10-Q 1 v239353_10q.htm FORM 10-Q

  

  

 

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 September 30, 2011

OR

 
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 001-34986



 

FXCM Inc.

(Exact name of registrant as specified in its charter)

 
Delaware   27-3268672
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

32 Old Slip
New York, NY 10005

(Address of principal executive offices) (Zip Code)

Telephone: (646) 432-2986

(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 o No 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer o   Accelerated filer o
Non-accelerated filer x   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

The number of shares of the registrant’s Class A common stock, par value $0.01 per share, outstanding was 15,368,028 as of November 14, 2011. The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding as of November 14, 2011 was 100.

 

 


 
 

TABLE OF CONTENTS

FXCM INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2011

Table of Contents

 
Item
Number
  Page
PART I — FINANCIAL INFORMATION
 

Item 1.

Financial Statements

    1  
FXCM Inc. Condensed Consolidated Statements of Financial Condition (Unaudited)     1  
FXCM Inc. Condensed Consolidated Statements of Operations and
Comprehensive Income (Unaudited)
    2  
FXCM Inc. Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)     3  
FXCM Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)     4  
FXCM Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)     5  

Item 2.

Management’s Discussion and Analysis of Financial Condition and
Results of Operations

    30  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

    51  

Item 4.

Controls and Procedures

    53  
PART II — OTHER INFORMATION
 

Item 1.

Legal Proceedings

    54  

Item 1A.

Risk Factors

    55  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    55  

Item 3.

Defaults Upon Senior Securities

    56  

Item 4.

(Removed and Reserved)

    56  

Item 5.

Other Information

    56  

Item 6.

Exhibits

    56  
SIGNATURES     57  

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Forward-Looking Statements

This Quarterly Report contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as such factors may be updated by Quarterly Reports on Form 10-Q subsequently filed with the U.S. Securities and Exchange Commission (the “SEC”), including by “Item 1A. Risk Factors” of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

FXCM Inc. is a holding company that was incorporated as a Delaware corporation on August 10, 2010 and its sole asset is a controlling equity interest in FXCM Holdings, LLC. Unless the context suggests otherwise, references in this report to “FXCM,” the “Company,” “we,” “us” and “our” refer (1) prior to the December 2010 initial public offering (“IPO”) of the Class A common stock of FXCM Inc. and related transactions, to FXCM Holdings, LLC and its consolidated subsidiaries and (2) after our IPO and related transactions, to FXCM Inc. and its consolidated subsidiaries.

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PART I

Item 1 — Financial Statements (Unaudited)

FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)

Condensed Consolidated Statements of Financial Condition (Unaudited)

   
  September 30,
2011
  December 31,
2010
     (In thousands, except share
and per share data)
Assets
                 
Current assets
                 
Cash and cash equivalents   $ 177,582     $ 193,330  
Cash and cash equivalents, held for customers     828,235       641,152  
Due from brokers     8,136       125  
Accounts receivable, net     16,143       18,324  
Deferred tax asset     8,017       7,625  
Tax receivable     546       1,643  
Total current assets     1,038,659       862,199  
Deferred tax asset     83,474       90,107  
Office, communication and computer equipment, net     32,386       18,709  
Goodwill     38,289       37,937  
Other intangible assets, net     23,995       26,472  
Other assets     17,045       12,369  
Total assets   $ 1,233,848     $ 1,047,793  
Liabilities and Equity
                 
Current liabilities
                 
Customer account liabilities   $ 828,235     $ 641,152  
Accounts payable and accrued expenses     52,273       37,470  
Due to brokers     694       13,314  
Deferred tax liability     1,650       1,844  
Due to related parties pursuant to tax receivable agreement     3,744       3,817  
Deferred revenue           6,000  
Total current liabilities     886,596       703,597  
Deferred tax liability     4,735       5,770  
Due to related parties pursuant to tax receivable agreement     67,702       70,419  
Total liabilities     959,033       779,786  
Commitments and Contingencies
                 
Stockholders’ Equity
                 
Class A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 15,368,028 and 17,319,000 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively     154       173  
Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 100 shares issued and outstanding as of September 30, 2011 and December 31, 2010     1       1  
Additional paid-in-capital     87,215       101,848  
Retained earnings     6,661       146  
Accumulated other comprehensive income     67       52  
Total stockholders’ equity     94,098       102,220  
Non-controlling interest     180,717       165,787  
Total stockholders’ equity     274,815       268,007  
Total liabilities and stockholders’ equity   $ 1,233,848     $ 1,047,793  

 
 
See accompanying notes to the condensed consolidated financial statements.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

       
  Three Months Ended   Nine Months Ended
     September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
     (Amounts in thousands, except per share data)
Revenues
                                   
Retail trading revenue   $ 97,017     $ 80,383     $ 268,234     $ 234,608  
Institutional trading revenue     7,720       7,190       21,820       20,779  
Interest income     963       488       2,837       1,493  
Other income     3,368       2,470       14,228       7,273  
Total revenues     109,068       90,531       307,119       264,153  
Expenses
                                   
Referring broker fees     25,720       24,607       72,253       61,680  
Compensation and benefits     22,955       17,826       68,662       52,325  
Advertising and marketing     9,870       5,601       24,375       16,916  
Communication and technology     8,190       6,373       23,559       19,171  
General and administrative     13,197       8,178       55,356       25,792  
Depreciation and amortization     5,367       1,831       14,201       5,292  
Interest expense     93       27       226       78  
Total expenses     85,392       64,443       258,632       181,254  
Income before income taxes     23,676       26,088       48,487       82,899  
Income tax provision/(benefit)     8,136       (1,449 )      10,756       3,517  
Net income     15,540       27,537       37,731       79,382  
Net income attributable to members of FXCM Holdings, LLC     12,142       27,537       28,222       79,382  
Net income attributable to FXCM Inc. for the three and nine months ended September 30, 2011     3,398             9,509        
Other comprehensive income, net of tax
                                   
Foreign currency translation gain/(loss)     (2,809 )      370       (290 )      226  
Comprehensive income/(loss)     12,731       27,907       37,441       79,608  
Comprehensive income attributable to members of FXCM Holdings, LLC     9,906       27,907       27,917       79,608  
Comprehensive income/(loss) attributable to FXCM Inc. for the three and nine months ended September 30, 2011   $ 2,825     $     $ 9,524     $  

       
  Three Months Ended   Nine Months Ended
     September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
Weighted average shares of Class A common stock outstanding:
                                   
Basic     16,468             16,997        
Diluted     16,468             16,997        
Net income per share attributable to stockholders of Class A common stock of FXCM Inc.:
                                   
Basic   $ 0.21     $     $ 0.56     $  
Diluted   $ 0.21     $     $ 0.56     $  
Dividends declared per common share   $ 0.06     $     $ 0.18     $  

 
 
See accompanying notes to the condensed consolidated financial statements.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
(In thousands, except share amounts)

                 
  FXCM Inc.
     Non-controlling
Interest
  Retained
Earnings
  Accumulated
Other
Comprehensive
  Additional
Paid-in Capital
    
Common Stock – Class B
    
Common Stock – Class A
  Total
Stockholders'
Equity
     Shares   Dollars   Shares   Dollars
Balance as of
January 1, 2011
  $ 165,787     $ 146     $ 52     $ 101,848       100     $ 1       17,319,000     $ 173     $ 268,007  
Net income     28,222       9,509                                           37,731  
Other comprehensive income,
net of tax
                                                                                
Foreign currency translation gain     (305 )            15                                     (290 ) 
Repurchase of class A common stock pursuant to publicly announced program                       (21,931 )                  (1,950,972 )      (19 )      (21,950 ) 
Employee stock options                       7,298                               7,298  
Dividends on Class A common stock           (2,994 )                                          (2,994 ) 
Payments for IPO costs     (141 )                                                (141 ) 
Contributions     16,265                                                 16,265  
Distributions     (29,111 )                                                (29,111 ) 
Balance as of
September 30, 2011
  $ 180,717     $ 6,661     $ 67     $ 87,215       100     $ 1       15,368,028     $ 154     $ 274,815  

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)

Condensed Consolidated Statements of Cash Flows (Unaudited)

   
  Nine Months Ended
     September 30, 2011   September 30, 2010
     (Amounts in thousands)
Cash Flows From Operating Activities
                 
Net income   $ 37,731     $ 79,382  
Adjustments to reconcile net income to net cash provided by operating activities
                 
Depreciation and amortization     14,201       5,292  
Stock-based compensation     6,526        
Deferred tax expense     4,960       180  
Deferred revenue     (6,000 )      (4,500 ) 
Loss on disposal of fixed assets     143       10  
Changes in operating assets and liabilities
                 
Cash and cash equivalents, held for customers     (72,529 )      (70,547 ) 
Restricted cash           (9,356 ) 
Due from brokers     (8,011 )      705  
Accounts receivable     2,373       (6,647 ) 
Taxes receivables     1,575        
Other assets     (3,487 )      (3,169 ) 
Customer account liabilities     73,058       70,772  
Accounts payable and accrued expenses     11,342       (1,050 ) 
Due to brokers     (12,620 )      (82 ) 
Net cash provided by operating activities     49,262       60,990  
Cash Flows From Investing Activities
                 
Payment for acquisition, net of cash acquired     (4,898 )       
Purchase of intangibles     (1,304 )       
Purchases of office, communication and computer equipment     (19,926 )      (6,016 ) 
Net cash used in investing activities     (26,128 )      (6,016 ) 
Cash Flows From Financing Activities
                 
Payments for IPO costs     (141 )       
Members’ distributions     (29,111 )      (70,724 ) 
Contribution from members     16,265        
Dividends paid     (2,994 )       
Stock repurchased     (21,950 )       
Net cash used in financing activities     (37,931 )      (70,724 ) 
Effect of foreign currency exchange rate changes on cash and cash equivalents     (951 )      1  
Net decrease in cash and cash equivalents     (15,748 )      (15,749 ) 
Cash and Cash Equivalents
                 
Beginning of period     193,330       139,858  
End of Period   $ 177,582     $ 124,109  
Supplemental Disclosures
                 
Cash paid for taxes   $ 2,653     $ 8,846  

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Nature of Business and Organization

FXCM Inc. (the “Corporation”), a Delaware corporation, was incorporated on August 10, 2010 as a holding company for the purpose of facilitating an initial public offering (“IPO”) of the Corporation’s common equity. On December 1, 2010, a registration statement filed with the SEC relating to shares of Class A common stock of the Corporation to be offered and sold in an IPO was declared effective. On December 7, 2010, the Corporation completed an IPO of 17,319,000 shares of Class A common stock at a public offering price of $14.00 per share. Prior to the IPO, the Corporation had not engaged in any business or other activities except in connection with its formation and the IPO.

The Corporation was a wholly-owned subsidiary of FXCM Holdings, LLC (“Holdings”) prior to the consummation of the reorganization described below. Subsequent to the reorganization, Holdings is a minority-owned, controlled and consolidated subsidiary of the Corporation.

Collectively, the Corporation and its consolidated subsidiaries are referred to hereinafter as “the Company.”

Holdings

The Company operates through Holdings and its global subsidiaries, which are subject to local regulatory requirements. Holdings is a Delaware limited liability company and wholly owns Forex Capital Markets, LLC(“US”), FXCM Canada, Ltd. (“Canada”), Forex Trading, LLC (“FXT”) and ODL Group Limited (“ODL”).FXT’s wholly owned subsidiaries include FXCM Asia Limited (“HK”), Forex Capital Markets Limited(“UK”), and FXCM Australia, Ltd. (“Australia). On October 1, 2010, the Company acquired ODL, a leadingbroker of FX, CFDs, spread betting, equities and equity options headquartered in the United Kingdom (the“U.K.”). ODL’s wholly owned subsidiaries include FXCM Securities Limited (“FSL”) (formerly, ODLSecurities Limited) and FXCM Japan Securities Co., Limited. (“FJSL”) (formerly, ODL Japan Co. Limited (“ODL JL''). On March 31, 2011, the Company acquired FXCM Japan, Inc., (“FXCMJ”) a Japan-based foreign exchange provider. FXCMJ was sold to the Company by GCI Capital Co., Ltd., who had previously reached an agreement with the Company to use the FXCM Japan trademark prior to the acquisition. FXCMJ was a wholly owned subsidiary of ODL JL. FXCMJ’s wholly owned subsidiary is GCI Technology USA, Inc. On July 10, 2011, FXCMJ merged into ODL JL and ODL JL concurrently changed its name to FXCM Japan Securities Co., Limited.

