10-Q 1 ibkr_10q-1q2014.htm 1Q2014 10-Q ibkr_10q-1q2014.htm




  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 _____________________________________________________
 
FORM 10-Q
 
_____________________________________________________

(Mark One)
     
x
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
For the quarterly period ended March 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: 001-33440
 
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0390693
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
SS Smaller reporting company o
 
       
(Do not check if a smaller
   
       
reporting company)
   
           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x.
 
As of May 8, 2014, there were 54,666,825 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.

 
 
 


 


INTERACTIVE BROKERS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014
Table of Contents
 
       
Page
       
No.
         
PART I:
 
FINANCIAL INFORMATION
 
         
Item 1:
 
Financial Statements (Unaudited)
3
         
   
Condensed Consolidated Statements of Financial Condition
4
         
   
Condensed Consolidated Statements of Comprehensive Income
5
         
   
Condensed Consolidated Statements of Cash Flows
6
         
   
Condensed Consolidated Statements of Changes in Equity
7
         
   
Notes to Condensed Consolidated Financial Statements
8
         
Item 2:
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
         
Item 3:
 
Quantitative and Qualitative Disclosures About Market Risk
50
         
Item 4:
 
Controls and Procedures
53
         
PART II:
 
OTHER INFORMATION
 
         
Item 1:
 
Legal Proceedings
54
         
Item 1A:
 
Risk Factors
54
         
Item 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
54
         
Item 3:
 
Defaults upon Senior Securities
54
         
Item 5:
 
Other Information
54
         
Item 6:
 
Exhibits
55
         
SIGNATURES
 
56



 
2

 

PART I.  FINANCIAL INFORMATION
 

Financial Statements Introductory Note

Interactive Brokers Group, Inc. (“IBG, Inc.”, “we”, “our” or the “Company”) is a holding company whose primary asset is its ownership of approximately 13.6% of the membership interests of IBG LLC (the “Group”). See Notes 1 and 4 to the condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.
 
We are an automated global electronic broker and market maker specializing in executing and clearing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world and offering custody, prime brokerage, stock and margin borrowing services to our customers. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and from Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, China (Hong Kong and Shanghai), India, Australia and Japan. At March 31, 2014, we had 901 employees worldwide.
 

 
3

 

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)

   
March 31,
     
December 31,
 
(in thousands, except share amounts)
 
2014
     
2013
 
Assets
             
Cash and cash equivalents
$
         991,439
    $
1,213,241
 
Cash and securities - segregated for regulatory purposes
 
       15,579,679
     
       13,991,711
 
Securities borrowed
 
         2,846,539
     
         2,751,501
 
Securities purchased under agreements to resell
 
            282,748
     
            386,316
 
Financial instruments owned, at fair value:
             
    Financial instruments owned
 
         2,605,766
     
         3,285,313
 
    Financial instruments owned and pledged as collateral
 
            822,434
     
         1,163,531
 
Total financial instruments owned
 
         3,428,200
     
         4,448,844
 
Receivables:
             
    Customers, less allowance for doubtful accounts of $68,024 and $67,999 at March 31, 2014 and December 31, 2013
    14,413,560          13,596,650  
    Brokers, dealers and clearing organizations
 
            902,173
     
            858,189
 
    Receivable from affiliate
 
                     38
     
                     55
 
    Interest
 
              36,162
     
              26,489
 
Total receivables
 
       15,351,933
     
       14,481,383
 
Other assets
 
            499,838
     
            597,704
 
Total assets
$
38,980,376
    $
37,870,700
 
               
Liabilities and equity
             
Liabilities:
             
Financial instruments sold but not yet purchased, at fair value
$
  3,170,552
    $
     3,153,673
 
Securities loaned
 
         2,931,222
     
         2,563,653
 
Short-term borrowings
 
              33,603
     
              24,635
 
Payables:
             
    Customers
 
       26,975,572
     
       26,319,420
 
    Brokers, dealers and clearing organizations
 
            241,394
     
            330,956
 
    Payable to affiliate
 
            287,215
     
            287,242
 
    Accounts payable, accrued expenses and other liabilities
 
              93,145
     
              96,026
 
    Interest
 
                3,467
     
                2,969
 
Total payables
 
       27,600,793
     
       27,036,613
 
               
Total liabilities
 
       33,736,170
     
       32,778,574
 
               
Commitments, contingencies and guarantees
             
               
Equity
             
Stockholders’ equity
             
 Common stock, $0.01 par value per share:
             
   Class A – Authorized - 1,000,000,000, Issued - 54,789,790 and 54,788,049 shares, Outstanding – 54,666,825 and 54,664,095 shares at March 31, 2014 and December 31, 2013
 
                   548
     
                   548
 
   Class B – Authorized, Issued and Outstanding – 100 shares at March 31, 2014 and December 31, 2013
 
                        -
     
                        -
 
   Additional paid-in capital
 
            585,070
     
            583,312
 
   Retained earnings
 
            112,491
     
              98,868
 
   Accumulated other comprehensive income, net of income taxes of $1,059 and $936 at March 31, 2014 and December 31, 2013
 
              27,396
     
              27,028
 
   Treasury stock, at cost, 122,965 and 123,954 shares at March 31, 2014 and December 31, 2013
 
               (2,462
   
               (2,492
Total stockholders’ equity
 
            723,043
     
            707,264
 
Noncontrolling interests
 
         4,521,163
     
         4,384,862
 
Total equity
 
         5,244,206
     
         5,092,126
 
Total liabilities and stockholders’ equity
$
 38,980,376
    $
37,870,700
 

See accompanying notes to the condensed consolidated financial statements.
 
