Fair Value of Financial Instruments

The Company’s financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance, as described in Footnote 3 “Significant Accounting Policies.” The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value (in thousands):



	Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2013	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	2,156,466	$	—	$	—	$	2,156,466
Listed options	288,227		—		—		288,227
U.S. government and Non-U.S. government obligations	32,678		—		—		32,678
Corporate debt	46,606		—		—		46,606
Total Financial instruments owned, at fair value	2,523,977		—		—		2,523,977

Securities on deposit with clearing organizations ⁽²⁾	160,369		—		—		160,369
Deferred compensation investments ⁽³⁾	—		84		—		84
Investment in Deephaven Funds ⁽³⁾	—		1,430		—		1,430
Assets within discontinued operations:							—
Securitized HECM loan inventory ⁽⁴⁾	—		5,841,664		—		5,841,664
Loan inventory	—		177,674		—		177,674
Total fair value of financial instrument assets	$	2,684,346	$	6,020,852	$	—	$	8,705,198
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	1,848,729	$	—	$	—	$	1,848,729
U.S. government obligations	29,441		—		—		29,441
Corporate debt	49,616		—		—		49,616
Listed options	229,721		—		—		229,721
Foreign currency forward contracts	—		5,431		—		5,431
Total Financial instruments sold, not yet purchased, at fair value	2,157,507		5,431		—		2,162,938
Liabilities within discontinued operations:
Liability to GNMA trusts, at fair value ⁽⁴⁾	—		5,803,859		—		5,803,859
Total fair value of financial instrument liabilities	$	2,157,507	$	5,809,290	$	—	$	7,966,797

________________________________________


⁽¹⁾	Equities of $1.22 billion have been netted by their respective CUSIP number and their long and short positions.


⁽²⁾	Securities on deposit with clearing organizations consist of U.S. government obligations and are recorded within Receivable from brokers, dealers and clearing organizations on the Consolidated Statements of Financial Condition.


⁽³⁾	Deferred compensation investments and Investment in Deephaven Funds are included within Investments on the Consolidated Statements of Financial Condition.


⁽⁴⁾	Represents HECMs that have been securitized into HECM Mortgage Backed Securities (“HMBS”) where the securitization is not accounted for as a sale of the underlying HECMs. See Securitized HECM loan inventory below for full description.



	Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2012	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	378,933	$	—	$	—	$	378,933
Listed options	92,305		—		—		92,305
U.S. government obligations and corporate bonds	68,765		—		—		68,765
Mutual funds - Bond Funds	114,872				—		114,872
Total Financial instruments owned, at fair value	654,875		—		—		654,875
Securities on deposit with clearing organizations	7,147				—		7,147
Investment - Knight preferred shares	199,632				—		199,632
Total fair value of financial instrument assets	$	861,654	$	—	$	—	$	861,654
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	423,740	$	—	$	—	$	423,740
U.S. government obligations	19,056		—		—		19,056
Listed options	69,757		—		—		69,757
Total Financial instruments sold, not yet purchased, at fair value	512,553		—		—		512,553
Total fair value of financial instrument liabilities	$	512,553	$	—	$	—	$	512,553

___________________________________

⁽¹⁾ Equities of $5.9 million have been netted by their respective CUSIP number and their long and short positions.

The Company’s equities, listed options, U.S. government and non-U.S. government obligations, and rated corporate debt are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations with reasonable levels of price transparency.

The types of instruments that trade in markets that are not considered to be active, but are valued based on observable inputs such as quoted market prices or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy.

Certain instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. For those instruments that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

The Company’s assets measured at fair value on a nonrecurring basis solely relates to goodwill and intangible assets arising from various acquisitions which would be classified as Level 3 within the fair value hierarchy. See Footnote 10 “Goodwill and Intangible Assets” for additional information.

There were no transfers of financial instruments between levels of the fair value hierarchy for any periods presented.

The Company’s loan inventory, foreign currency forward contracts , deferred compensation investments and its remaining investment in the Deephaven Funds are classified within Level 2 of the fair value hierarchy.