The Company is an online provider of foreign exchange (“FX”) trading and related services to domestic and international retail and institutional customers and offers customers access to global over-the-counter FX markets. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a “currency pair”. The Company’s proprietary trading platform presents its FX customers with the price quotations on several currency pairs from various global banks, financial institutions and market makers, or FX market makers. The Company’s primary source of revenue is earned by adding a markup to the price provided by FX market makers and generates its trading revenue based on the volume of transactions. The Company utilizes what is referred to as an agency execution or agency model. Under the agency model, when a customer executes a trade on the price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of automatically hedging the Company’s positions and eliminating market risk exposure. The systematic hedge gains and losses are included in retail trading revenue in the condensed consolidated statements of operations and comprehensive income. The Company also offers FX trading services to banks, hedge funds and other institutional customers, also on an agency model basis, through its FXCM Pro division. This service allows customers to obtain optimal prices offered by external banks. The counterparties to these trades are external financial institutions that hold customer account balances and settle the transactions. The Company receives commissions for these services without incurring market risk. In rare circumstances when initial collateral does not cover risk exposure, we provide short term credit directly to institutional customers in order to continue trading. Additionally, the Company is engaged in

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Nature of Business and Organization  – (continued)

various ancillary FX related services which include use of our platform, technical expertise, trading facilities and software. Through its subsidiary ODL, the Company also is a FX broker of contracts for differences (“CFDs”), spread betting, equities and equity options.

Certain agreements and transactions associated with the IPO are set forth below.

Reorganization

Prior to the completion of the IPO, the Limited Liability Company Agreement of Holdings (the “LLC agreement”) was restated among other things, to modify its capital structure by reclassifying the interests held by its existing owners (i.e., the owners of Holdings prior to the IPO) into a single new class of units (“Holding Units”). Holdings’ existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO, (subject to the terms of the exchange agreement as described therein) to exchange their Holding Units for shares of the Corporation’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

Following the IPO, each of the existing owners holds one share of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of the Corporation that is equal to the aggregate number of Holdings Unit of Holdings held by such holder, subject to customary adjustments for stock splits, stock dividends and reclassifications.

At the time of the offering, the Corporation purchased newly-issued Holdings Units from Holdings and outstanding Holdings Units from the existing owners of Holdings, including members of its senior management, at a purchase price per unit equal to the $14.00 price per share of Class A common stock in the offering net of underwriting discounts. Since the existing owners continue to have control of over 50% of the voting shares (through their interests in the Corporation) upon completion of the exchange, the exchange of cash by the Corporation for Holdings Units of Holdings was accounted for as a transaction between entities under common control in accordance with the guidance in ASC Subtopic 805-50. Holdings recognized the amount of cash transferred at the date of the exchange and measured the cash received at its carrying amount. The date of the exchange was December 1, 2010 (i.e., the effective date of the initial public offering).

Tax Receivable Agreement

As described above, the Corporation purchased Holdings Units from other members of Holdings at the time of the IPO. In addition, under the terms of the exchange agreement described above, the members of Holdings (other than the Corporation) may, from and after the first anniversary of the date of the closing of the IPO (subject to the terms of the exchange agreement), exchange their Holdings Units for shares of Class A common stock of the Corporation on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Holdings intends to make an election under Section 754 of the Code effective for each taxable year in which such a purchase or exchange of Holdings Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of Holdings at the time of the purchase or subsequent exchange of Holdings Units that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that the Corporation would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates

A summary of the Company’s significant accounting policies and estimates is as follows:

Basis of Presentation

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company consolidates those entities in which it is the primary beneficiary of a variable-interest entity as required by ASC 810, Consolidations, or entities where it has a controlling financial interest.

As indicated above, the Corporation operates and controls all of the businesses and affairs of Holdings and its subsidiaries. Under ASC 810, Holdings meets the definition of a variable interest entity. Further, the Corporation is the primary beneficiary of Holdings as a result of its 100% voting power and control over Holdings and as a result of its obligation to absorb losses and its right to receive benefits of Holdings that could potentially be significant to Holdings. As a result, the Corporation consolidates the financial results of Holdings and records a non-controlling interest for the economic interest in Holdings held by the existing unit holders to the extent that the book value of their interest in Holdings is greater than zero. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 21.0% and 79.0%, respectively, as of September 30, 2011. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 23.0% and 77.0%, respectively, as of December 31, 2010. Net income attributable to the non-controlling interest on the statements of operations and comprehensive income represents the portion of earnings or loss attributable to the economic interest in Holdings held by the non-controlling unit holders. Non-controlling interest on the statements of financial condition represents the portion of net assets of Holdings attributable to the non-controlling unit-holders based on total units of Holdings owned by such unit holder. All material intercompany accounts and transactions are eliminated in consolidation.

As permitted under Rule 10-01 of SEC Regulation S-X, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in FXCM’s Annual Report on Form 10-K for the year ended December 31, 2010.

Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash at banks and highly liquid instruments with original maturities of less than 90 days at the time of purchase. At times, these balances may exceed federally insured limits. This potentially subjects the Company to concentration risk. The Company has not experienced losses in such accounts.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

Cash and Cash Equivalents, held for customers

Cash and cash equivalents, held for customers represents cash held to fund customer liabilities in connection with foreign currency transactions. The balance arises primarily from cash deposited by customers, customer margin balances, and cash held by FX market makers related to hedging activities. The Company records a corresponding liability in connection with this amount that is included in customer account liabilities in the condensed consolidated statements of financial condition (see Note 5). A portion of the balance is not available for general use due to legal restrictions in accordance with certain jurisdictional regulatory requirements. These legally restricted balances were $706.8 million and $502.9 million as of September 30, 2011 and December 31, 2010, respectively.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. These two inputs create the following fair value hierarchy:

Level I:  Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level II:  Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level III:  Unobservable inputs for assets or liabilities.

As of September 30, 2011 and December 31, 2010, substantially all of the Company’s financial instruments were carried at fair value based on spot exchange rates broadly distributed in active markets, or amounts approximating fair value. Assets, including, due from brokers and others, are carried at cost or contracted amounts, which approximates fair value. Similarly, liabilities, including customer account liabilities, due to brokers and payables to others are carried at fair value or contracted amounts, which approximates fair value.

The Company did not have any Level II and III financial assets or liabilities as of September 30, 2011 and December 31, 2010. The Company did not have any transfers in or out of Level I and II during the nine months ended September 30, 2011, and the year ended December 31, 2010. Cash and cash equivalents and cash and cash equivalents, held for customers are deemed to be Level I financial assets.

Due from/to Brokers

Due from/to Brokers represents the amount of the unsettled spot currency trades that the Company has open with its financial institutions. The Company has master netting agreements with its respective counterparties under which it is due to/from brokers balances are presented on a net-by-counterparty basis in accordance with U.S. GAAP.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

Office, Communication and Computer Equipment, net

Office, communication and computer equipment, net, consist of purchased technology hardware and software, internally developed software, leasehold improvements, furniture and fixtures and other equipment, computer equipment, licenses and communication equipment. Office, communication and computer equipment, net, are recorded at historical cost, net of accumulated depreciation. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Certain costs of software developed or obtained for internal use are capitalized. Depreciation is computed using the straight-line method. The Company depreciates these assets using the following useful lives:

 
Computer equipment   3 to 5 years
Software   2 to 5 years
Leasehold improvements   Lesser of the estimated economic useful life or the term of the lease
Furniture and fixtures and other equipment   3 to 5 years
Licenses   2 to 4 years
Communication equipment   3 to 5 years

Valuation of Other Long-Lived Assets

The Company also assesses potential impairments of its other long-lived assets, including office, communication and computer equipment, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. There was no impairment of other long-lived assets in the nine months ended September 30, 2011 and the year ended December 31, 2010.

Business Combination

The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations, and records assets acquired and liabilities assumed at their fair values as of the acquisition date. The Company records any excess purchase price over the value assigned to net tangible and identifiable intangible assets of a business acquired as goodwill. Acquisition related costs are expensed as incurred. Refer to Note 4 for further details.

Goodwill

The Company recorded goodwill from the acquisition of ODL and FXCMJ. Goodwill represents the excess purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. The Company is required to test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. The Company tests for impairment during the fourth quarter of our fiscal year using October 1 carrying values. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value. The determination of fair value includes considerations of projected cash flows, relevant trading multiples of comparable companies and the trading price of our common stock and other factors. There was no impairment of goodwill for the nine months ended September 30, 2011 and year ended December 31, 2010. Although there is no impairment as of September 30, 2011, events such as economic weakness and unexpected

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

significant declines in operating results of reporting units may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future. See Note 8 below, for further discussion.

Other Intangible Assets, net

Other intangible assets, net, primarily include customer relationships, non-compete agreements and trade name acquired from ODL and FXCMJ.

The customer relationships, non-compete agreements and trade name are finite-lived intangibles and are amortized on a straight-line basis over their estimated average useful life of 2 to 9 years, 2 to 3 years and 1 year, respectively. The useful life of these intangibles is based on the period they are expected to contribute to future cash flows as determined by the Company’s historical experience. For these finite-lived intangible assets subject to amortization, impairment is considered upon certain “triggering events” and is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset. There was no impairment of finite-lived intangible assets for the nine months ended September 30, 2011 and year ended December 31, 2010.

The FX trading license is an indefinite-lived asset that is not amortized but tested for impairment. The Company’s policy is to test for impairment at least annually or in interim periods if certain events occur indicating that the fair value of the asset may be less than its carrying amount. An impairment test on this indefinite-lived asset is performed during the fourth quarter of the Company’s fiscal year using the October 1 carrying value. Impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. There was no impairment of indefinite-lived intangible assets for the nine months ended September 30, 2011 and year ended December 31, 2010.

Equity Method Investment

Investments where the Company is deemed to exercise significant influence (generally defined as owning a voting interest of 20% to 50%), but no control, are accounted for using the equity method of accounting. The Company records its pro-rata share of earnings or losses each period and records any dividends as a reduction in the investment balance. These earnings or losses are included in other income in the condensed consolidated statements of operations and comprehensive income. The carrying amount of equity method investments was $3.5 million and $3.6 million as of September 30, 2011 and December 31, 2010, respectively, and is reflected in other assets in the condensed consolidated statements of financial condition.

Accounts Receivable, net

As of September 30, 2011 and December 31, 2010, accounts receivable, net, consisted primarily of amounts due from institutional customers relating to the Company’s foreign exchange business, and fees receivable from the Company’s white label service to third parties and payments for order flow, described in “Retail Trading Revenue” below. Receivables are shown net of reserves for uncollectible accounts. The reserve for bad debts is maintained at a level that management believes to be sufficient to absorb estimated losses in the accounts receivable portfolio. The reserve is increased by the provision for bad debts which is charged against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and our historical experience with the particular customer. Based on management’s assessment of the collectability of each account, there were no uncollectible accounts as of September 30, 2011 and December 31, 2010. There was no reserve netted against receivables in the condensed consolidated statement of financial condition as of September 30, 2011 and December 31, 2010.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

Foreign Currency

Foreign denominated assets and liabilities are re-measured into the functional currency at exchange rates in effect at the condensed consolidated statement of financial condition dates through the condensed consolidated statements of operations and comprehensive income. Gains or losses resulting from foreign currency transactions are re-measured using the rates on the dates on which those elements are recognized during the period, and are included in retail trading revenue in the condensed consolidated statements of operations and comprehensive income. Gains resulting from foreign currency transactions were not material for the three and nine months ended September 30, 2011. The Company recorded a gain of $3.7 million and a gain of $1.0 million for the three and nine months ended September 30, 2010, respectively.

Translation gains or losses resulting from translating the Company’s subsidiaries’ financial statements from the local functional currency to the reporting currency, net of tax, are included in other comprehensive income. Assets and liabilities are generally translated at the balance sheet date while revenues and expenses are generally translated at an applicable average rate.

Guarantees

At the inception of guarantees, if any, the Company will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued.

Revenue Recognition

The Company makes foreign currency markets for customers trading in foreign exchange spot markets (“Foreign Currencies”) and through its subsidiary FSL, engages in equity and related brokerage activities. Foreign Currencies are recorded on trade date and positions are marked to market daily with related gains and losses, including gains and losses on open spot transactions, recognized currently in income. Commissions earned on brokerage activities are recorded on a trade date basis and are recognized currently in income.

Retail Trading Revenue

Retail trading revenue is earned by adding a markup to the price provided by FX market makers generating trading revenue based on the volume of transactions and is recorded on trade date. The retail trading revenue is earned utilizing an agency model. Under the agency model, when a customer executes a trade on the best price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of automatically hedging the Company’s positions and eliminating market risk exposure. Retail trading revenues principally represent the difference of the Company’s realized and unrealized foreign currency trading gains or losses on its positions with customers and the systematic hedge gains and losses from the trades entered into with the FX market makers. Retail trading revenue also includes fees earned from arrangements with other financial institutions to provide platform, back office and other trade execution services. This service is generally referred to as a white label arrangement. The Company earns a percentage of the markup charged by the financial institutions to their customers. Fees from this service are recorded when earned on a trade date basis. Additionally, the Company earns income from trading in CFDs, payments for order flow, rollovers and spread betting. The Company’s policy is to hedge its CFD positions with other financial institutions based on internal guidelines. Income or loss on CFDs represents the difference between the Company’s realized and unrealized trading gains or losses on its positions and the hedge gains or losses with the other financial institutions. Income or loss on CFDs is recorded on a trade date basis. Income or loss on rollovers is the interest differential customers earn or pay on overnight currency pair positions held and the markup that the Company receives on interest paid or received on currency pair positions held overnight. Income or loss on rollovers is recorded on a trade date basis.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

Income earned on order flow represents payments received from certain FX market makers in exchange for routing trade orders to these firms for execution. The Company’s order routing software ensures that payments for order flow do not affect the routing of orders in a manner that is detrimental to its retail customers. The Company recognizes payments for order flow as earned. Spread betting is where a customer takes a position against the value of an underlying financial instrument moving either upward or downward in the market. Income on spread betting is recorded as earned.

