asia Pacific region.

        ITG's business is organized into four reportable operating segments (see Note 22, Segment Reporting, to the consolidated financial statements):

    U.S. Operations

    Canadian Operations

    European Operations

    Asia Pacific Operations

        These four operating segments offer a wide range of solutions for asset managers and broker-dealers in the areas of electronic brokerage; research, sales and trading; platforms and analytics. These offerings include trade execution services and solutions for portfolio management, as well as investment research, pre-trade analytics and post-trade analytics and processing, summarized below.

Electronic Brokerage

        ITG electronic brokerage services include self-directed trading by clients using algorithms, smart routing and matching in cash equities through POSIT (including single stocks and portfolio lists), futures and options.

ITG Algorithms and ITG Smart Router

        ITG Algorithms and ITG Smart Router offer portfolio managers and traders a way to trade orders quickly, comprehensively and cost-efficiently from any ITG Execution Management System ("EMS") or ITG Order Management System ("OMS") and most third-party trading platforms. The algorithms execute orders anonymously and discreetly, thereby potentially lowering market impact costs and improving overall performance. ITG Algorithms help users pursue best execution through two suites: ITG Single-Stock Algorithms and ITG List-Based Algorithms.

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        ITG Smart Router offers a solution for routing trades that can help capture liquidity with a combination of speed and confidentiality. These routers continuously scan markets for liquidity with an emphasis on trading without displaying the order. ITG Smart Router uses proprietary techniques to quickly execute at the best available prices.

POSIT

        POSIT was launched in 1987 as a point-in-time electronic crossing network. Today, POSIT operates as an Alternative Trading System ("ATS"), providing anonymous continuous and scheduled crossing of non-displayed (or dark) equity orders and price improvement opportunities within the National Best Bid and Offer ("NBBO").

        POSIT Alert is a block crossing mechanism within POSIT. POSIT Alert scans uncommitted shares from participating clients. When a crossing opportunity is detected, POSIT Alert notifies the relevant buy-side users that a matching opportunity exists.

        POSIT Marketplace provides access to POSIT liquidity, the dark pools of other ATSs, and certain exchange dark order types. POSIT Marketplace is a dark pool aggregator that provides clients with access to a large range of non-displayed liquidity destinations. POSIT Marketplace uses advanced quantitative techniques in an effort to interact with quality liquidity while protecting clients from gaming.

ITG Derivatives

        ITG Derivatives provides electronic listed futures and options trading, including algorithmic trading and direct market access. ITG Derivatives offers advanced options features for traders employing volatility-neutral or delta-neutral strategies and also provides low-latency application programming interfaces.

Commission Management Services

        ITG offers guidance, administration, and consolidation of client commission arrangements across a wide range of our clients' preferred brokerage and research providers through ITG Commission Manager, a robust, multi-asset, web-based commission management portal.

Securities Lending Services

        Through stock borrow and stock loan transactions, ITG facilitates shortened or extended settlement periods to help clients meet their internal cash flow needs. ITG can also borrow securities to help reduce failures to deliver stock.

Research, Sales & Trading

ITG Investment Research

        ITG provides differentiated, unbiased, data-driven equity research through its ITG Investment Research subsidiary. This offering has expanded ITG's client relationships beyond the trading desk to chief investment officers, portfolio managers and analysts. Through the use of innovative data mining and analysis and exclusive data partnerships, as well as detailed analysis of energy asset plays, ITG Investment Research identifies key metrics that may influence a company's future performance. ITG Investment Research currently provides research on approximately 300 companies. We also provide our syndicated research products to, and perform custom analyses for, corporations and our energy research team provides transaction advisory services to potential purchasers of energy-related investments.

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ITG Market Research

        ITG Market Research offers market research capabilities to corporate clients within the healthcare and telecom industries. The healthcare market research practice combines survey results with proprietary empirical data to deliver innovative syndicated and custom reporting capabilities. The telecom research practice uses multiple data sources to provide insights into the mobile handset market in North America.

High-Touch Trading

        ITG provides high-touch sales trading and portfolio trading for institutional clients. ITG's high-touch trading desk is staffed with experienced trading professionals who provide ITG clients with execution expertise and also convey trading ideas based on ITG Investment Research's research and analysis.

Platforms

Execution Management and Order Management

        ITG EMSs are designed to meet the needs of disparate trading styles. Triton is ITG's award-winning, multi-asset and broker-neutral EMS, which brings a complete set of integrated execution and analytical tools to the user's desktop for global list-based and single-stock trading, as well as futures and options capabilities and a fully integrated and supported financial services communications network (ITG Net). Triton Derivatives is a broker-neutral, direct-access EMS that provides traders with access to scalable, low-latency, multi-asset trading opportunities.

        ITG OMS combines portfolio management, compliance functionality (ITG Compliance Monitoring System), and a fully integrated and supported financial services communications network (ITG Net) with a consolidated, outsourced service for global trade matching and settlement (ITG Trade Operations Outsourcing) that provides connectivity to the industry's post-trade utilities, as well as support for multiple, flexible settlement communication methods and a real-time process monitor.

        ITG Position Manager ("PM") is a multi-prime, broker-neutral order management system, offering full support and real-time profit-and-loss information for multiple currencies, strategies, asset types and portfolios. ITG PM is fully integrated with Triton Black, ITG's next generation multi-broker global EMS built to deliver efficient workflows for the most demanding traders, as well as ITG Net to deliver a robust product suite engineered specifically for hedge funds.

ITG Net

        ITG Net is a global financial communications network that provides secure, reliable and fully supported connectivity between buy-side and sell-side firms for multi-asset order routing and indication-of-interest messages with ITG and third-party trading platforms. ITG Net supports more than 8,500 billable connections to more than 350 unique brokerage firms and execution venues worldwide. ITG Net also integrates the trading products of third-party brokers and ATSs into our OMS and EMS platforms.

ITG RFQ-hub

        In July 2014, ITG acquired ID's, a Paris-based company that operates RFQ-hub, a multi-asset platform for global-listed and over-the-counter ("OTC") financial instruments. ITG RFQ-hub, as it is now known, connects buy-side trading desks and portfolio managers with a large network of sell-side market makers, allowing these trading desks to place requests-for-quotes in OTC-negotiated equities, futures, options, swaps, convertible bonds, structured products and commodities. ITG RFQ-hub is available as a stand-alone platform and is also integrated with Triton.

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ITG Single Ticket Clearing

        ITG's commitment to best execution platforms also extends to broker-neutral operational services to help ensure that trades clear and settle efficiently, and to significantly lower the transaction costs associated with trade tickets. ITG Single Ticket Clearing is a broker-neutral service that aggregates executions across multiple destinations for settlement purposes. ITG Single Ticket Clearing helps reduce the number of trade tickets and resulting charges imposed by custodians, reducing the costs of trade processing due to market fragmentation.

Analytics

ITG Trading Analytics

        The ITG Smart Trading Analytics suite enables portfolio managers and traders to improve execution performance before the trade happens (pre-trade) and during trading (real-time) by providing reliable trading analytics and risk models that help them perform predictive analyses, manage risk, change strategy and reduce trading costs. Trading costs are affected by multiple factors, such as execution strategies, time horizon, volatility, spread, volume and order size. ITG Smart Trading Analytics gauges the effects of these factors and aids in the understanding of the trade-off between market impact and opportunity cost.

        ITG Transaction Cost Analysis ("TCA") offers unique measurement and reporting capabilities to analyze costs and performance across the trading continuum. ITG TCA assesses trading performance and implicit costs under various market conditions so users can adjust strategies and potentially reduce costs and boost investment performance. ITG TCA is also available for foreign exchange transactions (ITG TCA for FX).

        ITG Alpha Capture Reporting measures cost at every point of the investment process and provides portfolio managers with quarterly analytical reviews, written interpretations and on-site consultative recommendations to enhance performance.

ITG Portfolio Analytics

        ITG provides market-leading tools to assist asset managers with portfolio decision-making tasks from portfolio construction and optimization to the enterprise challenge of global, real-time portfolio performance monitoring.

        ITG Portfolio Fair Value Service helps mutual fund managers meet their obligations to investors and regulators to fairly price the securities within their funds, and helps minimize the impact of market timing.

        ITG Portfolio Optimization System allows portfolio managers to develop new portfolio construction strategies and solve complex optimization problems. ITG Portfolio Optimization System allows users to accurately model tax liability, transaction costs and long/short objectives, while adhering to diverse portfolio-specific constraints.

Non-U.S. Operations

        ITG has established a strong and growing presence in key financial centers around the world to serve the needs of global institutional investors. In addition to its New York headquarters and its Boston, Chicago, Los Angeles and San Francisco offices in the U.S., ITG has offices in Canada in Toronto and Calgary. In Europe, ITG has offices in London, Dublin and Paris. In the Asia Pacific region, ITG has offices in Sydney, Melbourne, Hong Kong and Singapore. Local representation in regional markets provides an important competitive advantage for ITG. ITG also provides electronic and high-touch trading for Latin American equities from its New York headquarters, including

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algorithms for Brazil, Mexico and Chile, and POSIT Alert in Brazil and Mexico, as well as, high-touch trading access into Colombia and Peru.

Canadian Operations

        ITG Canada was founded in 2000 and ranks in the Top 10 investment dealers in Canada. ITG Canada provides electronic brokerage services, including ITG Algorithms, ITG Smart Router and MATCH Now, as well as high-touch agency execution and portfolio trading services. In addition, ITG Canada provides Triton, Triton Derivatives, connectivity services, ITG Single Ticket Clearing, ITG Portfolio Optimization System, ITG Smart Trading Analytics, ITG TCA and investment research services. ITG Canada also engages in principal trading activities. ITG Canada's customers primarily consist of asset and investment managers, broker-dealers and hedge funds.

        In July 2007, ITG Canada launched MATCH Now, an alternative marketplace for Canadian-listed equities, operated by ITG's wholly-owned subsidiary, TriAct Canada Marketplace LP ("TriAct"). MATCH Now is a leading anonymous crossing system in Canada, offering continuous execution opportunities within a fully confidential non-displayed book at the mid-point of the Canadian NBBO.

European Operations

        ITG Europe was established as a broker-dealer in 1998. Today, ITG Europe focuses on trading European, Middle Eastern and African equities as well as providing ITG's technologies to its clients. ITG Europe provides electronic brokerage services including ITG Algorithms, ITG Smart Router, and the POSIT suite, as well as high-touch agency execution services, portfolio trading services and commission management services. In Europe, ITG provides Triton, ITG OMS, connectivity services, ITG Single Ticket Clearing, ITG RFQ-hub, ITG TCA, ITG Alpha Capture Reporting, ITG Smart Trading Analytics and ITG Portfolio Fair Value Service.

Asia Pacific Operations

    Australia

        In 1997, ITG launched ITG Australia, an institutional brokerage firm specializing in execution and analytics for Australia equities. ITG provides institutional investors with a range of products and services including trade execution, trade execution management through Triton, connectivity services and pre- and post-trade analysis through ITG TCA and ITG Smart Trading Analytics. Trade execution services include electronic brokerage products such as ITG Algorithms and the POSIT suite, as well as high-touch agency trading.

    Hong Kong

        In 2001, ITG formed ITG Hong Kong, an institutional broker-dealer focused on developing and applying ITG's technologies across the Asian markets. Execution services are provided through electronic brokerage products such as ITG Algorithms and the POSIT suite and through an experienced high-touch agency trading services team. Other trading and analytical tools provided by ITG Hong Kong include Triton, connectivity services, ITG TCA and ITG Smart Trading Analytics.

    Singapore

        In 2010, ITG Singapore Pte Limited ("ITG Singapore") obtained a Capital Markets Services License from the Monetary Authority of Singapore ("MAS"). ITG Singapore provides institutional investors in Singapore with a range of ITG's products and services including trade execution management through Triton and trading analysis through ITG TCA and ITG Smart Trading Analytics.

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Competition

        The financial services industry generally, and the institutional securities brokerage business in which we operate, are extremely competitive, and we expect them to remain so for the foreseeable future. Our full suite of products does not directly compete with a particular firm; however, individual products compete with various firms and consortia:

    Our trading and portfolio analytics compete with offerings from several sell-side-affiliated and independent companies.

    POSIT competes with various national and regional securities exchanges, ATSs, Electronic Communication Networks, Multilateral Trading Facilities ("MTFs"), and systematic internalizers for trade execution services. These venues have proliferated in recent years.

    Our EMSs, OMSs and connectivity services compete with offerings from independent vendors, agency-only firms and other sell-side firms.

    Our algorithmic and smart routing products, as well as our high-touch agency execution and portfolio trading services, compete with agency-only and other sell-side firms.

    Our ITG Investment Research offering competes with the research divisions of large and regional investment banks and brokerages as well as a number of independent research firms.

Regulation

        Certain of our subsidiaries are subject to various securities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. In the U.S., the SEC is the federal agency responsible for the administration of the federal securities laws, with the regulation of broker-dealers primarily delegated to self-regulatory organizations ("SROs"), principally the Financial Industry Regulatory Authority ("FINRA") as well as other national securities exchanges. In addition to federal and SRO oversight, securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Furthermore, our non-U.S. subsidiaries are subject to regulation by central banks and regulatory bodies in those jurisdictions where each subsidiary is authorized to do business, as further discussed below. The SROs, central banks and regulatory bodies conduct periodic examinations of our broker-dealer subsidiaries in accordance with the rules they have adopted and amended from time to time.

        ITG's principal regulated subsidiaries are listed below. The principal self-regulator of all our U.S. broker-dealers is FINRA.

    ITG Inc. is a U.S. broker-dealer registered with the SEC, FINRA, The NASDAQ Stock Market ("NASDAQ"), New York Stock Exchange, NYSE Arca, Inc. ("ARCA"), NYSE MKT LLC ("NYSE MKT"), BATS Y-Exchange, Inc. ("BYX"), BATS Z-Exchange, Inc. ("BZX"), Chicago Stock Exchange Inc., EDGA Exchange, Inc. ("EDGA"), EDGX Exchange, Inc. ("EDGX"), NASDAQ OMX BX, Inc. ("NASDAQ BX"), NASDAQ OMX PHLX, Inc. ("NASDAQ OMX PHLX"), National Futures Association ("NFA"), Ontario Securities Commission ("OSC"), all 50 states, Puerto Rico and the District of Columbia.

    ITG Derivatives is a U.S. broker-dealer registered with the SEC, FINRA, NYSE MKT, ARCA, BYX, BZX, BOX Options Exchange LLC, CBOE, C2 Options Exchange Incorporated, International Securities Exchange, ISE Gemini, LLC, NASDAQ, NASDAQ BX, NASDAQ OMX PHLX, Commodities and Futures Trading Commission ("CFTC"), Miami International Stock Exchange, the NFA and 28 states.

    AlterNet is a U.S. broker-dealer registered with the SEC, FINRA, NASDAQ, EDGA, EDGX and 14 states.