 
 
4

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
   
Three months ended
 
   
March 31,
 
(in thousands, except for shares or per share amounts)
 
2014
     
2013
 
               
Revenues:
             
        Trading gains
$
              127,512
    $
         18,994
 
        Commissions and execution fees
 
                136,641
     
           119,538
 
        Interest income
 
                  85,883
     
             70,502
 
        Other income
 
                  19,158
     
             19,911
 
         Total revenues
 
                369,194
     
           228,945
 
               
Interest expense
 
                  14,286
     
             12,871
 
               
         Total net revenues
 
                354,908
     
           216,074
 
               
Non-interest expenses:
             
        Execution and clearing
 
                  54,210
     
             59,540
 
        Employee compensation and benefits
 
                  53,486
     
             46,318
 
        Occupancy, depreciation and amortization
 
                    9,819
     
             10,069
 
        Communications
 
                    6,002
     
               5,453
 
        General and administrative
 
                  13,247
     
             12,471
 
         Total non-interest expenses
 
                136,764
     
           133,851
 
               
Income before income taxes
 
                218,144
     
             82,223
 
               
Income tax expense
 
                  16,950
     
               6,935
 
Net income
 
                201,194
     
             75,288
 
        Less net income attributable to noncontrolling interests
 
                182,105
     
             68,731
 
Net income available for common stockholders
$
              19,089
    $
         6,557
 
               
Earnings per share:
             
        Basic
$
                  0.35
    $
            0.14
 
        Diluted
$
                0.34
    $
             0.14
 
               
Weighted average common shares outstanding:
             
        Basic
 
54,664,225
     
47,499,898
 
        Diluted
 
56,041,282
     
47,688,314
 
               
               
               
Comprehensive income:
             
     Net income available for common stockholders
$
            19,089
    $
            6,557
 
     Other comprehensive income:
             
          Cumulative translation adjustment, before income taxes
 
                       491
     
              (3,735
          Income taxes related to items of other comprehensive income
 
                       123
     
                      7
 
     Other comprehensive income (loss), net of tax
 
                       368
     
              (3,742
Comprehensive income available for common stockholders
$
              19,457
    $
          2,815
 
               
               
Comprehensive income attributable to noncontrolling interests:
             
     Net income attributable to noncontrolling interests
$
           182,105
    $
          68,731
 
     Other comprehensive income (loss) - cumulative translation adjustment
 
                    3,120
     
            (27,621
Comprehensive income attributable to noncontrolling interests
$
             185,225
    $
         41,110
 
               

See accompanying notes to the condensed consolidated financial statements.
 
 
5

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
   
Three Months Ended March 31,
 
(in thousands)
 
2014
     
2013
 
Cash flows from operating activities:
             
     Net income
$
201,194
     $
75,288
      
     Adjustments to reconcile net income to net cash used in operating activities:
             
    Deferred income taxes
 
                    2,390
     
                    9,759
 
    Depreciation and amortization
 
                    4,896
     
                    4,969
 
    Employee stock plan compensation
 
                  10,051
     
                    8,470
 
    (Gains) losses on other investments, net
 
                     (162
   
                       133
 
    Bad debt expense
 
                       743
     
                       454
 
     Change in operating assets and liabilities:
             
    (Increase) decrease in cash and securities - segregated for regulatory purposes
 
           (1,585,783
   
                  42,571
 
    Increase in securities borrowed
 
                (95,038
   
              (907,250
    Decrease (increase) in securities purchased under agreements to resell
 
                103,568
     
                (33,038
    Decrease (increase) in financial instruments owned
 
             1,020,583
     
              (117,573
    Increase in receivables from customers
 
              (817,653
   
           (1,333,080
    (Increase) decrease in other receivables
 
                (53,640
   
                  34,475
 
    Increase in other assets
 
                  (1,136
   
                  (7,943
    Increase in financial instruments sold but not yet purchased
 
                  16,879
     
                  81,127
 
    Increase in securities loaned
 
                367,569
     
                359,492
 
    Increase in payable to customers
 
                656,152
     
             1,638,924
 
    Decrease in other payables
 
                (89,674
   
                (65,689
         Net cash used in operating activities
 
              (259,061
)    
              (208,911
Cash flows from investing activities:
             
     Purchases of other investments
 
                (60,368
   
                (67,482
     Proceeds from sales of other investments
 
                152,561
     
                  67,234
 
     Distributions received from and redemptions of equity investments
 
                            -
     
                  11,054
 
     Purchase of property and equipment
 
                  (4,707
   
                  (3,702
         Net cash provided by investing activities
 
                  87,486
     
                    7,104
 
Cash flows from financing activities:
             
     Dividends paid to shareholders
 
                  (5,466
   
                  (4,750
     Dividends paid to noncontrolling interests
 
                (57,217
   
                (35,137
     Increase (decrease) in short-term borrowings, net
 
                    8,968
     
                (91,573
         Net cash used in financing activities
 
                (53,715
   
              (131,460
Effect of exchange rate changes on cash and cash equivalents
 
                    3,488
     
                (31,364
Net decrease in cash and cash equivalents
 
              (221,802
   
              (364,631
Cash and cash equivalents at beginning of period
 
             1,213,241
     
             1,380,599
 
Cash and cash equivalents at end of period
$
 991,439
    $
 1,015,968
 
               
Supplemental disclosures of cash flow information:
             
    Cash paid for interest
$
 13,788
    $
  14,460
 
    Cash paid for taxes
$
26,533
    $
          20,628
 
               
Non-cash financing activities:
             
     Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC
$
 393
    $
   (125
     Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC
$
  (393
  $
      125
 
               

See accompanying notes to the condensed consolidated financial statements.
 

