Edgar Filing: INVESTMENT TECHNOLOGY GROUP, INC.

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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 fiscal period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from to

Commission File Number 001-32722

INVESTMENT TECHNOLOGY GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		95 - 2848406
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

165 Broadway, New York, New York		10006
(Address of Principal Executive Offices)		(Zip Code)

(212) 588 - 4000

(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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		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

At October 15, 2014, the Registrant had 34,788,970 shares of common stock, $0.01 par value, outstanding.

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QUARTERLY REPORT ON FORM 10-Q

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	PART I. — Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Financial Condition: September 30, 2014 (unaudited) and December 31, 2013	3

	Condensed Consolidated Statements of Income (unaudited): Three and Nine Months Ended September 30, 2014 and 2013	4

	Condensed Consolidated Statements of Comprehensive Income (unaudited): Three and Nine Months Ended September 30, 2014 and 2013	5

	Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited): Nine Months Ended September 30, 2014	6

	Condensed Consolidated Statements of Cash Flows (unaudited): Three and Nine Months Ended September 30, 2014 and 2013	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

	PART II. — Other Information

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

	Signature	36

Investment Technology Group, ITG, AlterNet, ITG Net, MATCH Now, POSIT and POSIT Alert are registered trademarks of the Investment Technology Group, Inc. companies. ITG Derivatives is a trademark of the Investment Technology Group, Inc. companies.

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PRELIMINARY NOTES

When we use the terms “ITG,” the “Company,” “we,” “us” and “our,” we mean Investment Technology Group, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

In addition to the historical information contained throughout this Quarterly Report on Form 10-Q, there are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements regarding our expectations related to our future financial position, results of operations, revenues, cash flows, dividends, financing plans, business and product strategies, competitive positions, as well as the plans and objectives of management for future operations, and all expectations concerning securities markets, client trading and economic trends are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” and the negative of these terms and other comparable terminology.

Although we believe our expectations reflected in such forward-looking statements are based on reasonable assumptions and beliefs, and on information currently available to our management, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, general economic, business, credit and financial market conditions, both internationally and domestically, financial market volatility, fluctuations in market trading volumes, effects of inflation, adverse changes or volatility in interest rates, fluctuations in foreign exchange rates, evolving industry regulations and regulatory scrutiny, changes in tax policy or accounting rules, the actions of both current and potential new competitors, changes in commission pricing, rapid changes in technology, errors or malfunctions in our systems or technology, cash flows into or redemptions from equity mutual funds, ability to meet liquidity requirements related to the clearing of our customers’ trades, customer trading patterns, the success of our products and service offerings, our ability to continue to innovate and meet the demands of our customers for new or enhanced products, our ability to successfully integrate companies we have acquired and our ability to attract and retain talented employees.

Certain of these factors, and other factors, are more fully discussed in Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2013 (as amended), which you are encouraged to read. Our 2013 Annual Report on Form 10-K (as amended) is also available through our website at http://investor.itg.com under “SEC Filings.”

We disclaim any duty to update any of these forward-looking statements after the filing of this report to conform our prior statements to actual results or revised expectations and we do not intend to do so. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the filing of this report.

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PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(In thousands, except share amounts)

	September 30,			December 31,
	2014			2013
	(unaudited)
Assets
Cash and cash equivalents	$	228,461		$	261,897
Cash restricted or segregated under regulations and other	71,038			71,202
Deposits with clearing organizations	33,635			74,771
Securities owned, at fair value	21,943			7,436
Receivables from brokers, dealers and clearing organizations	2,094,468			1,018,342
Receivables from customers	1,376,047			591,004
Premises and equipment, net	59,484			66,171
Capitalized software, net	38,072			37,892
Goodwill, net	14,332			—
Intangibles, net	32,700			31,201
Income taxes receivable	539			54
Deferred taxes	30,864			34,130
Other assets	23,411			15,787
Total assets	$	4,024,994		$	2,209,887

Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable and accrued expenses	$	186,145		$	175,931
Short-term bank loans	89,926			73,539
Payables to brokers, dealers and clearing organizations	1,660,229			1,025,268
Payables to customers	1,611,985			469,264
Securities sold, not yet purchased, at fair value	22,856			2,953
Income taxes payable	14,156			14,805
Deferred taxes	1,141			363
Term debt	20,937			30,332
Total liabilities	3,607,375			1,792,455

Commitments and contingencies

Stockholders’ Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 52,229,962 and 52,158,374 shares issued at September 30, 2014 and December 31, 2013, respectively	522			522
Additional paid-in capital	237,561			240,057
Retained earnings	474,481			436,570
Common stock held in treasury, at cost; 17,444,851 and 16,005,500 shares at September 30, 2014 and December 31, 2013, respectively	(295,995		)	(268,253		)
Accumulated other comprehensive income (net of tax)	1,050			8,536
Total stockholders’ equity	417,619			417,432
Total liabilities and stockholders’ equity	$	4,024,994		$	2,209,887

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Revenues:
Commissions and fees	$	102,900	$	98,378	$	317,777	$	310,254
Recurring	26,452		25,761		77,004		77,384
Other	5,421		3,419		16,067		11,263
Total revenues	134,773		127,558		410,848		398,901

Expenses:
Compensation and employee benefits	52,408		49,664		156,305		150,415
Transaction processing	21,561		19,790		62,166		63,821
Occupancy and equipment	14,937		15,821		45,000		53,082
Telecommunications and data processing services	12,942		12,649		38,294		40,465
Other general and administrative	20,281		18,351		60,101		56,887
Restructuring charges	—		—		—		(75		)
Interest expense	566		593		1,796		1,894
Total expenses	122,695		116,868		363,662		366,489
Income before income tax expense	12,078		10,690		47,186		32,412
Income tax expense	713		2,975		9,275		10,989
Net income	$	11,365	$	7,715	$	37,911	$	21,423

Income per share:
Basic	$	0.32	$	0.21	$	1.06	$	0.58
Diluted	$	0.32	$	0.20	$	1.04	$	0.56

Basic weighted average number of common shares outstanding	35,093		36,544		35,628		36,956
Diluted weighted average number of common shares outstanding	36,026		37,781		36,599		38,214

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013

Net income	$	11,365		$	7,715	$	37,911		$	21,423
Other comprehensive (loss) income, net of tax:
Currency translation adjustment	(9,668		)	5,855		(7,486		)	(2,845		)
Other comprehensive (loss) income	(9,668		)	5,855		(7,486		)	(2,845		)
Comprehensive income	$	1,697		$	13,570	$	30,425		$	18,578

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended September 30, 2014

(In thousands, except share amounts)

	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings		Common Stock Held in Treasury			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at January 1, 2014	$	—	$	522	$	240,057		$	436,570	$	(268,253	)	$	8,536		$	417,432

Net income	—		—		—			37,911		—			—			37,911
Other comprehensive income	—		—		—			—		—			(7,486		)	(7,486		)
Issuance of common stock for restricted share awards (919,834 shares), including a net excess tax benefit of $ 0.4 million	—		—		(14,551		)	—		14,972			—			421
Issuance of common stock for the employee stock purchase plan (71,587 shares)	—		—		963			—		—			—			963
Shares withheld for net settlement of share-based awards (324,548 shares)	—		—		—			—		(6,586		)	—			(6,586		)
Purchase of common stock for treasury (2,034,637)	—		—		—			—		(36,128		)	—			(36,128		)
Share-based compensation	—		—		11,092			—		—			—			11,092
Balance at September 30, 2014	$	—	$	522	$	237,561		$	474,481	$	(295,995	)	$	1,050		$	417,619

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	Nine Months Ended September 30,
	2014			2013
Cash flows from Operating Activities:
Net income	$	37,911		$	21,423
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	37,889			40,281
Deferred income tax expense	1,571			1,121
Provision for doubtful accounts	424			(671		)
Share-based compensation	12,533			15,056
Non-cash restructuring charges	—			357
Fixed asset disposal	—			649
Changes in operating assets and liabilities:
Cash restricted or segregated under regulations and other	(625		)	(9,399		)
Deposits with clearing organizations	41,136			(3,327		)
Securities owned, at fair value	(15,276		)	(2,019		)
Receivables from brokers, dealers and clearing organizations	(1,107,090		)	(539,304		)
Receivables from customers	(809,418		)	(398,998		)
Accounts payable and accrued expenses	9,755			9,214
Payables to brokers, dealers and clearing organizations	654,356			187,119
Payables to customers	1,175,003			712,819
Securities sold, not yet purchased, at fair value	20,776			2,149
Income taxes receivable/payable	(69		)	14,240
Excess tax benefit from share-based payment arrangements	(1,065		)	(219		)
Other, net	(5,153		)	(3,188		)
Net cash provided by operating activities	52,658			47,303

Cash flows from Investing Activities:
Investment in unconsolidated affiliates	(2,669		)	(474		)
Acquisition of subsidiaries, net of acquired cash	(18,293		)	—
Capital purchases	(8,239		)	(29,757		)
Capitalization of software development costs	(19,905		)	(17,152		)
Net cash used in investing activities	(49,106		)	(47,383		)

Cash flows from Financing Activities:
Repayments of long term debt	(9,395		)	(6,515		)
Proceeds from borrowing under short-term bank loans	16,387			30,332
Proceeds from sales-leaseback transaction	—			20,562
Excess tax benefit from share-based payment arrangements	1,065			219
Common stock issued	990			162
Common stock repurchased	(36,128		)	(24,001		)
Shares withheld for net settlements of share-based awards	(6,586		)	(3,715		)
Net cash (used in) provided by financing activities	(33,667		)	17,044

Effect of exchange rate changes on cash and cash equivalents	(3,321		)	(1,272		)
Net (decrease) increase in cash and cash equivalents	(33,436		)	15,692
Cash and cash equivalents — beginning of year	261,897			245,875
Cash and cash equivalents — end of period	$	228,461		$	261,567

Supplemental cash flow information
Interest paid	$	2,982		$	2,270
Income taxes paid (refunded)	$	7,579		$	(4,546	)

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Basis of Presentation

Investment Technology Group, Inc. was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc., AlterNet Securities, Inc. (“AlterNet”) and ITG Derivatives LLC (“ITG Derivatives”), institutional broker-dealers in the United States (“U.S.”), (2) Investment Technology Group Limited, an institutional broker-dealer in Europe, (3) ITG Australia Limited, an institutional broker-dealer in Australia, (4) ITG Canada Corp., an institutional broker-dealer in Canada, (5) ITG Hong Kong Limited, an institutional broker-dealer in Hong Kong, (6) ITG Software Solutions, Inc., our intangible property, software development and maintenance subsidiary in the U.S., and (7) ITG Solutions Network, Inc., a holding company for ITG Analytics, Inc., a provider of pre- and post-trade analysis, fair value and trade optimization services, ITG Investment Research, Inc., a provider of independent data-driven investment research, and ITG Platforms Inc., a provider of trade order and execution management technology and network connectivity services for the financial community.

