Stock-Based Compensation

The Knight Capital Group, Inc. 2010 Equity Incentive Plan (“2010 Plan”) was established to provide long-term incentive compensation to employees and directors of the Company. The 2010 Plan is administered by the Compensation Committee of the Company’s Board of Directors, and allows for the grant of options, stock appreciation rights (“SARs”), restricted stock and restricted stock units (collectively, the “awards”), as defined by the 2010 Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the 2010 Plan also limits the number of awards that may be granted to a single individual. The 2010 Plan replaced prior stockholder-approved equity plans for future equity grants and no additional grants will be made under those historical stock plans. However, the terms and conditions of any outstanding equity grants under the historical stock plans were not affected. As of June 30, 2013, the Company has not issued any SARs.

At a special meeting of the Company’s stockholders on December 27, 2012, the Company’s stockholders approved the Amended and Restated 2010 Equity Incentive Plan (the “Amended 2010 Plan”) to increase the number of shares authorized for grant under the 2010 Plan from 10.6 million to 64.6 million and amend certain provisions of the 2010 Plan. Key changes to the 2010 Plan that were adopted in the Amended 2010 Plan included: (i) an amendment to require a qualifying termination of employment before vesting provisions in new awards accelerate in the event of a change-in-control, also known as “double-trigger” accelerated vesting; (ii) an amendment to the modification provision to require stockholder approval before (x) SARs may be repriced, replaced, regranted through cancellation or modified if such change would reduce the exercise price for the shares underlying such SAR and (y) options or SARs may be exchanged for cash if such exchange would reduce the exercise price for the shares underlying such option or SAR; (iii) an amendment to limit the number of shares subject to awards granted to each non-employee member of the Company’s Board during any calendar year to 200,000; and (iv) an extension of the time after which no awards may be granted under the Amended 2010 Plan to ten years from the date the stockholders approved the Amended 2010 Plan.

Unvested awards granted before September 1, 2010 are generally canceled if employment is terminated for any reason before the end of the relevant vesting period. For annual incentive awards granted after September 1, 2010 and up to September 30, 2011, full vesting is given where an employee has been terminated without cause by the Company. For all other awards granted after September 1, 2010 and up to September 30, 2011 unvested awards are generally canceled if employment is terminated for any reason before the end of the relevant vesting period. Effective October 1, 2011, for all awards granted after such date, unless otherwise provided for in the applicable award agreement, full vesting will be given where an employee has been terminated without cause by the Company.

On July 1, 2013, the Knight Capital Group, Inc. Amended and Restated 2010 Equity Incentive Plan was assumed by KCG in connection with the Mergers and was renamed the KCG Holdings, Inc. Amended and Restated Equity Incentive Plan. On July 1, 2013, the Knight Capital Group, Inc. 2009 Executive Incentive Plan was also assumed by KCG in connection with the Mergers and was renamed the KCG Holdings, Inc. Amended and Restated Executive Incentive Plan.

As a result of the Mergers on July 1, 2013, each outstanding stock option, whether vested or unvested, was automatically replaced with an option to purchase KCG Class A Common Stock equal to one third of the number of shares of Knight Common Stock subject to such original stock option immediately prior to the completion of the Mergers (rounded down to the nearest whole share of KCG Class A Common Stock). The exercise price per share of KCG Class A Common Stock is equal to the exercise price per share of Knight Common Stock subject to such Company stock option multiplied by three (rounded up to the nearest whole cent) and the number of shares of KCG Class A Common Stock subject to such Company stock option equals one third of the number of shares of Knight Common Stock subject to such original stock option immediately prior to the completion of the Mergers. Pursuant to the terms of the applicable Company stock plans and award agreements, each option granted on or prior to December 19, 2012 immediately vested. There were no stock options granted subsequent to December 19, 2012 through June 30, 2013.

As a result of the Mergers, each restricted share granted after December 19, 2012 and each outstanding restricted stock unit was replaced with a restricted share or restricted stock unit, as applicable, equal to one third of a share of common stock of KCG (rounded to the nearest whole share). Awards granted on or prior to December 19, 2012 (except for restricted stock units that vest based upon performance) automatically vested upon the completion of the Mergers. Awards granted after December 19, 2012 (and restricted stock units granted on or prior to December 19, 2012 that vest based on performance) will continue to vest in accordance with their existing vesting schedule, subject to acceleration under certain circumstances.