The following is a description of the valuation basis, techniques and significant inputs used by the Company in valuing its Level 2 assets and liabilities:

Foreign currency forward contracts

At September 30, 2013, the Company had foreign currency forward contracts with a notional value of 80.0 million British pounds that are used to hedge the Company’s investment in its European subsidiaries. The fair value of these contracts was determined based upon spot foreign exchange rates, LIBOR interest rates and dealer quotations.

Deferred compensation investments

Deferred compensation investments comprise investments in liquid mutual funds that the Company acquires to hedge its obligations to employees and directors under certain non-qualified deferred compensation arrangements. These mutual fund investments can generally be redeemed at any time and are valued based upon quoted market prices.

Investment in Deephaven Funds

Investment in Deephaven Funds represents the Company's residual investment in certain funds that were formerly managed by Deephaven Capital Management, a former Knight subsidiary. These investments are in the process of liquidation and are valued based upon the fair value of the underlying investments within such funds.

Loan inventory (within Assets within discontinued operations)

The Company’s loan inventory primarily comprises newly issued HECMs that Urban has originated or purchased and for which the Company has elected to account for at fair value. Significant inputs that are used in determining fair value include LIBOR and U.S. treasury interest rates, weighted average coupon and pricing of actively-traded HMBS and dealer quotations for HECMs. These instruments are recorded within Assets within discontinued operations on the Company's Consolidated Statements of Financial Condition.

Securitized HECM loan inventory (within Assets within discontinued operations)

Securitized HECM loan inventory comprises HECMs that Urban has securitized into HMBS. The Company has recorded the securitized loans within Assets within discontinued operations and a corresponding liability recorded as Liability to GNMA trusts, at fair value, within Liabilities within discontinued operations on its Consolidated Statements of Financial Condition. As of September 30, 2013 all of the HMBS created by the Urban have been sold to third parties. Significant inputs that are used in determining fair value include LIBOR and U.S. treasury interest rates, weighted average coupon and pricing of actively-traded HMBS and dealer quotations for HECMs.

Derivative Instruments

Fair value of derivative instruments

The Company enters into derivative transactions, primarily with respect to making markets in listed domestic options. In addition, the Company enters into derivatives to manage foreign currency exposure. Cash flows associated with such derivative activities are included in cash flows from operating activities on the Consolidated Statements of Cash Flows, when applicable.

Futures

During the normal course of business, the Company enters into futures contracts. These financial instruments are subject to varying degrees of risks whereby the fair value of the securities underlying the financial instruments, may be in excess of, or less than, the contract amount. The Company is obligated to post collateral against certain futures contracts.

The following tables summarize the fair value of derivative instruments and futures contract trading activities in the Consolidated Statements of Financial Condition and the gains and losses included in the Consolidated Statements of Operations (fair value in thousands):



		September 30, 2013
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	$	21	651	$	62	244
Forward contracts ⁽¹⁾	Financial instruments owned, at fair value	—		—	5,431		2
Forward contracts (1)	Receivables from/Payables to brokers, dealers and clearing organizations	331		1	—		—
Equity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	1,442		3,059	595		1,046
Swap contracts	Receivables from/Payables to brokers, dealers and clearing organizations	230		1	—		—
Listed options	Financial instruments owned, at fair value	288,227		772,768	229,721		753,979
Fixed income
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	4,183		24,400	1,724		6,601
Commodity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	732		2,278	1,478		3,565
Total		$	295,166	803,158	$	239,011	765,437

⁽¹⁾ Designated as hedging instrument



		December 31, 2012
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	$	8	500	$	—	95
Forward contracts	Accrued expenses and other liabilities	—		—	110		1
Equity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	498		1,027	70		234
Swap contracts	Receivables from/Payables to brokers, dealers and clearing organizations	570		1	—		—
Listed options	Financial instruments owned, at fair value	92,305		199,324	69,757		196,804
Fixed income
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	3,474		42,143	5,043		61,398
Commodity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	428		1,385	410		1,824
Total		$	97,283	244,380	$	75,390	260,356