Institutional Trading Revenue

Institutional trading revenue relates to commission income generated by facilitating spot foreign currency trades on behalf of institutional customers through the services provided by the FXCM Pro division. FXCM Pro allows these customers to obtain the best execution price from external banks and routes the trades to outside financial institutions for settlement. The counterparties to these trades are external financial institutions that also hold customer account balances. The Company receives commission income for customers’ use of FXCM Pro without taking any market or credit risk. Institutional trading revenue is recorded on a trade date basis.

Other Income

In January 2007, the Company entered into an agreement to provide trade execution services to a related party, GCI Capital Co. Ltd (“GCI”). As consideration for the services, the Company received an upfront non- refundable payment of $30.0 million in addition to ongoing monthly fees that are recognized when earned. The Company did not receive any ongoing monthly fees for the three and nine months ended September 30, 2011 and 2010. Ongoing monthly fees were historically based on a fixed monthly amount and were changed to a variable per trade fee in June 2009. Prior to the acquisition of FXCM, the upfront fee was deferred and recognized on a straight line basis over the estimated period of performance of 5 years. Upon the consummation of the acquisition, the agreement to provide trade execution services was terminated and the deferred revenue was recognized as income and is included in other income in the condensed consolidated statements of operations and comprehensive income.

Other income also includes amounts earned from the sale of market data, equity and equity option brokerage activities and ancillary fee income.

Referring Broker Fees

Referring broker fees represent commissions paid to brokers for introducing trading customers to the Company. Commissions are determined based on the number and size of transactions executed by the customers and are recorded on a trade date basis.

Stock Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). The fair value of the Company’s stock-based compensation is estimated using the Black-Scholes option pricing model. The Company recognizes compensation expense for equity awards on a straight-line basis over the requisite service period of the award. Compensation expense is adjusted for an estimate of equity awards that do not vest in the future because service or performance conditions are not satisfied (forfeitures) and have been included in compensation and benefits in the condensed consolidated statements of operations and comprehensive income. See Note 14 for further discussion.

Advertising and Marketing

Advertising and marketing costs are charged to operations when incurred.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

General and Administrative Expenses

General and administrative expenses include bank processing and regulatory fees, professional and consulting fees, occupancy and equipment expense and other administrative costs. Bank processing fees are costs associated with the processing of credit card transactions and prime brokerage fees charged by clearing banks. Regulatory fees are volume-based costs charged by certain regulatory authorities.

Income Taxes

Prior to the IPO in December 2010, the Company has historically operated as partnerships for U.S. federal income tax purposes and mainly as a corporate entity in non-U.S. jurisdictions. As a result, our income was not subject to U.S. federal and state income taxes. Generally, the tax liability related to income earned by these entities represents obligations of the individual partners and members. Income taxes shown on our historical combined income statements are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in non-U.S. jurisdictions.

Following the IPO, FXCM Holdings, LLC and certain of its subsidiaries continue to operate in the United States as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. Accordingly, these entities in some cases continue to be subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, FXCM Inc. is subject to U.S. corporate federal, state and local income taxes that are reflected in our condensed consolidated financial statements.

Allocation and Distribution of Holdings Earnings

The allocation of Holdings’ earnings to the members is determined in accordance with the sharing ratios as defined in the LLC agreement. Distributions to members are made according to the LLC Agreement. Refer to Notes 13, 18 and 22.

Recently Adopted Accounting Pronouncements

During the three and nine months ended September 30, 2011, issued accounting pronouncements that were applicable but not adopted by the Company:

Accounting Standards Not Yet Adopted

Fair Value Measurements and Related Disclosures

In May 2011, the FASB issued authoritative guidance that provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards. Additional disclosure requirements under this guidance include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a nonfinancial asset that is different from the asset's highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. This guidance will be effective for the Company on January 1, 2012 and is not expected to have a material impact on the Company's consolidated financial statements.

Presentation of Comprehensive Income

In June 2011, the FASB issued authoritative guidance that eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity, among other updates to the presentation of comprehensive income. Under this guidance, an entity has the option to present the total

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates  – (continued)

of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This guidance will be effective for the Company on January 1, 2012 and will impact the presentation of the Company's consolidated financial statements.

Testing Goodwill for Impairment

In September 2011, the FASB issued authoritative guidance that allows an entity to use a qualitative approach to test goodwill for impairment. Under this guidance, an entity has the option to first assess 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, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. In addition, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. This accounting guidance is effective for the Company on January 1, 2012 with early adoption permitted. The Company adopted this guidance as of September 30, 2011. Since this guidance only changes the manner in which the Company assess goodwill for impairment, it did not affect its financial position or results of operations.

Note 3. Non-Controlling Interest

The Corporation consolidates the financial results of Holdings whereby it records a non-controlling interest for the economic interest in Holdings, held by the existing unit holders (see Note 2). During the nine months period ended September 30, 2011, the Company repurchased a portion of its outstanding Class A common stock (see Note 15). Accordingly, the interest in Holdings changed for the Corporation and the non-controlling interest as presented in the following table, with amounts in thousands, except share data:

       
  Shares Outstanding   Economic Interest in Holdings
     Non-
Controlling
  FXCM Inc.   Total
Balance as of December 31, 2010     17,319,000       77.00 %      23.00 %      100.00 % 
Class A common stock repurchased pursuant to publicly announced program     (1,950,972 )      2.00 %      (2.00 )%      0.00 % 
Balance as of September 30, 2011     15,368,028       79.0 %      21.0 %      100.0 % 

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Business Acquisition

Pro Forma Condensed Combined Financial Information

The following pro forma condensed combined financial information presents the results of the operations of the Company as they may have appeared if the acquisition of FXCMJ and ODL had been completed on January 1, 2011 and 2010, with amounts in thousands:

       
  Three Months Ended   Nine Months Ended
     September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
Total revenues   $ 109,068     $ 100,852     $ 305,043     $ 305,612  
Net Income   $ 15,540     $ 12,111     $ 32,251     $ 48,153  

These pro forma results for the three and nine months ended September 30, 2011 and 2010 primarily include the related tax impact and the elimination of certain revenues and expenses resulting from transactions conducted with ODL and FXCMJ prior to the acquisitions.

Note 5. Customer Account Liabilities

Customer account liabilities represent balances held by the Company and margin balances arising in connection with foreign currency transactions and CFDs, including unrealized gains and losses on open foreign exchange commitments and CFDs. Customer account liabilities were $828.2 million and $641.2 million as of September 30, 2011 and December 31, 2010, respectively.

Note 6. Equity Method Investment

As of September 30, 2011 and December 31, 2010, the Company had $3.5 million and $3.6 million, respectively, of equity interest in equity method investments, which consisted primarily of a 26% equity interest in a developer of FX trading software. Equity method investments are included in other assets in the condensed consolidated statements of financial condition as of September 30, 2011 and December 31, 2010. Equity method investments are included in corporate for purposes of segment reporting (see Note 21).

Income recognized from equity method investments was not material for the three and nine months ended September 30, 2011 and 2010 and is included in other income in the condensed consolidated statements of operations and comprehensive income.

There were no dividend distributions received from the FX trading software developer during the three and nine months ended September 30, 2011 and 2010.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Office, Communication and Computer Equipment, net

Office, communication and computer equipment, including leasehold improvements, licenses, capitalized software development costs and capital leases, consisted of the following as of September 30, 2011 and December 31, 2010, with amounts in thousands:

   
  September 30, 2011   December 31, 2010
Computer equipment   $ 24,164     $ 20,412  
Software     14,358       5,435  
Leasehold improvements     4,376       4,419  
Furniture and fixtures and other equipment     2,101       1,722  
Licenses     17,669       8,083  
Communication equipment     1,162       926  
       63,830       40,997  
Less: Accumulated depreciation     (31,444 )      (22,288 ) 
Office, communication and computer equipment, net   $ 32,386     $ 18,709  

Depreciation is computed on a straight-line basis (see Note 2). Depreciation expense was $3.7 million and $9.2 million for the three and nine months ended September 30, 2011, respectively. Depreciation expense was $1.6 million and $4.6 million for the three and nine months ended September 30, 2010, respectively. The amount of fixed assets disposed of by the Company during the three and nine months ended September 30, 2011 was not material.

Note 8. Goodwill

The following table presents the changes in goodwill by segment during the nine months ended September 30, 2011, with amounts in thousands:

     
  Retail Trading   Institutional Trading   Total
Balance at December 31, 2010   $ 27,105     $ 10,832     $ 37,937  
Goodwill acquired     369             369  
Foreign currency translation adjustment     (12 )      (5 )      (17 ) 
Balance at September 30, 2011   $ 27,462     $ 10,827     $ 38,289  

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Other Intangible Assets, net

The Company’s acquired intangible assets consisted of the following as of September 30, 2011 and December 31, 2010, with amounts in thousands:

           
  September 30, 2011   December 31, 2010
     Gross
Carrying Amount
  Accumulated Amortization   Net
Carrying Amount
  Gross
Carrying Amount
  Accumulated Amortization   Net
Carrying Amount
Finite-lived intangible assets
                                                     
Customer relationships   $ 23,906     $ (5,222 )    $ 18,684     $ 21,547     $ (2,443 )    $ 19,104  
Non-compete agreements     7,214       (2,644 )      4,570       7,214       (644 )      6,570  
Trade name     338       (338 )      (0 )      330       (83 )      247  
Foreign currency translation adjustment     (212 )      202       (10 )      (199 )            (199 ) 
Total finite-lived intangible assets   $ 31,246     $ (8,002 )    $ 23,244     $ 28,892     $ (3,170 )    $ 25,722  
Indefinite-lived intangible assets
                                                     
License     601             601       600             600  
Exchange membership seat     150             150       150             150  
Total indefinite-lived intangible assets   $ 751     $     $ 751     $ 750     $     $ 750  

Customer relationships, non-compete agreements and trade name are amortized on a straight-line basis over 2 to 9 years, 2 to 3 years and 1 year, respectively, and approximates the weighted average useful lives. Indefinite-lived assets are not amortized (see Note 2). Amortization expense was $1.7 million and $5.0 million for the three and nine months ended September 30, 2011, respectively. Amortization expense was not material for the three months ended September 30, 2010 and $0.7 million for the nine months ended September 30, 2010. Estimated future amortization expense for acquired intangible assets outstanding as of September 30, 2011 is as follows, with amounts in thousands:

 
Year Ending December 31,   Estimated
Amortization
Expense
Remainder of 2011   $ 1,608  
2012     6,303  
2013     5,259  
2014     3,288  
2015     3,006  
Thereafter     3,780  
     $ 23,244  

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Other Assets

Other assets were comprised of the following as of September 30, 2011 and December 31, 2010, with amounts in thousands:

   
  September 30, 2011   December 31, 2010
Prepaid expenses   $ 7,288     $ 5,714  
Equity method investments     3,500       3,632  
Employee advances     2,276       2,144  
Deposits     3,980       504  
Other     1       375  
     $ 17,045     $ 12,369  

Note 11. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses were comprised of the following as of September 30, 2011 and December 31, 2010, with amounts in thousands:

   
  September 30, 2011   December 31, 2010
Operating expenses payable   $ 17,001     $ 14,466  
Settlement reserve     6,000        
Compensation payable     10,858       9,187  
Commissions payable     9,726       8,918  
Income taxes payable     3,287       397  
Due to members     2,789        
IPO related costs payable           1,556  
Regulatory fees payable     180       1,514  
Business acquisition cash consideration     2,432       1,432  
     $ 52,273     $ 37,470  

Note 12. Earnings per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The Company uses the treasury stock method in accordance with ASC 260, Earnings Per Share, to determine the dilutive potential of stock options and Class B common stock that are exchangeable into the Company’s Class A common stock.

In accordance with ASC 260, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common stockholders and are therefore participating securities. The shares of Class B common stock do not share in the earnings of the Company and are therefore not participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented. Further, EPS for the periods prior to the IPO is not presented since the Company was not a public company and did not have any participating securities.

The Company granted 690,000 stock options to certain employees and non-employees during the three and nine months ended September 30, 2011 and 8,127,890 to certain employees, non-employees and members of the board of directors in 2010 for an aggregate of 8,817,890 stock options (See Note 14). These options were not included in the computation of earnings per common share because they were anti-dilutive under the treasury method.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Earnings per Share  – (continued)

Additionally, as discussed in Note 1, Holdings existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO, (subject to the terms of the exchange agreement as described therein) to exchange their Holding Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These shares were also excluded from the computation of earnings per common shares because they were anti-dilutive under the treasury method.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands except per share data:

       
  Three Months ended   Nine Months Ended
     September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
Basic and diluted net income per share:
                                   
Numerator
                                   
Net income available to holders of Class A common stock   $ 3,398     $     $ 9,509     $  
Earnings allocated to participating securities                        
Earnings available for common stockholders   $ 3,398     $     $ 9,509     $  
Denominator for basic net income per share of Class A common stock
                                   
Weighted average shares of Class A common stock     16,468             16,997        
IPO stock options                        
Assumed conversion of Holding Units for Class A common stock             —               —  
Dilutive weighted average shares of Class A common stock     16,468             16,997        
Basic income per share of Class A common stock   $ 0.21     $     $ 0.56     $  
Diluted income per share of Class A common stock   $ 0.21     $     $ 0.56     $  

Note 13. Related Party Transactions

The Company has advanced funds to several employees. As of September 30, 2011 and December 31, 2010, the outstanding balance was $2.3 million and $2.1 million, respectively, and is included in other assets in the condensed consolidated statements of financial condition.