ITG is an independent execution and research broker that partners with global portfolio managers and traders to provide unique data-driven insights throughout the investment process. From investment decision through to settlement, ITG helps clients understand market trends, improve performance, mitigate risk and navigate increasingly complex markets. A leader in electronic trading since launching the POSIT crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools and proprietary research. The firm is headquartered in New York with offices in North America, Europe, and the Asia Pacific region.

The Company’s business is organized into four reportable operating segments (see Note 15, Segment Reporting, to the condensed consolidated financial statements):

· U.S. Operations

· Canadian Operations

· European Operations and

· Asia Pacific Operations.

The four operating segments offer a wide range of solutions for asset managers and broker-dealers in the areas of electronic brokerage; research, sales and trading; platforms; and analytics. These offerings include trade execution services and solutions for portfolio management, as well as investment research, pre-trade analytics and post-trade analytics and processing.

The condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for the fair presentation of results.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with Securities and Exchange Commission (“SEC”) rules and regulations; however, management believes that the disclosures herein are adequate to make the information presented not misleading. This report should be read in conjunction with the audited financial statements and the notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (as amended).

New Accounting Pronouncements

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services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Application of the new guidance involves five steps: (1) identifying contracts with customers; (2) identifying the separate performance obligations within the contracts; (3) determining the transaction price; (4) allocating the transaction price to the separate performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The standard will also require significant additional qualitative and quantitative disclosures describing the nature, amount, timing, and uncertainty of revenues. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not yet selected a transition method nor has it determined the impact of adoption on its financial statements.

(2) Fair Value Measurements

Fair value is 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. In determining fair value, various methods are used including market, income and cost approaches. Based on these approaches, certain assumptions that market participants would use in pricing the asset or liability are used, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable firm inputs. Valuation techniques that are used maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, fair value measured financial instruments are categorized according to the fair value hierarchy prescribed by ASC 820, Fair Value Measurements and Disclosures. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

· Level 1: Fair value measurements using unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities.

· Level 2: Fair value measurements using correlation with (directly or indirectly) observable market-based inputs, unobservable inputs that are corroborated by market data, or quoted prices in markets that are not active.

· Level 3: Fair value measurements using inputs that are significant and not readily observable in the market.

Level 1 consists of financial instruments whose value is based on quoted market prices such as exchange-traded mutual funds and listed equities.

Level 2 includes financial instruments that are valued based upon observable market-based inputs.

Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable.

Fair value measurements for those items measured on a recurring basis are as follows (dollars in thousands):

September 30, 2014	Total		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents:
Tax free money market mutual funds	$	33	$	33	$	—	$	—
Money market mutual funds	3,506		3,506		—		—
Securities owned, at fair value:
Corporate stocks-trading securities	17,867		17,867		—		—
Mutual funds	4,076		4,076		—		—
Total	$	25,482	$	25,482	$	—	$	—

Liabilities
Securities sold, not yet purchased, at fair value:
Corporate stocks-trading securities	22,856		22,856		—		—
Total	$	22,856	$	22,856	$	—	$	—

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December 31, 2013	Total		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents:
Tax free money market mutual funds	$	33	$	33	$	—	$	—
Money market mutual funds	2,695		2,695		—		—
Securities owned, at fair value:
Corporate stocks-trading securities	2,894		2,894		—		—
Mutual funds	4,542		4,542		—		—
Total	$	10,164	$	10,164	$	—	$	—

Liabilities
Securities sold, not yet purchased, at fair value:
Corporate stocks-trading securities	2,953		2,953		—		—
Total	$	2,953	$	2,953	$	—	$	—

Cash and cash equivalents other than bank deposits are measured at fair value and primarily include U.S. government money market mutual funds.

Securities owned, at fair value and securities sold, not yet purchased, at fair value include corporate stocks, equity index mutual funds and bond mutual funds, all of which are exchange traded.

Certain of the Company’s assets and liabilities are carried at contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers, clearing organizations and customers. These receivables and payables to brokers, dealers and clearing organizations are short-term in nature, and following September 30, 2014, substantially all have settled at the contracted amounts.

The Company believes the carrying amounts of its term-debt obligations at September 30, 2014 and December 31, 2013 approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates.

(3) Restructuring Charges

2013 Restructuring

In the second quarter of 2013, the Company implemented a strategic plan to close its technology research and development facility in Israel and outsource that function to a third party service provider effective January 1, 2014.

Activity and liability balances recorded as part of the 2013 restructuring plan through September 30, 2014 are as follows (dollars in thousands):

	Employee separation costs			Consolidation of leased facilities			Total
Balance at December 31, 2013	$	235		$	100		$	335
Cash payments	(37		)	—			(37		)
Other	(198		)	(100		)	(298		)
Balance at September 30, 2014	$	—		$	—		$	—

During the first nine months of 2014, $0.3 million of accruals were reversed.

2012 Restructuring

In the fourth quarter of 2012, the Company implemented a restructuring plan to reduce annual operating costs.

Activity and liability balances recorded as part of the 2012 restructuring plan through September 30, 2014 are as follows (dollars in thousands):

	Employee separation costs
Balance at December 31, 2013	$	75
Utilized—cash	(23		)
Other	(52		)
Balance at September 30, 2014	$	—

During the first nine months of 2014, $0.1 million of accruals were reversed.

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2011 Restructuring

In the second and fourth quarters of 2011, the Company implemented restructuring plans to improve margins and enhance stockholder returns.

Activity and liability balances recorded as part of the 2011 restructuring plan through September 30, 2014 are as follows (dollars in thousands):

	Employee separation costs			Consolidation of leased facilities			Total
Balance at December 31, 2013	$	7		$	1,567		$	1,574
Utilized - cash	(7		)	(649		)	(656		)
Balance at September 30, 2014	$	—		$	918		$	918

The payment of the remaining accrued costs related to the vacated leased facilities will continue through December 2016.

2010 Restructuring

In the fourth quarter of 2010, the Company closed its Westchester, NY office and relocated the staff, primarily sales traders and support, to its New York City office.

Activity and liability balances recorded as part of the 2010 restructuring plan through September 30, 2014 are as follows (dollars in thousands):

	Consolidation of leased facilities
Balance at December 31, 2013	$	1,784
Utilized—cash	(291		)
Balance at September 30, 2014	$	1,493

The payment of the remaining accrued costs related to the vacated leased facilities will continue through December 2016.

(4) Cash Restricted or Segregated Under Regulations and Other

Cash restricted or segregated under regulations and other represents (i) funds on deposit for the purpose of securing working capital facilities for clearing and settlement activities in Hong Kong, (ii) a special reserve bank account for the exclusive benefit of customers (“Special Reserve Bank Account”) maintained by ITG Inc. in accordance with Rule 15c3-3 of the Exchange Act (“Customer Protection Rule”) or agreements for proprietary accounts of broker dealers (“PABs”), (iii) funds on deposit for Canadian and European trade clearing and settlement activity, (iv) segregated balances under a collateral account control agreement for the benefit of certain customers, and (v) funds relating to the securitization of bank guarantees supporting the Company’s Australian lease.

(5) Securities Owned and Sold, Not Yet Purchased

The following is a summary of securities owned and securities sold, not yet purchased (dollars in thousands):

	Securities Owned				Securities Sold, Not Yet Purchased
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Corporate stocks—trading securities	$	17,867	$	2,894	$	22,856	$	2,953
Mutual funds	4,076		4,542		—		—
Total	$	21,943	$	7,436	$	22,856	$	2,953

Trading securities owned and sold, not yet purchased primarily consists of temporary positions obtained in the normal course of agency trading activities, including positions held in connection with the creation and redemption of exchange-traded funds on behalf of clients.

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(6) Income Taxes

A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

During the nine months ended September 30, 2014, the Company (a) amended certain prior-year tax returns in the U.S. for deductions in those years not previously taken, (b) resolved uncertain tax positions in the U.S. for fiscal years 2007 through 2010, reducing tax reserves, (c) revised estimates for certain tax positions for other prior years, increasing tax reserves and (d) adjusted accruals for prior year returns. The net effect was a decrease in tax expense of $2.7 million.

The Company had reserves for tax positions taken of $14.2 million and $13.1 million at September 30, 2014 and December 31, 2013, respectively. The Company had accrued interest expense related to tax reserves of $2.3 million and $2.2 million, net of related tax effects, at September 30, 2014 and December 31, 2013, respectively.

(7) Acquisitions

ID’S

On July 30, 2014, the Company acquired 100% of ID’S for $23.3 million, including acquired cash of $4.2 million. ID’S is a Paris-based company that operates RFQ-hub, a multi-asset platform for global-listed and over-the-counter (“OTC”) financial instruments. RFQ-hub connects buy-side trading desks and portfolio managers with a large network of sell-side market makers, allowing these trading desks to place requests-for-quotes in OTC-negotiated equities, futures, options, swaps, convertible bonds, structured products and commodities. The platform will remain available on a standalone basis and will also be integrated into ITG’s Triton execution management system.