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    ITG Canada is a Canadian broker-dealer registered as an investment dealer with the Investment Industry Regulatory Organization of Canada ("IIROC"), the OSC, the Autorité Des Marchés Financiers in Quebec, Alberta Securities Commission, British Columbia Securities Commission, Manitoba Securities Commission, New Brunswick Securities Commission, Nova Scotia Securities Commission and Saskatchewan Financial Services Commission. ITG Canada is also registered as a Futures Commission Merchant in Ontario and Manitoba and Derivatives Dealer in Quebec. ITG Canada is a member of the Toronto Stock Exchange ("TSX"), TSX Venture Exchange, the Canadian National Stock Exchange and the Montreal Exchange. TriAct operates MATCH Now, an ATS under National Instrument 21-101, and is registered as an investment dealer with IIROC, the OSC and the Alberta Securities Commission.

    Our European operations include ITG Ventures Limited, ITG Europe, ITG Europe's wholly-owned broker-dealer subsidiary Investment Technology Group Europe Limited ("ITGEL") and AlterNet (UK) Limited a U.K. broker ("AlterNet UK"). ITG Europe and ITGEL are authorized and regulated by the Central Bank of Ireland under the European Communities (Markets in Financial Instruments) Regulations 2007. ITG Europe is a member of the main national European exchanges, including the London Stock Exchange, Deutsche Börse and Euronext, as well as most of the European-domiciled MTFs. It also operates the POSIT crossing system in Europe as a MTF under the Markets in Financial Instruments Directive ("MiFID"). ITGEL's London Branch is registered with the Prudential Regulation Authority and the Financial Conduct Authority ("FCA") and ITGEL's Paris branch is registered with the Banque de France. AlterNet UK is also registered with the FCA.

    ITG Australia is a market participant of the Australian Securities Exchange ("ASX") and Chi-X Australia Limited. It is also a holder of an Australian Financial Services License issued by the Australian Securities and Investments Commission ("ASIC"). ITG Australia's principal regulators are the ASX and ASIC.

    ITG Hong Kong is a participating organization of the Hong Kong Stock Exchange and a holder of a securities dealer's license issued by the Securities and Futures Commission of Hong Kong ("SFC"), with the SFC acting as its principal regulator.

    ITG Singapore is a holder of a Capital Markets Services License from the MAS, with the MAS acting as its principal regulator.

        Broker-dealers are subject to regulations covering all aspects of the securities trading business, including sales methods, trade practices, investment research distribution, use and safekeeping of clients' funds and securities, capital structure, record keeping and conduct of directors, officers and employees. Additional legislation or changes in the interpretation or enforcement of existing laws and rules may directly affect the mode of operation and profitability of broker-dealers. The SEC, SROs, state securities commissions and foreign regulatory authorities may conduct administrative proceedings or commence judicial actions, which can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its directors, officers or employees.

        ITG Inc., AlterNet, and ITG Derivatives are required by law to belong to the Securities Investor Protection Corporation ("SIPC"). In the event of a U.S. broker-dealer's insolvency, the SIPC fund provides protection for client accounts up to $500,000 per customer, with a limitation of $250,000 on claims for cash balances. ITG Canada and TriAct are required by Canadian law to belong to the Canadian Investors Protection Fund ("CIPF"). In the event of a Canadian broker-dealer's insolvency, CIPF provides protection for client accounts up to CAD $1 million per customer. ITG Europe and ITGEL are required to be members of the Investor Compensation Protection Schemes which provides compensation to retail investors in the event of certain stated defaults by an investment firm. ITG Hong Kong is regulated by the SFC. The SFC operates the Investor Compensation Fund which provides compensation to retail investors in the event of a default by a regulated financial institution.

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ITG Australia is obligated to contribute to the ACH Clearing Fund and/or the National Guarantee Fund if and when requested by ASIC. In the past twelve months, no such requests have been made of ITG Australia.

Regulation ATS

        Regulation ATS permits "alternative trading systems" such as POSIT to match orders submitted by buyers and sellers without having to register as a national securities exchange. Accordingly, POSIT is not registered with the SEC as an exchange. We continue to review and monitor POSIT's systems and procedures to ensure compliance with Regulation ATS.

Net Capital Requirement

        ITG Inc., AlterNet and ITG Derivatives are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act, which requires the maintenance of minimum net capital.

        ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $1.0 million or 2% of aggregate debit balances arising from customer transactions. AlterNet and ITG Derivatives have elected to use the basic method permitted by Rule 15c3-1, which requires that they maintain minimum net capital equal to the greater of 62/3% of aggregate indebtedness or $100,000, and in the case of ITG Derivatives, $1 million, which is due to the fact that ITG Derivatives is a registered Futures Commission Merchant pursuant to CFTC Regulation 1.17.

        For further information on our net capital position, see Note 16, Net Capital Requirement, to the consolidated financial statements.

Research and Product Development

        We devote a significant portion of our resources to the development and improvement of technology-based services. Important aspects of our research and development efforts include enhancements of existing software, the ongoing development of new software and services and investment in technology to enhance our efficiency.

        The amounts expensed for research and development costs, excluding routine maintenance, for the years ended December 31, 2014, 2013 and 2012 are estimated at $35.8 million, $41.7 million and $45.4 million, respectively.

Intellectual Property

        Patents and other proprietary rights are important to our business. We also rely upon trade secrets, know-how, continuing technological innovations, and licensing opportunities to maintain and improve our competitive position.

        We own a portfolio of patents that principally relate to financial services. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. We also own and maintain a portfolio of trademarks. The extent and duration of trademark rights are dependent upon national laws and use of the trademarks.

        While we consider our patents and trademarks to be valued assets, we do not believe that our competitive position is heavily dependent on patent or trademark protection or that our operations are dependent upon any single patent or group of related patents.

        It is our practice to enter into confidentiality and intellectual property ownership agreements with our clients, employees, independent contractors and business partners, and to control access to, and distribution of, our intellectual property.

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Clients

        For the years ended December 31, 2014, 2013 and 2012, no single client accounted for more than 5% of our consolidated revenue.

Employees

        On December 31, 2014, the Company employed 1,087 staff globally, of whom 753, 88, 133 and 113 staff were employed by the U.S., Canadian, European and Asia Pacific Operations, respectively.

Website and Availability of Public Reports

        Our website can be found at http://www.itg.com. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information is routinely posted and accessible on the investor relations section of our corporate website, investor.itg.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

        We are required to file reports and other information with the SEC. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, together with any amendments to those reports are available without charge on our website at http://investor.itg.com. We make this information available on our website as soon as reasonably practicable after we electronically file such information with, or furnish it to, the SEC. A copy of these filings is also available at the SEC's website (www.sec.gov). Additionally, you may read and copy any documents filed by us at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

Item 1A.    Risk Factors

Certain Factors That May Affect Our Financial Condition and Results of Operations

        We face risks and uncertainties that may affect our financial condition and results of operations. The following risk factors should be considered in evaluating our business and growth outlook and may be important to understanding any statement in this Annual Report on Form 10-K. These risk factors should be read in conjunction with Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Decreases in equity trading activity by active fund managers and declining securities prices could harm our business and profitability.

        Declines in the trading activity of active fund managers generally result in lower revenues from our trading solutions, which generate the majority of our revenues globally. In addition, securities' price declines adversely affect our non-North American trading commissions, which are based on the value of transactions. The demand for our trading solutions is directly affected by factors such as economic, regulatory and political conditions that may lead to decreased trading activity and prices in the securities markets in the U.S. and in all of the foreign markets we serve. Significant flows of funds out of actively-managed equity funds has curtailed their trading activity, which has weighed heavily on our buy-side trading volumes and the use of our higher value services. Volatility levels also impact the amount of trading activity. Sustained periods of low volatility brought on from the quantitative easing programs of central banks can result in lower levels of trading activity. In addition, trading activity in periods following extreme levels of volatility tends to decline.

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Decreases in our commission rates and other transactional revenues could adversely affect our operating results.

        Commission rates on institutional trading activity have declined historically and we anticipate a continuation of the competitive pricing environment for the foreseeable future. In addition, reduced activity from our active fund manager clients has resulted in a shift in the mix of our business to include an increased portion from higher-turnover lower-rate clients, particularly sell-side firms. A decline in commission rates or revenue capture from future mix shifts or from rate reductions within client segments could materially reduce our margins and harm our financial condition and operating results.

Our fixed costs may result in reduced profitability or losses.

        We incur significant operating and capital expenditures to support our business that do not vary directly, at least in the short term, with fluctuations in executed transaction volumes or revenues. In addition, changes in market practices have required us, and may require us in the future, to invest in additional infrastructure to increase capacity levels without a corresponding increase in revenues. To ensure that we have the capacity to process projected increases in trade orders and executed transaction volumes, we have historically made substantial infrastructure investments in advance of such projected increases, including during periods of low revenues. We have also made substantial investments in our research products to attract additional trade flows from our buy-side clients. In the event of reductions in trade executions and/or revenues, we may not be able to reduce such expenses quickly and, as a result, we could experience reduced profitability or losses. If the growth in our executed volumes does not occur or we are not able to successfully implement and monetize our investments, including by failing to accurately forecast the demand for new products, effectively deploy new products or decommission legacy products, the expenses related to such investments could cause reduced profitability or losses.

A failure in the design, operation or configuration of our technology could adversely affect our profitability and reputation.

        A technological failure or error of one or more of our products or systems, including but not limited to POSIT, our algorithms, smart routers, and order and execution management systems, could result in lost revenues and/or significant market losses. We operate complex trading systems, algorithms and analytical products that may fail to correctly model interacting or conflicting trading objectives, unusual market conditions, available trading venues and other factors, which may cause unintended results. Similarly, the operation and configuration of our systems can be quite complex and departure from standard procedures can result in adverse trading outcomes. Such problems could cause us to incur trading losses, lose clients or experience other reputational harm resulting in lost revenues and profits. Our quality assurance testing cannot test for all potential scenarios or ensure that the technology will function as designed and intended in all cases.

Failure to keep up with rapid changes in technology while continuing to seek to provide leading products and services to our customers could negatively impact our results of operations.

        The institutional brokerage industry is subject to rapid technological change and evolving industry standards. Our customers' demands become greater and more sophisticated as the dissemination of products and information to customers increases. If we are unable to anticipate and respond to the demand for new services, products and technologies, innovate in a timely and cost-effective manner and adapt to technological advancements and changing standards, we may be unable to compete effectively, which could have a material adverse effect on our business. Many of our competitors have significantly greater resources than we do to fund such technological advances. Moreover, the development of technology-based services is a complex and time-consuming process. New products and enhancements

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to existing products can require long development and testing periods. Budgetary constraints on funding new product initiatives related to our core business or strategic initiatives in the current environment, significant delays in new product releases, failure to meet key deadlines, or significant problems in creating new products could negatively impact our revenues and profits.

Insufficient system capacity, system operating failures, or disasters could materially harm our reputation, financial position and profitability.

        The success of our business is dependent on the computer and communications systems supporting our operations, which must monitor, process and support a large volume of transactions across numerous execution venues in many countries and multiple currencies. As our business continues to expand, we will need to continue to expand our systems to accommodate an increasing volume of transactions across a larger client base and more geographical locations. In addition, certain changes in market practices may require us to invest in infrastructure to increase capacity levels. Unexpectedly high volumes or times of unusual market volatility could cause our systems to operate slowly, decrease output or even fail for periods of time, as could general power or telecommunications failures, hardware failures, software errors, human error, computer viruses, acts of vandalism, natural disasters, terrorist activities, cybersecurity breaches or other business disruptions. System failure or degradation could adversely affect our ability to effectuate transactions and lead our customers to file formal complaints with industry regulatory organizations, initiate regulatory inquiries or proceedings, file lawsuits against us, trade less frequently through us or cease doing business with us. In turn, we could incur financial loss, liability to clients, regulatory intervention or reputational damage.

        Our corporate headquarters and largest concentration of employees and technology is in the New York metropolitan area. Our other offices are also located in major cities around the globe. If a business system disruption were to occur, especially in New York, for any reason, including widespread health emergencies, natural disasters or terrorist activities, and we were unable to execute our disaster recovery plan, or our disaster recovery plan proves insufficient, it could have a material effect on our business. Moreover, we have varying levels of disaster recovery plan coverage among our non-U.S. subsidiaries.

        Any system capacity or operational failure or business system disruption could result in regulatory or legal claims. We could incur significant costs in defending such regulatory or legal claims, even those without merit. Moreover, such failures could result in the need to remediate issues and repair or expand our networks and systems. Any obligation to expend significant resources to defend claims or repair and expand infrastructure could have an adverse effect on our financial condition and results of operations.

Our systems and those of our third-party service providers may be vulnerable to cybersecurity risks.

        Our business relies on the secure collection, storage, processing and transmission of proprietary information, including our clients' confidential data, in our internal systems and through our vendor networks and communications infrastructure. Increased cybersecurity threats pose a risk to this information, in addition to our and our third party service providers' systems and networks. While we have not been the victim of cyber-attacks that have had a material impact on our operations or financial condition, we have experienced cyber security incidents such as denial of service attempts, malware infections, phishing attempts, and other attempts at compromising our information technology that are typical for a company of our size that operates in the global financial marketplace. Despite our efforts to implement industry-standard security measures, we face the risk that our security measures may prove insufficient as attacks have resulted in material breaches against other financial services companies with significant security controls. Successful security breaches of our systems or the systems of certain of our vendors could expose us to a risk of misappropriation of our or our clients' confidential information, the corruption or deletion of data, and the disruption of our services to our

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clients. These outcomes could result in reputational damage, loss of clients, lower trading volumes, a negative impact on our competitive position, significant expense in implementing future security measures, litigation, and regulatory inquiries or proceedings, all of which could adversely impact our financial results.

We are dependent on certain third party vendors for key services.

        We depend on a number of third parties to supply elements of our trading systems, computers, market and research data, data centers, FIX connectivity, communication network infrastructure, other equipment and related support and maintenance. We cannot be certain that any of these providers will be willing or able to continue to provide these services in an efficient and cost-effective manner or to meet our evolving needs. Moreover, we are dependent on our communications network providers for interconnectivity with our clients, markets and clearing agents to service our customers and operate effectively. If our vendors fail to meet their obligations, provide poor, inaccurate or untimely service, or we are unable to make alternative arrangements for the supply of these services, we may fail, in turn, to provide our services or to meet our obligations to our customers, and our business, financial condition and our operating results could be materially harmed.

Our securities business and related clearing operations expose us to material liquidity risk.

        We self-clear equity transactions in the U.S., Hong Kong and Australia. In those markets, we may be required to provide considerable additional funds with clearing and settlement organizations, such as the National Securities Clearing Corporation or Depository Trust and Clearing Corporation in the U.S., especially during periods of high market volatility. In addition, regulatory agencies have recently required these clearing and settlement organizations to increase the level of margin deposit requirements and they may continue to do so in the future. We rely on our excess cash, certain established credit facilities and the use of outsourced clearing arrangements to meet those demands. While we have historically met requests for additional margin deposits, there is no guarantee that our excess cash and our established credit facilities and clearing arrangements will be sufficient for future needs, particularly if there is an increase in requirements. There is also no guarantee that these established credit facilities will be extended beyond their expiration.