 
6

 

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2014 and March 31, 2013
(Unaudited)

(in thousands, except for share amounts)
                                                                 
 
Common Stock
                                                       
                                       
Accumulated
                         
               
Additional
                     
Other
     
Total
     
Non-
         
 
Issued
   
Par
     
Paid-In
     
Treasury
     
Retained
     
Comprehensive
     
Stockholders'
     
controlling
     
Total
 
 
Shares
   
Value
     
 Capital
     
 Stock
     
 Earnings
     
 Income
     
 Equity
     
Interests
     
Equity
 
                                                                   
Balance, January 1, 2014
  54,788,049
  $
548
    $
583,312
    $
  (2,492
  $
   98,868
    $
        27,028
    $
  707,264
    $
4,384,862
    $
5,092,126
 
                                                                   
Common Stock distributed pursuant to stock plans
           1,741
   
            
     
                
     
              30
                     
                   30
     
                   
     
                30
 
Compensation for stock grants vesting in the future
             
        1,365
                             
              1,365
     
           8,686
     
         10,051
 
Dividends paid to stockholders
                             
            (5,466
           
            (5,466
   
                 
     
         (5,466
Dividends paid by IBG LLC to noncontrolling interests
                                             
                      
     
        (57,217)
     
       (57,217
Adjustments for changes in proportionate ownership in IBG LLC
             
           393
                             
                 393
     
             (393)
     
                 
 
Comprehensive income
                             
            19,089
     
                     368
     
            19,457
     
       185,225
     
       204,682
 
Balance, March 31, 2014
  54,789,790
  $
 548
    $
585,070
    $
 (2,462
  $
 112,491
    $
         27,396
    $
   723,043
    $
 4,521,163
    $
 5,244,206
 
                                                                   
                                                                   
                                                                   
 
Common Stock
                                                       
                                       
Accumulated
                         
               
Additional
                     
Other
     
Total
     
Non-
         
 
Issued
   
Par
     
Paid-In
     
Treasury
     
Retained
     
Comprehensive
     
Stockholders'
     
controlling
      Total  
 
Shares
   
Value
     
 Capital
     
 Stock
     
 Earnings
     
 Income
     
 Equity
     
Interests
     
Equity
 
                                                                   
Balance, January 1, 2013
  47,797,844
  $
 478
    $
493,912
    $
  (7,718
  $
        82,072
    $
          29,754
    $
       598,498
    $
 4,214,649
    $
 4,813,147
 
                                                                   
Common stock distributed pursuant to stock plans
           3,605
                   
              52
                     
                   52
             
                52
 
Compensation for stock grants vesting in the future
             
        1,036
                             
              1,036
     
           7,662
     
           8,698
 
Dividends paid to shareholders
                             
            (4,750
           
            (4,750
           
         (4,750
Dividends paid by IBG LLC to noncontrolling interests
                                                     
        (35,137
   
       (35,137
Adjustments for changes in proportionate ownership in IBG LLC
             
          (125
                           
               (125
   
              125
     
                 
 
Comprehensive income
                             
              6,557
     
                (3,742
   
              2,815
     
         41,110
     
         43,925
 
Balance, March 31, 2013
  47,801,449
  $
 478
    $
494,823
    $
(7,666
  $
        83,879
    $
           26,012
    $
       597,526
    $
 4,228,409
    $
 4,825,935
 
                                                                   
 
See accompanying notes to the condensed consolidated financial statements.
 

 
 
7

 

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

1. Organization and Nature of Business
 
Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a Delaware holding company whose primary asset is its ownership of approximately 13.6% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “IBG LLC” or the “Group”). The accompanying condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in IBG LLC for all periods presented (Note 4). IBG LLC is an automated global electronic broker and market maker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.
 
IBG LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”): Timber Hill LLC (“TH LLC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiary, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).
 
IBG, Inc. operates in two business segments, electronic brokerage and market making. IBG, Inc. conducts its electronic brokerage business through certain Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.
 
Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (Note 13). IB LLC, IBUK, IBC, IBI and IBSJ carry securities accounts for customers or perform custodial functions relating to customer securities.
 
2. Significant Accounting Policies
 
Basis of Presentation
 
These condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”).  These condensed consolidated financial statements include the accounts of the Company and its subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of March 31, 2014 and December 31, 2013, the results of operations and comprehensive income for the three months ended March 31, 2014 and 2013 and cash flows for the three months ended March 31, 2014 and 2013. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s 2013 Annual Report on Form 10-K filed with the SEC on March 3, 2014. The condensed consolidated financial statement information as of December 31, 2013 has been derived from the 2013 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.
 
 
Principles of Consolidation, including Noncontrolling Interests
 
The condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries.  As sole managing member of IBG LLC, IBG, Inc. exerts control over the Group’s operations. In 



 
8

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

accordance with ASC 810, Consolidation, the Company consolidates the Group’s financial statements and records the interests in the Group that IBG, Inc. does not own as noncontrolling interests.
 
The Company’s policy is to consolidate all other entities in which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements and accompanying notes. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ materially from those estimates. Such estimates include the allowance for doubtful accounts, compensation accruals, current and deferred income taxes, and estimated contingency reserves.
 
Fair Value
 
At March 31, 2014 and December 31, 2013, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and were marked to market, or were assets and liabilities which are short-term in nature and were carried at amounts that approximate fair value.
 
IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurement, to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are:
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable.
 
Financial instruments owned and financial instruments sold, not yet purchased are generally classified as Level 1 financial instruments. The Company’s Level 1 financial instruments, which are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt securities. IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.
 
Currency forward contracts are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded. Other securities that are not traded in active markets are also classified in Level 2. Level 3 financial instruments are comprised of securities that have been delisted or otherwise are no longer tradable and have been valued by the Company based on internal estimates.
 