The results of ID’S have been included in the Company’s condensed consolidated financial statements since its acquisition date. At closing, $22.5 million was paid, and an additional $0.8 million contingent payment was recognized and is expected to be paid in 2017. Additional contingent payments of approximately $2.8 million will be recognized as expense from the acquisition date through 2017, when they are expected to be paid, as they are considered to be compensatory.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition (dollars in thousands):

Cash consideration	$	22,499
Contingent payments	814
Total purchase price	$	23,313

Cash	$	4,206
Accounts receivable, net	985
Customer related intangible asset	2,674
Computer software	2,272
Trade Name	160
Deferred Tax Liability	(1,880		)
Goodwill	14,896
Total purchase price	$	23,313

The above purchase price allocation is based upon preliminary calculations and valuations and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period.

The goodwill and intangibles assets were assigned to the European Operations segment. The acquired customer relationships and internal developed software are amortized over 15 and 5 years, respectively. The trade name has an indefinite life. The goodwill and intangible assets are not deductible for tax purposes.

The Company incurred professional fees related to this transaction of $0.8 million, which has been included in other general and administrative expenses in the Condensed Consolidated Statements of Income.

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(8) Goodwill and Other Intangibles

The following table presents the changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2014 (dollars in thousands):

	European Operations			Total
Balance at December 31, 2013	$	—		$	—
2014 Activity:
Acquisition of ID’S	14,896			14,896
Currency translation adjustment	(564		)	(564		)
Balance at September 30, 2014	$	14,332		$	14,332

Acquired other intangible assets consisted of the following at September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014				December 31, 2013
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Useful Lives (Years)
Trade name	$	8,552	$	—	$	8,400	$	—	—
Customer-related intangibles	30,377		10,589		27,851		8,923		13.3
Proprietary software	23,649		19,678		21,501		17,921		6.2
Trading rights	339		—		243		—		—
Other	50		—		50		—		—
Total	$	62,967	$	30,267	$	58,045	$	26,844

At September 30, 2014, indefinite-lived intangibles not subject to amortization amounted to $8.6 million, of which $8.4 million related to the POSIT trade name.

Amortization expense for definite-lived intangibles was $0.9 million and $3.4 million for the three months and nine months ended September 30, 2014, respectively, compared with $1.0 and $3.1 million in the respective prior-year periods. These amounts are included in other general and administrative expense in the Condensed Consolidated Statements of Income.

During the nine months ended September 30, 2014, no intangibles were deemed impaired, and accordingly, no adjustment was required.

(9) Receivables and Payables

Receivables from, and Payables to, Brokers, Dealers and Clearing Organizations

The following is a summary of receivables from, and payables to, brokers, dealers and clearing organizations (dollars in thousands):

	Receivables from						Payables to
	September 30, 2014			December 31, 2013			September 30, 2014		December 31, 2013
Broker-dealers	$	1,304,286		$	254,031		$	1,035,548	$	284,681
Clearing organizations	246,525			23,033			7,347		2,798
Securities borrowed	544,980			742,307			—		—
Securities loaned	—			—			617,334		737,789
Allowance for doubtful accounts	(1,323		)	(1,029		)	—		—
Total	$	2,094,468		$	1,018,342		$	1, 660,229	$	1,025,268

Receivables from, and Payables to, Customers

The following is a summary of receivables from, and payables to, customers (dollars in thousands):

	Receivables from						Payables to
	September 30, 2014			December 31, 2013			September 30, 2014		December 31, 2013
Customers	$	1,377,191		$	592,139		$	1,611,985	$	469,264
Allowance for doubtful accounts	(1,144		)	(1,135		)	—		—
Net	$	1,376,047		$	591,004		$	1,611,985	$	469,264

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Securities Borrowed and Loaned

As of September 30, 2014, securities borrowed as part of the Company’s matched book operations with a fair value of $515.5 million were delivered for securities loaned. The gross amounts of interest earned on cash provided to counterparties as collateral for securities borrowed, and interest incurred on cash received from counterparties as collateral for securities loaned, and the resulting net amount included in other revenue on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, respectively, were as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Interest earned	$	2,763		$	2,882		$	13,621		$	11,662
Interest incurred	(1,799		)	(1,938		)	(9,203		)	(8,242		)
Net	$	964		$	944		$	4,418		$	3,420

Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount of cash collateral advanced or received. Deposits paid for securities borrowed transactions require the Company to deposit cash with the lender. With respect to deposits received for securities loaned, the Company receives collateral in the form of cash in an amount generally in excess of the market value of the securities loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.

The Company’s securities borrowing and lending is generally done under industry standard agreements (“Master Securities Lending Agreements”) that may allow, following an event of default by either party, the prompt close-out of all transactions (including the liquidation of securities held) and the offsetting of obligations to return cash or securities, as the case may be, by the non-defaulting party. Events of default under the Master Securities Lending Agreements generally include, subject to certain conditions: (i) failure to timely deliver cash or securities as required under the transaction, (ii) a party’s insolvency, bankruptcy, or similar proceeding, (iii) breach of representation, and (iv) a material breach of the agreement. The counterparty that receives the securities in these transactions generally has unrestricted access in its use of the securities. For financial statement purposes, the Company does not offset securities borrowed and securities loaned.

The following table summarizes the transactions under certain Master Securities Lending Agreements that may be eligible for offsetting if an event of default occurred and a right of offset was legally enforceable (dollars in thousands):

	Gross Amounts of Recognized Assets/ (Liabilities)			Gross Amounts Offset in the Consolidated Statement of Financial Condition		Net Amounts Presented in the Consolidated Statement of Financial Condition			Collateral Received or Pledged (including Cash)			Net Amount
As of September 30, 2014:
Deposits paid for securities borrowed	$	544,980		$	—	$	544,980		$	544,879		$	101
Deposits received for securities loaned	(617,334		)	—		(617,334		)	(602,306		)	(15,028		)
As of December 31, 2013:
Deposits paid for securities borrowed	$	742,307		$	—	$	742,307		$	742,083		$	224
Deposits received for securities loaned	(737,789		)	—		(737,789		)	(722,091		)	(15,698		)

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(10) Accounts Payable and Accrued Expenses

The following is a summary of accounts payable and accrued expenses (dollars in thousands):

	September 30, 2014		December 31, 2013
Accrued research payables	$	59,165	$	52,015
Accrued compensation and benefits	45,795		47,622
Accrued rent	19,516		19,938
Trade payables	20,153		15,222
Deferred revenue	13,323		12,533
Deferred compensation	4,081		4,552
Accrued restructuring	2,411		3,768
Accrued transaction processing	3,001		2,972
Other	18,700		17,309
Total	$	186,145	$	175,931

(11) Borrowings

Short-term Bank Loans

The Company’s international securities clearance and settlement activities are funded with operating cash or with short-term bank loans in the form of overdraft facilities. At September 30, 2014, there was $89.9 million outstanding under these facilities at a weighted average interest rate of approximately 1.3% associated with international settlement activities.

In the U.S., securities clearance and settlement activities are funded with operating cash, securities loaned or with short-term bank loans under a committed credit agreement. On January 31, 2014, ITG Inc. as borrower, and Investment Technology Group, Inc. (“Parent Company”) as guarantor entered into a new $150 million two-year revolving credit agreement (the “Credit Agreement”) with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement includes an accordion feature that allows for potential expansion of the facility up to $225 million. At September 30, 2014, there were no amounts outstanding under the Credit Agreement.

Term Debt

At September 30, 2014, term debt is comprised of the following (dollars in thousands):

Term loan	$	4,245
Obligations under capital lease	16,692
Total	$	20,937

On June 1, 2011, Parent Company as borrower, entered into a $25.5 million Master Loan and Security Agreement (“Term Loan Agreement”) with Banc of America Leasing & Capital, LLC (“Bank of America”). The four-year term loan established under this agreement (“Term Loan”) is secured by a security interest in existing furniture, fixtures and equipment owned by the Parent Company and certain U.S. subsidiaries as of June 1, 2011. The primary purpose of this financing was to provide capital for strategic initiatives.

Along with the Term Loan Agreement, Parent Company entered into a $5.0 million master lease facility with Bank of America (“Master Lease Agreement”), under which purchases of new equipment may be financed. Each equipment lease under the Master Lease Agreement is structured as a capital lease and has a separate 48-month term from its inception date, at the end of which Parent Company may purchase the underlying equipment for $1.

On August 10, 2012, Parent Company entered into a $25.0 million master lease facility with BMO Harris Equipment Finance Company (“BMO”) to finance equipment and construction expenditures related to the build-out of the Company’s new headquarters in lower Manhattan. The original amount borrowed of $21.2 million has a 3.39% fixed-rate term financing structured as a capital lease with a 48-month term, at the end of which Parent Company may purchase the underlying assets for $1.

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(12) Earnings Per Share

The following is a reconciliation of the basic and diluted earnings per share computations (dollars in thousands, except per share amounts):

	September 30,
	2014		2013
Three Months Ended
Net income for basic and diluted earnings per share	$	11,365	$	7,715
Shares of common stock and common stock equivalents:
Average common shares used in basic computation	35,093		36,544
Effect of dilutive securities	933		1,237
Average common shares used in diluted computation	36,026		37,781
Earnings per share:
Basic	$	0.32	$	0.21
Diluted	$	0.32	$	0.20

Nine Months Ended
Net income for basic and diluted earnings per share	$	37,911	$	21,423
Shares of common stock and common stock equivalents:
Average common shares used in basic computation	35,628		36,956
Effect of dilutive securities	971		1,258
Average common shares used in diluted computation	36,599		38,214
Earnings per share:
Basic	$	1.06	$	0.58
Diluted	$	1.04	$	0.56

The following is a summary of anti-dilutive equity awards not included in the detailed earnings per share computations (amounts in thousands):

	September 30,
	2014	2013
Three months ended	471	284
Nine months ended	421	282

(13) Other Comprehensive Income

The components and allocated tax effects of other comprehensive income for the periods ended September 30, 2014 and December 31, 2013 are as follows (dollars in thousands):

	Before Tax Effects		Tax Effects		After Tax Effects
September 30, 2014
Currency translation adjustment	$	1,050	$	—	$	1,050
Total	$	1,050	$	—	$	1,050

December 31, 2013
Currency translation adjustment	$	8,536	$	—	$	8,536
Total	$	8,536	$	—	$	8,536

Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries or the cumulative translation adjustment related to those investments since there is currently no need to repatriate funds from certain foreign subsidiaries to the U.S. by way of dividends.