Customer account liabilities include balances for employees and shareholders with greater than a 5% ownership in the Company. As of September 30, 2011 and December 31, 2010, employees account liabilities totaled $0.5 million and $3.0 million, respectively and are included in the condensed consolidated statements of financial condition as customer account liabilities. Account liabilities of shareholders with a greater than 5% ownership in the Company was $3.0 million and $10.8 million as of September 30, 2011 and December 31, 2010, respectively and are included in the condensed consolidated statements of financial condition as customer account liabilities.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Related Party Transactions  – (continued)

UK is party to an arrangement with Global Finance Company (Cayman) Limited, (“Global Finance”), and Master Capital Group, S.A.L. (“Master Capital”). A shareholder with greater than a 5% ownership of the Company beneficially owns more than 90% of the equity of Global Finance and Master Capital. Pursuant to such arrangement, Global Finance and Master Capital are permitted to use the brand name “FXCM” and our technology platform to act as our local presence in certain countries in the Middle East and North Africa (“MENA”). UK collects and remits to Global Finance and Master Capital fees and commissions charged by Global Finance and Master Capital to customers in MENA countries. For the three and nine months ended September 30, 2011, these fees and commissions were approximately $0.8 million and $2.7 million, respectively. For the three and nine months ended September 30, 2010, these fees and commissions were approximately $0.3 million and $1.0 million, respectively. The Company expects to enter into a definitive agreement in the near future.

In June 2011, US entered into an agreement with certain founding members of Holdings, whereby, these members reimburse US for amounts related to NFA and CFTC matters, up to $16.0 million. Refer to Notes 2 and 18 for further details.

Exchange Agreement

Prior to the completion of the IPO, the LLC Agreement was restated among other things, to modify its capital structure by reclassifying the interests held by its existing owners (i.e. the owners of Holdings prior to the IPO) into a single new class of units (“Holding Units”), Holdings existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO (subject to the terms of the exchange agreement as described therein), to exchange their Holding Units for shares of the Corporation’s Class A Common Stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

Payments under Tax Receivable Agreement

The Corporation has entered into a tax receivable agreement with the other members of Holdings that provides for payments, in the aggregate of $71.4 million as of September 30, 2011 and $74.2 million as of December 31, 2010, from time to time by the Corporation to such other members of 85% of the amount of the benefits, if any, that the Corporation is deemed to realize as a result of increases in tax basis and certain other tax benefits related to its entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of the Corporation and not of Holdings. For purposes of the tax receivable agreement, the benefit deemed realized by the Corporation will be computed by comparing the actual income tax liability of the Corporation (calculated with certain assumptions) to the amount of such taxes that the Corporation would have been required to pay had there been no increase to the tax basis of the assets of Holdings as a result of the purchase or exchanges and certain other assumptions. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless the Corporation exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or the Corporation breaches any of its material obligations under the tax receivable agreement in which case all obligations will generally be accelerated and due as if the Corporation had exercised its right to terminate the agreement.

Note 14. Stock-Based Compensation

The Company has a long term incentive plan (the “LTIP”) that provides for the grant of stock options to purchase shares of its Class A common stock to its employees (“Employee Stock Options”) and the independent board of directors (“Independent Directors Options”) (collectively, the “Stock Options”). The Employee Stock Options have a contractual term of seven years and a four-year graded vesting schedule. The

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Stock-Based Compensation  – (continued)

Independent Directors Options also have a seven-year contractual term but cliff vest on the first anniversary after the grant date. As of September 30, 2011, the weighted average exercise price of the Stock Options was $13.74. Under the terms of the LTIP, the Company may issue new shares or treasury shares upon share option exercise.

The following table summarizes our Stock Options activity under the LTIP for the nine months ended September 30, 2011:

 
  Number of Shares
Outstanding as of January 1, 2011(1)     8,127,890  
Granted     690,000  
Forfeited     (150,000 ) 
Outstanding as of September 30, 2011     8,667,890  

(1) Reflects stock options granted on December 1, 2010 at the time of the IPO.

At September 30, 2011 the weighted average period over which compensation cost on non-vested Stock Options is expected to be recognized is 3.2 years and the unrecognized expense is $32.3 million.

Stock-based compensation before income taxes included in compensation and benefits in the condensed consolidated statements of operations and comprehensive income was $2.1 million for the three months ended September 30, 2011 and $6.5 million for the nine months ended September 30, 2011, for the Employee Stock Options. Stock-based compensation before income taxes included in compensation and benefits in the condensed consolidated statements of operations and comprehensive income was not material for the three months ended September 30, 2011 and $0.3 million for the nine months ended September 30, 2011, for the Independent Directors Options. The Company did not record compensation expense for the three and nine months ended September 30, 2010, since the Stock Options were not awarded during the period. The total compensation cost capitalized and included in office, communication and computer equipment, net in the condensed consolidated statements of financial condition was $0.8 million as of September 30, 2011 and was not material as of December 31, 2010.

In arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Company’s forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Company’s financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to expense recognized in the Company’s financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period.

The Company did not have any cash proceeds or income tax benefits realized from the exercise of Stock Options for the three and nine months ended September 30, 2011.

Valuation Assumptions

Calculating the fair value of employee stock options requires estimates and significant judgment. The Company uses the Black-Scholes option pricing model to estimate the fair value of its employee stock options.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Stockholders’ Equity

Refer to the description of the Reorganization and IPO as described in Note 1 for further information regarding the current capital structure of the Company.

The Company’s authorized capital stock consists of 3,000,000,000 shares of Class A common stock, par value $.01 per share, 1,000,000 shares of Class B common stock, par value $.01 per share, and 300,000,000 shares of preferred stock, par value $.01 per share.

Class A Common Stock Repurchase Program

On May 17, 2011 the Company’s Board of Directors approved the repurchase of up to $30.0 million of its Class A common stock (the “Stock Repurchase Program”). On October 17, 2011, the Board of Directors approved a $20.0 million increase in the Stock Repurchase Program for an aggregate of $50.0 million (see Note 22). Purchases under the Stock Repurchase Program may be made from time to time in the open market and in privately negotiated transactions. Under the Stock Repurchase Program, there is no expiration date or other restrictions limiting the period over which the Company can make its share repurchase. The Stock Repurchase Program will expire only when and if the Company has repurchased $50.0 million of its shares under this program. Under the Stock Repurchase Program, repurchased shares are retired and returned to unissued stock. The size and timing of these purchases are based on a number of factors, including price, business and market conditions.

During the nine months ended September 30, 2011, the Company repurchased and retired 1,950,972 shares of its class A common stock for approximately $22.0 million pursuant to the trading program under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The following table presents the changes in the Company’s Class A common stock shares outstanding during the nine months ended September 30, 2011, with amounts in thousands:

 
Class A Common Stock   As of September 30, 2011
Balance at December 31, 2010     17,319  
Issued      
Repurchased     (1,951 ) 
Balance at September 30, 2011     15,368  

As of September 30, 2011, there were no changes to the capital structure of Class B common stock issued and held from December 31, 2010. Therefore, as of September 30, 2011, there were 100 shares of Class B common stock issued and held by the members of Holdings.

Holders of shares of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

Class A Common Stock

Holders of shares of the Company’s Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Company’s board of directors out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon dissolution or liquidation or the sale of all or substantially all of the Company’s assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A common stock will be entitled to receive pro rata the Company’s remaining assets available for distribution. Holders of shares of Class A common stock do not have preemptive, subscription, redemption or conversion rights.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Stockholders’ Equity  – (continued)

Class B Common Stock

Each holder of the Company’s Class B common stock shall be entitled, without regard to the number of shares of Class B common stock held by such holder, to one vote for each Holdings Unit in Holdings held by such holder. The unit holders of Holdings collectively have a number of votes in FXCM Inc. that is equal to the aggregate number of Holdings Units that they hold. Holders of our Class B common stock do not have any right to receive dividends or to receive a distribution upon a liquidation or dissolution of FXCM Inc.

Note 16. Employee Benefit Plan

The Company maintains a defined contribution employee profit-sharing and savings 401(k) plan for all eligible full time employees. The Company was not required to and made no contributions to the plan for the three and nine months ended September 30, 2011 and 2010.

Note 17. Net Capital Requirements

US, registered as a futures commission merchant and a retail foreign exchange dealer with the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”), is subject to the NFA’s net capital requirements for forex dealing members. Since the agency model (see Note 1) is not used for all customer transactions, US is required to maintain “adjusted net capital” equal to or in excess of $20 million plus 5% of all liabilities owed to customers exceeding $10 million. Adjusted net capital and the level of notional values under these transactions change from day to day.

HK, organized in Hong Kong, is a licensed leveraged foreign exchange trading company with the Securities and Futures Commission (“SFC”) and is subject to required minimum liquid capital financial requirements.

UK, organized in the U.K., is a registered securities and futures firm with the Financial Services Authority (“FSA”). UK is regulated by the FSA and is subject to minimum capital requirements.

ODL and FSL are organized in the U.K. and are regulated by the FSA. ODL is a registered consolidated group company. FSL is a registered broker dealers. ODL and FSL are subject to minimum capital requirements. ODL JL, a registered broker dealer organized in Japan, was regulated by the FSA of Japan and was subject to minimum capital requirements. As ODL JL was merged into FJSL in July 2011, the Company did not have any capital requirements for this entity as of September 30, 2011. FSLJ, a registered broker dealer organized in Japan, is regulated by the FSA of Japan and is subject to minimum capital requirements. As ODL was acquired by the Company on October 1, 2010, the Company did not have any capital requirements for these entities prior to the acquisition.

Canada, organized in Nova Scotia, was registered as an exchange contracts dealer with the British Columbia Securities Commission (“BCSC”). Canada ceased operations in October 2009 and deregistered with the BCSC with the ultimate objective of dissolution. Canada was subject to BCSC minimum financial requirements or “risk adjusted capital” as of December 31, 2010. Canada received final deregistration approval in January 2011 and therefore did not have net capital requirements as of September 30, 2011.

Australia, organized in New Zealand, is a registered exchange contract dealer with the Australia Securities & Investments Commission (“ASIC”) and is subject to ASIC minimum financial requirements or “adjusted surplus liquid funds.”

The minimum capital requirements of the above entities may effectively restrict the payment of cash distributions to members.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 17. Net Capital Requirements  – (continued)

The tables below present the capital, as defined by the respective regulatory authority, the minimum capital requirement and the excess capital for US, HK, UK, Canada, Australia, ODL, FSL, ODL JL and FXCMJ as of September 30, 2011 and December 31, 2010, with amounts in millions:

             
  September 30, 2011
     US   HK   UK   Australia   ODL   FSL   FJSL
Capital   $ 43.6     $ 17.1     $ 32.1     $ 4.0     $ 26.8     $ 24.5     $ 15.0  
Minimum capital requirement     26.8       6.3       14.6       1.4       7.1       5.1       4.5  
Excess capital   $ 16.8     $ 10.8     $ 17.5     $ 2.6     $ 19.7     $ 19.4     $ 10.5  

               
  December 31, 2010
     US   HK   UK   Canada   Australia   ODL   FSL   ODL JL
Capital   $ 89.4     $ 16.1     $ 28.4     $ 1.0     $ 3.1     $ 6.1     $ 15.4     $ 2.0  
Minimum capital requirement     26.5       5.1       8.9       0.1       0.1       5.5       5.5       1.0  
Excess capital   $ 62.9     $ 11.0     $ 19.5     $ 0.9     $ 3.0     $ 0.6     $ 9.9     $ 1.0  

Note 18. Commitments and Contingencies

Operating Lease Commitments

The Company leases office space and equipment under operating leases. Some of the lease agreements contain renewal options ranging from 3 to 15 years at prevailing market rates. The lease for the office facilities is subject to escalation factors primarily related to property taxes and building operating expenses. Future minimum lease payments under non-cancelable operating leases with terms in excess of one year are as follows as of September 30, 2011, with amounts in thousands:

 
Year Ended December 31   As of September 30, 2011
Remainder of 2011   $ 2,094  
2012     5,463  
2013     3,749  
2014     3,529  
2015     3,377  
Thereafter     29,495  
     $ 47,707  

The aggregate rental expense for operating leases charged to operations, included in general and administrative expense in the condensed consolidated statements of operations and comprehensive income, for the three and nine months ended September 30, 2011, was $2.6 million and $6.2 million, respectively. The aggregate rental expense for operating leases charged to operations included in general and administrative expense in the condensed consolidated statement of operations and comprehensive income for the three and nine months ended September 30, 2010 was $1.0 million and $3.2 million, respectively. These amounts are net of sublease income that was not material for both periods.