Other fair value investments, reported in other assets in the accompanying condensed consolidated statement of financial condition and in Note 6—Financial Assets and Financial Liabilities, are comprised of financial instruments that the Company does not carry in its market making business, which were comprised of listed stocks and options, and corporate debt securities.  These investments are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are classified as Level 1 financial instruments.  Other fair value liabilities are comprised of unrestricted listed equities which are classified as Level 1 financial instruments.
 
Earnings per Share
 
Earnings per share (“EPS”) are computed in accordance with ASC 260, Earnings per Share. Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period. Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.
 
 
 
 
9

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

Stock-Based Compensation
 
IBG, Inc. follows ASC 718, Compensation—Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires all share-based payments to employees to be recognized in the condensed consolidated financial statements using a fair value-based method. Grants, which are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby establishing the fair value of each grant. The fair value of awards granted to employees are generally expensed as follows—50% in the year of grant in recognition of plan forfeiture provisions (described below) and the remaining 50% over the related vesting period utilizing the “graded vesting” method permitted under ASC 718-10. In the case of “retirement eligible” employees (those employees older than 59), 100% of awards are expensed when granted.
 
Awards granted under stock-based compensation plans are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested awards previously granted.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments, with maturities of three months or less, that are not segregated and deposited for regulatory purposes or to meet margin requirements at clearing houses to be cash equivalents.
 
Cash and Securities—Segregated for Regulatory Purposes
 
As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash or securities are deposited as required to conduct day-to-day clearance activities. Securities segregated for regulatory purposes consisted of U.S. Treasury Bills of $3.43 billion and $1.30 billion at March 31, 2014 and December 31, 2013, respectively, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $6.44 billion and $6.73 billion as of March 31, 2014 and December 31, 2013, respectively, which amounts approximate fair value.
 
Securities Borrowed and Securities Loaned
 
Securities borrowed and securities loaned are recorded at the amount of collateral advanced or received. Securities borrowed transactions require the Company to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities. With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned. IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. Receivables and payables with the same counterparty are not offset in the condensed consolidated statements of financial condition.
 
Securities lending fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the condensed consolidated statements of comprehensive income.
 
Securities Purchased Under Agreements to Resell
 
Securities purchased under agreements to resell, which are reported as collateralized financing transactions, are recorded at contract value, plus accrued interest, which approximates fair value. To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions. The Company does not net securities purchased under agreements to resell transactions with securities sold under agreements to repurchase transactions entered into with the same counterparty.
 
Financial Instruments Owned and Sold But Not Yet Purchased
 
Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices. All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the condensed consolidated statements of financial condition.
 
 
 
10

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

IBG, Inc. also enters into currency forward contracts. These transactions, which are also accounted for on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term. Unrealized mark-to-market gains and losses on currency forward contracts are reported as components of financial instruments owned or financial instruments sold but not yet purchased in the condensed consolidated statements of financial condition.
 
Customer Receivables and Payables
 
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the condensed consolidated statements of financial condition. Amounts receivable from customers that are determined by management to be uncollectible are expensed as a component of general and administrative expense.
 
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
 
Receivables and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled trades, including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and cash margin deposits. Payables to brokers, dealers and clearing organizations also include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”).
 
Investments
 
IBG, Inc. makes certain strategic investments related to financial services and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323, Investments—Equity Method and Joint Ventures. Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s initial investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss. IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the condensed consolidated statements of comprehensive income. The recorded amounts of IBG, Inc.’s equity method investments, $27.0 million at March 31, 2014 ($27.5 million at December 31, 2013), which are reported as a component of other assets in the condensed consolidated statements of financial condition, increase or decrease accordingly. Contributions paid to and distributions received from equity investees are recorded as additions or reductions, respectively, to the respective investment balance.
 
A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred. The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing.  IBG, Inc.’s equity investments do not have readily determinable market values. All investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable. If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made.
 
IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting. Such investments, $27.2 million at March 31, 2014 ($27.6 million at December 31, 2013), are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management’s estimate of the impairment, and are also components of other assets in the condensed consolidated statements of financial condition. Dividends received from cost basis investments are recognized as a component of other income when such dividends are received.
 
The Company also makes other fair value investments (which are not considered core business activities) that are accounted for at fair value (Note 6), with gains and losses recorded as a component of other income.
 
 
 
 
11

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

Property and Equipment
 
Property and equipment, which is a component of other assets, consists of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment. Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.
 
Comprehensive Income and Foreign Currency Translation
 
The Company’s operating results are reported in the condensed consolidated statement of comprehensive income pursuant to Accounting Standards Update 2011-05, Comprehensive Income.
 
Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income section of the statement of comprehensive income, but are excluded from reported net income. IBG, Inc.’s OCI is comprised of foreign currency translation adjustments, net of related income taxes, where applicable. In general, the practice and intention of the Company is to reinvest the earnings of its non-U.S. subsidiaries in those operations.
 
IBG, Inc.’s non-U.S. domiciled subsidiaries have a functional currency that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated OCI.
 
Revenue Recognition
 
 
—Trading Gains
 
Trading gains and losses are recorded on trade date and are reported on a net basis. Trading gains are comprised of changes in the fair value of financial instruments owned and financial instruments sold but not yet purchased (i.e., unrealized gains and losses) and realized gains and losses. Included in trading gains are net gains and losses on exchange traded options, futures and other derivative instruments. Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends and interest income and expense attributable to financial instruments owned and financial instruments sold but not yet purchased are reported on a net basis as a component of trading gains in the accompanying condensed consolidated statements of comprehensive income.
 
 
—Commissions and Execution Fees
 
Commissions charged for executing and clearing customer transactions are recorded on a trade date basis and are reported as commissions and execution fees in the condensed consolidated statements of comprehensive income, and the related expenses are reported as execution and clearing expenses.
 