        In addition, each of our broker-dealer subsidiaries worldwide is subject to regulatory capital requirements promulgated by the applicable regulatory and exchange authorities of the countries in which they operate. Growth in our non-North American trading activity has led, and could continue to lead to, higher regulatory capital requirements. The failure by any of these subsidiaries to maintain its required regulatory capital may lead to suspension or revocation of its broker-dealer registration and its suspension or expulsion by its regulatory body. Historically, all regulatory capital needs of our broker-dealers have been provided by existing cash and cash from operations. However, if existing cash together with cash from operations are not sufficient, we may need to reject orders from clients and we may ultimately breach regulatory capital requirements.

As a clearing member firm in certain jurisdictions we are subject to significant default risk.

        We are required to finance our clients' unsettled positions from time to time and we could be held responsible for the defaults of our clients. Default by our clients may also give rise to our incurring penalties imposed by execution venues, regulatory authorities and settlement systems. Although we regularly review our credit exposure, default risk may arise from events or circumstances that may be difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions that could in turn adversely affect us.

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Our equity trading operations in jurisdictions other than the U.S., Hong Kong and Australia are dependent on their clearing agents and any failures by such clearing agents could materially impact our business and operating results.

        Certain of our international operations are dependent on agents for the clearing and settlement of securities transactions. If our agents fail to properly facilitate the clearing and settlement of our customer trades, we could be subject to financial, legal and regulatory risks and costs that may impact our business and operating results. In addition, it could cause our clients to reduce or cease their trading with us, which would adversely affect our revenues and financial results.

        Moreover, certain of our agreements with clearing agents may be terminated upon short notice. There is no guarantee that we could obtain alternative services in a timely manner and any interruption of the normal course of our trading and clearing operations could have a material impact on our business and results of operations.

Our business exposes us to credit risk that could affect our operating results and profitability.

        We are exposed to credit risk from third parties that owe us money, securities or other obligations, including our customers and trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons, and we could be held responsible for such defaults. In addition, client trading errors which they are unable to cover may cause us to incur financial losses. Volatile securities markets, credit markets and regulatory changes may increase our exposure to our customers' credit profiles, which could adversely affect our financial condition and operating results. While our broker-dealer subsidiaries that are not self-clearing have clearing agreements with their clearing agents who review the credit risk of trading counterparties, we have no assurances that those reviews or our own are adequate to provide sufficient protection from this risk.

We may incur material losses on foreign exchange transactions entered into on behalf of clients and be exposed to material liquidity risk due to counterparty defaults or errors.

        We enable clients to settle cross-border equity transactions in their local currency through the use of foreign exchange contracts. These arrangements typically involve the delivery of securities or cash to a counterparty that is not processed through a central clearing facility in exchange for a simultaneous receipt of cash or securities. We may operate as either a principal or agent in these transactions. As a result, a default by one of our counterparties prior to the settlement of their obligation could materially impact our liquidity and have a material adverse affect on our financial condition and results of operations.

        In addition, we are exposed to operational risk. Employee and technological errors in executing, recording or reporting foreign exchange transactions may result in material losses due to the large size of such transactions and the underlying market risk in correcting such errors.

We incur limited principal trading risk in our Canadian Operations.

        A limited portion of our revenues is derived from principal trading in our Canadian Operations, including arbitrage trading and the net spread on foreign exchange contracts executed to facilitate equity trades by clients in different currencies. As a result of this trading, we may incur losses relating to the purchase or sale of securities and currencies for our own account. Although we attempt to close out all of our positions by the end of the day, we bear the risk of market fluctuations and we may incur losses due to changes in the prices of such securities and currencies. Any principal gains or losses resulting from these positions could have a disproportionate effect, positive or negative, on our revenues and profits, and could also result in reputational damage.

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        Our Canadian Operations also derive a limited portion of its revenues from the principal trading of spot and short-dated forward foreign exchange contracts with clients, unrelated to equity trades. Although we seek to execute offsetting foreign exchange contracts concurrently with any client trades, earning a net spread, there can be no assurances that the trades are in fact concurrent (and therefore we bear the risk of market fluctuations). In addition, foreign exchange contracts are not centrally cleared and therefore we bear counterparty and settlement risk on such trades.

Our Canadian market making activities expose us to the risk of significant losses.

        ITG Canada is registered as a market maker in a limited number of ETFs and inter-listed stocks. In our role as a market maker, we are required to maintain active bids and offers that may be executed against, resulting in inventory positions that subject us to market risk. There can be no assurance that we will be able to manage such risk successfully or that we will not experience significant losses from such activities.

Our risk management policies and procedures may not be effective and may leave us exposed to unidentified or unexpected risks.

        We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, technological, compliance and legal reporting systems, internal controls, management review processes and other mechanisms that rely on a combination of technical and human controls and supervision. These policies, procedures and practices used to identify, monitor and control a variety of risks may fail to be effective. As a result, we face the risk of losses, including, for example, losses resulting from trading errors, customer defaults, fraud and money laundering.

        Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As such, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have a material adverse effect on our stock price.

The business in which we operate is extremely competitive worldwide.

        Many of our competitors have substantially greater financial, technical, marketing and other resources than we do, which, among other things, enable them to compete with the services we provide on the basis of price, including lowering prices for certain of our key services to gain business in their higher margin areas, and a willingness to commit their firms' capital to service their clients' trading needs on a principal, rather than on an agency basis. In addition, many of our competitors bundle multiple services as part of their equity trading offering. To the extent we seek to unbundle any of our products or services, we may lose clients which would also result in a loss of revenues and profits. Many of them offer a wider range of services, have broader name recognition, and have larger customer bases than we do. Some of our competitors have long-standing, well-established relationships with their clients, and also hold dominant positions in their trading markets. Moreover, new entrants may enter the market with alternative methods of providing trade execution and related services, and existing competitors often launch new initiatives. Many of our competitors have undertaken measures to link various electronic trading systems and platforms in an effort to attract order flow to off-exchange venues and increase internal executions.

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        Although we believe that our products and services have established certain competitive advantages, our ability to maintain these advantages will require continued enhancements to our products, investment in the development of our services, additional marketing activities and enhanced customer support services. There can be no assurance that we will have sufficient resources to continue to make this investment, that our competitors will not devote significantly more resources to competing services or that we will otherwise be successful in maintaining our market position. If competitors offer superior services, our market share would be affected and this would adversely impact our business and results of operations.

We face certain challenges and risks to our international business that may adversely affect our strategy.

        Global client coverage is a key component of our business plan. We have invested significant resources in our foreign operations and the globalization of our products and services. However, there are certain risks inherent in the operation of our business outside of the U.S., including, but not limited to, additional regulatory capital requirements, less developed technology and infrastructure, and higher costs for infrastructure. These risks may limit our ability to provide services to clients in certain markets. There also may be difficult processes for obtaining regulatory approvals. This could result in delays in our global business plans, difficulties in staffing foreign operations and adapting our products to foreign markets, practices and languages, exchange rate risks and the need to meet foreign regulatory requirements. Each of these could force us to alter our operational plans and this may adversely impact our strategy.

We incur risks related to our international business due to currency exchange rate fluctuations that could impact our financial results and financial position.

        A significant amount of our business is conducted in foreign currencies. Conducting business in currencies other than the U.S. Dollar subjects us to exchange rate fluctuations. These fluctuations can materially impact our financial results.

We are dependent on certain major customers and a decline in their use of our services could materially impact our revenues.

        Our customers may discontinue their use of our trading services at any time. The loss of any significant customer could have a material adverse effect on our results of operations.

        The chart below sets forth our dependence on our three largest clients individually, as well as on our ten largest clients in the aggregate, expressed as a percentage of total revenues:

 
  % of Total Consolidated Revenue  
 
  2014   2013   2012  

Largest customer

    2.7 %   2.4 %   2.4 %

Second largest customer

    2.0 %   2.1 %   2.1 %

Third largest customer

    1.7 %   1.8 %   1.9 %

Ten largest customers

    16.9 %   16.8 %   14.9 %

The securities markets and the brokerage industry in which we operate globally are subject to extensive, evolving regulation that could materially impact our business.

        We currently operate POSIT in the U.S. under Regulation ATS, our European operations are subject to MiFID and we must comply with the requirements of the U.S. PATRIOT Act and its foreign equivalents for monitoring our customers and suspicious transactions. Moreover, most aspects of our broker-dealer operations are highly regulated, such as sales and reporting practices, operational compliance, capital requirements and licensure of employees. Accordingly, we face the risk of

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significant intervention by regulatory authorities in all jurisdictions in which we conduct business, such as the SEC and FINRA in the U.S. and their equivalents in other countries. As we expand our business, we may be exposed to increased and different types of regulatory requirements.

        We are subject to, and in the future, we may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which may adversely affect our business. Also, regulatory changes that impact how our customers conduct their business may impact our business and results of operations. The current U.S. administration and other members of the U.S. federal government and other governments outside of the United States have implemented new regulatory requirements for the financial services industry and have indicated that there may be more to come. These newly-implemented rules could cause us to expend more significant compliance, business and technology resources, incur additional operational costs and create additional regulatory exposure. In addition, we cannot predict the extent to which any future regulatory changes would affect our business.

        On June 24, 2014, the SEC issued an order mandating the U.S. exchanges to implement the National Market System Plan to Implement a Tick Size Pilot Program (the "Pilot"). The plan for the Pilot was released by 11 national exchanges and FINRA on August 25, 2014 and it was published in the Federal Register on November 7, 2014. The comment period for the Pilot ended on December 22, 2014 and the plan is pending approval by the SEC. The Pilot will last for one year and it will change the minimum 'tick sizes' (quoting and trading increments) for 1,200 Regulation NMS common stocks with smaller market capitalizations. The proposal would also include a 'trade-at' prohibition for 400 of the Regulation NMS stocks covered by the Pilot that would prevent price matching by a trading center, such as a dark pool, that is not displaying a protected bid or protected offer, subject to certain exceptions. The proposed Pilot is intended to allow the SEC, SROs, and the public to evaluate and assess the impact of increment conventions on the liquidity and trading of stocks of smaller capitalization companies. If the Pilot (specifically the trade-at prohibition) is expanded to more securities, the program could impact our U.S. trading volumes and operational costs. Moreover, the SEC adopted the Consolidated Audit Trail rule ("CAT") in July 2012, which requires SROs to establish an order trail reporting system that would enable regulators to track, within 24 hours of the trade date, information related to trading orders received and executed across the securities markets. On September 30, 2014, the exchanges submitted a Regulation NMS plan for implementation of the CAT to the SEC for approval. The implementation schedule is based on the SEC approval date. Within one year of SEC approval, each exchange will start reporting CAT data to the established central repository. Non-small industry members and small industry members will start reporting CAT data within two and three years of approval, respectively.

        On November 19, 2014, the SEC unanimously adopted Regulation Systems Compliance and Integrity ("Regulation SCI"). The regulation became effective on February 3, 2015 and the compliance date is currently scheduled for November 3, 2015. The rule requires SCI entities (i.e., exchanges, SROs, clearing and settlement agencies, and certain ATSs—including POSIT) to establish extensive policies, procedures, and/or controls to ensure the capacity, stability, integrity, and resiliency of their trading and regulatory reporting systems. Regulation SCI, among other things, also requires the reporting of certain systems issues, testing of business continuity and disaster recovery plans with mandatory participation by customers and members, the establishment of geographically diverse backup capabilities, the completion of an objective annual review of systems, and the maintenance and preservation of certain books and records concerning matters covered by the rule.

        In addition, new regulatory obligations have been proposed, adopted or implemented pertaining to markets outside of the United States, which may also have a material impact upon our business model.

    In Europe, these include MiFID II which is currently in the rulemaking process with implementation planned for January of 2017. In particular, under MiFID II, multilateral trading

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      facilities ("MTF")—the European equivalent to an SEC-registered ATS—that trade in dark cash equity orders would be required to cross such orders at the midpoint, open, or closing prices of the primary venue (where displayed orders in those securities are traded) and adhere to volume limits on dark trading. These limits would be set at 4% of all the displayed and dark regulated venue trading volume for any individual dark venue and 8% of such volume for all dark trading venues in the aggregate. The calculations would be performed at an individual stock level over a 12-month rolling period. In the event that the relevant limit is breached, the crossing of that particular stock in the individual dark trading venue or in all such venues (as applicable depending on whether the 4% or 8% threshold is breached) would cease for the following 6 months. MiFID II provides an exception from these requirements for large sized orders, which may be crossed at any price point and without regard to the above-mentioned volume limits.

      In addition, a financial transaction tax (the "European FTT") is being considered which would include at least ten of the twenty-eight members of the European Union. In addition to the impact that such tax would have on the affected securities and signatory countries, certain alternative versions of the proposals could include an extra-territorial scope that may impact the trading activities of entities which are, and trade entirely outside, the European FTT zone. Ministers from the relevant member states have reiterated that they intend to implement the European FTT by January 1, 2016.

    Hong Kong is awaiting new regulations related to dark liquidity pools. These regulations are likely to limit access to dark pools to institutional clients only, require increased monitoring of dark pools, mandatory disclosure of dark pool operations, and increased client documentation for those accessing dark pools via a Hong Kong broker.

        Compliance with certain of these adopted laws, rules or regulations of the various jurisdictions in which we operate could result in the loss of revenue and has caused us, and could cause us, to incur significant costs. In addition, if any new regulatory obligations are implemented, ITG could incur significant costs to establish the appropriate processes, systems, and/or controls. Last, if we fail to comply adequately with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel, or other sanctions, including revocation of our exchange or self-regulatory organization memberships or our broker-dealer registrations.

Increased regulatory scrutiny may lead to increased costs for compliance and the potential for monetary penalties, negatively impacting our profitability.

        In the recent past, there has been increased regulatory scrutiny of our industry by regulators and other governmental authorities, including in the areas of trading risk management controls, undisclosed trading practices and dark pool operations, resulting in an increase in regulatory investigations and reviews. Such enhanced scrutiny could cause ITG to incur significant costs in light of the legal and compliance resources needed to respond to such investigations and reviews, in addition to the potential for monetary penalties arising from such investigations and reviews.

If we are unable to obtain sources of data to create our differentiated research product, we could see a reduction in revenues and profitability.

        Our investment research product leverages data derived from, among other sources, industry data providers and web harvesting technology. If there is a limitation on the availability of data from these sources or if new regulations or laws restrict their use in investment research products, the quality of our research product could be negatively impacted along with the amount of revenue and profitability we derive from this offering.

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We could be subject to challenges by U.S. and foreign tax authorities that could result in additional taxes and penalties.

        We are subject to income and other taxes in each jurisdiction in which we operate. We are also subject to reviews and audits by U.S. and foreign tax authorities. Our determination of our tax obligations in each jurisdiction requires us and our advisers to make judgment calls and estimations. Our determination may differ, even materially, from the judgment of the tax authorities and therefore cause us to incur additional taxes and related interest and penalties, which could impact our financial results.

Inability to protect our intellectual property may result in increased competition, loss of business or other negative results on our business and financial condition.