Capital Lease Commitments

The Company leases office equipment under capital leases. Interest paid as part of our capital lease obligation was not material for the three and nine months ended September 30, 2011 and 2010. The capital leases expire in 2015. Future minimum lease payments for capital leases are not material for the years 2011 to 2015.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 18. Commitments and Contingencies  – (continued)

Litigation

The Corporation and its subsidiaries have been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and feels that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently at various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators’ and/or court’s decisions.

In June 2010, US was contacted by the NFA requesting information regarding trade execution activities. In November 2010, US was additionally contacted by the CFTC for similar information. In August 2011, US entered into a settlement with the NFA. The settlement terms principally pertain to US’s practice concerning the execution of price improvements in its trading execution system prior to August 2010. Under the terms of the settlement, US agreed, without admitting or denying any of the allegations to pay a fine of $2 million to the NFA and to provide restitution to the affected clients.

In October 2011, US entered into a settlement with the CFTC. The settlement principally addresses allegations regarding US’s failure to monitor and maintain its trading systems prior to August, 2010. Under the terms of the settlement, US agreed, without admitting or denying any of the allegations to pay a fine of $6 million to the CFTC and to provide restitution to the affected clients.

The Company established a reserve of approximately $16.3 million relating to these matters and is included in general and administrative in the condensed consolidated statement of operations and comprehensive income. Additionally, in June 2011, US entered into an agreement with certain founding members of Holdings, whereby these members would reimburse US for the amounts related to the NFA and CFTC matters, up to $16.0 million, plus additional amounts, as approved by such founding members. Consequently, there was no impact to the Corporation’s net income for the three and nine months ended September 30, 2011, as the expense was allocated to the respective founding members for such expense as permitted under the terms of the LLC Agreement. Accordingly, $16.3 million of additional capital was provided by the respective founding members (see Notes 2 and 13).

On February 8, 2011, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York by a single former customer against Forex Capital Markets LLC. The complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C §1961 et seq ., as well as the New York General Business Law. The complaint seeks an unspecified amount of damages, trebled, and alleges false and deceptive trade practices, fraudulent and unfair trade execution and account handling practices. A motion to compel arbitration was filed by Forex Capital Markets LLC during April 2011. In September 2011 the Plaintiff moved for leave to amend his complaint to add additional allegations and additional parties, including FXCM CEO Dror Niv and two software companies as defendants, and a new plaintiff that also alleges it was a customer. The Company has opposed the motion for leave to amend. Both our motion to compel arbitration and the Plaintiff's motion for leave to amend are pending.

On October 25, 2011, three debtors, Certified, Inc., Global Bullion Trading Group, Inc., and WJS Funding, Inc. filed an adversary complaint in the United States Bankruptcy Court for the Southern District of Florida against Forex Capital Markets LLC, ODL Securities, Inc., and ODL Securities, Ltd. (“Defendants”). The complaint asserts claims under the Federal Bankruptcy Code to recover allegedly preferential and fraudulent transfers to the Defendants, under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C §1961 et seq., as well as the common law. The complaint seeks an unspecified amount of compensatory and punitive damages, interests, and costs.

As discussed above, the Company established reserves of approximately $16.3 million. As to the other matters described above, the Company cannot predict the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 18. Commitments and Contingencies  – (continued)

settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company, based on current knowledge and after consultation with counsel, does not expect that the resolution of such other matters will have a material effect on the Company.

It is the opinion of management of the Company that the ultimate outcomes of the matters referenced above are unlikely to have a material adverse effect on the business, financial condition or operating results of the Company. The Company’s condensed consolidated financial statements do not include any accrual for litigation contingency; as such amounts cannot be reasonably estimated and are not expected to have a material impact.

Income Taxes

The Company is under examination by French tax authorities regarding its taxable status and is evaluating the potential impact on its operations in France. The Company does not believe this matter would have a material adverse consequence on its business, financial condition and operating results.

Guarantees

At the inception of guarantees, if any, the Company will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. The Company did not have any such guarantees in place as of September 30, 2011 and December 31, 2010.

Note 19. Income Taxes

FXCM’s effective rate was 34.4% and 22.2% for the three and nine months ended September 30, 2011, respectively. The effective rate was (5.6%) and 4.2% for the three and nine months ended September 30, 2010, respectively. FXCM’s income tax provision was $8.1 million and $10.8 million for the three and nine months ended September 30, 2011. The income tax benefit and provision was $1.4 million and $3.5 million for the three and nine months ended September 30, 2010, respectively. The increase in the effective tax rate for the three and nine months ended September 30, 2011 compared to September 30, 2010 was primarily due to the fact that in 2010 the Company's subsidiaries operated as limited liability companies which are not subject to federal or state income tax. Subsequent to the IPO, the Company’s controlling interest is subject to U.S. federal and state income taxes resulting in an increased tax provision and effective tax rate. The rate also increased due to a shift in jurisdictional income to entities taxed locally as corporations in the foreign jurisdictions. Additionally, for the nine months ended September 30, 2011, a $16.3 million reserve was recorded relating to settlements with the NFA and CFTC regarding trade execution activities. A portion of the reserve is not tax deductible resulting in increased taxable income, income tax provision and effective tax rate.

During the three months ended September 30, 2011, there were no material changes to the uncertain tax positions.

The Company is no longer subject to tax examinations by taxing authorities for tax years prior to 2008 and, presently, has no open examinations for tax years before 2011.

Note 20. Foreign Currencies and Concentrations of Credit Risk

As a riskless principal under the agency model, the Company accepts and clears foreign exchange spot contracts for the accounts of its customers (see Note 2). These activities may expose the Company to off- balance-sheet risk in the event that the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.

In connection with these activities, the Company executes and clears customers’ transactions involving the sale of foreign currency not yet purchased, substantially all of which are transacted on a margin basis subject to internal policies. Such transactions may expose the Company to off-balance-sheet risk in the event

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 20. Foreign Currencies and Concentrations of Credit Risk  – (continued)

margin deposits are not sufficient to fully cover losses that customers may incur. In the event that a customer fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligation.

The Company controls such risks associated with its customer activities by requiring customers to maintain margin collateral, in the form of cash, in compliance with various internal guidelines. The Company’s trading software technology monitors margin levels on a real time basis and, pursuant to such guidelines, requires customers to deposit additional cash collateral, or to reduce positions, if necessary. The system is designed to ensure that any breach in a customer’s margin requirement as a result of losses on the trading account will automatically trigger a final liquidation, which will execute the closing of all positions. Exposure to credit risk is therefore minimal. Institutional customers are permitted credit pursuant to limits set by the Company’s prime brokers. The prime brokers incur the credit risk relating to the trading activities of these customers in accordance with the respective agreements between such brokers and the Company.

The Company is engaged in various trading activities with counterparties which include brokers and dealers, futures commission merchants, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the financial instrument. It is the Company’s policy to: (i) perform credit reviews and due diligence prior to conducting business with counterparties; (ii) set exposure limits and monitor exposure against such limits; and (iii) periodically review, as necessary, the credit standing of counterparties using multiple sources of information. The Company’s due from brokers balance included in the condensed consolidated statements of financial condition was $8.1 million as of September 30, 2011 and not material as of December 31, 2010. Four banks held more than 10% each of the Company’s total cash and cash equivalents and cash and cash equivalents, held for customers as of September 30, 2011. Three banks held more than 10% each of the Company’s total cash and cash equivalents and cash and cash equivalents, held for customers as of December 31, 2010.

Note 21. Segments

ASC 280 Segments Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s operations relate to foreign exchange trading and related services and operate in two segments — retail and institutional, with different target markets and are covered by a separate sales force, customer support and trading platforms. The Company’s segments are organized around three geographic areas. These geographic areas are the United States, Asia and Europe and are based on the location of its customers’ accounts.

Retail Trading

The Company operates its retail business whereby it acts as an agent between retail customers and a collection of large global banks and financial institutions by making foreign currency markets for customers trading in foreign exchange spot markets through its Retail Trading business segment. In addition, the Retail Trading business segment includes the Company’s white label relationships, CFDs, payments for order flow and rollovers.

Institutional Trading

Institutional Trading facilitates spot foreign currency trades on behalf of institutional customers through the services provided by the FXCM Pro Division of US. This service allows customers to obtain the best execution price from external banks and financial institutions.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 21. Segments  – (continued)

Information concerning the Company’s operations by reportable segment is as follows, with amounts in thousands:

       
  Three Months Ended September 30, 2011
     Retail Trading   Institutional Trading   Corporate   Total
Total revenues   $ 101,348     $ 7,720     $     $ 109,068  
Operating expenses     60,314       3,632       21,446       85,392  
Income (loss) before income taxes   $ 41,034     $ 4,088     $ (21,446 )    $ 23,676  

       
  Three Months Ended September 30, 2010
     Retail Trading   Institutional Trading   Corporate   Total
Total revenues   $ 83,413     $ 7,190     $ (72 )    $ 90,531  
Operating expenses     42,104       2,360       19,979       64,443  
Income (loss) before income taxes   $ 41,309     $ 4,830     $ (20,051 )    $ 26,088  

       
  Nine Months Ended September 30, 2011
     Retail Trading   Institutional Trading   Corporate   Total
Total revenues   $ 285,299     $ 21,820     $     $ 307,119  
Operating expenses     165,211       13,789       79,632       258,632  
Income (loss) before income taxes   $ 120,088     $ 8,031     $ (79,632 )    $ 48,487  

       
  Nine Months Ended September 30, 2010
     Retail Trading   Institutional Trading   Corporate   Total
Total revenues   $ 243,374     $ 20,779     $     $ 264,153  
Operating expenses     121,478       11,327       48,449       181,254  
Income (loss) before income taxes   $ 121,896     $ 9,452     $ (48,449 )    $ 82,899  

   
Assets   As of September 30, 2011   As of December 31, 2010
Retail   $ 1,113,798     $ 917,857  
Institutional     10,969       18,192  
Corporate     109,081       111,743  
Total assets   $ 1,233,848     $ 1,047,792  

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)
  
Notes to Unaudited Condensed Consolidated Financial Statements

Note 22 — Subsequent Events

We have evaluated our subsequent events through the issuance date of this Quarterly Report on Form 10-Q.

On October 7, 2011, the Company acquired Foreland Forex Co. Limited, a Japan based foreign exchange provider, for $17.0 million net of cash received.

On October 17, 2011, the Board of Directors approved a $20.0 million increase in the Stock Repurchase Program (see Note 15).

The Company declared a quarterly dividend of $0.06 per share on its outstanding Class A common stock. The dividend is payable on December 30, 2011 to Class A stockholders of record at the close of business on December 19, 2011.

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FXCM Inc.
(Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of FXCM Inc., and the related notes included elsewhere in this report and our Annual Report on Form 10K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 31, 2011, including the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Operations” contained therein. The historical consolidated financial data discussed below reflects the historical results and financial position of FXCM Inc. In addition, this discussion and analysis contains forward looking statements and involves numerous risks and uncertainties, including those described under “Cautionary Note Regarding Forward-Looking Statement” and “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements.

OVERVIEW

Business

The Company is an online provider of foreign exchange (“FX”), trading and related services to approximately 156,053 active retail and institutional customers globally. We offer our customers access to over-the-counter, FX markets through our proprietary technology platform. In a FX trade, a participant buys a currency pair. Our platform presents our FX customers with the best price quotations on up to 56 currency pairs from a number of global banks, financial institutions and FX market makers, which we believe provides our customers with an efficient and cost-effective way to trade FX. We utilize what is referred to as agency execution or an agency model. When our customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker. We earn fees by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses.

Industry Trends

Economic Environment — Customer FX trading volumes are impacted by the volatility levels in financial markets. August and September 2011 were periods of elevated volatility in the foreign currency markets with heightened concerns about the fiscal position of some of the Euro zone countries. It is difficult to predict volatility in the FX market.

Competitive Environment — The retail FX trading market is fragmented and highly competitive. Our competitors in the retail market can be grouped into several broad categories based on size, business model, product offerings, target customers and geographic scope of operations. These include U.S. based retail FX brokers, international multi-product trading firms, other online trading firms, and international banks and other financial institutions with significant FX operations. We expect competition to continue to remain strong for the foreseeable future.

Regulatory Environment — Our business and industry are highly regulated. Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders.

Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the United Kingdom (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions), Hong Kong, Australia and Japan.

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We are also regulated in all regions by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the United Kingdom, or FSA, the Securities and Futures Commission in Hong Kong, or SFC, the Australian Securities and Investment Commission in Australia, or ASIC and FSA of Japan, among others. In addition, certain of our branch offices in Europe, while subject to local regulators, are regulated by the FSA with respect to, among other things, FX, CFDs and net capital requirements. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations.

Notwithstanding the foregoing, we accept and seek to deal with customers resident in foreign jurisdictions in a manner which does not breach any local laws or regulations where they are resident or require local registration, licensing or authorization from local governmental or regulatory bodies or self-regulatory organizations. We determine the nature and extent of services we can provide and the manner in which we conduct our business with customers resident in foreign jurisdictions based on a variety of factors.