 
—Interest Income and Expense
 
The Company earns interest income and incurs interest expense primarily in connection with its electronic brokerage customer business and its securities lending activities. Such interest is recorded on the accrual basis.
 
 
—Foreign Currency Transaction Gains and Losses
 
Foreign currency transaction gains and losses from market making are reported as a component of trading gains in the condensed consolidated statements of comprehensive income. Electronic brokerage foreign currency transaction gains and losses are included in interest (if arising from currency swap transactions) or other income.
 
 
 
12

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

Income Taxes
 
IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws (Note 10) and reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. Determining income tax expense requires significant judgments and estimates.
 
IBG, Inc. recognizes interest related to income tax matters as interest income or expense and penalties related to income tax matters as income tax expense.
 
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating the ability to recover deferred tax assets within the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.
 
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The Company is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows, or financial position.
 
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
 
The Company records tax liabilities in accordance with ASC 740 and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.
 

 
13

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

Recently Issued Accounting Pronouncements
 
Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASUs”) as the means to add to or delete from, or otherwise amend the ASC. In 2014, prior to the issuance of the Company’s condensed consolidated financial statements, ASUs 2014-01 through 2014-08 have been issued. Following is a summary of recently issued ASUs that have affected or may affect the Company’s condensed consolidated financial statements:
 
   
Affects
 
Status
         
ASU 2013-05
 
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
 
Effective for fiscal periods beginning on or after December 15, 2013.
         
ASU 2014-06
 
Technical Corrections and Improvements Related to Glossary Terms
 
Effective on issuance in March 2014.
 
Adoption of those ASUs that became effective during 2014, prior to the issuance of the Company’s condensed consolidated financial statements, did not have a material effect on those financial statements.
 
3. Trading Activities and Related Risks
 
IBG, Inc.’s trading activities include providing securities market making and brokerage services. Trading activities expose IBG, Inc. to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes:
 
 
a regular review of the risk management process by executive management as part of its oversight role;
 
 
defined risk management policies and procedures supported by a rigorous analytic framework; and
 
 
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
 
Market Risk
 
IBG, Inc. is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates. IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities. IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The following discussion describes the types of market risk faced:
 
 
Equity Price Risk
 
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. IBG, Inc. is subject to equity price risk primarily in financial instruments owned and sold but not yet purchased. IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
 
 
 
 
14

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

 
Currency Risk
 
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. The Company manages this risk using spot (i.e., cash) currency transactions, currency futures contracts and currency forward contracts.
 
 
Interest Rate Risk
 
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options, and futures and on its debt obligations. These risks are managed through investment policies and by entering into interest rate futures contracts.
 
Credit Risk
 
IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose IBG, Inc. to default risk. IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
 
The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources. IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
 
In the normal course of business, IBG, Inc. executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
 
For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. Repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities. IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.
 
Concentrations of Credit Risk
 
IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of March 31, 2014, the Company did not have any material concentrations of credit risk.
 
Off-Balance Sheet Risks
 
IBG, Inc. may be exposed to a risk of loss not reflected in the condensed consolidated financial statements to settle futures and certain over-the-counter contracts at contracted prices, which may require repurchase or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such contracts may exceed the amounts reported in IBG, Inc.’s condensed consolidated statements of financial condition.
 
 
 
 
15

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

4. Equity and Earnings per Share
 
In connection with its initial public offering of Class A common stock (“IPO”) in May 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC from Holdings, became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results into its financial statements. Holdings wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in IBG LLC, approximately 86.4% as of March 31, 2014.  The condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC. The noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of total equity, as described below.
 
Recapitalization and Post-IPO Capital Structure
 
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in Holdings in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG LLC.
 
In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members’ interests in Holdings in proportion to their interests. Immediately following the Recapitalization and IPO, Holdings owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. in proportion to Holdings’ ownership of IBG LLC.
 
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock. All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of Holdings’ and IBG, Inc.’s respective ownership of IBG LLC. At March 31, 2014 and December 31, 2013, 1,000,000,000 shares of Class A common stock were authorized, of which 54,789,790 and 54,788,049 shares have been issued; and 54,666,825 and 54,664,095 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of March 31, 2014 and December 31, 2013, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of March 31, 2014 and December 31, 2013, respectively.
 
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with the 2011 and 2013 redemptions of Holdings member interests in exchange for common stock, which deferred tax assets are a component of other assets in the condensed consolidated statement of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the 2011 and 2013 redemption dates, respectively, as allowable under current tax law. As of March 31, 2014 and December 31, 2013, the unamortized balance of these deferred tax assets was $289.3 million and $294.7 million, respectively.
 
IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to pay Holdings (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases. These payables, net of payments made to Holdings, are reported as payable to affiliate in the condensed consolidated statement of financial condition.
 
The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the condensed consolidated statement of financial condition.
 
The cumulative amounts of deferred tax assets, payables to Holdings and credits to additional paid-in capital arising from stock offerings from the date of the IPO through March 31, 2014 were $420.4 million, $357.4 million and $63.1 million, respectively. Amounts payable under the Tax Receivable Agreement are payable to Holdings annually following the filing of IBG, Inc.’s federal income tax return. The Company has paid Holdings a cumulative total of $70.4 million through March 31, 2014 pursuant to the terms of the Tax Receivable Agreement.
 
 
 
16

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
The Exchange Agreement, as amended June 6, 2012, provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, holders of Holdings member interests are able to request redemption of such member interests over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
 
At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized Common Stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings redeemed 5,013,259 IBG LLC shares with a total value of $114.0 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption these IBG LLC shares were retired. In 2013 and 2011, respectively, the Company issued 4,683,415 shares and 1,983,624 shares of Common Stock directly to Holdings in exchange for an equivalent number of shares of member interests in IBG LLC.
 