        Our success is dependent, in part, upon our proprietary intellectual property. We generally rely upon patents, copyrights, trademarks and trade secrets to establish and protect our rights in our proprietary technology, methods, products and services. We cannot assure that any of the rights granted under any patent, copyright or trademark that we may obtain will protect our competitive advantages. A third party may still try to challenge, invalidate or circumvent the protective mechanisms that we select. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., so we cannot predict our ability to properly protect our intellectual property in those jurisdictions. Third parties operating in jurisdictions in which we have not filed for protection may obtain rights in intellectual property that we have protected in the U.S. and other jurisdictions or may be able to misappropriate our intellectual property with impunity.

        There can be no assurance that we will be able to protect our proprietary intellectual property from improper disclosure or use, or that others will not develop technologies that are similar or superior to our technology without violating our intellectual property. Violations of our intellectual property by third parties could have an adverse effect on our competitiveness and business. In addition, the cost of seeking to enforce our intellectual property rights could have an adverse effect on our financial results.

If we were to unknowingly infringe third party intellectual property or be accused of doing so without merit, we would bear significant costs of defense and litigation, which could impact our financial results.

        In the past several years, there has been a proliferation of patents applicable to the technology and financial services industries. Under current law, U.S. patent applications remain secret for 18 months and may, depending on how they are prosecuted, remain secret until the issuance of a patent. In light of these factors, it is not always possible to determine in advance whether any of our products or services may infringe the present or future patent rights of others. From time to time, we may receive notices from others of claims or potential claims of intellectual property infringement or we may be called upon to defend our products, customers, vendees or licensees against such third party claims. Responding to these kinds of claims, regardless of merit, could consume valuable time and result in costly litigation that could have a material adverse effect on us. Such claims could also result in our entering into royalty or licensing agreements with the third parties claiming infringement on terms that could have a material impact on our profitability.

Financial and operational problems with our acquisitions and strategic initiatives could have a material impact on our results of operation.

        Over the last several years, we have undertaken several strategic acquisitions, including the acquisitions of RFQ-hub, a multi-asset platform for global-listed and OTC financial instruments, Majestic Research Corp. and Ross Smith Energy Group, Ltd. (together now ITG Investment Research), as well as various organic strategic initiatives. We may elect to pursue strategic acquisitions and

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strategic initiatives in the future. Acquisitions entail numerous risks, including but not limited to difficulties in valuing the acquired businesses, combining personnel and firm cultures, integrating acquired products, services and operations, achieving anticipated synergies that were inherent in our valuation assumptions, the assumption of unknown material liabilities of acquired companies and the potential loss of key clients or employees of acquired companies. Similarly, strategic initiatives may be important to our business prospects and we may not be able to successfully execute such initiatives. In either case, we may have clients with whom we have established trading relationships that seek to negatively bundle our products or services without increasing the amount of revenue they pay us resulting in lost revenues and profits. If we are unable to successfully complete acquisitions and integrate the acquired businesses, suffer a material loss due to an acquired business or fail to execute strategic initiatives, we may not achieve appropriate levels of return on these significant investments, which may have a material effect on our operating results.

Our business could be adversely affected by our inability to attract and retain talented employees, including sales, technology and development professionals.

        Our business operations require highly specialized knowledge of the financial industry and of technological innovation as it applies to the financial industry. If we are unable to hire or retain the services of talented management, sales, research, technology and development professionals, we would be at a competitive disadvantage. In addition, recruitment and retention of qualified staff could result in substantial additional costs.

Misconduct and errors of our employees could cause us reputational and financial harm.

        Employee errors in recording or executing transactions for customers can cause us to enter into transactions that customers may disavow and refuse to settle. These transactions expose us to risk of loss, which can be material, until we detect the errors in question and unwind or reverse the transactions. As with any unsettled transaction, adverse movements in the prices of the securities involved in these transactions before we unwind or reverse them can increase this risk. We may incur losses as a result of these transactions that could materially impact our financial results.

        In addition to trading errors, other employee errors or misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to prevent employee errors or misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of customers or improper use of confidential information. Such misconduct could result in losses, litigation or other material adverse effects on the Company.

Our business exposes us to the risk of litigation.

        Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. These risks include, among other things, liability arising from disputes relating to the delay or failure of trade executions, trade settlement terms or the inadequacy or inaccuracy of research products. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could have a material adverse effect on our business, financial condition and results of operations.

The market price of our common stock could be volatile.

        The market price of our common stock may be volatile and could be significantly affected by any number of factors like volatility in the broader stock market, changes in analyst earnings estimates, quarterly variations in our results of operations, shifting investor perceptions, a large purchase or sale by a significant stockholder, the announcement of new products or the occurrence of events described in the other risk factors in this Annual Report on Form 10-K.

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Item 1B.    Unresolved Staff Comments

        None

Item 2.    Properties

U.S.

        Our principal offices are located at One Liberty Plaza, in New York, New York, where we occupy approximately 132,000 square feet of office space pursuant to a lease agreement expiring in January 2029.

        We maintain a facility in Los Angeles, California where we occupy approximately 54,000 square feet of office space pursuant to a lease agreement expiring in December 2016. This facility is used primarily for technology research and development and support services.

        We have a regional office in Boston, Massachusetts where we occupy approximately 54,000 square feet of office space pursuant to a lease expiring in May 2021.

        We also have additional regional offices in Chicago, Illinois where we occupy approximately 10,300 square feet pursuant to a lease agreement expiring in October 2016, and in San Francisco, California where we occupy approximately 3,900 square feet pursuant to a lease agreement expiring in June 2018.

Canada

        ITG Canada has an office in Toronto where we occupy approximately 19,900 square feet of office space pursuant to a lease expiring in December 2016. We also have an office in Calgary where we occupy approximately 7,600 square feet pursuant to a lease expiring in February 2016.

Europe

        In Europe, ITG has offices in Dublin, London and Paris where we occupy approximately 6,200, 12,200 and 3,100 square feet of office space, respectively. The Dublin space is leased pursuant to an agreement that expires in November 2017, the London space is leased pursuant to an agreement that expires in July 2018, and the space in Paris is leased pursuant to an agreement that expires in January 2022.

Asia Pacific

        ITG Australia has offices in Melbourne and Sydney, where we occupy approximately 5,600 and 3,400 square feet of office space, respectively, pursuant to leases expiring in February 2016 and June 2017.

        ITG Hong Kong occupies approximately 7,500 square feet of office space in Hong Kong pursuant to a lease that expires in September 2015. We also lease space for our regional office in Singapore.

Item 3.    Legal Proceedings

        We are not a party to any pending legal proceedings other than claims and lawsuits arising in the ordinary course of business. In addition, our broker-dealers are regularly involved in reviews, inquiries, examinations, investigations and proceedings by government agencies and self-regulatory organizations regarding our business, which may result in judgments, settlements, fines, penalties, injunctions or other relief. Although there can be no assurances, at this time, the Company believes, based on information currently available, that the outcome of any such proceeding, review, inquiry, examination and investigation will not have a material adverse effect on our consolidated financial position or results of operations.

Item 4.    Mine Safety Disclosures

        Not applicable

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Data

        Our common stock trades on the NYSE under the symbol "ITG".

        The following table sets forth, for the periods indicated, the range of the intra-day high and low sales prices of our common stock as reported on the NYSE.

 
  High   Low  

2013:

             

First Quarter

    12.81     9.12  

Second Quarter

    14.64     9.82  

Third Quarter

    17.89     14.07  

Fourth Quarter

    20.87     14.66  

2014:

   
 
   
 
 

First Quarter

    20.79     16.07  

Second Quarter

    20.80     15.83  

Third Quarter

    19.36     15.55  

Fourth Quarter

    21.27     14.65  

        On February 23, 2015, the closing price per share for our common stock as reported on the NYSE was $22.04. On February 23, 2015, we believe that our common stock was held by approximately 5,416 stockholders of record or through nominees in street name accounts with brokers.

        In May 2013, our Board of Directors authorized the repurchase of 4.0 million shares. In October 2014, our Board of Directors authorized the repurchase of an additional 4.0 million shares. Neither of these authorizations has an expiration date. As of December 31, 2014, there were 4.8 million shares remaining available for repurchase under ITG's stock repurchase program. The specific timing and amount of repurchases will vary based on market conditions and other factors.

        During 2014, the Company repurchased approximately 3.0 million shares of our common stock at a cost of approximately $54.4 million, which was funded from our available cash resources. Of these shares, approximately 2.7 million were purchased under our Board of Directors' authorization for a total cost of $48.2 million (average cost of $18.03 per share). An additional 0.4 million shares ($6.2 million) pertained solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards.

        The following table sets forth our stock repurchase activity during 2014, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of a publicly announced plan or program, and the number of shares yet to be purchased under the plan or program.

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ISSUER PURCHASES OF EQUITY SECURITIES

Period
  Total Number of
Shares (or Units)
Purchased
(a)
  Average
Price Paid per
Share (or Unit)
  Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
  Maximum Number
of Shares (or Units)
that May Yet
Be Purchased
Under the Plans or
Programs
 

From: January 1, 2014

                         

To: January 31, 2014

      $         3,447,440  

From: February 1, 2014

   
 
   
 
   
 
   
 
 

To: February 28, 2014

    869,072     16.80     560,000     2,887,440  

From: March 1, 2014

   
 
   
 
   
 
   
 
 

To: March 31, 2014

    186,214     18.00     183,800     2,703,640  

From: April 1, 2014

   
 
   
 
   
 
   
 
 

To: April 30, 2014

    1,810     19.55         2,703,640  

From: May 1, 2014

   
 
   
 
   
 
   
 
 

To: May 31, 2014

    458,952     18.82     458,600     2,245,040  

From: June 1, 2014

   
 
   
 
   
 
   
 
 

To: June 30, 2014

    314,020     18.25     312,237     1,932,803  

From: July 1, 2014

   
 
   
 
   
 
   
 
 

To: July 31, 2014

    2,051     17.55         1,912,803  

From: August 1, 2014

   
 
   
 
   
 
   
 
 

To: August 31, 2014

    303,355     17.76     300,000     1,632,803  

From: September 1, 2014

   
 
   
 
   
 
   
 
 

To: September 30, 2014

    223,711     17.06     220,000     1,412,803  

From: October 1, 2014

   
 
   
 
   
 
   
 
 

To: October 31, 2014

    263,277     17.39     225,400     5,187,403  

From: November 1, 2014

   
 
   
 
   
 
   
 
 

To: November 30, 2014

    202,975     19.56     199,500     4,987,903  

From: December 1, 2014

   
 
   
 
   
 
   
 
 

To: December 31, 2014

    213,567     19.88     212,100     4,775,803  

Total

    3,039,004   $ 17.90     2,671,637        

(a)
This column includes the acquisition of 367,367 shares of common stock from employees in order to satisfy minimum statutory withholding tax requirements upon settlement of equity awards.

        We have not paid a cash dividend to stockholders during any period of time covered by this report. Our current policy, which is reviewed continually, is to retain earnings to finance the operations and expansion of our businesses and to return capital to stockholders through repurchases. As a result, we are not currently paying cash dividends on common stock.

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Performance Graph

        The following line graph compares the total cumulative stockholder return on our common stock against the cumulative total return of the Russell 2000 Index and the mean of the NASDAQ Other Finance Index and the AMEX Securities Broker/Dealer Index, for the five-year period ended December 31, 2014.

GRAPHIC

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Item 6.    Selected Financial Data

        The selected Consolidated Statements of Operations data and the Consolidated Statements of Financial Condition data presented below for each of the years in the five-year period ended December 31, 2014, are derived from our consolidated financial statements. Such selected financial data should be read in connection with the consolidated financial statements contained in this report.

 
  Year Ended December 31,  
 
  2014   2013   2012   2011   2010  
Consolidated Statements of Operations Data:
($ in thousands, except per share amounts)
   
   
   
   
   
 

Total revenues

  $ 559,814   $ 530,801   $ 504,436   $ 572,037   $ 570,754  

Total expenses

    494,827     487,746     774,891     778,665     521,421  

Income (loss) before income tax expense (benefit)

    64,987     43,055     (270,455 )   (206,628 )   49,333  

Income tax expense (benefit)

    14,095     11,970     (22,596 )   (26,839 )   25,353  

Net income (loss)

  $ 50,892   $ 31,085   $ (247,859 ) $ (179,789 ) $ 23,980  

Basic earnings (loss) per share

  $ 1.44   $ 0.84   $ (6.45 ) $ (4.42 ) $ 0.56  

Diluted earnings (loss) per share

  $ 1.40   $ 0.82   $ (6.45 ) $ (4.42 ) $ 0.55  

Basic weighted average number of common shares outstanding (in millions)

    35.3     36.8     38.4     40.7     42.8  

Diluted weighted average number of common shares outstanding (in millions)

    36.4     38.1     38.4     40.7     43.5  
Consolidated Statements of Financial Condition Data:
($ in thousands)
   
   
   
   
   
 

 


 

 


 

 


 

 


 

 


 

 


 

Total assets

  $ 1,350,849   $ 1,539,472   $ 1,492,976   $ 1,604,332   $ 1,784,083  

Cash and cash equivalents

  $ 275,210   $ 261,897   $ 245,875   $ 284,188   $ 317,010  

Short-term bank loans

  $ 78,360   $ 73,539   $ 22,154   $ 1,606   $  

Term debt

  $ 17,781   $ 30,332   $ 19,272   $ 23,997   $  

Total stockholders' equity

  $ 415,596   $ 417,432   $ 409,770   $ 671,114   $ 870,068  

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with our consolidated financial statements, including the notes thereto.

Overview

        ITG is an independent execution and research broker that partners with global portfolio managers and traders to provide innovative financial technology and unique data-driven insights throughout the investment process. From investment decision through to settlement, ITG helps clients understand market trends, improve performance, mitigate risk and navigate increasingly complex markets. A leader in electronic trading since launching the POSIT crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools and proprietary research. The firm is headquartered in New York with offices in North America, Europe, and the Asia Pacific region.

        Our business is organized into four reportable operating segments (see Note 22, Segment Reporting, to the consolidated financial statements):

    U.S. Operations

    Canadian Operations

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    European Operations

    Asia Pacific Operations

Our four operating segments provide the following types of products and services:

    Electronic Brokerage—includes self-directed trading by clients using algorithms, smart routing and matching through POSIT in cash equities (including single stocks and portfolio lists), futures and options

    Research, Sales and Trading—includes (a) differentiated, unbiased, data-driven equity research through the use of innovative data mining and analysis, as well as detailed analysis of energy asset plays, and (b) portfolio trading and high-touch trading desks providing execution expertise and trading ideas based on investment research

    Platforms—includes trade order and execution management software applications in addition to network connectivity

    Analytics—includes (a) tools enabling portfolio managers and traders to improve pre-trade and real-time execution performance, (b) portfolio construction and optimization decisions and (c) securities valuation

    Sources of Revenues

        Revenues from our products and services are generated from commissions and fees, recurring (subscriptions) and other sources.