		Gain (Loss) Recognized
	Financial Statements	For the three months ended September 30,
	Location	2013			2012
Derivative instruments not designated as hedging instruments:
Foreign currency
Futures contracts	Trading revenues, net	$	3,825		$	4,493
Equity
Futures contracts	Trading revenues, net	17,461			10,724
Swap contracts	Trading revenues, net	1,884			1,985
Listed options ⁽¹⁾	Trading revenues, net	17,044			24,582
Fixed income
Futures contracts	Trading revenues, net	22,008			15,557
Commodity
Futures contracts	Trading revenues, net	18,774			8,792
		$	80,996		$	66,133
Derivative instruments designated as hedging instruments:
Foreign exchange - forward contract	Accumulated other comprehensive (loss)	$	(4,948	)	$	—

⁽¹⁾

Realized gains and losses on listed equity options relate to the Company’s market making activities in such options. Such market making activities also comprise trading in the underlying equity securities with gains and losses on such securities generally offsetting the gains and losses reported in this table. Gains and losses on such equity securities are also included in Trading revenue, net on the Company’s Consolidated Statements of Operations.



		Gain (Loss) Recognized
	Financial Statements	For the nine months ended September 30,
	Location	2013			2012
Derivative instruments not designated as hedging instruments:
Foreign currency
Futures contracts	Trading revenues, net	$	9,243		$	16,446
Equity
Futures contracts	Trading revenues, net	44,125			62,241
Swap contracts	Trading revenues, net	10,755			5,007
Listed options ⁽¹⁾	Trading revenues, net	63,322			41,455
Fixed income
Futures contracts	Trading revenues, net	64,211			66,573
Commodity
Futures contracts	Trading revenues, net	44,053			26,065
		$	235,709		$	217,787
Derivative instruments designated as hedging instruments:
Foreign exchange - forward contract	Accumulated other comprehensive (loss)	$	(4,948	)	$	—

⁽¹⁾

Realized gains and losses on listed options relate to the Company’s market making activities in such options. Such market making activities also comprise trading in the underlying equity securities with gains and losses on such securities generally offsetting the gains and losses reported in this table. Gains and losses on such equity securities are also included in Trading revenue, net on the Company’s Consolidated Statements of Operations.

Assets and Liabilities Subject to Netting

The gross amounts of assets and liabilities subject to netting and gross amounts offset in the Consolidated Statements of Financial Condition were as follows (in thousands):



September 30, 2013	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Financial Instruments		Cash Collateral Received
							Financial Instruments		Cash Collateral Received
Assets
Listed options	$	288,227	$	—	$	288,227	$	—	$	—	$	288,227
Securities borrowed	1,370,921		—		1,370,921		1,329,508		—		41,413
Total Assets	$	1,659,148	$	—	$	1,659,148	$	1,329,508	$	—	$	329,640
Liabilities
Listed options	$	229,722	$	—	$	229,722	$	—	$	5,064	$	224,658
Securities loaned	543,451		—		543,451		533,266		—		10,185
Financial instruments sold under agreements to repurchase	595,029		—		595,029		595,022		—		7
Foreign currency forward contracts	5,431		—		5,431		—		—		5,431
Total Liabilities	$	1,373,633	$	—	$	1,373,633	$	1,128,288	$	5,064	$	240,281



December 31, 2012	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Financial Instruments		Cash Collateral Received
							Financial Instruments		Cash Collateral Received
Assets
Listed options	$	92,305	$	—	$	92,305	$	—	$	—	$	92,305
Securities borrowed	52,261		—		52,261		50,717				1,544
Total Assets	$	144,566	$	—	$	144,566	$	50,717	$	—	$	93,849
Liabilities
Listed options	$	69,757	$	—	$	69,757	$	—	$	1,393	$	68,364
Total Liabilities	$	69,757	$	—	$	69,757	$	—	$	1,393	$	68,364

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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