We evaluate our activities in relation to jurisdictions in which we are not currently regulated by governmental bodies and/or self-regulatory organizations on an ongoing basis. This evaluation may involve speaking with regulators, local counsel and referring brokers or white labels (firms that offer our trading services to their clients under their own brand name in exchange for a revenue sharing arrangement with us) operating in any such jurisdiction and reviewing published regulatory guidance and examining the licenses that any competing firms may have. As a result of these evaluations, we may determine to alter our business practices in order to comply with legal or regulatory developments in such jurisdictions. At any given time, the manner in which we conduct business in any one of these jurisdiction may be changed or in a state of transition.

As a result, our growth may be limited by future restrictions in these jurisdictions and we remain at risk that we may be exposed to civil or criminal penalties or be required to cease operations if we are found to be operating in jurisdictions without the proper license or authorization or if we become subject to regulation by local government bodies.

The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes in our industry. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable.

Business Strategy

We intend to implement the following strategies:

Continue to use our global brand and marketing to drive organic customer growth;
Make selected acquisitions to expand our customer base or add presence in markets where we currently have low penetration;
Expand our range of products to add new customers and increase revenues from existing customers; and
Capture market share from competitors who are unable to keep pace with the changing and demanding regulatory landscape while capitalizing on the long-term benefits associated with a more transparent financial marketplace.

Primary Sources of Revenues

Most of our revenues are derived from fees charged as a commission or markup when our retail or institutional customers execute trades on our platform with our FX market makers. This revenue is primarily a function of the number of active accounts, the volume those accounts trade and the fees we earn on that volume.

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Retail Trading Revenue — Retail trading revenue is our largest source of revenue and is primarily driven by: (i) the number of active accounts and the mix of those accounts, such as low versus high volume accounts; (ii) the volume these accounts trade, which is driven by the amount of funds customers have on deposit and the overall volatility of the FX market; (iii) the size of the markup we receive, which is a function of the mix of currency pairs traded, the spread we add to the prices supplied by our FX market makers and the interest differential between major currencies and the markup we receive on interest paid and received on customer positions held overnight; and (iv) the amount of additional retail revenues earned, including revenues from contracts-for difference (CFD) trading, fees earned through white label relationships and payments we receive for order flow from FX market makers. In addition, 38% and 22% of our retail trading revenues for the three months ended September 30, 2011 and 2010, respectively, were derived from such additional retail revenues earned. For the nine months ended September 30, 2011 and 2010, 27% and 11% of retail trading revenue were derived from such additional retail revenues earned.

Institutional Trading Revenue — We generate revenue by executing spot foreign currency trades on behalf of institutional customers through our institutional trading segment, FXCM Pro, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customer account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk.

Other — We are engaged in various ancillary FX related services and joint ventures, including use of our platform and trading facilities, providing technical expertise, and earning fees from data licensing. We also earn commission revenue from equity and related brokerage activities.

Primary Expenses

Referring Broker Fees — Referring broker fees consist primarily of compensation paid to our referring brokers and white labels. We generally provide white labels access to our platform, systems and back-office services necessary for them to offer FX trading services to their customers. We also establish relationships with referring brokers that identify and direct potential FX trading customers to our platform. Referring brokers and white labels generally incur advertising, marketing and other expenses associated with attracting the customers they direct to our platform. Accordingly, we do not incur any incremental sales or marketing expense in connection with trading revenue generated by customers provided through our referring brokers and/or white labels. We do, however, pay a portion of the FX trading revenue generated by the customers of our referring brokers and/or white labels and record this under referring broker fees.

Compensation and Benefits — Compensation and benefits expense includes employee and member salaries, bonuses, stock compensation awards, benefits and employer taxes. Changes in this expense are driven by fluctuations in the number of employees, increases in wages as a result of inflation or labor market conditions, changes in rates for employer taxes and other cost increases affecting benefit plans. In addition, this expense is affected by the composition of our work force. The expense associated with our bonus plans can also have a significant impact on this expense category and may vary from year to year.

Advertising and Marketing — Advertising and marketing expense consists primarily of electronic media, print and other advertising costs, as well as costs associated with our brand campaign and product promotion.

Communications and Technology — Communications and technology expense consists primarily of costs for network connections to our electronic trading platforms, telecommunications costs, and fees paid for access to external market data. This expense is affected primarily by the growth of electronic trading, our network/ platform capacity requirements and by changes in the number of telecommunication hubs and connections which provide our customers with direct access to our electronic trading platforms.

General and Administrative — We incur general and administrative costs to support our operations, including:

Professional fees and outside services expenses — consisting primarily of legal, accounting and outsourcing fees;
Bank processing fees — consisting of service fees charged by banks primarily related to our customer deposits and withdrawals;

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Regulatory fees — consisting primarily of fees from regulators overseeing our businesses which are largely tied to our overall trading revenues; and
Occupancy and building operations expense — consisting primarily of costs related to leased property including rent, maintenance, real estate taxes, utilities and other related costs. Our company headquarters are located in New York, NY, with other U.S. offices in Plano, TX and San Francisco, CA. Outside the United States, we have offices in London, Paris, Berlin, Athens, Milan, Hong Kong, Sydney, Jerusalem and Tokyo.

Our general and administrative expenses have increased as a result of the additional legal, accounting, insurance and other expenses associated with being a public company. Among other things, compliance with the Sarbanes-Oxley Act and related rules and regulations have resulted in increased legal and accounting costs.

Depreciation and Amortization — Depreciation and amortization expense results primarily from the depreciation of long-lived assets purchased and internally developed software that has been capitalized. Amortization of purchased intangibles primarily includes amortization of intangible assets obtained through our acquisition of ODL as described in our Annual Report.

Income Taxes — Prior to the IPO in December 2010, we have historically operated as partnerships for U.S. federal income tax purposes and mainly as a corporate entity in non-U.S. jurisdictions. As a result, our income was not subject to U.S. federal and state income taxes. Generally, the tax liability related to income earned by these entities represents obligations of the individual partners and members. Income taxes shown on our historical consolidated income statements are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in non-U.S. jurisdictions.

Following the IPO, FXCM Holdings, LLC and certain of its subsidiaries continue to operate in the United States as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. Accordingly, these entities in some cases continue to be subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, FXCM Inc. is subject to U.S. corporate federal, state and local income taxes that are reflected in our condensed consolidated financial statements.

Other

Non-Controlling Interest — As a result of the IPO, FXCM Inc. is a holding company, and its sole material asset is a controlling equity interest in FXCM Holdings, LLC. As the sole managing member of FXCM Holdings, LLC, FXCM Inc. operates and controls all of the business and affairs of FXCM Holdings, LLC and, through FXCM Holdings, LLC and its subsidiaries, conduct our business. The ownership interest of the other members of FXCM Holdings, LLC is reflected as a non-controlling interest in the condensed consolidated financial statements of FXCM Inc.

Segment Information

The FASB establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s operations relate to foreign exchange trading and related services and operate in two segments — retail and institutional, with different target markets with separate sales forces, customer support and trading platforms. For financial information regarding our segments, see Note 21 to our condensed consolidated financial statements.

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RESULTS OF OPERATIONS

Acquisition of FXCM Japan Inc.

On March 31, 2011, we acquired a 100% interest in FXCMJ, a Japan-based foreign exchange provider, (the “Acquisition”). The Acquisition was designed to increase our profile in the Japanese market and accelerate our growth in continental Asia, utilizing FXCMJ’s relationships and sales force. As consideration, we provided $15.9 million in cash. The Acquisition was accounted for in accordance with FASB ASC 805, Business Combinations. The assets acquired and the liabilities assumed were recorded at their fair values in accordance with FASB ASC 820, Fair Value Measurements and Disclosures.

The Acquisition resulted in an increase in goodwill and intangible assets in our condensed consolidated statement of financial condition. Intangible assets acquired includes retail customer relationships. The Acquisition will result in an increase in amortization of intangible assets in our condensed consolidated statements of operations and comprehensive income as this intangible asset is amortized over its estimated useful life.

The following table sets forth FXCM’s condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2011 and 2010:

   
  Three Months Ended September 30,
     2011   2010
Revenues
                 
Retail trading revenue   $ 97,017     $ 80,383  
Institutional trading revenue     7,720       7,190  
Interest income     963       488  
Other income     3,368       2,470  
Total revenues     109,068       90,531  
Expenses
                 
Referring broker fees     25,720       24,607  
Compensation and benefits     22,955       17,826  
Advertising and marketing     9,870       5,601  
Communication and technology     8,190       6,373  
General and administrative     13,197       8,178  
Depreciation and amortization     5,367       1,831  
Interest expense     93       27  
Total expenses     85,392       64,443  
Income before income taxes     23,676       26,088  
Income tax provision     8,136       (1,449 ) 
Net income     15,540       27,537  
Other Comprehensive income
                 
Foreign currency translation gain/(loss)     (2,809 )      370  
Total comprehensive income     12,731       27,907  

Highlights

The three months ended September 30, 2011 experienced strong growth in customer balances with a 95.1% increase in customer equity to $828.2 million and a 16.0% increase in active accounts to 156,053 from September 30, 2010.
Total revenues increased 20.5% to $109.1 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was due primarily to a 20.7% increase in retail trading revenue, due primarily to retail trading volumes increasing 34.1% in the third quarter 2011 versus third quarter 2010, partially offset by a 10.6% decrease in markup to $93 per million traded.

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Net income decreased 43.6% to $15.5 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 as a result of higher expenses resulting from the acquisitions of ODL and FXCMJ in October 2010 and March 2011, respectively, including higher amortization of ODL intangibles, acquired in October 2010.

The following table sets forth FXCM’s condensed consolidated statement of operations and comprehensive income for the nine months ended September 30, 2011 and 2010:

   
  Nine Months Ended September 30,
     2011   2010
Revenues
                 
Retail trading revenue   $ 268,234     $ 234,608  
Institutional trading revenue     21,820       20,779  
Interest income     2,837       1,493  
Other income     14,228       7,273  
Total revenues     307,119       264,153  
Expenses
                 
Referring broker fees     72,253       61,680  
Compensation and benefits     68,662       52,325  
Advertising and marketing     24,375       16,916  
Communication and technology     23,559       19,171  
General and administrative     55,356       25,792  
Depreciation and amortization     14,201       5,292  
Interest expense     226       78  
Total expenses     258,632       181,254  
Income before income taxes     48,487       82,899  
Income tax provision     10,756       3,517  
Net income     37,731       79,382  
Other Comprehensive income
                 
Foreign currency translation gain/(loss)     (290 )      226  
Total comprehensive income     37,441       79,608  

Highlights

The nine months ended September 30, 2011 experienced strong growth in customer balances with a 95.1% increase in customer equity to $828.2 million and a 16.0% increase in active accounts to approximately 156,053 compared to September 30, 2010.
Total revenue increased 16.3% to $307.1 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase was due primarily to increases in retail revenue and other income. Retail trading revenue increased 14.3% due primarily to retail trading volumes increasing by 19.5% in the nine months ended September 30, 2011 versus the nine months ended September 30, 2010 and markup decreasing 4.0% to $96 per million traded. Other income increased by $7.0 million or 95.6% to $14.2 million due primarily to the recognition of $4.5 million in deferred revenue in the first quarter 2011 as income upon the termination of an agreement to provide trade execution services to FXCMJ as well as the inclusion of $6.2 million in revenues in the nine months ended September 30, 2011 from ODL’s equity broker-dealer business.
Net income decreased 52.5% to $37.7 million for the period ended September 30, 2011 compared to the nine months ended September 30, 2010 as a result of higher expenses resulting from the acquisitions of ODL and FXCMJ in October 2010 and March 2011, respectively, including higher amortization of intangibles of ODL, acquired in October 2010 and $16.3 million of reserves relating to a settlement with the NFA and CFTC regarding trade execution activities.

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On March 31, 2011, we completed the acquisition of the retail FX business of FXCMJ. Our acquisition of the retail FX business of FXCMJ is intended to increase our profile and accelerate our growth in the Japanese market utilizing their relationships and sales force.

Revenues

   
  Three Months Ended September 30,
     2011   2010
     (In thousands, except as noted)
Revenues:
                 
Retail trading revenue   $ 97,017     $ 80,383  
Institutional trading revenue.     7,720       7,190  
Interest income     963       488  
Other income.     3,368       2,470  
Total revenues   $ 109,068     $ 90,531  
Customer equity (dollars in millions)   $ 828     $ 425  
Active accounts     156,053       134,478  
Total retail trading volume(1) (billions)   $ 1,042     $ 776  
Retail trading revenue per million traded(1)   $ 93     $ 104  

(1) Volumes translated into equivalent U.S. dollars

Retail trading revenue increased by $16.6 million or 20.7% to $97.0 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was due primarily to retail trading volumes increasing 34.1% in the third quarter 2011 due to organic growth and the acquisitions of ODL and FXCMJ versus third quarter 2010, partially offset by a 10.6% decrease in markup to $93 per million traded. The decrease in markup for the three months ended September 30, 2011 compared to the same period ended September 30, 2010 is due to an increased proportion of higher volume clients and Japanese clients who pay less markup than our traditional client base.