        Commissions and fees are derived primarily from (i) commissions charged for trade execution services, (ii) income generated on net executions, whereby equity orders are filled at different prices within or at the National Best Bid and Offer ("NBBO") and (iii) commission sharing arrangements between ITG Net (our private value-added FIX-based financial electronic communications network) and third-party brokers and alternative trading systems whose trading products are made available to our clients on our order management system ("OMS") and execution management system ("EMS") applications in addition to commission sharing arrangements for our ITG Single Ticket Clearing Service and our RFQ-hub request-for-quote service. Because commissions are earned on a per-transaction basis, such revenues fluctuate from period to period depending on (a) the volume of securities traded through our services in the U.S. and Canada, (b) the contract value of securities traded in Europe and the Asia Pacific region and (c) our commission rates. Certain factors that affect our volumes and contract values traded include: (i) macro trends in the global equities markets that affect overall institutional equity trading activity, (ii) competitive pressure, including pricing, created by a proliferation of electronic execution competitors and (iii) potential changes in market structure in the U.S. and other regions. In addition to share volume, revenues from net executions are also impacted by the width of spreads within the NBBO. Trade orders are delivered to us from our OMS and EMS products and other vendors' products, direct computer-to-computer links to customers through ITG Net and third-party networks and phone orders from our customers.

        Recurring revenues are derived from the following primary sources: (i) connectivity fees generated through ITG Net for the ability of the sell-side to receive orders from, and send indications of interest to, the buy-side and for the sell-side to receive requests-for-quotes through RFQ-hub, (ii) subscription revenue generated from providing research, (iii) software and analytical products and services and (iv) maintenance and customer technical support for our OMS.

        Other revenues include: (i) income from principal trading in Canada, including arbitrage trading, (ii) the net spread on foreign exchange transactions executed on a principal basis to facilitate equity trades by clients in different currencies as well as on other foreign exchange transactions unrelated to equity trades, (iii) the net interest spread earned on securities borrowed and loaned matched book

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transactions, (iv) transaction advisory services provided to potential purchasers of energy-related investments, (v) non-recurring consulting services, such as one-time implementation and customer training related activities, (vi) investment and interest income, (vii) interest income on securities borrowed in connection with customers' settlement activities and (viii) market gains/losses resulting from temporary positions in securities assumed in the normal course of our agency trading business (including errors and accommodations).

    Expenses

        Compensation and employee benefits, our largest expense, consist of salaries and wages, incentive compensation, employee benefits and taxes. Incentive compensation fluctuates based on revenues, profitability and other measures, taking into account the landscape for key talent. Incentive compensation includes a combination of cash and deferred share-based awards. Only the cash portion, which represents a lesser portion of our total compensation costs, is expensed in the current period. As a result, our ratio of compensation expense to revenues may fluctuate from period-to-period based on revenue levels.

        Transaction processing expense consists of costs to access various third-party execution destinations and to process, clear and settle transactions. These costs tend to fluctuate with share and trade volumes, the mix of trade execution services used by clients and the rates charged by third parties.

        Occupancy and equipment expense consists primarily of rent and utilities related to leased premises, office equipment and depreciation and amortization of fixed assets and leasehold improvements.

        Telecommunications and data processing expenses primarily consist of costs for obtaining market data, telecommunications services and systems maintenance.

        Other general and administrative expenses primarily include software amortization, consulting, business development, professional fees and intangible amortization.

        Interest expense consists primarily of costs associated with outstanding debt and credit facilities.

Non-GAAP Financial Measures

        To supplement our financial information presented in accordance with U.S. GAAP, management uses certain "non-GAAP financial measures" as such term is defined in SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flows that excludes or includes amounts that are included in, or excluded from, the most directly comparable measure calculated and presented in accordance with U.S. GAAP. For example, non-GAAP measures may exclude the impact of certain unique and/or non-operating items such as acquisitions, divestitures, restructuring charges, large write-offs or items outside of management's control. Management believes that the following non-GAAP financial measures described below provide investors and analysts useful insight into our financial position and operating performance.

        Adjusted expenses and adjusted net income (loss) together with related per share amounts are non-GAAP performance measures that we believe are useful to assist investors in gaining an understanding of the trends and operating results for our core business. These measures should be viewed in addition to, and not in lieu of, results reported under U.S. GAAP.

        Reconciliations of adjusted expenses and adjusted net income to expenses and net income (loss) and related per share amounts as determined in accordance with U.S. GAAP for the years ended

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December 31, 2013 and 2012 are provided below. There were no such adjustments during the year ended December 31, 2014.

 
   
   
  Non-U.S.  
 
  ITG Consolidated    
 
Year Ended December 31, 2013:
  U.S.   Canada   Europe   Asia Pacific  

Total expenses

  $ 487,746   $ 302,349   $ 63,553   $ 73,686   $ 48,158  

Less:

                               

Restructuring charges(1)

    75     1,264     348     (1,537 )    

Duplicate rent expense(2)

    (2,568 )   (2,568 )            

Office move(3)

    (3,910 )   (3,910 )            

Adjusted expenses

  $ 481,343   $ 297,135   $ 63,901   $ 72,149   $ 48,158  

Income tax expense

  $ 11,970                          

Net effect of adjustments(1)

    405                          

Adjusted income tax expense

  $ 12,375                          

Net income

  $ 31,085                          

Net effect of adjustments

    5,998                          

Adjusted net income

  $ 37,083                          

Diluted earnings per share

  $ 0.82                          

Net effect of adjustments

    0.15                          

Adjusted diluted earnings per share

  $ 0.97                          

 

 
   
   
  Non-U.S.  
 
  ITG Consolidated    
 
Year Ended December 31, 2012:
  U.S.   Canada   Europe   Asia Pacific  

Total expenses

  $ 774,891   $ 569,480   $ 66,516   $ 91,616   $ 47,279  

Less:

                               

Goodwill and other asset impairment charge(4)

    274,285     245,103         28,481     701  

Restructuring charges(1)

    9,499     6,798     1,145     615     941  

Duplicate rent expense(2)

    1,378     1,378              

Adjusted expenses

  $ 489,729   $ 316,201   $ 65,371   $ 62,520   $ 45,637  

Net loss

  $ (247,859 )                        

Net effect of adjustments

    256,034                          

Adjusted net income

  $ 8,175                          

Diluted loss per share

  $ (6.45 )                        

Net effect of adjustments

    6.66                          

Adjusted diluted earnings per share

  $ 0.21                          

(1)
In the second quarter of 2013, we incurred a $1.6 million charge to implement a restructuring plan to close our technology research and development facility in Israel and migrate that function to an outsourced-service-provider model effective January 1, 2014. This plan primarily focused on reducing costs by limiting our geographic footprint while maintaining the necessary technological expertise via a consulting arrangement. This restructuring plan triggered the recognition of a tax charge of $1.6 million in the second quarter of 2013 associated with the anticipated withdrawal of capital from Israel. We also reduced previously-recorded 2012 and 2011 restructuring accruals of $1.6 million to reflect the sub-lease of previously-vacated office space and certain legal and other

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    employee-related charges deemed unnecessary. During the fourth quarter of 2012, we incurred a $9.5 million charge to implement a restructuring plan to reduce operating costs by reducing workforce, market data and other general and administrative costs across our businesses. The charge consisted entirely of employee separation costs.

(2)
During the fourth quarter of 2012, we began to build out and ready our new lower Manhattan headquarters while continuing to occupy our then-existing headquarters in midtown Manhattan and as a result incurred duplicate rent charges through June 2013.

(3)
In the second quarter of 2013, we moved into our new headquarters and incurred a non-operating charge, which included a reserve for the remaining lease obligation for the previous midtown Manhattan headquarters.

(4)
In the second quarter of 2012, goodwill with a carrying value of $274.3 million in the U.S. Operations and European Operations reporting segments was deemed impaired and its fair value was determined to be zero, resulting in a full impairment charge.

Executive Summary for the Year Ended December 31, 2014

Consolidated Overview

        Our 2014 results reflect the benefits of the targeted investments we have made in our international capabilities and the enhanced operating efficiency we have established through a focus on the profitability of our products and services. In 2014, we had significant growth in revenues and profitability in Europe, ended the year with two consecutive quarters of profitability in Asia Pacific and posted record revenues in Canada during the fourth quarter. Our revenues grew 5% over 2013 to $559.8 million while our costs of $494.8 million were up only 1% compared to expenses and 3% compared to adjusted expenses in 2013 (see Non-GAAP Financial Measures). Our net income for 2014 was $50.9 million, or $1.40 per diluted share compared to net income of $31.1 million, or $0.82 per diluted share and adjusted net income of $37.1 million, or $0.97 per diluted share in 2013 (see Non-GAAP Financial Measures). Our annualized return on average equity for the year was 12.2%, compared to a return of 7.6% for 2013.

        Business conditions in the U.S. remained weak for most of 2014. The average daily combined volume of NYSE- and NASDAQ-listed securities for 2014 was up only 3.7% from the multi-year low in 2013. The weakness was also apparent in domestic equity fund flow activity. Following an improved start to the year, domestic equity funds continued to see outflows, totaling nearly $60 billion during 2014. On the positive side, during the fourth quarter we saw a surge in volatility as central bank policies from around the world began to diverge, creating movements in currencies and commodities that triggered volatility in equity prices and increased volumes.

        While the recent period of higher volatility and increased trading volumes has continued into the early part of 2015, it is unclear whether such activity will be sustainable over the long term. As a result, our strategy is to continue to expand our business across different asset classes and client constituencies and to grow our international businesses. Our July acquisition of RFQ-hub, a Paris-based request-for-quote technology platform for global listed and over-the-counter financial instruments is closely aligned with these strategic goals. We continue to focus on the profitability of our products and services as we strive to improve our operating model and create flexibility for expansion.

Segment Discussions

        In the U.S., the overall combined average daily market volume of NYSE-and NASDAQ-listed securities for 2014 was 3.7% above the low levels of 2013, benefitting from a rebound in the fourth quarter. Our average daily trading volumes in the U.S. remained under pressure, falling 3.3% compared to 2013.

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        Our overall revenue earned per share remained at $0.0047, despite a higher proportion of volume from our lower-rate sell-side clients. The proportion of this lower-rate business increased to 52% versus 50% for 2013, adversely impacting our revenue per share. While we saw lower revenue per share from sell-side clients, we continued to see improvement in the revenue per share from buy-side clients. The higher revenue per share from buy-side clients was driven by higher rates for clients' use of our POSIT Alert block crossing system and our high-touch and portfolio trading services. These higher rates were attributable in part to clients paying for research through trading at a bundled rate. During the year, our energy research capabilities also provided additional sources of revenue in the form of transaction advisory services provided to potential purchasers of energy-related investments.

        For the year, average daily trading volumes on all Canadian markets increased 9% from 2013 while commissions and fees from our Canadian Operations were 4% higher in U.S. dollar terms and 12% higher in local currency terms. Overall market trading was particularly strong in the fourth quarter when volumes increased 33% over the fourth quarter of 2013. Our strong performance for the year was driven in part by significantly higher volumes in MATCH Now, which were up more than 80% from 2013.

        Our European commission and fees grew by 43% compared to 2013, far outpacing the 16% growth in market-wide trading activity in the region due in large part to higher trading in POSIT. Our success in Europe reflects the investments we have made in our infrastructure and in our global product capabilities, including POSIT Alert. Our strong revenue growth together with our continued efforts to manage costs led to an 88% increase in pre-tax income in comparison to 2013. We continued to make targeted strategic investments during the second half of the year through the acquisition of RFQ-hub and the expansion of our Paris- and London-based sales teams. While these initiatives have not had a material impact on our results thus far, we expect them to contribute to profitability in 2015 and beyond.

        In the Asia-Pacific region, we achieved two consecutive quarters of profitability in the second half of 2014 despite incurring $0.5 million in employee termination charges late in the year to lower our local cost base going forward. Though overall market-wide trading activity in the markets in which we participate decreased 8%, our commissions and fees in the region grew by 3%, benefitting from the growth in commissions from buy-side clients using our POSIT Alert block crossing system and from higher commission sharing revenues derived from Triton. POSIT Alert continues to be a key source of growth in Asia Pacific with value traded having increased for six straight quarters.

Capital Resource Allocation

        During 2014, we repurchased 2.7 million shares for $48.2 million, or $18.03 per share. We intend to continue to use share repurchases to offset dilution from the issuance of stock under employee compensation plans and to opportunistically return capital to stockholders depending on market conditions. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1.

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Results of Operations Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

U.S. Operations

 
  Year Ended
December 31,
   
   
 
$ in thousands
  2014   2013   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 220,567   $ 231,140   $ (10,573 )   (5 )

Recurring

    73,807     76,720     (2,913 )   (4 )

Other

    12,559     10,176     2,383     23  

Total revenues

    306,933     318,036     (11,103 )   (3 )

Expenses:

                         

Compensation and employee benefits

    135,498     125,672     9,826     8  

Transaction processing

    39,178     41,995     (2,817 )   (7 )

Other expenses

    114,156     133,231     (19,075 )   (14 )

Restructuring charges

        (1,264 )   1,264      

Interest expense

    2,322     2,715     (393 )   (14 )

Total expenses

    291,154     302,349     (11,195 )   (4 )

Income before income tax expense

  $ 15,779   $ 15,687   $ 92     1  

        Commissions and fees decreased due to a 3% reduction in our average daily trading volumes. Although our average revenue per share remained unchanged year over year at $0.0047, the proportion of average daily volumes executed by lower-priced sell-side clients increased to 52% of our volumes compared to 50% in 2013, adversely impacting our revenue per share. While we also saw lower revenue per share from sell-side clients, we continued to see improvement in the revenue per share from buy-side clients. The higher revenue per share from buy-side clients was driven by higher rates for clients' use of our POSIT Alert block crossing system and our high-touch and portfolio trading services. These higher rates were attributed in part to clients paying for research through trading at a higher, bundled rate.

 
  Year Ended
December 31,
   
   
 
U.S. Operations: Key Indicators*
  2014   2013   Change   % Change  

Total trading volume (in billions of shares)

    40.9     42.4     (1.5 )   (4 )

Average trading volume per day (in millions of shares)

    162.5     168.1     (5.6 )   (3 )

Average revenue per share

  $ 0.0047   $ 0.0047   $      

U.S. market trading days

    252     252          

*
Excludes activity from ITG Net commission share arrangements.

        Recurring revenues decreased due to the impact of client attrition from our OMS product, resulting in lower OMS subscription revenues and connectivity fees, partially offset by higher research subscriptions.

        Other revenues increased primarily due to an increase in transaction advisory services revenues generated by our energy research team. This increase more than offset a reduction in revenues generated by our stock loan matched book business, which included a gain of $2.5 million in 2013 related to adjustments to historical dividend withholdings.