As a consequence of these redemption transactions, and distribution of shares to employees (Note 9), IBG, Inc.’s interest in IBG LLC has increased to approximately 13.6%, with Holdings owning the remaining 86.4% as of March 31, 2014. The redemptions also resulted in an increase in the Holdings interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 87.6% at March 31, 2014.
 
Earnings per Share
 
Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period:
 
   
Three months ended
   
March 31,
   
2014
   
2013
Basic earnings per share:
         
Net income available for common stockholders
$
             19,089
  $
             6,557
           
Weighted average shares of common stock outstanding:
         
    Class A
 
           54,664,125
   
           47,499,798
    Class B
 
                       100
   
                       100
   
           54,664,225
   
           47,499,898
           
Basic earnings per share
$
                0.35
  $
                0.14


 
17

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares:
 
   
Three months ended
   
March 31,
   
2014
   
2013
Diluted earnings per share:
         
Net income available for common stockholders
$
            19,089
  $
            6,557
           
Weighted average shares of common stock outstanding:
         
     Class A:
         
    Issued and outstanding
 
           54,664,125
   
           47,499,798
            Potentially dilutive common shares issuable pursuant toemployee incentive plans
 
             1,377,057
   
                188,416
     Class B
 
                       100
   
                       100
   
           56,041,282
   
           47,688,314
           
Diluted earnings per share
$
                0.34
  $
            0.14
 
Member and Stockholder Dividends
 
For the three months ended March 31, 2014, IBG LLC paid dividends totaling $66.2 million to its members, of which IBG, Inc.’s proportionate share was $9.0 million.  In March 2014, the Company paid cash dividends of $0.10 per share of Common Stock, totaling $5.5 million.
 
On April 15, 2014, the Company declared a cash dividend of $0.10 per common share, payable on June 13, 2014 to shareholders of record as of May 30, 2014.
 
5. Comprehensive Income
 
The following table presents comprehensive income and earnings per share on comprehensive income:
 
   
Three months ended
   
March 31,
   
2014
   
2013
           
Comprehensive income available for common stockholders, net of tax
$
     19,457
  $
       2,815
           
           
Earnings per share on comprehensive income:
         
     Basic
$
         0.36
  $
            0.06
     Diluted
$
     0.35
  $
            0.06
           
           
Weighted average common shares outstanding:
         
     Basic
 
54,664,225
   
47,499,898
     Diluted
 
56,041,282
   
47,688,314

 
 
18

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

6. Financial Assets and Financial Liabilities
 
Fair Value
 
The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of March 31, 2014 and December 31, 2013. As required by ASC 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement.
 

   
Financial Assets At Fair Value as of March 31, 2014
                       
     Level 1       Level 2       Level 3       Total
                       
Securities segregated for regulatory purposes
$
       3,428,577
  $
              -
  $
              -
  $
   3,428,577
Financial instruments owned:
                        
     Stocks
 
                990,435
   
                         -
   
                     119
   
           990,554
     Options
 
             1,418,104
   
                         -
   
                         -
   
        1,418,104
     Warrants and discount certificates
 
                  74,891
   
                         -
   
                         -
   
             74,891
     U.S. and foreign government securities
 
                  15,740
   
                  2,074
   
                         -
   
             17,814
     Corporate and municipal bonds
 
                  77,647
   
                22,998
   
                         -
   
           100,645
     Currency forward contracts
 
                           -
   
                  3,758
   
                         -
   
               3,758
Total financial instruments owned
 
             2,576,817
   
                28,830
   
                     119
   
        2,605,766
                       
Financial instruments owned and pledged as collateral:
                     
     Stocks
 
                762,857
   
                         -
   
                         -
   
           762,857
     Warrants
 
                       205
   
                         -
   
                         -
   
                  205
     U.S. and foreign government securities
 
                  58,470
   
                         -
   
                         -
   
             58,470
     Corporate and municipal bonds
 
                       902
   
                         -
   
                         -
   
                  902
Total financial instruments owned and pledged as collateral
 
                822,434
   
                         -
   
                         -
   
           822,434
                       
Total financial insturments owned
 
             3,399,251
   
                28,830
   
                     119
   
        3,428,200
                       
Other fair value investments, included in other assets:
                     
     Stocks and options
 
                  33,642
   
                         -
   
                     112
   
             33,754
     Corporate and municipal bonds
    -    
                  1,869
      -    
               1,869
Total other fair value investments, included in other assets
 
                  33,642
   
                  1,869
   
                     112
   
             35,623
                       
Total Financial Assets at Fair Value
$
      68,614,470
  $
   30,699
  $
                231
  $
   6,892,400
                       
                       
   
Financial Liabilities At Fair Value as of March 31, 2014
                       
   
Level 1
   
Level 2
   
Level 3
   
Total
Financial instruments sold, not yet purchased:
                     
     Stocks
$
          1,612,564
  $
               -
  $
                1
  $
 1,612,565
     Options
 
             1,467,109
   
                         -
   
                         -
   
        1,467,109
     Warrants and discount certificates
 
                    1,051
   
                         -
   
                         -
   
               1,051
     U.S. and foreign government securities
 
                       693
   
                  1,279
   
                         -
   
               1,972
     Corporate bonds
 
                  75,039
   
                12,213
   
                         -
   
             87,252
     Currency forward contracts
 
                           -
   
                     603
   
                         -
   
                  603
Total financial instruments sold, not yet purchased
 
             3,156,456
   
                14,095
   
                         1
   
        3,170,552
                       
Other fair value liabilities, included in accounts payable, accrued expenses and other liabilities
           