Institutional trading revenue increased by $0.5 million or 7.4% to $7.7 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. While institutional trading volume increased 64.4% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 our markup or institutional trading revenue per million traded declined 34.2%. Our institutional markup is dependent on customer mix, with some customers paying a higher markup than others. In the third quarter 2011 experienced an adverse customer mix relative to the third quarter 2010.

Interest income increased by $0.5 million or 97.3% to $1.0 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The increase was primarily due to higher cash balances which increased by 83.3% at September 30, 2011 versus September 30, 2010.

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Other income increased by 36.4% to $3.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The change in other income was due primarily to the inclusion of $2.4 million from ODL’s equity broker-dealer business as a result of the ODL acquisition in October 2010.

   
  Nine Months Ended September 30,
     2011   2010
     (In thousands, except as noted)
Revenues:
                 
Retail trading revenue   $ 268,234     $ 234,608  
Institutional trading revenue.     21,820       20,779  
Interest income     2,837       1,493  
Other income     14,228       7,273  
Total revenues   $ 307,119     $ 264,153  
Customer equity (dollars in millions)   $ 828     $ 425  
Active accounts     156,053       134,478  
Total retail trading volume(1) (billions)   $ 2,802     $ 2,344  
Retail trading revenue per million traded(1)   $ 96     $ 100  

(1) Volumes translated into equivalent U.S. dollars

Retail trading revenue increased by $33.6 million or 14.3% to $268.2 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase was due primarily to retail trading volumes increasing 19.5% as a result of organic growth and the acquisitions of ODL and FXCMJ in the nine months ended September 30, 2011 versus the nine months ended September 30, 2010, partially offset by a 4.0% decrease in markup to $96 per million traded. Our retail markup is influenced by a number of factors but tends to be negatively impacted by lower volatilities in the currency markets. In the first nine months ended September 30, 2011, currency volatilities were lower than the first nine months ended September 30, 2010 on average, the latter period including a very volatile May 2010 where Euro zone troubles were of particular focus.

Institutional trading revenue increased by $1.0 million or 5.0% to $21.8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. While institutional trading volume increased 48.1% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 our markup or institutional trading revenue per million traded declined 21.6%. Our institutional markup is influenced by customer mix, with some institutional customers paying a higher markup than others. The third quarter 2011 experienced an adverse customer mix relative to the third quarter 2010.

Interest income increased by $1.3 million or 90.0% to $2.8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase was primarily due to higher cash balances which increased by 83.3% at September 30, 2011 versus September 30, 2010.

Other income increased 95.6% to $14.2 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, due primarily to the recognition of $4.5 million in deferred revenue in the first quarter 2011 as income upon the termination of an agreement to provide trade execution services to FXCMJ as well as the inclusion of $6.2 million in revenues in the nine months ended September 30, 2011 from ODL’s equity broker-dealer business as a result of the ODL acquisition in October 2010.

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Expenses

   
  Three Months Ended September 30,
     2011   2010
     (In thousands)
Expenses:
                 
Referring broker fees   $ 25,720     $ 24,607  
Compensation and benefits     22,955       17,826  
Advertising and marketing     9,870       5,601  
Communications and technology     8,190       6,373  
General and administrative     13,197       8,178  
Depreciation and amortization     5,367       1,831  
Interest expense     93       27  
Total expenses   $ 85,392     $ 64,443  

Referring broker fees increased $1.1 million or 4.5% to $25.7 million for the three months ended September 30, 2011 compared to the three months ended September, 2010. The change was due primarily to a higher proportion of the Company’s volume derived from indirect sources and the inclusion of ODL in the Company’s results. Indirect volume increased 27% for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 due primarily to a higher proportion of trading volume in the three months ended September 30, 2011 being derived from Asia, where the Company typically has more referring broker relationships than other regions. In addition, ODL which was acquired in October 1, 2010 added $0.8 million in referring broker fees in the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

Compensation and benefits expense increased $5.1 million or 28.8% to $23.0 million for the three months ended September 30, 2011 compared to the same period in 2010. The change was due primarily to $2.1 million in stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010, and $3.8 million from ODL and FXCMJ which were acquired in October 1, 2010 and March 31, 2011, respectively.

Advertising and marketing expense increased $4.3 million or 76.2% to $9.9 million for the three months ended September 30, 2011 compared to the same period in 2010. The Company has been increasing spending of advertising and marketing to further growth, including initiating sponsorships of a FX television show and a trading contest that commenced in the first and third quarters of 2011, respectively, on the CNBC television network in the first quarter of 2011.

Communications and technology expense increased $1.8 million or 28.5% to $8.2 million for the three months ended September 30, 2011, compared to the same period in 2010. $1.9 million of the increase resulted from the inclusion of ODL’s and FXCMJ’s communication and technology costs included in the Company’s results of operations compared to the three months ended September 30 2010, offset by a slight decrease in communication and technology expense during the quarter ended September 30, 2011 compared to the same prior period.

General and administrative expense increased $5.0 million or 61.4% to $13.2 million for the three months ended September 30, 2011 compared to the same period in 2010. $2.6 million of increase was due to the inclusion of ODL and FXCMJ in the results of the three months ended September 30, 2011, and $1.0 million in higher bank fees, primarily prime brokerage fees.

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Depreciation and amortization expense rose $3.5 million or 193.1% to $5.4 million during the three months ended September 30, 2011 compared to the same period in 2010. Of this amount, $1.5 million was increased amortization due to the amortization of intangibles acquired in the ODL and FXCMJ purchases, $0.6 million due to the inclusion of ODL and FXCMJ in the Company’s results in the three months ended September 30, 2011 following the acquisition of ODL and FXCMJ in October 2010 and March 31, 2011, respectively. The remainder is due to higher depreciation and amortization expense resulting from higher office, communication, computer equipment and software.

   
  Nine Months Ended September 30,
     2011   2010
     (In thousands)
Expenses:
                 
Referring broker fees   $ 72,253     $ 61,680  
Compensation and benefits     68,662       52,325  
Advertising and marketing     24,375       16,916  
Communications and technology     23,559       19,171  
General and administrative     55,356       25,792  
Depreciation and amortization     14,201       5,292  
Interest expense     226       78  
Total expenses   $ 258,632     $ 181,254  

Referring broker fees increased $10.6 million or 17.1% to $72.3 million for the nine months ended September 30, 2011 compared to the nine months ended September, 2010. The change was due primarily to a higher proportion of the Company’s volume derived from indirect sources and the inclusion of ODL in the Company’s results. Indirect volume increased 12% for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 due primarily to a higher proportion of trading volume in the nine months ended September 30, 2011 being derived from Asia, where the Company typically has more referring broker relationships than other regions. In addition, ODL and FXCMJ which were acquired in October 1, 2010 and March 31, 2011, respectively, added $4.0 million in referring broker fees in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

Compensation and benefits expense increased $16.3 million or 31.2% to $68.7 million for the nine months ended September 30, 2011 compared to the same period in 2010. The change was due primarily to $6.5 million in stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010 and $9.2 million from ODL and FXCMJ which were acquired in October 2010 and March 31, 2011, respectively.

Advertising and marketing expense increased $7.5 million or 44.1% to $24.4 million for the nine months ended September 30, 2011 compared to the same period in 2010. The Company has been increasing spending of advertising and marketing to further growth, including initiating sponsorships of a FX television show and a trading contest that commenced in the first and third quarters of 2011, respectively, on the CNBC television network in the first quarter of 2011.

Communications and technology expense increased $4.4 million or 22.9% to $23.6 million for the nine months ended September 30, 2011, compared to the same period in 2010. $4.7 million of the increase is due to the acquisition of ODL and FXCMJ offset by a slight decrease in communication and technology expense relating to our institutional trading business for the nine months ended September 30, 2011.

General and administrative expense increased $29.6 million or 114.6% to $55.4 million for the nine months ended September 30, 2011 compared to the same period in 2010. $16.3 million is the increase was due to reserves established in anticipation of a settlement with the NFA and CFTC relating to trade execution activities, $8.1 million due to the inclusion of ODL and FXCMJ in the results of the nine months ended September 30, 2011, $4.0 million in higher bank fees, primarily prime brokerage fees.

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Depreciation and amortization expense rose $8.9 million or 168.3% to $14.2 million during the nine months ended September 30, 2011 compared to the same period in 2010. Of this amount, $4.6 million was increased amortization due to the amortization of intangibles acquired in the ODL and FXCMJ purchases, $1.2 million due to the inclusion of depreciation related to ODL and FXCMJ in the Company’s results in the nine months ended September 30, 2011 following the acquisition of ODL and FXCMJ on October 1, 2010 and March 31, 2011, respectively. The remainder is higher depreciation and amortization expense resulting from higher office, communication, computer equipment and software.

Income Taxes

   
  Three Months Ended September 30,
     2011   2010
     (In thousands, except percentages)
Income before income taxes   $ 23,676     $ 26,088  
Income tax provision   $ 8,136     $ (1,449 ) 
Effective tax rate     34.4 %      (5.6 )% 

Income tax provision increased $9.6 million or 661.5% to $8.1 million for the three months ended September 30, 2011 compared to the same period in 2010. The increase in income tax provision is primarily due to the fact that the Company operated as partnership in the U.S. and was not subject to U.S. income taxes prior to the IPO in December 2010. Subsequent to the IPO, the Company is subject to U.S. federal and state income taxes resulting in an increased income tax provision and effective tax rate.

   
  Nine Months Ended September 30,
     2011   2010
     (In thousands, except percentages)
Income before income taxes   $ 48,487     $ 82,899  
Income tax provision   $ 10,756     $ 3,517  
Effective tax rate     22.2 %      4.2 % 

Income tax provision increased $7.2 million or 205.8% to $10.8 million for the nine months ended September 30, 2011 compared to the same period in 2010. FXCM’s effective rate increased to 22.2% for the nine months ended September 30, 2011 from 4.2% for the nine months ended September 30, 2010.

The increase in the effective tax rate for the three and nine months ended September 30, 2011 compared to September 30, 2010 was primarily due to the fact that in 2010 the Company's subsidiaries operated as limited liability companies which are not subject to federal or state income tax. Subsequent to the IPO, the Company’s controlling interest is subject to U.S. federal and state income taxes resulting in an increased tax provision and effective tax rate. The rate also increased due to a shift in jurisdictional income to entities taxed locally as corporations in the foreign jurisdictions. Additionally, for the nine months ended September 30, 2011, a $16.3 million reserve was recorded relating to settlements with the NFA and CFTC regarding trade execution activities. A portion of the reserve is not tax deductible resulting in increased taxable income, income tax provision and effective tax rate.

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Segment Results

Period ended September 30, 2011 and 2010

Retail trading — Retail Trading is our largest segment and consists of providing FX trading and related services to approximately 156,053 active retail customers globally as of September 30, 2011.

Revenues, operating expenses and income before income taxes of the Retail Trading segment for the three months ended September 30, 2011 and 2010 are as follows:

   
  Three Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $ 101,349     $ 83,413  
Operating expenses     60,314       42,104  
Income before income taxes   $ 41,035     $ 41,309  

Revenues for the Retail Trading segment increased $17.9 million or 21.5% for the three months ended September 30, 2011 compared to the same period in 2010. The increase is a result of retail customer trading volume increased 34% to $1,042 billion, partially offset by markup for retail trading revenue per million traded decreasing 10.6% from $104 to $93.

Operating expenses increased $18.2 million to $60.3 million for the period ended September 30, 2011 compared to the same period in 2010. The increase was due primarily to $1.1 million in higher referring broker fees, $7.9 million in higher compensation and benefits expense, $3.5 million in higher depreciation and amortization expense, $4.3 million or 75.9% in higher advertising and marketing expense and $1.4 million of higher general and administrative expenses. The increase in referring broker expense was due primarily to a higher proportion of the Company’s volume derived from indirect sources and the inclusion of ODL in the Company’s results. The increase in compensation and benefits expense was due primarily to stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010 and the inclusion of ODL’s and FXCMJ’s compensation and benefit expenses in the Company’s result for the three months ended September 30, 2011 compared to the same period ended September 30, 2010. The increase in depreciation and amortization expense was due primarily to the amortization of intangibles acquired in the ODL and FXCMJ purchases and the inclusion of ODL’s and FXCMJ’s depreciation and amortization expenses in the Company’s results in the three months ended September 30, 2011 following the acquisitions of ODL and

Revenues, operating expenses and income before income taxes of the Retail Trading segment for the nine months ended September 30, 2011 and 2010 are as follows:

   
  Nine Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $ 285,299     $ 243,374  
Operating expenses     165,211       121,478  
Income before income taxes   $ 120,088     $ 121,896  

Revenues for the Retail Trading segment increased $41.9 million or 17.2% for the nine months ended September 30, 2011 compared to the same period in 2010. The increase is a result of retail customer trading volume increased 19.5% to $2,802 billion, partially offset by the markup for retail trading revenue per million traded decreasing 4.0% from $96 from $100, and the recognition of $6.0 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ in the nine months ended September 30, 2011, partially offset by the inclusion of $6.2 million in revenues from ODL’s equity broker-dealer business in the nine months ended September 30, 2011, acquired in October 2010.