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(14) Net Capital Requirement

ITG Inc., AlterNet and ITG Derivatives are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $1.0 million or 2% of aggregate debit balances arising from customer transactions, as defined. AlterNet and ITG Derivatives have elected to use the basic method permitted by Rule 15c3-1, which requires that they each maintain minimum net capital equal to the greater of 6 2/3% of aggregate indebtedness or $100,000 and $1.0 million, respectively. Dividends or withdrawals of capital cannot be made if capital is needed to comply with regulatory requirements.

Net capital balances and the amounts in excess of required net capital at September 30, 2014 for the U.S. Operations are as follows (dollars in thousands):

	Net Capital		Excess
U.S. Operations
ITG Inc.	$	73,147	$	72,147
AlterNet	4,817		4,597
ITG Derivatives	4,626		3,626

As of September 30, 2014, ITG Inc. had $10.7 million of cash in a Special Reserve Bank Account for the benefit of customers under the Customer Protection Rule pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements and $0.4 million under PABs.

In addition, the Company’s Canadian, European and Asia Pacific Operations have subsidiaries with regulatory capital requirements. The regulatory net capital balances and amount of regulatory capital in excess of the minimum requirements applicable to each business at September 30, 2014, is summarized in the following table (dollars in thousands):

	Net Capital		Excess (Deficit)
Canadian Operations
Canada	$	40,364	$	39,916
European Operations
Ireland	72,948		21,802
U.K.	4,060		3,140
Asia Pacific Operations
Australia	18,931		7,946
Hong Kong	28,037		12,243
Singapore	367		171

(15) Segment Reporting

The Company is organized into four geographic operating segments through which the Company’s chief operating decision maker manages the Company’s business. The U.S., Canadian, European and Asia Pacific Operations segments provide the following categories of products and services:

· Electronic Brokerage — includes self-directed trading using algorithms, smart routing and matching through POSIT in cash equities (including single stocks and portfolio lists), futures and options

· Research, Sales and Trading — includes (a) differentiated, unbiased, data-driven equity research through the use of innovative data mining and analysis, as well as detailed analysis of energy plays, and (b) portfolio trading and high-touch trading desks providing execution expertise and trading ideas based on investment research

· Platforms — includes trade order and execution management software applications in addition to network connectivity

· Analytics — includes tools enabling portfolio managers and traders to improve pre-trade and real-time execution performance, portfolio construction and optimization decisions and securities valuation.

The accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2013. The Company allocates resources to, and evaluates the performance of, its reportable segments based on income or loss before income tax expense. Consistent with the Company’s resource allocation and operating performance evaluation approach, the effects of inter-segment activities are eliminated except in limited circumstances where certain technology related costs are allocated to a segment to support that segment’s revenue producing activities. Commissions and fees revenue for trade executions and commission share revenues are principally attributed to each segment based upon the location of execution of the related transaction. Recurring revenues are principally attributed based upon the location of the client using the respective service.

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A summary of the segment financial information is as follows (dollars in thousands):

	U.S. Operations		Canadian Operations		European Operations		Asia Pacific Operations			Consolidated
Three Months Ended September 30, 2014
Total revenues	$	72,540	$	17,946	$	31,677	$	12,610		$	134,773
Income before income tax expense	1,049		3,203		7,518		308			12,078
Identifiable assets	978,246		110,224		2,262,568		673,956			4,024,994
Three Months Ended September 30, 2013
Total revenues	$	76,843	$	17,575	$	22,663	$	10,477		$	127,558
Income (loss) before income tax expense (benefit)	4,478		2,749		4,115		(652		)	10,690
Identifiable assets	1,377,616		137,389		1,128,133		514,172			3,157,310
Nine Months Ended September, 2014
Total revenues	$	225,531	$	55,194	$	95,605	$	34,518		$	410,848
Income (loss) before income tax expense (benefit)	10,542		11,306		26,968		(1,630		)	47,186
Nine Months Ended September 30, 2013
Total revenues	$	242,687	$	56,224	$	65,407	$	34,583		$	398,901
Income (loss) before income tax expense (benefit) (1)(2)(3)	14,779		9,120		10,436		(1,923		)	32,412

(1) In the second quarter of 2013, the Company incurred $1.6 million to implement a restructuring plan to close its technology research and development facility in Israel and migrate that function to an outsourced service provider model effective January 1, 2014. This plan primarily focused on reducing costs by limiting ITG’s geographic footprint while maintaining the necessary technological expertise via a consulting arrangement. The Company also reduced previously-recorded 2012 and 2011 restructuring accruals of $1.6 million to reflect the sub-lease of previously-vacated office space and certain legal and other employee-related charges deemed unnecessary.

(2) During the fourth quarter of 2012, ITG began its build out of its new lower Manhattan headquarters while continuing to occupy its then-existing headquarters in midtown Manhattan. As a result, ITG incurred duplicate rent charges of $2.6 million during the first half of 2013.

(3) In the second quarter of 2013, ITG moved into its new headquarters and incurred a one-time charge of $3.9 million, which includes a reserve for the remaining lease obligation at the previous midtown Manhattan headquarters.

The table below details the total revenues for the categories of products and services provided by the Company (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Revenues by Product Group:
Electronic Brokerage	$	68,663	$	66,234	$	214,740	$	210,597
Research, Sales and Trading	30,470		26,683		90,026		80,236
Platforms	23,570		23,151		70,636		72,845
Analytics	11,612		11,177		34,413		34,447
Corporate (non-product)	458		313		1,033		776
Total Revenues	$	134,773	$	127,558	$	410,848	$	398,901

(16) Off-Balance Sheet Risk and Concentration of Credit Risk

The Company is a member of various U.S. and non-U.S. exchanges and clearing houses that trade and clear, respectively, equities and/or derivative contracts. Associated with the Company’s membership, the Company may be required to pay a proportionate share of financial obligations of another member who may default on its obligations to the exchanges or the clearing house. While the rules governing different exchange or clearing house memberships vary, in general, the Company’s obligations would arise only if the exchanges and clearing houses had previously exhausted other remedies. The maximum potential payout under these memberships cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote. In the ordinary course of business, the Company guarantees obligations of subsidiaries which may arise from third-party

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clearing relationships and trading counterparties. The activities of the subsidiaries covered by these guarantees are included in the Company’s consolidated financial statements.

The Company’s customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing transactions such as bank loans. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure.

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, securities owned at fair value, receivables from brokers, dealers and clearing organizations and receivables from customers. Cash and cash equivalents and securities owned, at fair value are deposited with high credit quality financial institutions.

The Company loans securities temporarily to other brokers in connection with its securities lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis, and by requiring additional cash as collateral or returning collateral when necessary.

The Company borrows securities temporarily from other brokers in connection with its securities borrowing activities. The Company deposits cash as collateral for the securities borrowed. Decreases in security prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return collateral, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by depositing additional collateral with counterparties or receiving cash when deemed necessary.

The Company may at times maintain inventories in equity securities on both a long and short basis. Whereas long inventory positions represent the Company’s ownership of securities, short inventory positions represent obligations of the Company to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to the Company as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked to market daily and are continuously monitored by the Company.

(17) Subsequent Event

In the third quarter of 2014, the Company repurchased 520,000 shares for $9.1 million. As of September 30, 2014, the Company had 1.4 million shares available for repurchase under available authorizations. On October 15, 2014, the Company’s Board of Directors authorized the repurchase of an additional 4.0 million shares. This additional authorization has no expiration date. The specific timing and amount of repurchases will vary based on market conditions and other factors.

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

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto.

Overview

ITG is an independent execution and research broker that partners with global portfolio managers and traders to provide innovative financial technology and unique data-driven insights throughout the investment process. From investment decision through settlement, ITG helps clients understand market trends, improve performance, mitigate risk and navigate increasingly complex markets. A leader in electronic trading since launching the POSIT crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools and proprietary research. ITG is headquartered in New York with offices in North America, Europe and the Asia Pacific region.

Our business is organized into four reportable operating segments: U.S. Operations, Canadian Operations, European Operations and Asia Pacific Operations (see Note 15, Segment Reporting, to the condensed consolidated financial statements). Our four operating segments provide the following categories of products and services:

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· Platforms — includes trade order and execution management software applications in addition to network connectivity

Sources of Revenues

Revenues from our products and services are generated from commissions and fees, recurring (subscriptions) and other sources.

Commissions and fees are derived primarily from (i) commissions charged for trade execution services, (ii) income generated on net executions, whereby equity orders are filled at different prices within or at the National Best Bid and Offer (“NBBO”) and (iii) commission sharing arrangements between ITG Net (our private value-added FIX-based financial electronic communications network) and third-party brokers and alternative trading systems whose trading products are made available to our clients on our order management system (“OMS”) and execution management system (“EMS”) applications in addition to commission sharing arrangements for our ITG Single Ticket Clearing Service and our RFQ-hub request-for-quote service. Because commissions are earned on a per-transaction basis, such revenues fluctuate from period to period depending on (a) the volume of securities traded through our services in the U.S. and Canada, (b) the contract value of securities traded in Europe and the Asia Pacific region and (c) our commission rates. Certain factors that affect our volumes and contract values traded include: (i) macro trends in the global equities markets that affect overall institutional equity trading activity, (ii) competitive pressure, including pricing, created by a proliferation of electronic execution competitors and (iii) potential changes in market structure in the U.S. and other regions. In addition to share volume, revenues from net executions are also impacted by the width of spreads within the NBBO. Trade orders are delivered to us from our OMS and EMS products and other vendors’ products, direct computer-to-computer links to customers through ITG Net and third-party networks and phone orders from our customers.