                       
     Stock
 
                       305
   
                         -
   
                         -
   
                  305
Total other fair value liabilities, included in accounts payable, accrued expenses and other liabilities
 
                       305
   
                         -
   
                         -
   
                  305
                       
Total Financial Liabilities at Fair Value
$
     3,156,761
  $
             14,095
  $
                  1
  $
    3,170,857


 
19

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

 
   
Financial Assets At Fair Value as of December 31, 2013
                       
   
Level 1
   
Level 2
   
Level 3
   
Total
                       
Securities segregated for regulatory purposes
$
  1,300,016
  $
                  -
  $
               -
  $
  1,300,016
Financial instruments owned:
                     
     Stocks
 
             1,243,914
   
                         -
   
                       57
   
        1,243,971
     Options
 
             1,880,481
   
                         -
   
                         -
   
        1,880,481
     Warrants and discount certificates
 
                  57,144
   
                         -
   
                         -
   
             57,144
     U.S. and foreign government securities
 
                    4,641
   
                  2,102
   
                         -
   
               6,743
     Corporate and municipal bonds
 
                  72,750
   
                18,476
   
                         -
   
             91,226
     Currency forward contracts
 
                           -
   
                  5,748
   
                         -
   
               5,748
Total financial instruments owned
 
             3,258,930
   
                26,326
   
                       57
   
        3,285,313
                       
Financial instruments owned and pledged as collateral:
                     
     Stocks
 
             1,097,734
   
                         -
   
                         -
   
        1,097,734
     Warrants
 
                       233
   
                         -
   
                         -
   
                  233
     U.S. and foreign government securities
 
                  64,439
   
                         -
   
                         -
   
             64,439
     Corporate and municipal bonds
 
                    1,125
   
                         -
   
                         -
   
               1,125
Total financial instruments owned and pledged as collateral
 
             1,163,531
   
                         -
   
                         -
   
        1,163,531
                       
Total financial insturments owned
 
             4,422,461
   
                26,326
   
                       57
   
        4,448,844
                       
Other fair value investments, included in other assets:
                     
     Stocks
 
                  25,604
   
                     419
   
                     101
   
             26,124
     Corporate and municipal bonds
 
                    1,776
   
                47,896
   
                         -
   
             49,672
     Mortgage backed securities
 
                           -
   
                26,892
   
                         -
   
             26,892
     Other asset backed securities
 
                           -
   
                22,734
   
                         -
   
             22,734
     Other
 
                           -
   
                  5,328
   
                         -
   
               5,328
Total other fair value assets
 
                  27,380
   
              103,269
   
                     101
   
           130,750
                       
Total Financial Assets at Fair Value
$
     5,749,857
  $
        129,595
  $
          158
  $
  5,879,610
                       
                       
   
Financial Liabilities At Fair Value as of December 31, 2013
                       
   
Level 1
   
Level 2
   
Level 3
   
Total
Financial instruments sold, not yet purchased:
                     
     Stocks
$
  1,266,429
  $
                -
  $
            3
  $
  1,266,432
     Options
 
             1,793,248
   
                         -
   
                         -
   
        1,793,248
     Warrants and discount certificates
 
                    1,215
   
                         -
   
                         -
   
               1,215
     U.S. and foreign government securities
 
                           -
   
                  4,412
   
                         -
   
               4,412
     Corporate bonds
 
                  77,936
   
                  9,628
   
                         -
   
             87,564
     Currency forward contracts
 
                           -
   
                     802
   
                         -
   
                  802
Total financial instruments sold, not yet purchased
$
      3,138,828
  $
        14,842
  $
      3
  $
3,153,673
 
Transfers between Level 1 and Level 2
 
Transfers of financial instruments owned and sold, not yet purchased to or from Levels 1 and 2 arise where the market for a specific security has become active or inactive during the period. The fair values transferred are ascribed as if the financial assets or financial liabilities had been transferred as of the end of the period.
 
During the three months ended March 31, 2014, the Company reclassified approximately $2.1 million of financial instruments owned from Level 1 to Level 2 and reclassified approximately $1.8 million from Level 2 to Level 1. Financial instruments sold, but not yet purchased of approximately $1.4 million were reclassified from Level 1 to Level 2 and approximately $1.1 million were reclassified from Level 2 to Level 1. The Company reclassified approximately $1.8 million of other fair value investments, recorded in other assets, from Level 1 to Level 2.
 
 
 
20

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
During the three months ended March 31, 2013, the Company reclassified approximately $1.1 million of financial instruments owned from Level 1 to Level 2 and reclassified approximately $3.4 million from Level 2 to Level 1.  Financial instruments sold, but not yet purchased of approximately $2.0 million were reclassified from Level 1 to Level 2 and approximately $3.1 million were reclassified from Level 2 to Level 1.

Level 3 Financial Assets and Financial Liabilities
 
The Company’s Level 3 financial assets and financial liabilities are comprised of delisted securities reported within financial instruments owned and financial instruments sold, not yet purchased. The following tables report Level 3 activities for the three months ended March 31, 2014:
 
Financial assets—Level 3 activities:

Balance, January 1, 2014
$
            158
 
     Total gains or losses (realized/unrealized)
     
      - Included in earnings
 
                     30
 
    Purchases, issuances and settlements
 
                   (22
    Transfers in and/or out of Level 3
 
                     65
 
Balance, March 31, 2014
$
           231
 
 
Financial liabilities—Level 3 activities:
 
Balance, January 1, 2014
$
                  3
 
    Total gains or losses (realized/unrealized)
 
                       
 
      - Included in earnings
 
                       -
 
    Purchases, issuances and settlements
 
                     (2
)
    Transfers in and/or out of Level 3
 
                       -
 
Balance, March 31, 2014
$
                  1
 
 
There were no Level 3 activities, including transfers, for the three months ended March 31, 2013.
 