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Operating expenses increased $43.7 million for the nine months ended September 30, 2011 compared to the same period in 2010. The increase was due primarily to $9.9 million or 16.2% higher referring broker fees, $12.7 million or 42% in higher compensation and benefits expense, $8.9 million or 168.4% higher depreciation and amortization expense, $7.5 million or 44.1% in higher advertising and marketing expense and $4.7 million or 59.8% of higher general and administrative expenses. The increase in referring broker expense was due primarily to a higher proportion of the Company’s volume derived from indirect sources and the inclusion of ODL in the Company’s results. The increase in compensation and benefits expense was due primarily to stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010 and the inclusion of ODL’s and FXCMJ’s compensation and benefit expenses in the Company’s result for the nine months ended September 30, 2011 compared to the same period ended September 30, 2010. The increase in depreciation and amortization expense was due primarily to the amortization of intangibles acquired in the ODL and FXCMJ purchases and the inclusion of ODL’s and FXCMJ’s depreciation and amortization expenses in the Company’s results in the nine months ended September 30, 2011 following the acquisitions of ODL and FXCMJ in October 2010 and March 2011, respectively. The Company has been increasing spending of advertising and marketing to further growth, including initiating a sponsorship of a FX television show on the CNBC television network in the first quarter of 2011. The increase in general and administrative expense fees was primarily due to the inclusion of ODL and FXCMJ in the Company’s results for the nine months ended September 30, 2011 compared to the same period ended September 30, 2010 and higher prime brokerage fees.

Institutional Trading — Our institutional Trading segment operates under the name FXCM Pro and generates revenues by executing spot foreign currency trades on behalf of institutional customers, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customers account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk.

Revenues, operating expenses and income before income taxes of the Institutional Trading segment for the periods ended September 30, 2011 and 2010 are as follows:

   
  Three Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $ 7,720     $ 7,189  
Operating expenses     3,632       2,360  
Income before income taxes   $ 4,088     $ 4,829  

Revenues for our Institutional Trading segment increased $0.5 million or 7.4% to $7.7 million for the period ended September 30, 2011 compared to the period ended September 30, 2010. While institutional trading volume increased 64.4% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 our markup or institutional trading revenue per million traded declined 34.2%. Our institutional markup is dependent on customer mix, with some customers paying a higher markup than others. In the second quarter 2011 experienced an adverse customer mix relative to the second quarter 2010.

Operating expenses increased by $1.3 million or 53.8% to $3.6 million for the period ended September 30, 2011 compared to the period ended September 30, 2010. The change is due primarily to $0.3 million or 21.8% increase in communication and technology expense, which reflected the settlement of a disputed amount in 2010 to a third party provider of the platform used by the institutional segment which was non-recurring in 2011. This was offset by higher referring broker fees of $0.5 million and by $1.3 million in higher compensation and benefits expense resulting from stock options awards granted at the time of the IPO in December 2010 and higher benefit costs.

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  Nine Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $ 21,820     $ 20,779  
Operating expenses     13,789       11,327  
Income before income taxes   $ 8,031     $ 9,452  

Revenues for our Institutional Trading segment increased $1.0 million or 5.0% for the nine months ended September 30, 2011 compared to the same period in 2010. While institutional trading volume increased 32.3% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 our markup or institutional trading revenue per million traded declined 21.6%. Our institutional markup is influenced by customer mix, with some institutional customers paying a higher markup than others. In the second quarter 2011 experienced an adverse customer mix relative to the second quarter 2010.

Operating expenses increased $2.5 million or 21.7% for the nine months ended September 30, 2011 compared to the same period in 2010. The change is due primarily to $0.7 million or 109.2% of higher referring broker fees due to higher business activity, $2.2 million in higher compensation and benefits expense resulting from stock options awards granted at the time of the IPO in December 2010 and higher benefit costs, offset by $0.3 million of lower communication and technology expense, due to a non-recurring lump sum settlement of a disputed amount in the prior year to a third party provider of the platform used by the institutional segment to provide trading services.

Corporate — Loss before income taxes of the Corporate segment for the periods ended September 30, 2011 and 2010 are as follows:

   
  Three Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $     $ (72 ) 
Operating expenses     21,466       19,979  
Loss before income taxes   $ (21,466 )    $ (20,051 ) 

Loss before income taxes increased $1.5 million or 7.2% to $21.4 million for the three months ended September 30, 2011 compared to the same period in 2010. The increase was primarily due to the $16 million regulatory settlement reserve established, $1.5 million in Communication and Technology costs resulting from the inclusion of ODL and $1.1 million in general and administrative costs, $1.2 million due to increased rent and occupancy expenses resulting from additional branch office openings in Europe, the relocation of our Hong Kong office as well as increased office space in New York, and $1.3 million due to an increase in, legal and accounting fees.

   
  Nine Months Ended
     September 30,
2011
  September 30,
2010
     (In thousands)
Revenues   $     $  
Operating expenses     79,632       48,449  
Loss before income taxes   $ (79,632 )    $ (48,449 ) 

Loss before income taxes increased $31.2 million for the nine months ended September 30, 2011 compared to the same period in 2010. $19.6 million of increased General and administrative cost which includes a $16.3 million regulatory settlement reserve, higher compensation cost of $1.7 million resulting from the inclusion of ODL and stock compensation awards, and $4.7 million in higher Communication and Technology. $2.6 million in increased rent and occupancy expenses were the result of additional branch office openings in Europe, the relocation of our Hong Kong office and increased office space in New York, and $2.5 million was due to an increase in legal and accounting fees.

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LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operating liquidity and capital needs with funds generated from operations. We primarily invest our cash in short-term demand deposits at various financial institutions. In general, we believe all our deposits are with institutions of high credit quality and we have sufficient liquidity to conduct the operations of our businesses.

As a holding company, almost all of the funds generated from our operations are earned by our operating subsidiaries. We access these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies relating to liquidity and capital standards, which may limit the funds available for the payment of dividends to us.

       
    As of September 30, 2011
     Regulatory
Jurisdiction
  Minimum
Regulatory
Capital
Requirements
  Capital
Levels
Maintained
  Excess
Net Capital
     (In millions)
Forex Capital Markets, LLC     USA     $ 26.8     $ 43.6     $ 16.8  
Forex Capital Markets, Ltd.     U.K.       14.6       32.1       17.5  
FXCM Asia, Ltd.     Hong Kong       6.3       17.1       10.8  
FXCM Australia, Ltd.     Australia       1.4       4.0       2.6  
ODL Group, Ltd.     U.K.       7.1       26.8       19.7  
FXCM Securities, Ltd.     U.K.       5.1       24.5       19.4  
FXCM Japan Securities Co., Ltd.     Japan       4.5       15.0       10.5  

Cash Flow and Capital Expenditures

Nine Months Ended September 30, 2011 and 2010

The following table sets forth a summary of our cash flow for the nine months ended September 30, 2011 and 2010:

   
  September 30,
2011
  September 30,
2010
     (In thousands)
Cash provided by operating activities   $ 49,262     $ 60,990  
Cash used for investing activities     (26,128 )      (6,016 ) 
Cash used for financing activities     (37,931 )      (70,724 ) 
Effect of foreign currency exchange rate changes on cash and cash equivalents     (951 )      1  
Net (decrease) in cash and cash equivalents     (15,748 )      (15,749 ) 
Cash and cash equivalents – end of period   $ 177,582     $ 124,109  

Cash provided by operating activities was $49.3 million for the nine months ended September 30, 2011 compared to $61.0 million for the nine months ended September 30, 2010, a decrease of $11.7 million. This decrease was primarily due to a decrease in net income of $41.7 million and an increase in the adjustments to reconcile net income to net cash provided by operating activities in the amount of $30.0 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The adjustments to reconcile net income to net cash provided by operating activities was primarily a result of a increase in accounts receivable of $2.4 million for the nine months ended September 30, 2011 compared to a decrease of $6.7 million for the nine months ended September 30, 2010, a decrease in due to brokers of $12.6 million for the nine months ended September 30,2011 compared to an immaterial decrease of for the nine months ended September 30, 2010, a decrease in deferred revenue of $6.0 million for the nine months ended September 30, 2011 versus $4.5 million for the nine months ended September 30, 2010 as a result of $6.0 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ, depreciation and amortization expense of $14.2 million versus $5.3 million for the nine months ended September 30, 2011 and 2010, respectively, due to an increase of the expenses relating to the amortization

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of intangible assets resulting from the purchases of ODL and FXCMJ and equity compensation expense of $6.5 million for the nine months ended September 30, 2011 relating to stock compensation awards granted at the time of the Company’s IPO.

Cash used in investing activities was $26.1 million for the nine months ended September 30, 2011 compared to $6.0 million for the nine months ended September 30, 2010, an increase of $20.1 million. The reason for the increase in cash used was $19.9 million for the purchase of fixed assets for the nine months ended September 30, 2011 compared to $6.0 million for the purchase of fixed assets for the three months ended September 30, 2010, cash paid for the acquisition of FXCMJ of $4.9 million and purchase of intangible assets in the amount of $1.3 million.

Cash used in financing activities was $37.9 million for the nine months ended September 30, 2011 compared to $70.7 million for the nine months ended September 30, 2010, a decrease of $32.8 million. The decrease in cash used in financing activities was due to a distribution to members in the amount of $29.1 million for the nine months ended September 30, 2011 compared to a payout of $70.7 million in the nine months ended September 30, 2010, Dividends paid in the amount of $3.0 million and the repurchase of treasury stock in the amount of $22.0 million.

Capital expenditure $19.9 million for the nine months ended September 30, 2011 and $6.0 million for the nine months ended September 30, 2010. Capital expenditure for the nine months ended September 30, 2011 relate to software of $6.4 million, licenses of $9.4 million and computer equipment of $3.6 capitalized.

NON-GAAP FINANCIAL MEASURES

Management uses certain financial measures to evaluate our operating performance, as well as the performance of individual employees, that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies.

More specifically, we utilize results presented on an Adjusted Pro Forma basis, including Adjusted EBITDA that excludes certain items relating to the initial public offering of FXCM Inc. and also reflects the exchange of all units of FXCM Holdings, LLC for shares of Class A common stock of FXCM Inc. We believe that these Adjusted Pro Forma measures, when presented in conjunction with comparable U.S. GAAP measures, are useful to investors to compare our results across different periods and facilitate an understanding of our operating results. The differences between Adjusted Pro Forma and U.S. GAAP results are as follows:

1. Assumed Exchange of Units of FXCM Holdings, LLC for FXCM Inc. Class A Shares.  As a result of the exchange of FXCM Holdings units, the noncontrolling interest related to these units is converted to controlling interest. The Company’s management believes that it is useful to provide the per-share effect associated with the assumed exchange of all FXCM Holdings units.
2. Stock Based Compensation Expense.  Adjustments have been made to the Adjusted Pro Forma Earnings to eliminate expense relating to stock based compensation. The Company’s management believes it is useful to provide the effects of eliminating these expenses.
3. Income Taxes.  Prior to the initial public offering we were organized as a series of limited liability companies and foreign corporations and, even following the initial public offering, not all of the Company income is subject to corporate-level taxes. Adjustments have been made to the Adjusted Pro Forma tax provisions and earnings to assume that we had adopted a conventional corporate tax structure and are taxed as a C corporation in the U.S. at the prevailing corporate rates, that all deferred tax assets relating to foreign operations are fully realizable within the structure on a consolidated basis and that adjustments for deferred tax assets related to the ultimate tax deductions for equity-based compensation awards are made directly to stockholders’ equity. This assumption is consistent with the assumption that all FXCM Holdings’ units are exchanged for shares of FXCM Inc. Class A common stock, as discussed in Item 1 above as the assumed exchange would change our tax structure of the Company.

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4. Regulatory Reserve.  During the nine months ended September 30, 2011, the Company established a reserve of $16.3 million regarding a settlement with the NFA and the CFTC relating to trade execution activities. Pursuant to an agreement with a subsidiary of FXCM Holdings LLC, certain founding members of FXCM Holdings agreed to reimburse the cost of these matters, up to $16.3 million. In July 2011 and August 2011, $16.0 million and $0.3 million of additional capital was provided by the respective founding members and their capital accounts were increased and decreased for the funding and expense, respectively, in accordance with their membership interest in Holdings. Consequently there was no impact to FXCM Inc.'s net income for the three and nine months ended September 30, 2011 as the expense was allocated to the respective members for such expenses as permitted under terms of Holdings’ LLC agreement. The Company believes it is useful to provide the effects of eliminating these expenses.

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The following table reconciles our Adjusted Pro Forma results with our results presented in accordance with U.S. GAAP for the three months ended September 30, 2011 and 2010:

           
  Three Months Ended September 30,
     2011   2010
     In millions
     As
Reported
  Adjustments   Adjusted
Pro Forma
  As
Reported
  Adjustments   Adjusted
Pro Forma
Revenues   $ 109,068     $         109,068     $ 90,531              $ 90,531  
Expenses
                                                     
Referring broker fees     25,720             25,720       24,607             24,607  
Compensation and benefits     22,955       (2,120 )(1)      20,835       17,826             17,826  
Depreciation and amortization     5,367             5,367