Recurring revenues are derived from the following primary sources: (i) connectivity fees generated through ITG Net for the ability of the sell-side to receive orders from, and send indications of interest to, the buy-side and for the sell-side to receive requests-for-quotes through RFQ-hub, (ii) subscription revenue generated from providing research, (iii) software and analytical products and services and (iv) maintenance and customer technical support for our OMS.

Other revenues include: (i) income from principal trading in Canada, including arbitrage trading, (ii) the net spread on foreign exchange transactions executed to facilitate equity trades by clients in different currencies, (iii) the net interest spread earned on securities borrowed and loaned matched book transactions, (iv) transaction advisory services provided to potential purchasers of energy-related investments, (v) non-recurring consulting services, such as one-time implementation and customer training related activities, (vi) investment and interest income, (vii) interest income on securities borrowed in connection with customers’ settlement activities and (viii) market gains/losses resulting from temporary positions in securities assumed in the normal course of our agency trading business (including errors and accommodations).

Expenses

Compensation and employee benefits, our largest expense, consists of salaries and wages, incentive compensation, employee benefits and taxes. Incentive compensation fluctuates based on revenues, profitability and other measures, taking into account the landscape for key talent. Incentive compensation includes a combination of cash and deferred share-based awards. Only the cash portion, which represents a lesser portion of our total compensation costs, is expensed in the current period. As a result, our ratio of compensation expense to revenues may fluctuate from period-to-period based on revenue levels.

Transaction processing expense consists of costs to access various third-party execution destinations and to process, clear and settle transactions. These costs tend to fluctuate with share and trade volumes, the mix of trade execution services used by clients and the rates charged by third parties.

Occupancy and equipment expense consists primarily of rent and utilities related to leased premises, office equipment and depreciation and amortization of fixed assets and leasehold improvements.

Telecommunications and data processing expenses primarily consist of costs for obtaining market data, telecommunications services and systems maintenance.

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Other general and administrative expenses primarily include software amortization, consulting, business development, professional fees and intangible amortization.

Interest expense consists primarily of costs associated with outstanding debt and credit facilities.

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” as such term is defined in SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in, or excluded from, the most directly comparable measure calculated and presented in accordance with U.S. GAAP. For example, non-GAAP measures may exclude the impact of certain unique and/or non-operating items such as acquisitions, divestitures, restructuring charges, large write-offs or items outside of management’s control. Management believes that the following non-GAAP financial measures described below provide investors and analysts useful insight into our financial position and operating performance.

Adjusted expenses and adjusted net income together with related per share amounts are non-GAAP performance measures that we believe are useful to assist investors in gaining an understanding of the trends and operating results for our core business. These measures should be viewed in addition to, and not in lieu of, results reported under U.S. GAAP.

Reconciliations of adjusted expenses and adjusted net income to expenses and net income and related per share amounts as determined in accordance with U.S. GAAP for the three months and nine months ended September 30, 2013 are provided below (dollars in thousands except per share amounts).

Nine Months Ended September 30, 2013:	ITG Consolidated			U.S.			Canada		Europe			Asia Pacific
Total revenues	$	398,901		$	242,687		$	56,224	$	65,407		$	34,583

Total expenses	$	366,489		$	227,908		$	47,104	$	54,971		$	36,506
Less:
Duplicate rent charges (1)	(2,568		)	(2,568		)	—		—			—
Office move (2)	(3,910		)	(3,910		)	—		—			—
Restructuring charges (3)	75			1,264			348		(1,537		)	—
Adjusted operating expenses	$	360,086		$	222,694		$	47,452	$	53,434		$	36,506

Income before income tax	32,412
Effect of adjustments	6,403
Adjusted pre-tax operating income	$	38,815

Income tax expense	10,989
Tax effect of adjustments	405
Adjusted operating income tax expense	$	11,394

Net income	$	21,423
Net effect of adjustments	5,998
Adjusted operating net income	$	27,421

Diluted earnings per share	$	0.56
Net effect of adjustments	0.16
Adjusted diluted operating earnings per share	$	0.72

(1) During the fourth quarter of 2012, we began our build-out of our new lower Manhattan headquarters while continuing to occupy our then-existing headquarters in midtown Manhattan. As a result, we incurred duplicate rent charges through June 2013.

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(2) In the second quarter of 2013, we moved into our new headquarters and incurred a one-time charge, which includes a reserve for the remaining lease obligation at the previous midtown Manhattan headquarters.

(3) In the second quarter of 2013, we incurred $1.6 million to implement a restructuring plan to close our technology research and development facility in Israel and migrate that function to an outsourced service provider model effective January 1, 2014. This plan primarily focused on reducing costs by limiting our geographic footprint while maintaining the necessary technological expertise via a consulting arrangement. We also reduced previously-recorded 2012 and 2011 restructuring accruals of $1.6 million to reflect the sub-lease of previously-vacated office space and certain legal and other employee-related charges deemed unnecessary.

Executive Summary for the Quarter Ended September 30, 2014

Consolidated Overview

Our third quarter results continue to reflect the benefits of our strategy of geographic diversification as we continued to generate strong profitability in Europe and we achieved profitability in Asia Pacific. In Europe, we are continuing to benefit from the investments we made in our infrastructure and our global product suite as well as from our efforts to diversify our client base and grow liquidity in POSIT. Our net income for the third quarter of 2014 was $11.4 million, or $0.32 per diluted share compared to net income of $7.7 million, or $0.20 per diluted share in the third quarter of 2013. Revenues were $134.8 million, or nearly 6% above the third quarter of 2013. Our annualized return on average equity for the quarter was 10.9%, compared to a return of 7.6% in the third quarter of 2013.

Business conditions in the U.S. remained weak for most of the third quarter of 2014. The average daily combined volume of NYSE- and NASDAQ-listed securities in the third quarter of 2014 was down 7% from the second quarter of 2014 and virtually even with the multi-year low in the third quarter of 2013. The weak conditions were also apparent in domestic equity fund flow activity. Following an improved start to the year, domestic equity funds continue to see outflows, including more than $30 billion during the third quarter of 2014. Towards the end of the recent quarter, we saw a surge in volatility as central bank policies from around the world began to diverge, creating movements in currencies and commodities that triggered volatility in equity prices and increased volumes.

While the recent period of higher volatility and increased U.S. trading volumes has continued into the early part of the fourth quarter, it is unclear how sustainable it will be over the long-term. As a result, our strategy is to continue to expand our business across different asset classes and client constituencies and to grow our international businesses. Our recent acquisition of RFQ-hub, a Paris-based request-for-quote technology platform for global listed and over-the-counter financial instruments is closely aligned with these strategic goals. We expect this investment to be neutral to earnings for the remainder of 2014 and to be modestly accretive in 2015. We will also continue our focus on the profitability of the products and services within each of our operating regions to ensure that we realize the full value of our combined offering and that we operate our business as efficiently as possible.

Segment Discussions

In the U.S., the overall combined average daily market volume of NYSE- and NASDAQ-listed securities in the third quarter was virtually even with the depressed levels of the third quarter of 2013 and down 7% sequentially. Our overall U.S. trading volumes also remained under pressure, falling 5% from the third quarter of 2013 and 2% sequentially.

During the quarter, the proportion of volume from our sell-side clients grew to 56% versus 51% in the third quarter of 2013, adversely impacting our overall revenue earned per share, which fell to $0.0046 compared with $0.0049 in the third quarter of 2013. While we also saw lower revenue per share from sell-side clients, we continued to see improvement in the revenue per share from buy-side clients to the highest level we have seen in more than five years. The higher revenue per share from buy-side clients was driven by rate increases for clients’ use of our POSIT Alert block crossing system and our high-touch trading services. These rate increases were attributable in part to clients paying for research through trading at a higher, bundled rate. During the quarter, our energy research capabilities again provided additional sources of revenue in the form of transaction advisory services provided to potential purchasers of energy-related investments.

Average daily trading volumes on all Canadian markets increased 1% from the third quarter of 2013 while commissions and fees from our Canadian Operations were 1% higher in U.S. Dollar terms and 6% higher in local currency terms. While the market environment remains challenging, we are generating significantly higher volumes in MATCH Now, which have grown more than 50% from the third quarter of 2013.

The growth in our European commissions and fees of 42% versus the third quarter of 2013 significantly outpaced the 7% growth in market-wide trading. Our European results continue to reflect the investments we made in our infrastructure and in our

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global product capabilities including POSIT Alert, where average daily value executed more than doubled compared to the prior-year quarter. Our strong revenue growth together with our efforts to reduce settlement and clearing costs significantly improved our pre-tax results in the region by more than 80% in comparison to the third quarter of 2013.

In the Asia-Pacific region, we moved into profitability in the third quarter as revenues rose 20% compared to the prior-year period primarily due to increased order flow from local clients trading into Australia and Hong Kong. POSIT Alert continues to be a key source of growth in Asia Pacific with Alert revenues up more than 40% compared to the second quarter of 2014. While overall market-wide trading activity remained flat across the region, market-wide trading in Hong Kong was up 23% over the prior-year quarter. The increased activity in Hong Kong was attributable, in part, to the recent announcement of the Shanghai-Hong Kong Stock Connect, a proposed mutual market access program that will allow investors in Hong Kong and Mainland China to trade and settle shares listed on the other market via the exchange and clearing house in their respective local market.

Capital Resource Allocation

During the third quarter of 2014, we repurchased 520,000 shares for $9.1 million. During October 2014, the Board of Directors increased our share repurchase authorization by an additional 4.0 million shares. We intend to continue to use share repurchases to offset dilution from the issuance of stock under employee compensation plans and to opportunistically return capital to stockholders depending on market conditions.