Trading Gains from Market Making Transactions
 
Trading gains, net from market making transactions reported in the statements of comprehensive income, by major product type, are comprised of:
 
   
Three months ended
 
   
March 31,
 
   
2014
     
2013
 
               
Equities
 $
    95,145
    $
    68,524
 
Fixed Income
 
           5,730
     
           7,768
 
Foreign Exchange
 
         26,637
     
       (57,325
Commodities
 
                  -
     
                27
 
               
Total Trading Gains
$
  127,512
    $
 18,994
 
 
These transactions are related to the Company’s financial instruments owned and financial instruments sold, not yet purchased (all at fair value) and include both derivative and non-derivative financial instruments, including exchange traded options and futures. These gains and losses also include market making related dividend and fixed income trading interest income and expense.
 
 
 
21

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
The gains (losses) in the above table are not representative of the integrated trading strategies applied by the Company, which utilize financial instruments across various product types. Gains and losses in one product type frequently offset gains and losses in other product types.
 
Netting of Financial Assets and Financial Liabilities
 
The Company adopted the guidance in ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities and ASU 2013- 01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities for periods beginning after January 1, 2013. This authoritative guidance requires companies to report disclosures of offsetting assets and liabilities.
 
The Company does not net securities segregated for regulatory purposes, and securities borrowed and securities loaned are presented on a gross basis in the condensed consolidated statements of financial condition. In the tables below, the amounts of derivative financial instruments owned that are not offset in the condensed consolidated statements of financial condition, but could be netted against financial liabilities with specific counterparties under master netting agreements, including clearing houses (exchange traded options, warrants and discount certificates) or over the counter currency forward contract counterparties, are presented to provide financial statement readers with the Company’s estimate of its net exposure to counterparties for these derivative financial instruments.
 
The following table sets forth the netting of financial assets and of financial liabilities as of March 31, 2014 and December 31, 2013, pursuant to the requirements of ASU 2011-11 and ASU 2013-01 (millions).
 
   
March 31, 2014
                   
                       Gross Amounts Not Offset in the    
 
                       Condensed Consolidated Statement of    
 
                       Financial Condition      
        Gross Amounts   Net Amounts of    
 
             
        Offset in the   Assets Presented in            
 
     
   
 
  Condensed   the Condensed    
 
             
   Gross Amounts of   Consolidated   Consolidated    
 
             
    Recognized   Statement of   Statement of    
Financial
       Cash Collateral    
 
    Assets   Financial Condition   Financial Condition    
Instruments
     
Pledged
   
Net Amount
Offsetting of Financial Assets:
                               
    Securities segregated for regulatory purposes - purchased under agreements to resell 6,438.7 (1)      -      6,438.7         (6,438.7   -   -
Securities borrowed
 
                   2,846.5
   
                                 -
   
                        2,846.5
   
                  (2,793.3
   
                                 -
   
                         53.2
Securities purchased under agreements to resell
 
                     282.7
   
                                 -
   
                         282.7
   
                     (282.7
   
                                 -
   
                                    -
Financial Instruments owned:
                               
Options
 
                 1,418.1
   
                                 -
   
                           1,418.1
   
                  (1,350.8
   
                                 -
   
                             67.3
Warrants and discount certificates
 
                        75.1
   
                                 -
   
                              75.1
   
                         (1.1
   
                                 -
   
                               74.0
Currency forward contracts
 
                          3.8
   
                                 -
   
                                  3.8
   
                      -
     
                                 -
   
                                 3.8
Total
            11,064.9
 
                                 -
 
                     11,064.9
 
                (10,866.6
 
                                 -
 
                             198.3
                                     
                                     
                       Gross Amounts Not Offset in the    
 
                       Condensed Consolidated Statement of    
  
                       Financial Condition    
 
        Gross Amounts   Net Amounts of
 
             
        Offset in the   Liabilities Presented            
 
     
        Condensed   in the Condensed            
 
     
   Gross Amounts of   Consolidated   Consolidated
 
             
     Recognized   Statement of   Statement of    
 Financial
       Cash Collateral    
 
     Liabilities   Financial Condition   Financial Condition    
 Instruments
     
 Received
   
 Net Amount
Offsetting of Financial Liabilities:
                         
Securities loaned
                   2,931.2
 
                                 -
 
                           2,931.2
 
                  (2,918.2
 
                                 -
 
                       13.0
    Financial instruments sold, not yet purchased:
                   
Options
 
                   1,467.1
   
                                 -
   
                      1,467.1
   
                  (1,350.8
   
                                 -
   
                 116.3
Warrants and discount certificates
 
                          1.1
   
                                 -
   
                                1.1
   
                         (1.1
   
                                 -
   
                                    -
Currency forward contracts
 
                       0.6
   
                                 -
   
                                0.6
   
                        
     
                                 -
   
                            0.6
Total
                  4,400.0
 
                                 -
 
                          4,400.0
 
                  (4,270.1
 
                                 -
 
                       129.9
 
 
 
22

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

   
December 31, 2013
                   
                       Gross Amounts Not Offset in the    
 
                       Condensed Consolidated Statement of    
 
                       Financial Condition      
        Gross Amounts   Net Amounts of    
 
             
        Offset in the   Assets Presented in            
 
     
   
 
  Condensed   the Condensed    
 
             
   Gross Amounts of   Consolidated   Consolidated    
 
             
    Recognized   Statement of   Statement of    
Financial
       Cash Collateral    
 
    Assets   Financial Condition