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        Total expenses in 2014 decreased $11.2 million compared to 2013. In 2013, we incurred $2.6 million of duplicate rent charges associated with the build out of our new headquarters in lower Manhattan while we still occupied our then-existing headquarters in midtown Manhattan and $3.9 million related to our office move, including a reserve for the remaining lease obligation. This was partially offset by a $1.3 million reversal of previously-recorded 2012 and 2011 restructuring liabilities as a portion of the space vacated in our Los Angeles office was sub-let and certain legal and other employee-related accruals were deemed unnecessary. Total expenses declined $6.0 million compared to 2013 excluding these charges (see Non-GAAP Financial Measures).

        Compensation and employee benefits increased as a result of headcount increases and from higher incentive-based compensation to our management team associated with increased global profitability. Deferred stock-based compensation expense associated with awards granted for the 2014 and 2013 fiscal years to U.S. employees is expected to increase by approximately $2 million in 2015.

        Transaction processing costs declined more than the decrease in commissions and fees due to lower options volumes, which incur higher costs proportionally than our cash equity trading and lower execution costs from client use of our algorithm technology. As a percentage of commissions and fees, transaction processing costs declined to 17.8% from 18.2% during 2013.

        Other expenses decreased $19.1 million, of which $6.5 million represented the impact of the duplicate rent charges and office move expenses incurred during the prior-year period as described above. In addition, we (a) incurred lower data center, data and connectivity expenses from our cost reduction initiatives, (b) had lower depreciation, software amortization and consulting fees, (c) reduced our bad debt reserves. There was also a higher credit for research and development costs charged to other segments. These reductions were partially offset by an increase in employee recruiting and legal fees.

        In the second quarter of 2013, previously-recorded restructuring accruals from 2012 and 2011 were adjusted to reflect our then-current expectations.

        Interest expense primarily relates to interest costs on our term debt and commitment fees relating to our $150 million revolving credit facility, including debt issuance cost amortization.

Canadian Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2014   2013   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 59,992   $ 57,507   $ 2,485     4  

Recurring

    9,575     9,294     281     3  

Other

    8,526     8,193     333     4  

Total revenues

    78,093     74,994     3,099     4  

Expenses:

                         

Compensation and employee benefits

    23,901     25,929     (2,028 )   (8 )

Transaction processing

    9,710     10,691     (981 )   (9 )

Other expenses

    27,753     27,281     472     2  

Restructuring charges

        (348 )   348     100  

Total expenses

    61,364     63,553     (2,189 )   (3 )

Income before income tax expense

  $ 16,729   $ 11,441   $ 5,288     46  

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        Currency translation from a weaker Canadian Dollar decreased total Canadian revenues and expenses by $5.2 million and $3.8 million, respectively, resulting in a decrease of $1.4 million to pre-tax income.

        Canadian commissions and fees increased $2.5 million despite an unfavorable currency translation of $4.0 million, principally due to the growth in MATCH Now volumes of more than 80%.

        Recurring revenues increased due to a higher number of billable network connections through ITG Net and our billing for market data consumed by clients.

        Other revenues increased slightly due to an increase in income earned on foreign exchange transactions and principal arbitrage trading, partially offset by losses on client accommodations and the impact of currency translation.

        Compensation and employee benefits costs decreased 8% primarily due to a decrease in share-based compensation, which fluctuates for legacy awards to Canadian employees based on the changes in the market price of our stock and the impact of currency translation, partially offset by an increase in incentive-based compensation related to increased profitability.

        Transaction processing costs decreased due to lower rates for clearing and settlement from contract renegotiation with our clearing provider, lower execution costs as a higher percentage of our volume was executed in MATCH Now and the impact of currency translation. As a percentage of commission and fees, transaction processing costs declined to 16.2% from 18.6% in 2013.

        The increase in other expenses was primarily driven by higher charges for historical market data and legal-related expenses, partially offset by lower connectivity expenses as well as the impact of currency translation.

        In the second quarter of 2013, previously-recorded restructuring accruals from 2012 and 2011 were adjusted to reflect our then-current expectations.

European Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2014   2013   Change   % Change  

Revenues

                         

Commissions and fees

  $ 113,989   $ 79,639   $ 34,350     43  

Recurring

    13,924     12,508     1,416     11  

Other

    (350 )   (355 )   5     (1 )

Total revenues

    127,563     91,792     35,771     39  

Expenses:

                         

Compensation and employee benefits

    35,977     30,216     5,761     19  

Transaction processing

    26,796     19,567     7,229     37  

Other expenses

    30,786     22,366     8,420     38  

Restructuring charges

        1,537     (1,537 )   (100 )

Total expenses

    93,559     73,686     19,873     27  

Income before income tax expense

  $ 34,004   $ 18,106   $ 15,898     88  

        Currency translation from a stronger average British Pound increased European revenues and expenses by $6.8 million and $5.2 million, respectively, adding $1.6 million to pre-tax income.

        European results include substantially all the RFQ-hub operations since the July 30, 2014 acquisition date, adding $2.0 million in revenues, mostly recurring, and $2.5 million in expenses.

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        Our European commissions and fees grew 43% in 2014 as compared to 2013, far outpacing the 16% growth in market-wide value traded. We are continuing to benefit from the investments we have made in our infrastructure and our product suite resulting in increased activity from buy-side and sell-side clients using our electronic brokerage offerings, including our trading algorithms and POSIT, and from clients using our POSIT Alert block crossing system. We also saw increased commissions from the use of our high-touch trading services. Commissions and fees also benefitted from $5.9 million in favorable currency translation.

        Recurring revenues increased primarily from the new connectivity revenue from RFQ-hub.

        Compensation and employee benefits increased due to higher incentive-based compensation related to improved performance, increase in headcount, including employees from the RFQ-hub acquisition, and the impact of the unfavorable currency translation of $1.7 million. This increase was offset, in part, by $3.1 million in lower compensation associated with the outsourcing of our research and development facility in Israel to a third-party service provider. Deferred stock-based compensation expense associated with awards granted for the 2014 and 2013 fiscal years to European employees is expected to increase by approximately $2 million in 2015.

        Transaction processing costs increased due to the significant increase in value traded. However, transaction processing costs declined as a percentage of commissions and fees to 23.5% from 24.6% in 2013 due to the impact of a higher percentage of our value traded crossed in POSIT, including our POSIT Alert block crossing system, and our initiatives to reduce settlement and clearing costs.

        Other expenses increased due to higher charges for (a) global research and development costs, (b) historical market data, (c) consulting costs, net of capitalization, attributable to the outsourcing of our research and development facility in Israel to a third-party service provider, (d) marketing costs and due to the additional costs added by RFQ-hub.

Asia Pacific Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2014   2013   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 41,624   $ 40,333   $ 1,291     3  

Recurring

    6,488     5,650     838     15  

Other

    (887 )   (4 )   (883 )   NA  

Total revenues

    47,225     45,979     1,246     3  

Expenses:

                         

Compensation and employee benefits

    20,382     19,437     945     5  

Transaction processing

    10,716     11,539     (823 )   (7 )

Other expenses

    17,652     17,182     470     3  

Total expenses

    48,750     48,158     592     1  

Loss before income tax benefit

  $ (1,525 ) $ (2,179 ) $ 654     (30 )

        Currency translation from a weaker Australian Dollar decreased total Asia Pacific revenues and expenses both by $1.3 million, resulting in no impact on our pre-tax loss.

        Asia Pacific commissions and fees increased despite a reduction in market-wide trading activity and unfavorable currency translation due to the growth in commissions from clients using our POSIT Alert block crossing system and algorithmic trading capabilities as well as from higher commission-sharing revenues.

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        The growth in recurring revenues primarily reflects growth in the number of billable network connections through ITG Net and the decrease in other revenues is due to higher client trade accommodations, which totaled $1.2 million in 2014, compared to $0.3 million in 2013.

        Compensation and employee benefits increased due to increases in headcount and employee termination charges, partially offset by higher capitalized compensation for software development and favorable currency translation.

        Transaction processing costs decreased due to a reduction in value traded and our efforts to reduce execution and settlement costs. As a percentage of commissions and fees, transaction processing costs declined to 25.7% from 28.6% in 2013.

        The increase in other expenses reflects higher charges for historical market data and global research and development, as well as increases in hardware and software maintenance and connectivity, partially offset by reductions in market data costs and lower foreign exchange transaction losses.

Consolidated income tax expense

        Our effective tax rate was 21.7% for 2014 compared to 27.8% for 2013. The low rate in both periods is the result of a significantly higher proportion of our pre-tax income arising from our European Operations, which is taxed at a lower rate. Additionally, in the U.S. we recorded a $2.7 million tax benefit in 2014 for the net impact of settling multi-year tax return positions and establishing additional reserves for other tax positions. In 2013, our effective tax rate was favorably impacted by the resolution of a tax contingency in Europe and the recognition of the full-year 2012 research and experimentation credit in the U.S. during the first quarter of 2013 due to the timing of tax legislation. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

U.S. Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2013   2012   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 231,140   $ 231,197   $ (57 )    

Recurring

    76,720     82,766     (6,046 )   (7 )

Other

    10,176     7,416     2,760     37  

Total revenues

    318,036     321,379     (3,343 )   (1 )

Expenses:

                         

Compensation and employee benefits

    125,672     128,458     (2,786 )   (2 )

Transaction processing

    41,995     45,225     (3,230 )   (7 )

Other expenses

    133,231     141,354     (8,123 )   (6 )

Goodwill and other asset impairment

        245,103     (245,103 )   (100 )

Restructuring charges

    (1,264 )   6,798     (8,062 )   (119 )

Interest expense

    2,715     2,542     173     7  

Total expenses

    302,349     569,480     (267,131 )   (47 )

Income (loss) before income tax expense (benefit)

  $ 15,687   $ (248,101 ) $ 263,788     106  

        Commissions and fees remained flat as a 7% reduction in our average daily trading volumes was offset by a 7% increase in our average revenue per share to $0.0047. The increase in our average revenue per share was primarily attributable to increased use of our POSIT Alert block crossing system

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as well as more clients paying for research through trading at a higher bundled rate. The proportion of our average daily volume from sell-side clients remained relatively constant at 50% for both 2013 and 2012.

 
  Year Ended
December 31,
   
   
 
U.S. Operations: Key Indicators*
  2013   2012   Change   % Change  

Total trading volume (in billions of shares)

    42.4     45.4     (3.0 )   (7 )

Average trading volume per day (in millions of shares)

    168.1     181.6     (13.5 )   (7 )

Average revenue per share

  $ 0.0047   $ 0.0044   $ 0.0003     7  

U.S. market trading days

    252     250     2     1  

*
Excludes activity from ITG Derivatives and ITG Net commission-sharing arrangements.

        Recurring revenues decreased 7% reflecting the impact of client attrition from our OMS product, which resulted in lower OMS subscription revenues and connectivity fees, as well as lower research subscription revenues.

        Other revenues increased 37% due primarily to an increase in revenues generated by our stock loan matched book business, which included a gain of $2.5 million related to adjustments to historical dividend withholdings.

        Total expenses for 2013 of $302.3 million include duplicate rent charges of $2.6 million associated with the build out of our new headquarters in lower Manhattan while we still occupied our then-current headquarters in midtown Manhattan, $3.9 million related to our office move and a $1.3 million reversal of previously-recorded 2012 and 2011 restructuring liabilities. Total expenses for 2012 of $569.5 million include a goodwill impairment charge of $245.1 million, restructuring charges of $6.8 million and duplicate rent charges of $1.4 million. Excluding these items, adjusted expenses decreased 6% in 2013 to $297.1 million compared to $316.2 million in 2012 (see Non-GAAP Financial Measures).

        Compensation and employee benefits decreased from a reduction in headcount largely attributable to our restructuring in 2012, partially offset by higher incentive-based compensation costs associated with improved profitability in 2013.

        Transaction processing costs decreased due to the lower level of trading volumes. As a percentage of commissions and fees, transaction processing costs declined due primarily to the increased revenue per share described above.

        Other expenses decreased $8.1 million despite an increase of $1.2 million in duplicate rent charges associated with the build-out of our new headquarters in lower Manhattan and the $3.9 million charge we incurred upon completion of the move, which includes a reserve for the remaining lease obligations at our previous headquarters. This decrease was attributable to lower market data and connectivity costs resulting from our cost reduction initiatives, lower marketing costs due to our 2012 rebranding efforts, lower software amortization and a reduction of bad debt reserves from improved collection efforts. These reductions were partially offset by a reduced credit for research and development costs charged to other regional segments.

        In 2012, we recorded goodwill impairment charges of $245.1 million, reflecting the weakness in institutional trading volumes which resulted in lower estimated future cash flows of the U.S. Operations reporting segment, and a decline in industry market multiples (see Critical Accounting Estimates).

        In the second quarter of 2013, previously-recorded 2012 and 2011 restructuring accruals were reduced to reflect the sub-lease of previously-vacated office space in Los Angeles and certain legal and other employee-related charges deemed unnecessary.

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        Interest expense incurred in 2013 and 2012 primarily relates to interest cost on our term debt and commitment fees relating to the three-year, $150 million revolving credit agreement we entered into in January 2011, including debt issuance cost amortization.

Canadian Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2013   2012   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 57,507   $ 61,776   $ (4,269 )   (7 )

Recurring

    9,294     9,117     177     2  

Other

    8,193     6,020     2,173     36  

Total revenues

    74,994     76,913     (1,919 )   (2 )

Expenses:

                         

Compensation and employee benefits

    25,929     22,795     3,134     14  

Transaction processing

    10,691     11,584     (893 )   (8 )

Other expenses

    27,281     30,992     (3,711 )   (12 )

Restructuring charges

    (348 )   1,145     (1,493 )   (130 )

Total expenses

    63,553     66,516     (2,963 )   (4 )

Income before income tax expense

  $ 11,441   $ 10,397   $ 1,044     10  

        Currency translation decreased total Canadian revenues and expenses by $2.1 million and $1.8 million, respectively, resulting in a $0.3 million reduction to pre-tax income.

        Canadian commissions and fees declined 7%, primarily due to lower revenue from high-touch desk trading services and from unfavorable currency translation, offset in part by an increase in activity from clients using our electronic brokerage services.

        Recurring revenues increased slightly due to an increase in the number of billable connections through ITG Net and from our billing for market data consumed by clients, offset by lower research subscription revenues.

        Other revenues increased as a result of additional income earned on foreign exchange transactions and on principal trading, as well as from lower trading errors and client trade accommodations.

        Compensation and employee benefits costs increased primarily due to an increase in share-based compensation, partially offset by a decrease from reduced headcount. The increase in share-based compensation related to the impact of an increase in the price of our stock on legacy awards settled in cash.

        Transaction processing costs decreased due to the impact of lower execution costs on lower volumes and the elimination of an accrual for sales tax on exchange fees due to the resolution of a contingency, offset in part by higher clearing and settlement charges due to an increase in the number of trade tickets settled.

        The decrease in other expenses was primarily driven by lower data-center-related costs following our migration to a new location, lower consulting and market data costs from our cost reduction efforts and lower research and development costs.

        In the second quarter of 2013, previously-recorded restructuring accruals were adjusted to reflect our current expectations. Restructuring charges in 2012 include costs related to employee separation.