Results of Operations — Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

U.S. Operations

	Three Months Ended September 30,
$ in thousands	2014		2013		Change			% Change
Revenues:
Commissions and fees	$	50,429	$	56,056	$	(5,627	)	(10	)
Recurring	18,707		18,982		(275		)	(1	)
Other	3,404		1,805		1,599			89
Total revenues	72,540		76,843		(4,303		)	(6	)

Expenses:
Compensation and employee benefits	32,403		31,304		1,099			4
Transaction processing	9,830		10,115		(285		)	(3	)
Other expenses	28,692		30,353		(1,661		)	(5	)
Interest expense	566		593		(27		)	(5	)
Total expenses	71,491		72,365		(874		)	(1	)
Income before income tax expense	$	1,049	$	4,478	$	(3,429	)	(77	)

Commissions and fees decreased $5.6 million as a result of a 5% reduction in our average daily trading volumes and a 6% decline in our average revenue per share to $0.0046. This decrease was primarily attributable to an increase in the proportion of our volume from sell-side clients, which rose to 56% from 51% in the third quarter 2013. We also saw a decline in the average revenue per share from sell-side clients, however, this was offset by the continued increase in the average revenue per share from buy-side clients, which was at its highest level in more than five years. The higher revenue per share from buy-side clients was driven by rate increases for clients’ use of our POSIT Alert block crossing system and our high-touch trading services. These rate increases were attributable in part to clients paying for research through trading at a higher, bundled rate.

	Three Months Ended September 30,
U.S. Operations: Key Indicators*	2014		2013		Change			% Change
Total trading volume (in billions of shares)	9.4		9.9		(0.5		)	(5	)
Trading volume per day (in millions of shares)	146.7		154.6		(7.9		)	(5	)
Average revenue per share	$	0.0046	$	0.0049	$	(0.0003	)	(6	)
U.S. market trading days	64		64		—			—

* Excludes activity from ITG Net commission share arrangements.

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Recurring revenues decreased due to the impact of client attrition from our OMS product, resulting in lower OMS subscription revenues and connectivity fees, partially offset by higher research and analytical product subscriptions.

Other revenues increased primarily due to an increase in transaction advisory services revenues generated by our energy research team.

Compensation and employee benefits increased due to an increase in headcount, primarily in our technology areas, as well as higher incentive-based compensation to our executive management team associated with increased global profitability. These increases were partially offset by higher capitalized compensation for software development and lower severance payments.

Transaction processing costs declined as a result of the decline in both average daily volume and rate per share earned. As a percentage of commissions and fees, transaction processing costs increased to 19.5% from 18.0% in the third quarter of 2013 due to the impact of our increased sell-side volumes.

Other expenses decreased $1.7 million due to lower costs for data centers and software amortization and a higher credit for research and development costs charged to other operating segments. These reductions were partially offset by an increase in legal and employee recruiting fees.

Interest expense primarily relates to interest cost on our term debt and commitment fees relating to our $150 million revolving credit facility, including debt issuance cost amortization.

Canadian Operations

	Three Months Ended September 30,
$ in thousands	2014		2013		Change			% Change
Revenues:
Commissions and fees	$	13,490	$	13,376	$	114		1
Recurring	2,352		2,324		28			1
Other	2,105		1,875		230			12
Total revenues	17,947		17,575		372			2

Expenses:
Compensation and employee benefits	5,369		5,968		(599		)	(10	)
Transaction processing	2,535		1,950		585			30
Other expenses	6,840		6,908		(68		)	(1	)
Total expenses	14,744		14,826		(82		)	(1	)
Income before income tax expense	$	3,203	$	2,749	$	454		17

Currency translation from a weaker Canadian Dollar decreased total Canadian revenues and expenses by $0.8 million and $0.6 million, respectively, resulting in a decrease of $0.2 million to pre-tax income.

Canadian commissions and fees remained relatively unchanged from the third quarter of 2013 reflecting the offsetting impacts of higher MATCH Now volumes, which were up more than 50% from the third quarter of 2013, and unfavorable currency translation.

Other revenues increased primarily due to lower client trade accommodations and higher income earned on foreign exchange transactions and principal arbitrage trading.

Compensation and employee benefits costs decreased primarily due to a decrease in share-based compensation, which fluctuates for legacy awards to Canadian employees based on the changes in the market price of our stock and the impact of currency translation.

Transaction processing costs increased due to the impact of reversing an accrual for sales tax on exchange fees in the third quarter of 2013, which more than offset lower clearing and settlement charges from our clearing provider following a contract renegotiation and the favorable impact of currency translation.

Other expenses were down slightly as decreases in software licensing fees were offset by higher charges for historical market data.

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European Operations

	Three Months September 30,
$ in thousands	2014			2013			Change		% Change
Revenues
Commissions and fees	$	28,018		$	19,766		$	8,252	42
Recurring	3,771			3,103			668		22
Other	(112		)	(206		)	94		(46	)
Total revenues	31,677			22,663			9,014		40

Expenses:
Compensation and employee benefits	9,469			7,883			1,586		20
Transaction processing	6,405			5,141			1,264		25
Other expenses	8,284			5,524			2,760		50
Total expenses	24,158			18,548			5,610		30
Income before income tax expense	$	7,519		$	4,115		$	3,404	83

Currency translation from a stronger average British Pound during the quarter increased European revenues and expenses by $2.3 million and $1.8 million, respectively, adding $0.5 million to pre-tax income.

European results include substantially all of the RFQ-hub operations since the July 30, 2014 acquisition date, adding $0.9 million in revenues, mostly recurring, and $1.0 million in expenses, of which $0.7 is in compensation and employee benefits.

Our European commissions and fees increased as a result of our increased use of our trading algorithms and POSIT Alert block crossing system.

Recurring revenues increased primarily from the new connectivity revenue from RFQ-hub.

Compensation and employee benefits increased due to the impact of the RFQ-hub acquisition and higher incentive-based compensation related to improved performance. This increase was offset, in part, by the impact of $0.9 million in lower compensation associated with the outsourcing of our research and development facility in Israel to a third-party service provider.

Transaction processing costs increased as a result of the increase in value traded. However, transaction processing costs declined as a percentage of commissions and fees from 26% in the third quarter of 2013 to 24% this quarter due to the impact of a higher percentage of our value traded crossed in POSIT, including our POSIT Alert block crossing system, and our initiatives to reduce settlement and clearing costs.

Other expenses increased due to higher charges for global research and development costs and historical market data, higher consulting costs, net of capitalization, from outsourcing our research and development facility in Israel to a third-party service provider and new costs incurred by RFQ-hub.

Asia Pacific Operations

	Three Months Ended September 30,
$ in thousands	2014		2013			Change		% Change
Revenues:
Commissions and fees	$	10,963	$	9,180		$	1,783	19
Recurring	1,622		1,352			270		20
Other	24		(55		)	79		144
Total revenues	12,609		10,477			2,132		20

Expenses:
Compensation and employee benefits	5,167		4,509			658		15
Transaction processing	2,791		2,584			207		8
Other expenses	4,344		4,036			308		8
Total expenses	12,302		11,129			1,173		11
Income (loss) before income tax expense (benefit)	$	307	$	(652	)	$	959	147

Currency translation in the Asia Pacific region had virtually no impact on revenues, expenses or pre-tax income.

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The increase in Asia Pacific commissions and fees was driven primarily by increased order flow from local Asia clients trading into Australia and Hong Kong, the growth in commissions from clients using our POSIT Alert block crossing system and higher commission sharing revenues.

The growth in recurring revenues primarily reflects growth in the number of billable network connections through ITG Net.

Compensation and employee benefits increased due to increases in headcount and incentive-based compensation, partially offset by higher capitalized compensation for software development.

Transaction processing costs increased due to a higher value traded but fell as a percentage of commissions and fees due to our efforts to reduce execution and settlement costs. As a percentage of revenue, transaction processing costs declined to 25.5% from 28.1% in the third quarter of 2013.

Other expenses increased primarily due to higher charges for historical market data and global research and development costs, partially offset by lower consulting service fees.

Consolidated income tax expense

Our effective tax rate was 5.9% in the third quarter of 2014 compared to 27.8% in the third quarter of 2013. The low rate in the third quarter of 2014 primarily reflects a $2.4 million tax benefit recorded for the net impact of settling multi-year tax return positions and establishing additional reserves for other tax positions. In addition, a significantly higher portion of our pre-tax income came from our European Operations, which is taxed at a lower rate. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Results of Operations — Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

U.S. Operations

	Nine Months Ended September 30,
$ in thousands	2014		2013			Change			% Change
Revenues:
Commissions and fees	$	159,252	$	179,815		$	(20,563	)	(11	)
Recurring	55,041		56,975			(1,934		)	(3	)
Other	11,238		5,897			5,341			91
Total revenues	225,531		242,687			(17,156		)	(7	)

Expenses:
Compensation and employee benefits	98,871		93,993			4,878			5
Transaction processing	28,001		32,929			(4,928		)	(15	)
Other expenses	86,321		100,356			(14,035		)	(14	)
Restructuring charges	—		(1,264		)	1,264			(100	)
Interest expense	1,796		1,894			(98		)	(5	)
Total expenses	214,989		227,908			(12,919		)	(6	)
Income before income tax expense	$	10,542	$	14,779		$	(4,237	)	(29	)

Commissions and fees decreased as a result of a 13% reduction in our average daily trading volumes, offset in part by a 2% increase in our average revenue per share. Our average revenue per share increased even though the proportion of our volumes executed by sell-side clients increased to 52% compared to 50% in the first nine months of 2013 due to an increase in our average revenue per share from buy-side clients. The higher revenue per share from buy-side clients was driven by rate increases for clients’ use of our high-touch trading services, as well as clients trading via our POSIT Alert block crossing system. These rate increases were attributable in part to clients paying for research through trading at a higher, bundled rate.