Restricted Shares and Restricted Stock Units

Eligible employees and directors may receive restricted shares and/or restricted stock units (collectively “restricted awards”) as a portion of their total compensation. The majority of restricted awards vest ratably over three years. The Company has the right to fully vest employees and directors in their restricted stock units upon retirement and in certain other circumstances.

The Company measures compensation cost related to restricted awards based on the fair value of Knight Common Stock at the date of grant. Compensation expense from continuing operations relating to restricted awards, primarily recorded in Employee compensation and benefits, and the corresponding income tax benefit, which was recorded in Income tax expense on the Consolidated Statements of Operations are presented in the following table (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2013		2012		2013		2012
Stock award compensation expense	$	35,717	$	11,417	$	47,656	$	22,155
Income tax benefit	12,501		4,530		16,683		8,829

Included in the stock award compensation expense for the three and six months ended June 30, 2013 is $1.9 million and $5.9 million, respectively, related to acceleration of stock awards in conjunction with a reduction in workforce. Included in the stock award compensation expense for the three and six months ended June 30, 2013 is $22.5 million related to the acceleration of stock-based compensation for awards granted on or prior to December 19, 2012. These awards vested on July 1, 2013 as a result of the Mergers and the expense associated with the acceleration of the vesting was recorded in the second quarter of 2013.

The following tables summarize restricted awards activity, including awards related to employees working in businesses that are included within discontinued operations, for the six months ended June 30, 2013 (awards in thousands):



	Restricted Shares				Restricted Stock Units
	Number of Shares		Weighted- Average Grant date Fair Value		Number of Units		Weighted- Average Grant date Fair Value
Outstanding at January 1, 2013	82		$	15.08	8,172		$	11.44
Granted	—		—		12,826		3.69
Vested	(68	)	15.49		(7,224	)	8.30
Forfeited	—		—		(708	)	6.59
Outstanding at June 30, 2013	14		$	13.09	13,066		$	5.83

There is $29.2 million of unamortized compensation related to the unvested restricted awards outstanding at June 30, 2013. The cost of these unvested restricted shares is expected to be recognized over a weighted average life of 2.4 years.

Stock Options

The Company’s policy is to grant options for the purchase of shares of Knight Common Stock at not less than market value. Options generally vest ratably over a three or four-year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the applicable option award agreement. The Company has the right to fully vest employees in their options upon retirement and in certain other circumstances. Options are otherwise canceled if employment is terminated before the end of the relevant vesting period. The Company’s policy is to issue new shares upon option exercises by its employees and directors.

The fair value of each option granted is estimated as of its respective grant date using the Black-Scholes option-pricing model. Stock options granted have exercise prices equal to the market value of the Company’s common stock at the date of grant as defined by the Stock Plans. The principal assumptions utilized in valuing options and the methodology for estimating such model inputs include: 1) risk-free interest rate—estimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option; 2) expected volatility—estimate is based on several factors including implied volatility of market-traded options on the Company’s common stock on the grant date and the volatility of the Company’s common stock; and 3) expected option life—estimate is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific option characteristics, including the effect of employee terminations. There were no stock options granted during the three or six months ended June 30, 2013 or 2012.

Compensation expense from continuing operations relating to stock options, all of which was recorded in Employee compensation and benefits, as well as the corresponding income tax benefit, which is recorded in Income tax expense on the Consolidated Statements of Operations are as follows (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2013		2012		2013		2012
Stock option compensation expense	$	—	$	138	$	10	$	367
Income tax benefit	—		54		4		144

The following tables summarize stock option activity and stock options exercisable for the six months ended June 30, 2013 (options in thousands):



2013	Number of Stock Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted- Average Remaining Life (years)
Outstanding at January 1,	2,536		$	13.61
Granted at market value	—		—
Exercised	—		—
Forfeited or expired	(190	)	12.21
Outstanding at June 30,	2,346		$	12.21	$	—	2.89
Exercisable at June 30,	2,346		$	13.75	$	—	2.89
Available for future grants at June 30, *	52,457

* Represents both options and awards available for grant.

The aggregate intrinsic value is the amount by which the closing price of the Company’s common stock exceeds the exercise price of the stock options multiplied by the number of shares. There were no stock options exercised during the six months ended June 30, 2013.

There is no unamortized compensation related to the unvested stock options outstanding at June 30, 2013.