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European Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2013   2012   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 79,639   $ 54,390   $ 25,249     46  

Recurring

    12,508     12,971     (463 )   (4 )

Other

    (355 )   (95 )   (260 )   (274 )

Total revenues

    91,792     67,266     24,526     36  

Expenses:

                         

Compensation and employee benefits

    30,216     26,085     4,131     16  

Transaction processing

    19,567     15,156     4,411     29  

Other expenses

    22,366     21,279     1,087     5  

Goodwill and other asset impairment

        28,481     (28,481 )   (100 )

Restructuring charges

    1,537     615     922     150  

Total expenses

    73,686     91,616     (17,930 )   (20 )

Income (loss) before income tax expense (benefit)

  $ 18,106   $ (24,350 ) $ 42,456     174  

        Currency translation decreased total European revenues and expenses by $1.3 million and $0.5 million, respectively, resulting in a $0.8 million reduction to pre-tax income.

        European commissions and fees increased 46%, far outpacing the 9% growth in market-wide trading activity due primarily to the impact from the investments we made in our infrastructure and our products helping us expand our client base. This has led to increased activity from buy-side and sell-side clients using our electronic brokerage offerings, including our trading algorithms and POSIT, and from clients using our POSIT Alert block crossing system.

        Recurring and other revenue declined due to the cancellation of OMS subscriptions and an increase in trading errors and client trade accommodations, which totaled $0.5 million in 2013, compared to $0.4 million in 2012.

        Compensation and employee benefits expense increased due primarily to increased incentive-based compensation related to improved performance.

        Transaction processing costs increased 29% due to the significantly higher value traded in 2013, but fell as a percentage of commissions and fees due to the impact of a higher percentage of our value traded crossed in POSIT and our initiatives to reduce settlement and clearing costs.

        Other expenses increased 5% due primarily to increases in market data costs and facility costs relating to our new London office and London data center partially offset by lower research and development costs.

        In the second quarter of 2012, we recorded a goodwill impairment charge of $28.5 million reflecting the continued weakness in institutional trading activity experienced in 2012, which resulted in lower estimated future cash flows for the European Operations reporting segment (see Critical Accounting Estimates).

        In the second quarter of 2013, we implemented a restructuring plan to close our technology research and development facility in Israel and outsource that function to a third-party service provider effective January 1, 2014. Restructuring charges in 2012 include costs related to employee separation.

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Asia Pacific Operations

 
  Year Ended December 31,    
   
 
$ in thousands
  2013   2012   Change   % Change  

Revenues:

                         

Commissions and fees

  $ 40,333   $ 33,613   $ 6,720     20  

Recurring

    5,650     4,913     737     15  

Other

    (4 )   352     (356 )   (101 )

Total revenues

    45,979     38,878     (7,101 )   18  

Expenses:

                         

Compensation and employee benefits

    19,437     19,024     413     2  

Transaction processing

    11,539     9,208     2,331     25  

Other expenses

    17,182     17,405     (223 )   (1 )

Goodwill and other asset impairment

        701     (701 )   (100 )

Restructuring charges

        941     (941 )   (100 )

Total expenses

    48,158     47,279     879     2  

Loss before income tax expense

  $ (2,179 ) $ (8,401 ) $ 6,222     74  

        Currency translation decreased total Asia Pacific revenues and expenses by $1.4 million and $1.3 million, respectively, resulting in a $0.1 million increase to our pre-tax loss.

        Asia Pacific commissions and fees increased 20% over the prior year period primarily due to strong order flow by U.S. clients and local Asian clients trading into Japan, Korea and Hong Kong.

        The growth in recurring revenues primarily reflects growth in the number of billable network connections through ITG Net. The decrease in other revenues is due primarily to lower investment income and higher trading errors and client trade accommodations, which totaled $0.3 million in 2013, compared to $0.2 million in 2012.

        Compensation and employee benefits increased slightly due to an increase in incentive-based compensation related to improved performance.

        Transaction processing costs increased due to the higher value of securities traded and a higher proportion of our trades executed in Japan where costs are higher.

        The slight increase in other expenses reflects the additional connectivity and market data fees related to business growth and higher rental expenses for our Hong Kong office, partially offset by lower research and development costs.

        In the second quarter of 2012, we recorded a goodwill impairment charge of $0.7 million reflecting the continued weakness in institutional trading volumes (see Critical Accounting Estimates). Restructuring charges in 2012 primarily include costs related to employee separation.

Consolidated Income Tax Expense

        Our effective tax rate was 27.8% on our pre-tax income in 2013 compared to 8.4% on our pre-tax loss in 2012. In 2013, our low effective tax rate was favorably impacted by a higher proportion of earnings coming from our European Operations, where we incur lower tax rates, together with the resolution of a tax contingency in Europe and the recognition of the full year 2012 research and experimentation credit in the U.S. during the first quarter of 2013 due to the timing of tax legislation. These reductions to our effective tax rate were partially offset by increases associated with the lack of a deduction on the restructuring charge related to closing the Israel technology research and development facility and the tax charges associated with the anticipated withdrawal of capital from Israel. The low rate in 2012 was primarily attributable to the significant impairment charges in the U.S.,

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Europe and Asia Pacific, which were either partially or fully non-deductible. Furthermore, 2012 was favorably impacted by a net benefit recorded of $0.9 million following the resolution in the U.S. of a state tax contingency.

Liquidity and Capital Resources

Liquidity

        Our primary source of liquidity is cash provided by operations. Our liquidity requirements result from our working capital needs, which include clearing and settlement activities, as well as our regulatory capital needs. A substantial portion of our assets is liquid, consisting of cash and cash equivalents or assets readily convertible into cash. Cash is principally invested in U.S. government money market mutual funds and other money market mutual funds. At December 31, 2014, unrestricted cash and cash equivalents totaled $275.2 million. Included in this amount is $122.3 million of cash and cash equivalents held by subsidiaries outside the United States. Due to our current capital structure, we currently do not foresee a need to repatriate funds from certain foreign subsidiaries to the U.S. by way of dividends. Should we need to do so in the future, our effective tax rate may increase.

        As a self-clearing broker-dealer in the U.S., we are subject to cash deposit requirements with clearing organizations that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers' trading activity and market volatility. At December 31, 2014, we had interest-bearing security deposits totaling $36.4 million with clearing organizations in the U.S. for the settlement of equity trades. In the normal course of our U.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures. These financings may be funded from existing cash resources, borrowings under stock loan transactions or short-term bank loans under our committed facility. In January 2014, we entered into a new $150 million two-year revolving credit agreement with a syndicate of banks and JP Morgan Chase Bank, N.A. as administrative agent to finance these temporary positions and to satisfy temporary spikes in clearing margin requirements.

        We self-clear equity trades in Hong Kong and Australia and maintain restricted cash deposits of $25.8 million to support overdraft facilities. In Europe, we maintain $31.7 million in restricted cash deposits primarily supporting working capital facilities in the form of overdraft protection for our European clearing and settlement needs.

Capital Resources

        Capital resource requirements relate to capital purchases, as well as business investments, and are generally funded from operations. When required, as in the case of a major acquisition, our strong cash generating ability has historically allowed us to access U.S. capital markets.

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Operating Activities

        The table below summarizes the effect of the major components of operating cash flow.

 
  Year Ended December 31,  
(in thousands)
  2014   2013   2012  

Net income (loss)

  $ 50,892   $ 31,085   $ (247,859 )

Non-cash items included in net income (loss)

    62,478     78,220     321,199  

Effect of changes in receivables/payables from/to customers and brokers

    (34,627 )   (25,274 )   (32,563 )

Effect of changes in other working capital and operating assets and liabilities

    63,797     (38,839 )   (13,985 )

Net cash provided by operating activities

  $ 142,540   $ 45,192   $ 26,792  

        The cash flow provided by operating activities for 2014 was driven by an increase in net income, an increase in accounts payable and accrued expenses primarily from the build-up of accrued bonuses and a decrease in deposits held by clearing organizations. These increases to cash were offset by an increase in cash used for settlement activities. The decrease in deposits with clearing organizations was offset by a $35.0 million repayment in short-term bank loans in the U.S., while the increase in cash used in settlement activities was offset by an increase of $39.8 million in international short-term bank loans. The net change of $4.8 million in short-term bank loan financing is included in financing activities below.

        In the normal course of our clearing and settlement activities worldwide, cash is typically used to fund restricted or segregated cash accounts (under regulations and other), broker and customer fails to deliver/receive, securities borrowed, deposits with clearing organizations and net activity related to receivables/payables from/to customers and brokers. The cash requirements vary from day to day depending on volume transacted and customer trading patterns.

Investing Activities

        Net cash used in investing activities of $61.1 million includes our acquisition of RFQ-hub, investments in software development projects, computer hardware and software and a minority interest investment.

Financing Activities

        Net cash used in financing activities of $62.0 million primarily reflects repurchases of ITG common stock, shares withheld for net settlements of share-based awards and repayments of long-term debt, offset by net proceeds from short-term bank borrowings that are used to support our settlement activities.

        On January 31, 2014, ITG Inc. as borrower, and Investment Technology Group, Inc. as guarantor entered into a new $150 million two-year revolving credit agreement (the "Credit Agreement") with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement includes an accordion feature that allows for potential expansion of the facility up to $225 million. The terms and conditions of the Credit Agreement are substantially the same as the initial Credit Agreement that matured on January 31, 2014.

        During 2014, the Company repurchased approximately 3.0 million shares of our common stock at a cost of approximately $54.4 million, which was funded from our available cash resources. Of these shares, approximately 2.7 million were purchased under our Board of Directors' authorization for a total cost of $48.2 million (average cost of $18.03 per share). An additional 0.4 million shares ($6.2 million) pertained solely to the satisfaction of minimum statutory withholding tax upon the net

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settlement of equity awards. On October 15, 2014, the Board of Directors authorized the repurchase of an additional 4.0 million shares, bringing the total number of shares available for repurchase at that time to 5.4 million shares. This additional authorization has no expiration date. As of December 31, 2014, the total remaining number of shares currently available for repurchase under ITG's stock repurchase program was 4.8 million. The specific timing and amount of repurchases will vary based on market conditions and other factors. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1.

Regulatory Capital

        ITG Inc., AlterNet and ITG Derivatives are subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $1.0 million or 2% of aggregate debit balances arising from customer transactions, as defined. AlterNet and ITG Derivatives have elected to use the basic method permitted by Rule 15c3-1, which requires that they each maintain minimum net capital equal to the greater of 62/3% of aggregate indebtedness or $100,000 and $1.0 million, respectively. Dividends or withdrawals of capital cannot be made if capital is needed to comply with regulatory requirements.

        Net capital balances and the amounts in excess of required net capital at December 31, 2014 for the U.S. Operations are as follows (dollars in millions):

U.S. Operations
  Net Capital   Excess  

ITG Inc. 

  $ 99.8   $ 98.8  

AlterNet

    5.5     5.3  

ITG Derivatives

    2.4     1.4  

        As of December 31, 2014, ITG Inc. had $10.1 million of cash in a Special Reserve Bank Account for the benefit of customers under the Customer Protection Rule pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements and $1.0 million under agreements for proprietary accounts of broker-dealers.

        In addition, the Company's Canadian, European and Asia Pacific Operations have subsidiaries with regulatory capital requirements. The regulatory net capital balances and amount of regulatory capital in excess of the minimum requirements applicable to each business at December 31, 2014, is summarized in the following table (dollars in millions):

Canadian Operations
  Net Capital   Excess  

Canada

  $ 36.8   $ 36.4  

European Operations
         
 
 

Ireland

    63.2     39.0  

U.K. 

    3.9     3.0  

Asia Pacific Operations
         
 
 

Australia

    12.3     8.2  

Hong Kong

    26.8     14.1  

Singapore

    0.4     0.2  

Liquidity and Capital Resource Outlook

        Historically, our working capital, stock repurchase and investment activity requirements have been funded from cash from operations and short-term loans, with the exception of strategic acquisitions, which at times have required long-term financing. We believe that our cash flow from operations,

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existing cash balances and our available credit facilities will be sufficient to meet our ongoing operating cash and regulatory capital needs, while also complying with the terms of our Credit Agreement. However, our ability to borrow additional funds may be inhibited by financial lending institutions' ability or willingness to lend to us on commercially acceptable terms.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

        We are a member of various U.S. and non-U.S. exchanges and clearing houses that trade and clear, respectively, equities and/or derivative contracts. Associated with our membership, we may be required to pay a proportionate share of financial obligations of another member who may default on its obligations to the exchanges or the clearing house. While the rules governing different exchange or clearinghouse memberships vary, in general, our guarantee obligations would arise only if the exchange had previously exhausted its resources. The maximum potential payout under these memberships cannot be estimated. We have not recorded any contingent liability in the consolidated financial statements for these agreements and believe that any potential requirement to make payments under these agreements is remote.

Aggregate Contractual Obligations

        As of December 31, 2014, our contractual obligations and other commercial commitments amounted to $190.5 million in the aggregate and consisted of the following (dollars in millions):

 
  Payments due by period  
Contractual obligations
  Total   Less than
1 year
  1-3 years   3-5 years   More than
5 years
 

Purchase of goods and services

  $ 42,292   $ 32,957   $ 9,335   $   $  

Long-term debt

    2,653     2,653              

Capital lease obligations

    15,128     6,167     5,692     3,269      

Operating lease obligations

    125,056     17,214     24,779     17,618     65,445  

Minimum payments under certain employment arrangements(a)

    5,363     5,231     28     28     76  

Total

  $ 190,492   $ 64,222   $ 39,832   $ 20,915   $ 65,521  

(a)
Pursuant to employment arrangements, in the event of termination of employment without cause on December 31, 2014, we would be obligated to pay separation payments totaling $5.4 million.

        The above information excludes $14.4 million of gross unrecognized tax benefits discussed in Note 9, Income Taxes, to our consolidated financial statements because it is not possible to estimate the time period when, or if, it might be paid to tax authorities.

        As part of the $150 million, two-year credit agreement we entered into on January 31, 2014, we are required to pay a commitment fee of 0.50% on any unborrowed amounts.

New Accounting Pronouncements

        In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, ("ASU 2014-09"), Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Application of the new guidance involves five steps: (1) identifying contracts with customers; (2) identifying the separate performance obligations within the contracts; (3) determining the transaction price; (4) allocating the

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transaction price to the separate performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The standard will also require significant additional qualitative and quantitative disclosures describing the nature, amount, timing, and uncertainty of revenues. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. We are currently evaluating the new guidance and have not yet selected a transition method nor have we determined the impact of adoption on our financial statements.

Critical Accounting Estimates

        Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. In many instances, the application of such principles requires management to make estimates or to apply subjective principles to particular facts and circumstances. A change in the estimates or a variance in the application, or interpretation of accounting principles generally accepted in the U.S. could yield a materially different accounting result. Below is a summary of our critical accounting estimates where we believe that the estimations, judgments or interpretations that we made, if different, would have yielded the most significant differences in our consolidated financial statements. In addition, for a summary of all of our significant accounting policies see Note 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements.