	Nine Months Ended September 30,
U.S. Operations: Key Indicators*	2014		2013		Change			% Change
Total trading volume (in billions of shares)	28.8		32.9		(4.1		)	(12	)
Trading volume per day (in millions of shares)	153.2		175.1		(21.9		)	(13	)
Average revenue per share	$	0.0048	$	0.0047	$	(0.0001	)	2
U.S. market trading days	188		188		—			—

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* Excludes activity from ITG Net commission share arrangements.

Recurring revenues decreased due to the impact of client attrition from our OMS product, resulting in lower OMS subscription revenues and connectivity fees, partially offset by an increase in subscriptions for our research products.

Other revenues increased due primarily to an increase in transaction advisory services revenues generated by our energy research team and higher revenues generated by our stock loan matched book transactions.

Total expenses in the nine months of 2014 decreased $12.9 million compared to the first nine months of 2013. The first nine months of 2013 included $2.6 million of duplicate rent charges associated with building out our new headquarters in lower Manhattan while we still occupied our then-existing headquarters in midtown Manhattan and a one-time charge of $3.9 million upon the completion of the move, that included a reserve for the remaining lease obligation at our then-existing headquarters. Total expenses in the third quarter of 2013 were also reduced by reversals of our remaining 2012 and 2011 restructuring liabilities totaling $1.3 million as a portion of the space vacated in our Los Angeles office was sub-let and certain legal and other employee-related accruals were deemed unnecessary. Total expenses declined $7.7 million compared to the first nine months of 2013 excluding these charges (see Non-GAAP Financial Measures).

Compensation and employee benefits increased as a result of higher incentive-based compensation to our management team associated with increased global profitability and salary increase from an increase in headcount.

Transaction processing costs declined more than the decrease in commissions and fees due to lower options volumes, which incur higher costs proportionally than our cash equity trading and lower execution costs from client use of our algorithm technology. As a percentage of commissions and fees, transaction processing costs declined to 17.6% from 18.3% during the first nine months of 2013.

Other expenses decreased $14.0 million, of which $6.5 million represented the impact of duplicate rent charges incurred and the one-time charge recognized upon the completion of our move during the prior-year period as described above. In addition, we incurred lower data center, data and connectivity expenses from our cost reduction initiatives, as well as lower software amortization and consulting fees and a higher credit for research and development costs charged to other segments. These reductions were partially offset by an increase in employee recruiting and legal fees.

Interest expense primarily relates to interest cost on our term debt and commitment fees relating to our $150 million revolving credit facility, including debt issuance cost amortization.

Canadian Operations

	Nine Months Ended September 30,
$ in thousands	2014		2013			Change			% Change
Revenues:
Commissions and fees	$	42,109	$	43,587		$	(1,478	)	(3	)
Recurring	7,204		6,864			340			5
Other	5,881		5,773			108			2
Total revenues	55,194		56,224			(1,030		)	(2	)

Expenses:
Compensation and employee benefits	15,856		18,717			(2,861		)	(15	)
Transaction processing	7,162		7,947			(785		)	(10	)
Other expenses	20,870		20,788			82			—
Restructuring charges	—		(348		)	348			(100	)
Total expenses	43,888		47,104			(3,216		)	(7	)
Income before income tax expense	$	11,306	$	9,120		$	2,186		24

Currency translation from a weaker Canadian Dollar decreased total Canadian revenues and expenses by $3.5 million and $2.6 million, respectively, resulting in a decrease of $0.9 million to pre-tax income.

Canadian commissions and fees declined 3% primarily as a result of unfavorable currency translation, offset by the growth in MATCH Now volumes of more than 70%.

Recurring revenues primarily reflects growth in the number of billable network connections through ITG Net and our billing for market data consumed by clients.

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Other revenues decreased slightly due to an increase in losses on client accommodations and lower revenues from principal trading, partially offset by additional income earned on foreign exchange transactions.

Transaction processing costs decreased due to lower rates for clearance and settlement and the impact of currency translation.

The increase in other expenses was primarily driven by higher historical market data charges and legal-related expenses partially offset by lower connectivity and the impact of currency translation.

In the second quarter of 2013, previously-recorded restructuring accruals from 2012 and 2011 were adjusted to reflect our then-current expectations.

European Operations

	Nine Months Ended September 30,
$ in thousands	2014			2013			Change			% Change
Revenues:
Commissions and fees	$	85,830		$	56,400		$	29,430		52
Recurring	10,075			9,379			696			7
Other	(300		)	(372		)	72			(19	)
Total revenues	95,605			65,407			30,198			46

Expenses:
Compensation and employee benefits	26,623			22,831			3,792			17
Transaction processing	18,961			14,207			4,754			33
Other expenses	23,053			16,396			6,657			41
Restructuring charges	—			1,537			(1,537		)	(100	)
Total expenses	68,637			54,971			13,666			25
Income before income tax expense	$	26,968		$	10,436		$	16,532		158

Currency translation from a stronger average British Pound increased European revenues and expenses by $7.4 million and $5.5 million, respectively, adding $1.9 million to pre-tax income.

European results include substantially all the RFQ-hub operations since the July 30, 2014 acquisition date, adding $0.9 million in revenues, mostly recurring, and $1.0 million in expenses, of which $0.7 is in compensation and employee benefits.

While daily European market-wide value traded increased 11%, the 52% growth in our European commissions and fees far outpaced that rate. We are continuing to benefit from the investments we have made in our infrastructure and our product suite resulting in increased activity from buy-side and sell-side clients using our electronic brokerage offerings, including our trading algorithms and POSIT, and from clients using our POSIT Alert block crossing system. We also saw increased commissions from the use of our high-touch trading services. Commissions and fees also benefitted from $6.5 million in favorable currency translation.

Recurring revenue increased primarily from the new connectivity revenue from RFQ-hub.

Compensation and employee benefits increased due to the impact of the RFQ-hub acquisition and higher incentive compensation related to improved performance. This increase was offset, in part, by the impact of $2.7 million in lower compensation associated with the outsourcing of our research and development facility in Israel to a third-party service provider.

Transaction processing costs increased due to the significant increase in value traded, but decreased as a percentage of commissions and fees due to the impact of a higher percentage of our value traded crossed in POSIT, including our POSIT Alert block crossing system, and our initiatives to reduce settlement and clearing costs.

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In the second quarter of 2013, we implemented a restructuring plan to close our technology research and development facility in Israel and outsource that function to a third party service provider effective January 1, 2014.

Asia Pacific Operations

	Nine Months Ended September 30,
$ in thousands	2014			2013			Change			% Change
Revenues:
Commissions and fees	$	30,586		$	30,452		$	134		—
Recurring	4,684			4,166			518			12
Other	(752		)	(35		)	(717		)	NA
Total revenues	34,518			34,583			(65		)

Expenses:
Compensation and employee benefits	14,955			14,874			81			1
Transaction processing	8,042			8,738			(696		)	(8	)
Other expenses	13,151			12,894			257			2
Total expenses	36,148			36,506			(358		)	(1	)
Loss before income tax benefit	$	(1,630	)	$	(1,923	)	$	293		(15	)

Currency translation from a weaker Australian Dollar decreased total Asia Pacific revenues and expenses both by $0.9 million, resulting in no impact on the year-to-date pre-tax loss.

Asia Pacific commissions and fees remained flat from the prior-year period despite a reduction in market-wide trading activity and unfavorable currency translation, due to the growth in commissions from clients using our POSIT Alert block crossing system and higher commission sharing revenues.

The growth in recurring revenues primarily reflects growth in the number of billable network connections through ITG Net and the decrease in other revenues is due to an increase in client trade accommodations of $0.8 million.

Compensation and employee benefits increased due to an increase in headcount and employee benefits partially offset by an increase in capitalization related to software development, lower incentive compensation and the impact of currency translation.

Transaction processing costs decreased due to a reduction in the value traded and our efforts to reduce execution and settlement costs. As a percentage of commissions and fees, transaction processing costs declined to 26.3% from 28.7% in the first nine months of 2013.

The decrease in other expenses reflects lower foreign currency transaction losses, partially offset by an increase in charges for historical market data and global research and development.

Consolidated income tax expense

Our effective tax rate was 19.7% in the first nine months of 2014 compared to 33.9% in the first nine months of 2013. The rate in 2014 remained relatively low as more than half of our pre-tax income came from our European Operations, which are taxed at a lower rate. Furthermore, in the U.S., we recorded $2.7 million in tax benefits for the net impact of settling multi-year tax return positions and establishing additional reserves for other tax positions. This reduction in rate was partially offset by a higher U.S. effective tax rate in the first nine months of 2014 due in part to tax legislation extending the research and experimental tax credit into 2014 not being passed. In the first nine months of 2013, although one third of our pre-tax income came from the lower tax rates in our European Operations, the U.S. was significantly aided by the full year of 2012 research and experimental credits recorded in 2013 from the timing of tax legislation. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is cash provided by operations. Our liquidity requirements result from our working capital needs, which include clearing and settlement activities, as well as our regulatory capital needs. A substantial portion of our assets is liquid, consisting of cash and cash equivalents or assets readily convertible into cash. Cash is principally invested in U.S. government money market mutual funds and other money market mutual funds. At September 30, 2014, unrestricted cash and cash equivalents

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totaled $228.5 million. Included in this amount is $114.2 million of cash and cash equivalents held by subsidiaries outside the United States. Due to our current capital structure, we currently do not foresee a need to repatriate funds from certain foreign subsidiaries to the U.S. by way of dividends. Should we need to do so in the future, our effective tax rate may increase.

As a self-clearing broker-dealer in the U.S., we are subject to cash deposit requirements with clearing organizations that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers’ trading activity and market volatility. At September 30, 2014, we had interest-bearing security deposits totaling $33.6 million with clearing organizations in the U.S. for the settlement of equity trades. In the normal course of our U.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures. These financings may be funded from existing cash resources, borrowings under stock loan transactions or short-term bank loans under our committed facility. In January 2014, we entered into a new $150 million two-year revolving credit agreement with a syndicate of banks and JP Morgan Chase Bank, N.A. as administrative agent to finance these temporary positions and to satisfy temporary spikes in clearing margin requirements.

