Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In other jurisdictions, the Company and its subsidiaries file separate company state and local income tax returns.

The following table reconciles the U.S. federal statutory income tax rate to the Company's actual income tax rate from continuing operations:



	For the three months ended June 30,				For the six months ended June 30,
	2013		2012		2013		2012

U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%	35.0	%
U.S. state and local income taxes, net of U.S.
federal income tax effect	(15.3	)%	2.5	%	(88.7	)%	3.6	%
Nondeductible charges (1)	(25.0	)%	3.2	%	(175.3	)%	0.8	%
Other, net	(3.2	)%	(3.2	)%	(11.7	)%	(0.7	)%
Actual income tax rate	(8.5	)%	37.5	%	(240.7	)%	38.7	%


(1)	Nondeductible charges include certain professional fees related to the Mergers, reserve for legal proceedings, and meals and entertainment.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances recorded on the balance sheet dates are necessary in cases where management believes that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize its deferred tax assets in the future, and therefore no valuation allowance has been recorded at June 30, 2013 or December 31, 2012. Due to the losses generated in 2012, the Company currently is in a three year cumulative loss position. Management believes that this negative evidence is outweighed by positive evidence including the Company's long standing history of sustainable profitability, and its forecasts of future profitability. A significant portion of the customer base has remained unchanged and the business has demonstrated a return to profitability following the technology related losses of August 1, 2012, excluding any merger related costs, and the Company does not expect such losses to recur. The goodwill and intangible asset impairment that the Company recorded in 2012, which contributed to its three year cumulative loss position, related to businesses that have not performed well and is not reflective of any weakness in the Company's electronic market making business, which has historically been its most profitable business. A significant portion of this 2012 impairment as well as additional impairment charges in 2013 relate to the institutional fixed income sales and trading business which was sold in the second quarter of 2013.

A significant portion of the Company's 2012 U.S. federal net operating loss has been carried back against taxable income earned by the Company in 2010 and 2011, which resulted in a refund of U. S. federal taxes that the Company previously paid in such years. For the year ended December 31, 2012, the Company's taxable loss was $358.2 million.

The Company generated taxable income for 2010 and 2011 of approximately $338.0 million and paid U.S. federal income tax of approximately $118.0 million for these years. During the first quarter of 2013 the Company filed a claim to carryback $338.0 million of its 2012 tax loss back to 2010 and 2011. This carryback resulted in a refund of approximately $107.0 million of federal taxes paid in such prior years and the creation of a federal Alternative Minimum Tax ("AMT") credit of $6.8 million which can be utilized to offset future federal income tax liabilities. This refund was received by the Company in the second quarter of 2013.

The portion of the 2012 $358.2 million taxable loss that could not be carried back, approximately $20.2 million, will generate a U.S. federal net operating loss carryforward related to the year ended December 31, 2012. At June 30, 2013 and December 31, 2012, the Company had projected overall U.S. federal net operating loss carryforwards of $115.7 million and $70.4 million, respectively, of which $31.3 million resulted from acquisitions for both periods. The Company recorded a related deferred income tax asset of $40.5 million and $24.6 million as of June 30, 2013 and December 31, 2012, respectively, and an offsetting valuation allowance of $6.8 million and $7.0 million, respectively, at each balance sheet date which represents the portion of these net operating loss carryforwards related to acquisitions that are considered more likely than not to expire unutilized.

In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period results in an annual limitation on the Company's ability to utilize its net operating loss carryforwards that were created during tax periods prior to the change in ownership. As a result of the Series A Preferred Stock equity issuance, on August 6, 2012, the Company experienced an ownership change under Section 382 and a second ownership change under Section 382 as a result of the Mergers. As a result of the ownership changes, the rate of utilization of a portion of the Company's net operating loss carryforwards will be limited. The Company does not believe these limitations will have a significant effect on the Company's ability to utilize its anticipated federal net operating loss carryforward. The Company's U.S. federal net operating loss carryforwards will begin to expire in 2019.

At June 30, 2013 and December 31, 2012, the Company had, in aggregate, state and local net operating loss carryforwards of $1.72 billion and $1.47 billion, respectively of which $24.3 million resulted from acquisitions; $512.2 million and $424.8 million, respectively related to New Jersey; $593.9 million and $511.1 million, respectively related to New York; and $593.7 million and $510.5 million, respectively related to New York City. The Company recorded a related deferred income tax asset related to these state and local net operating loss carryforwards of $26.9 million and $22.9 million as of June 30, 2013 and December 31, 2012, respectively, and fully offsetting valuation allowances of $26.9 million and $22.9 million, respectively, which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized. The Company recorded a valuation allowance for substantially all of its state and local tax loss carryforwards as it is more likely than not that the benefit of such items will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates. Certain of these carryforwards are subject to annual limitations on utilization and they will begin to expire in 2019.

At June 30, 2013 and December 31, 2012, the Company had non U.S. net operating loss carryforwards of $68.7 million and $65.5 million, respectively. The Company recorded a foreign deferred income tax asset of $17.9 million and $17.0 million for these loss carryforwards as of June 30, 2013 and December 31, 2012, respectively, along with an offsetting U.S. federal deferred tax liability of $17.9 million and $17.0 million, respectively for the expected future reduction in U.S. foreign tax credits associated with the use of the non U.S. loss carryforwards. These non U.S. net operating losses may be carried forward indefinitely. At both June 30, 2013 and December 31, 2012, the Company had foreign tax credit carryforwards of $3.2 million and an offsetting valuation allowance of $1.6 million. The Company also had general business credit carryforwards at June 30, 2013 and December 31, 2012 of $2.5 million and $3.7 million, respectively. The Company also had AMT credit carryforwards of $6.8 million at June 30, 2013.

At June 30, 2013 and December 31, 2012, the Company had $1.4 million and $1.5 million of unrecognized tax benefits, respectively, all of which would affect the Company's effective tax rate if recognized.

As of June 30, 2013, the Company is subject to U.S. Federal income tax examinations for the tax years 2009 through 2012, and to non U.S. income tax examinations for the tax years 2007 through 2012. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2011. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the results of operations or financial condition.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income or loss from continuing operations before income taxes. Penalties, if any, are recorded in Other expenses and interest paid or received is recorded in Interest expense and Interest, net, on the Consolidated Statements of Operations.