Goodwill Impairment: Testing Methodology and Valuation Considerations

        We obtained goodwill and intangible assets as a result of the acquisitions of subsidiaries. Goodwill represents the excess of the cost over the fair market value of net assets acquired. We are required to periodically assess whether any of our goodwill is impaired. In order to do this, we apply judgment in determining our reporting units, which represent our business segments. Our annual goodwill impairment assessment involves assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of our qualitative analysis suggests that the carrying value of the reporting unit exceeds its fair value, additional steps are required to calculate a potential impairment loss using a two-step impairment test. The two-step impairment testing process is as follows:

    Step one—the fair value of each reporting unit is compared to its carrying value in order to identify potential impairment. If the fair value of a reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required. If the carrying value of the net assets exceeds the fair value of a reporting unit, potential impairment is indicated at the reporting unit level and step two of the impairment test is performed in order to determine the implied fair value of the reporting unit's goodwill and measure the potential impairment loss.

    Step two—when potential impairment is indicated in step one, we compare the implied fair value of goodwill with the carrying amount of that goodwill. Determining the implied fair value of goodwill requires a valuation of the reporting unit's tangible and (non-goodwill) intangible assets and liabilities in a manner similar to the allocation of the purchase price in a business combination. Any excess in the value of a reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

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Intangible Assets Subject to Amortization

        Intangible assets with definite useful lives are subject to amortization and are evaluated for recoverability when events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment. If such an event or change occurs, we estimate cash flows directly associated with the use of the intangible asset to test its recoverability and assess its remaining useful life. The projected cash flows require assumptions related to revenue growth, operating margins and other relevant market, economic and regulatory factors. If the expected undiscounted future cash flows from the use and eventual disposition of a finite-lived intangible asset or asset group are not sufficient to recover the carrying value of the asset, we then compare the carrying amount to its current fair value. We estimate the fair value using market prices for similar assets, if available, or by using a discounted cash flow model. We then recognize an impairment loss for the amount by which the carrying amount exceeds its fair value. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.

Share-Based Compensation

        In accordance with ASC 718, Compensation—Stock Compensation, share-based payment transactions require the application of a fair value methodology that involves various assumptions. The fair value of options awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions: expected life of the option, risk-free interest rate, expected volatility of our common stock price and expected dividend yield. We estimate the expected life of the options using historical data and the volatility of our common stock is estimated based on a combination of the historical volatility and the implied volatility from traded options. The fair value of restricted share awards with a market condition is estimated on the date of grant using a Monte Carlo simulation model. A Monte Carlo simulation is an iterative technique designed to estimate future payouts by taking into account our current stock price, the volatility of our common stock, risk-free rates, and a risk-neutral valuation methodology.

        Although both models meet the requirements of ASC 718, the fair values generated by the model may not be indicative of the actual fair values of the underlying awards, as it does not consider other factors important to those share-based compensation awards, such as continued employment, periodic vesting requirements and limited transferability.

Fair Value

        Securities owned, at fair value, and securities sold, not yet purchased, at fair value in the Consolidated Statements of Financial Condition are carried at fair value or amounts that approximate fair value, with the related unrealized gains or losses recognized in our results of operations. The fair value of these instruments is the amount at which these instruments could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Where available, we use the prices from independent sources such as listed market prices or broker/dealer quotations. For investments in illiquid and privately held securities that do not have readily determinable fair values, we use estimated fair values as determined by management.

Income Taxes and Uncertain Tax Positions

        ASC 740, Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. A valuation allowance may be recorded against deferred tax assets if it is more likely than not that those

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assets will not be realized. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or results of operations.

        We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit for each such position that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We consider many factors when evaluating and estimating our tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc. and are inherently complex. Our estimates may require periodic adjustments and may not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several years after completion of any fiscal year. The impact of our reassessment of uncertain tax positions in accordance with ASC 740 did not have a material impact on the results of operations, financial condition or liquidity.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Market risk refers to the potential for adverse changes in the value of a company's financial instruments as a result of changes in market conditions. We are exposed to market risk associated with changes in interest rates, foreign currency exchange rates and equity prices. We do not hold financial instruments for trading purposes on a long-term basis. We continually evaluate our exposure to market risk and oversee the establishment of policies, procedures and controls to ensure that market risks are identified and analyzed on an ongoing basis.

        We have performed sensitivity analyses on different tests of market risk as described in the following sections to estimate the impacts of a hypothetical change in market conditions on the U.S. Dollar value of non-U.S. Dollar-based revenues associated with our Canadian, European and Asia Pacific Operations. Estimated potential losses assume the occurrence of certain adverse market conditions. Such estimates do not consider the potential effect of favorable changes in market factors and also do not represent management's expectations of projected losses in fair value. We do not foresee any significant changes in the strategies we use to manage interest rate risk, foreign currency risk or equity price risk in the near future.

Interest Rate Risk

        Our exposure to interest rate risk relates primarily to interest-sensitive financial instruments in our investment portfolio and our revolving credit facility as well as our variable rate term debt. Given that our $150 million credit facility is specifically earmarked for limited short-term borrowings to support U.S. brokerage clearing operations, the impact of any adverse change in interest rates on this facility should not be material. Similarly, because only a small portion of our term debt is subject to a variable rate, the impact of any adverse change in interest rates should not be material. Interest-sensitive financial instruments in our investment portfolio will decline in value if interest rates increase. Our interest-bearing investment portfolio primarily consists of short-term, high-credit-quality money market mutual funds. The aggregate fair market value of our portfolio including restricted cash was $321.8 million and $320.0 million as of December 31, 2014 and 2013, respectively. Our interest-bearing investments are not insured and, because of the short-term high quality nature of the investments, are not likely to fluctuate significantly in market value.

Foreign Currency Risk

        We currently operate and continue to expand globally, principally through our operations in Canada, Europe and Asia Pacific as well as through the development of specially tailored versions of

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our services to meet the needs of our clients who trade in international markets. Our investments and development activities in these countries expose us to currency exchange rate fluctuations primarily between the U.S. Dollar and the British Pound Sterling, Euro, Australian Dollar, Canadian Dollar and Hong Kong Dollar. When the U.S. Dollar strengthens against these currencies, the U.S. Dollar value of non-U.S. Dollar-based revenue decreases. To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. We have not engaged in derivative financial instruments as a means of hedging this financial statement risk. Non-U.S. Dollar cash balances held overseas are generally kept at levels necessary to meet current operating and capitalization needs. At times, we may hedge small amounts of the Non-U.S. Dollar cash balances to mitigate exposure.

        Approximately 45% and 40% of our revenues for the years ended December 31, 2014 and 2013, respectively, were denominated in non-U.S. Dollar currencies. For the years ended December 31, 2014 and 2013, respectively, we estimate that a hypothetical 10% adverse change in the above mentioned foreign exchange rates would have resulted in a decrease in net income of $4.5 million and $2.5 million, respectively.

Equity Price Risk

        Equity price risk results from exposure to changes in the prices of equity securities on positions held due to trading errors, including client errors and our own errors, and from principal trading activities, primarily on an intra-day basis. Equity price risk can arise from liquidating all such principal positions. Accordingly, we maintain policies and procedures regarding the management of our principal trading accounts, which require review by a supervisory principal. It is our policy to attempt to trade out of all positions by the end of the day. However, at times, we hold positions overnight if we are unable to trade out of positions during the day. In addition, certain positions may be liquidated over a period of time in an effort to minimize market impact, and we may incur losses relating to such positions. We may also have positions in exchange-traded funds ("ETFs") with offsetting positions in the underlying securities as part of an ETF creation and redemption service that we provide to clients.

        We manage equity price risk associated with open positions through the establishment and monitoring of trading policies and through controls and review procedures that ensure communication and timely resolution of trading issues. In addition, our operations and trading departments review all trades that are open at the end of the day.

Cash Management Risk

        Our cash management strategy seeks to optimize excess liquid assets by preserving principal, maintaining liquidity to satisfy capital requirements, minimizing risk and maximizing our after-tax rate of return. Our policy is to invest in high quality credit issuers, limit the amount of credit exposure to any one issuer and invest in tax efficient strategies. Our first priority is to reduce the risk of principal loss. We seek to preserve our invested funds by limiting default risk, market risk, and re-investment risk. We attempt to mitigate default risk by investing principally in U.S. government money market mutual funds and other short-term government debt-based instruments.

        For working capital purposes, we invest only in money market instruments. Cash balances that are not needed for normal operations may be invested in a tax efficient manner in instruments with appropriate maturities and levels of risk to correspond to expected liquidity needs. To the extent that we invest in equity securities, we ensure portfolio liquidity by investing in marketable mutual fund securities with active secondary or resale markets. We do not use derivative financial instruments in our investment portfolio. At December 31, 2014 and 2013, our unrestricted cash and cash equivalents and mutual fund securities owned were $279.1 million and $266.4 million, respectively.

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Item 8.    Financial Statements and Supplementary Data

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Investment Technology Group, Inc.:

        We have audited the accompanying consolidated statements of financial condition of Investment Technology Group, Inc. and Subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Investment Technology Group, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Investment Technology Group, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2015, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.


/s/ KPMG LLP


 

 

 

New York, New York
March 13, 2015

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In thousands, except share amounts)

 
  December 31,  
 
  2014   2013  

Assets

             

Cash and cash equivalents

  $ 275,210   $ 261,897  

Cash restricted or segregated under regulations and other

    69,738     71,202  

Deposits with clearing organizations

    36,424     74,771  

Securities owned, at fair value

    12,073     7,436  

Receivables from brokers, dealers and clearing organizations

    646,330     866,271  

Receivables from customers

    107,935     72,660  

Premises and equipment, net

    60,306     66,171  

Capitalized software, net

    38,333     37,892  

Goodwill, net

    12,803      

Intangibles, net

    31,595     31,201  

Income taxes receivable

    105     54  

Deferred taxes

    37,209     34,130  

Other assets

    22,788     15,787  

Total assets

  $ 1,350,849   $ 1,539,472  

Liabilities and Stockholders' Equity

             

Liabilities:

             

Accounts payable and accrued expenses

  $ 199,211   $ 175,931  

Short-term bank loans

    78,360     73,539  

Payables to brokers, dealers and clearing organizations

    600,041     807,320  

Payables to customers

    11,132     16,797  

Securities sold, not yet purchased, at fair value

    8,253     2,953  

Income taxes payable

    19,772     14,805  

Deferred taxes

    703     363  

Term debt

    17,781     30,332  

Total liabilities

    935,253     1,122,040  

Commitments and contingencies

             

Stockholders' Equity:

   
 
   
 
 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding

         

Common stock, $0.01 par value; 100,000,000 shares authorized; 52,229,962 and 52,158,374 shares issued at December 31, 2014 and 2013, respectively

    522     522  

Additional paid-in capital

    240,135     240,057  

Retained earnings

    487,462     436,570  

Common stock held in treasury, at cost; 18,000,756 and 16,005,500 shares at December 31, 2014 and 2013, respectively

    (306,629 )   (268,253 )

Accumulated other comprehensive income (net of tax)

    (5,894 )   8,536  

Total stockholders' equity

    415,596     417,432  

Total liabilities and stockholders' equity

  $ 1,350,849   $ 1,539,472  

   

See accompanying Notes to Consolidated Financial Statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

 
  Year Ended December 31,  
 
  2014   2013   2012  

Revenues:

                   

Commissions and fees

  $ 436,172   $ 408,619   $ 380,976  

Recurring

    103,794     104,172     109,767  

Other

    19,848     18,010     13,693  

Total revenues

    559,814     530,801     504,436  

Expenses:

                   

Compensation and employee benefits

    215,758     201,254     196,362  

Transaction processing

    86,400     83,792     81,173  

Occupancy and equipment

    59,811     69,022     62,637  

Telecommunications and data processing services

    51,187     53,607     59,850  

Other general and administrative

    79,349     77,431     88,543  

Goodwill and other asset impairment

            274,285  

Restructuring charges

        (75 )   9,499  

Interest expense

    2,322     2,715     2,542  

Total expenses

    494,827     487,746     774,891  

Income (loss) before income tax expense (benefit)

    64,987     43,055     (270,455 )

Income tax expense (benefit)

    14,095     11,970     (22,596 )

Net income (loss)

  $ 50,892   $ 31,085   $ (247,859 )

Income (loss) per share:

                   

Basic

  $ 1.44   $ 0.84   $ (6.45 )

Diluted

  $ 1.40   $ 0.82   $ (6.45 )

Basic weighted average number of common shares outstanding

    35,349     36,788     38,418  

Diluted weighted average number of common shares outstanding

    36,365     38,114     38,418  

   

See accompanying Notes to Consolidated Financial Statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Statements of Comprehensive Income (Loss)

(In thousands)

 
  Year Ended December 31,  
 
  2014   2013   2012  

Net income (loss)

  $ 50,892   $ 31,085   $ (247,859 )

Other comprehensive (loss) income, net of tax:

                   

Currency translation adjustment

    (14,430 )   (3,338 )   3,533  

Other comprehensive (loss) income

    (14,430 )   (3,338 )   3,533  

Comprehensive income (loss)

  $ 36,462   $ 27,747   $ (244,326 )

   

See accompanying Notes to Consolidated Financial Statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2014, 2013 and 2012
(In thousands, except share amounts)

 
  Preferred
Stock
  Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Common
Stock
Held in
Treasury
  Accumulated
Other
Comprehensive
Income/(Loss)
  Total
Stockholders'
Equity
 

Balance at December 31, 2011

        519     249,469     653,344     (240,559 )   8,341     671,114  

Net loss

                (247,859 )           (247,859 )

Other comprehensive income

                        3,533     3,533  

Issuance of common stock for restricted share awards (670,933 shares) and employee stock unit awards (71,580 shares), including tax benefit shortfall and award cancellations of $4.1 million

            (16,306 )       13,722         (2,584 )

Awards reclassified to liability for cash settlement (259,840 shares)

            (2,838 )               (2,838 )

Issuance of common stock for the employee stock purchase plan (137,782 shares)

        1     1,130                 1,131  

Purchase of common stock for treasury (2,470,000 shares)

                    (23,457 )       (23,457 )

Shares withheld for net settlements of share-based awards (270,467 shares)

                    (2,817 )       (2,817 )

Share-based compensation

            13,547                 13,547  

Balance at December 31, 2012

  $   $ 520   $ 245,002   $ 405,485   $ (253,111 ) $ 11,874   $ 409,770  

Net income

                31,085             31,085  

Other comprehensive loss

                        (3,338 )   (3,338 )

Issuance of common stock for restricted share awards (1,029,623 shares), including tax benefit shortfall and award cancellations of $1.5 million

            (19,774 )       17,559         (2,215 )

Issuance of common stock for the employee stock purchase plan (121,363 shares)

        2     933                 935  

Purchase of common stock for treasury (2,005,200 shares)

                    (28,169 )       (28,169 )

Shares withheld for net settlements of share-based awards (352,051 shares)

                    (4,532 )       (4,532 )

Share-based compensation

            13,896                 13,896  

Balance at December 31, 2013

  $   $ 522   $ 240,057   $ 436,570   $ (268,253 ) $ 8,536   $ 417,432