We self-clear equity trades in Hong Kong and Australia and maintain restricted cash deposits of $25.8 million to support overdraft facilities. In Europe, we maintain $28.0 million in restricted cash deposits supporting working capital facilities primarily in the form of overdraft protection for our European clearing and settlement needs.

Capital Resources

Capital resource requirements relate to capital purchases, as well as business investments, and are generally funded from operations. When required, as in the case of a major acquisition, our strong cash generating ability has historically allowed us to access U.S. capital markets.

Operating Activities

The table below summarizes the effect of the major components of operating cash flow.

	Nine Months Ended September 30,
(in thousands)	2014			2013
Net income	$	37,911		$	21,423
Non-cash items included in net income	52,417			56,793
Effect of changes in receivables/payables from/to customers and brokers	(87,149		)	(38,364		)
Effect of changes in other working capital and operating assets and liabilities	49,479			7,451
Net cash provided by operating activities	$	52,658		$	47,303

The cash flow provided by operating activities during the first nine months of 2014 was driven by an increase in net income and a decrease in deposits held by clearing organizations offset by an increase in cash used for settlement activities. The decrease in deposits with clearing organizations was offset by a $35.0 million repayment in short-term bank loans in the U.S., while the increase in cash used in settlement activities was offset by an increase of $51.4 million in international short-term bank loans. The net change of $16.4 million in short-term bank loan financing is included in financing activities below.

In the normal course of our clearing and settlement activities worldwide, cash is typically used to fund restricted or segregated cash accounts (under regulations and other), broker and customer fails to deliver/receive, securities borrowed, deposits with clearing organizations and net activity related to receivables/payables from/to customers and brokers. The cash requirements vary from day to day depending on volume transacted and customer trading patterns.

Investing Activities

Net cash used in investing activities of $49.1 million includes our acquisition of RFQ-hub, investments in software development projects, computer hardware and software and a minority interest investment.

Financing Activities

Net cash used in financing activities of $33.7 million primarily reflects repurchases of ITG common stock, shares withheld for net settlements of share-based awards and repayments of long-term debt, offset by net proceeds from short-term bank borrowings that are used to support our settlement activities.

On January 31, 2014, ITG Inc. as borrower, and Investment Technology Group, Inc. (“Parent Company”) as guarantor entered into a new $150 million two-year revolving credit agreement (the “Credit Agreement”) with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement includes an accordion feature that allows for potential

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expansion of the facility up to $225 million. The terms and conditions of the Credit Agreement are substantially the same as the initial Credit Agreement that matured on January 31, 2014.

During the first nine months of 2014, we repurchased approximately 2.4 million shares of our common stock at a cost of $41.6 million, which was funded from our available cash resources. Of these shares, 2.0 million were purchased under our Board of Directors’ authorization for a total cost of $36.1 million (average cost of $17.76 per share). An additional 0.4 million shares repurchased ($5.5 million) pertained solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards. As of September 30, 2014, the total remaining number of shares currently available for repurchase under ITG’s stock repurchase program was 1.4 million. On October 15, 2014, the Board of Directors authorized the repurchase of an additional 4.0 million shares, bringing the total number of shares available for repurchase at that time to 5.4 million shares. This additional authorization has no expiration date. The specific timing and amount of repurchases will vary based on market conditions and other factors.

Regulatory Capital

Net capital balances and the amounts in excess of required net capital at September 30, 2014 for the U.S. Operations are as follows (dollars in thousands):

	Net Capital		Excess
U.S. Operations
ITG Inc.	$	73,147	$	72,147
AlterNet	4,817		4,597
ITG Derivatives	4,626		3,626

	Net Capital		Excess (Deficit)
Canadian Operations
Canada	$	40,364	$	39,916
European Operations
Ireland	72,948		21,802
U.K.	4,060		3,140
Asia Pacific Operations
Australia	18,931		7,946
Hong Kong	28,037		12,243
Singapore	367		171

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Liquidity and Capital Resource Outlook

Historically, our working capital, stock repurchase and investment activity requirements have been funded from cash from operations and short-term loans, with the exception of strategic acquisitions, which at times have required long-term financing. We believe that our cash flow from operations, existing cash balances and our available credit facilities will be sufficient to meet our ongoing operating cash and regulatory capital needs, while also complying with the terms of our Credit Agreement. However, our ability to borrow additional funds may be inhibited by financial lending institutions’ ability or willingness to lend to us on commercially acceptable terms.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We are a member of various U.S. and non-U.S. exchanges and clearing houses that trade and clear, respectively, equities and/or derivative contracts. Associated with our membership, we may be required to pay a proportionate share of financial obligations of another member who may default on its obligations to the exchanges or the clearing house. While the rules governing different exchange or clearinghouse memberships vary, in general, our guarantee obligations would arise only if the exchange had previously exhausted its resources. The maximum potential payout under these memberships cannot be estimated. We have not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believe that any potential requirement to make payments under these agreements is remote.

As of September 30, 2014, our other contractual obligations and commercial commitments consisted principally of fixed charges, including minimum future rentals under non-cancelable operating leases, minimum future purchases under non-cancelable purchase agreements and minimum compensation under employment agreements.

There has been no significant change to such arrangements and obligations since December 31, 2013.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (“ASU 2014-09”), Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Application of the new guidance involves five steps: (1) identifying contracts with customers; (2) identifying the separate performance obligations within the contracts; (3) determining the transaction price; (4) allocating the transaction price to the separate performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The standard will also require significant additional qualitative and quantitative disclosures describing the nature, amount, timing, and uncertainty of revenues. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. We are currently evaluating the new guidance and have not yet selected a transition method nor have we determined the impact of adoption on our financial statements.

Critical Accounting Estimates

There has been no significant change to our critical accounting estimates, which are more fully described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2013 (as amended).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please see our Annual Report on Form 10-K (Item 7A) for the year ended December 31, 2013 (as amended). There has been no material change in this information.

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, the Company’s disclosure controls and procedures were effective in reporting, on a timely basis, information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act and this Quarterly Report on Form 10-Q.

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b) Changes in Internal Controls over Financial Reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any pending legal proceedings other than claims and lawsuits arising in the ordinary course of business. In addition, our broker-dealers are regularly involved in reviews, inquiries, examinations, investigations and proceedings by government agencies and self-regulatory organizations regarding our business, which may result in judgments, settlements, fines, penalties, injunctions or other relief. Although there can be no assurances, at this time, the Company believes, based on information currently available, that the outcome of any such proceeding, review, inquiry, examination and investigation will not have a material adverse effect on our consolidated financial position or results of operations.

1A. Risk Factors

There has been no significant change to the risks or uncertainties that may affect our results of operations since December 31, 2013. Please see Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 (as amended).

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth our stock repurchase activity during the first nine months of 2014, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of a publicly-announced plan or program, and the number of shares yet to be purchased under the plan or program.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares (or Units) Purchased (a)	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
From: January 1, 2014
To: January 31, 2014	—	$	—	—	3,447,440

From: February 1, 2014
To: February 28, 2014	869,072	16.80		560,000	2,887,440

From: March 1, 2014
To: March 31, 2014	186,214	18.00		183,800	2,703,640

From: April 1, 2014
To: April 30, 2014	1,810	19.55		—	2,703,640

From: May 1, 2014
To: May 31, 2014	458,952	18.82		458,600	2,245,040

From: June 1, 2014
To: June 30, 2014	314,020	18.25		312,237	1,932,803

From: July 1, 2014
To: July 31, 2014	2,051	17.55		—	1,912,803

From: August 1, 2014
To: August 31, 2014	303,355	17.76		300,000	1,632,803

From: September 1, 2014
To: September 30, 2014	223,711	17.06		220,000	1,412,803

Total	2,359,185	$	17.63	2,034,637

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(a) This column includes the acquisition of 324,548 common shares from employees in order to satisfy minimum statutory withholding tax requirements upon net settlement of restricted share awards.

During the first nine months of 2014, we repurchased approximately 2.4 million shares of our common stock at a cost of $41.6 million, which was funded from our available cash resources. Of these shares, 2.0 million were purchased under our Board of Directors’ authorization for a total cost of $36.1 million (average cost of $17.76 per share). An additional 0.4 million shares repurchased ($5.5 million) pertained solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards. As of September 30, 2014, the total remaining number of shares currently available for repurchase under ITG’s stock repurchase program was 1.4 million. On October 15, 2014, the Board of Directors authorized the repurchase of an additional 4.0 million shares, bringing the total number of shares available for repurchase at that time to 5.4 million shares. The specific timing and amount of repurchases will vary based on market conditions and other factors.

We have not paid a cash dividend to stockholders during any period of time covered by this report. Our current policy, which is reviewed continually, is to retain earnings to finance the operations and expansion of our businesses and to return capital to stockholders through repurchases. As a result, we are not currently paying cash dividends on common stock.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

(A)	EXHIBITS

	31.1*	Rule 13a-14(a) Certification

	31.2*	Rule 13a-14(a) Certification

	32.1**	Section 1350 Certification
	101*	Interactive Data File
		The following furnished materials from Investment Technology Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language), are collectively included herewith as Exhibit 101:

		101. INS XBRL Instance Document.
		101. SCH XBRL Taxonomy Extension Schema.
		101. CAL XBRL Taxonomy Extension Calculation Linkbase.
		101. DEF XBRL Taxonomy Extension Definition Linkbase.
		101. LAB XBRL Taxonomy Extension Label Linkbase.
		101. PRE XBRL Taxonomy Extension Presentation Linkbase.

	*	Filed herewith.
	**	Furnished herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		INVESTMENT TECHNOLOGY GROUP, INC.
		(Registrant)

Date: November 10, 2014	By:	/s/ STEVEN R. VIGLIOTTI
		Steven R. Vigliotti Chief Financial Officer and Duly Authorized Signatory of Registrant