Edgar Filing: Interactive Brokers Group, Inc.

ibkr_10q3q2012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012.

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: 001-33440

INTERACTIVE BROKERS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		30-0390693
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

One Pickwick Plaza

Greenwich, Connecticut 06830

(Address of principal executive office)

(203) 618-5800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o	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.

As of November 9, 2012, there were 47,488,923 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.

INTERACTIVE BROKERS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

Table of Contents
			Page
			No.

	EXPLANATORY NOTE		3

PART I:	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)		4

	Condensed Consolidated Statements of Financial Condition		5

	Condensed Consolidated Statements of Comprehensive Income (2011 As Restated)		6

	Condensed Consolidated Statements of Cash Flows (2011 As Restated)		7

	Condensed Consolidated Statement of Changes in Equity (2011 As Restated)		8

	Notes to Condensed Consolidated Financial Statements		9


Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of
		Operations	34

Item 3:	Quantitative and Qualitative Disclosures About Market Risk		57

Item 4:	Controls and Procedures		60

PART II:	OTHER INFORMATION

Item 1:	Legal Proceedings		61

Item 1A:	Risk Factors		61

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		61

Item 3:	Defaults upon Senior Securities		61

Item 5:	Other Information		61

Item 6:	Exhibits		62

SIGNATURES			63

Explanatory Note

In May 2012, in connection with the review of the Company’s Quarterly Report of Form 10-Q for the quarter ended March 31, 2012, Deloitte & Touche LLP, the Company’s independent registered public accounting firm questioned the Company’s interpretation and application of accounting guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC or the “Codification”) 480-10-S99, Distinguishing Liabilities from Equity, SEC Materials, formerly FASB Emerging Issues Task Force Topic D-98, to cash redemption provisions regarding redeemable noncontrolling interests. After reassessing its interpretation and application of this accounting guidance, including obtaining an interpretation from the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”), the Company concluded that its interpretation of this accounting guidance and its application of that guidance to these cash redemption provisions was incorrect, resulting in an error in its consolidated financial statements. This error had no effect on reported net income attributable to common stockholders or cash flows, but did affect the classification of redeemable noncontrolling interests in IBG LLC (“LLC”) attributable to IBG Holdings LLC (“Holdings”) during the period from the Company’s May 3, 2007 initial public offering through June 6, 2012, as more fully described in Note 21 to the consolidated financial statements contained in Part 2, Item 8 of the Company’s Amended Annual Report on Form 10-K/A filed with the SEC on August 31, 2012.

As described in the notes to the unaudited condensed consolidated financial statements included in this Form 10-Q, this change in the classification of redeemable noncontrolling interests prior to the June 6, 2012 amendment to the Exchange Agreement (Note 4) also affected the calculation of earnings per share (Note 17). Additionally, as reported in the statement of changes in equity and further described in Note 4, subsequent to the June 6, 2012 amendment to the Exchange Agreement, Holdings’ noncontrolling interests have been reclassified, at book value, as a component of permanent equity.

Internal Control Considerations

In conjunction with the restatement, management identified control deficiencies in its internal controls over financial reporting associated with the review and interpretation of complex accounting issues - specifically, redeemable noncontrolling interests in LLC attributable to Holdings and stock based compensation - that constitute a material weakness in internal control. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. For a discussion of management’s consideration of our disclosure controls and procedures, the material weakness identified and the remediation plan implemented in September 2012, see Part II, Item IA, “Risk Factors”, and Part I, Item 4, “Controls and Procedures”, included in this filing on Form 10-Q.

In accordance with applicable SEC rules, this filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

PART I. FINANCIAL INFORMATION

Financial Statements Introductory Note

The Company is a holding company whose primary asset is its ownership of approximately 11.9% of the membership interests of LLC. See Notes 1 and 4 to the unaudited condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.

We are an automated global electronic broker and market maker specializing in routing orders and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, Hong Kong, India, Australia, Japan and Brazil. At September 30, 2012, we had 883 employees worldwide.

As discussed in Note 17, the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2011 included herein have been restated for certain errors.

	Interactive Brokers Group, Inc. and Subsidiaries
	Condensed Consolidated Statements of Financial Condition
	(Unaudited)

					September 30,			December 31,
(in thousands, except share data)					2012			2011
	Assets
	Cash and cash equivalents			$	1,659,505		$	1,695,495
	Cash and securities - segregated for regulatory purposes				12,325,775			10,069,938
	Securities borrowed				2,966,071			2,661,671
	Securities purchased under agreements to resell				344,165			375,366
	Trading assets, at fair value:
		Financial instruments owned			3,460,913			5,069,271
		Financial instruments owned and pledged as collateral			2,244,056			1,545,807
					5,704,969			6,615,078
	Other receivables:
		Customers, less allowance for doubtful accounts of $3,621 and
			$3,332 at September 30, 2012 and December 31, 2011		9,391,015			7,024,792
		Brokers, dealers and clearing organizations			874,879			1,397,772
		Receivable from affiliate			593			595
		Interest			21,426			20,540
					10,287,913			8,443,699
	Other assets				573,298			543,118
	Total assets			$	33,861,696		$	30,404,365

	Liabilities and equity
	Liabilities:
	Trading liabilities - financial instruments sold but not yet purchased,
		at fair value		$	4,547,182		$	6,156,148
	Securities loaned				1,945,097			1,386,059
	Short-term borrowings				16,870			6,538
	Other payables:
		Customers			21,281,337			17,300,105
		Brokers, dealers and clearing organizations			496,380			247,360
		Payable to affiliate			274,407			271,602
		Accounts payable, accrued expenses and other liabilities			140,857			116,771
		Interest			4,724			6,416
					22,197,705			17,942,254

	Senior notes payable				-			101,411
	Senior secured credit facility				-			-
					28,706,854			25,592,410

	Redeemable noncontrolling interests				-			5,269,619

	Commitments, contingencies and guarantees

	Equity (deficit):
	Stockholders’ equity (deficit):
		Common stock, $0.01 par value per share:
		Class A – Authorized - 1,000,000,000, Issued - 47,789,229 and
			46,061,256 shares, Outstanding – 47,488,923 and 45,576,791 shares
		at September 30, 2012 and December 31, 2011			477			460
		Class B – Authorized, Issued and Outstanding – 100 shares
		at September 30, 2012 and December 31, 2011			-			-
		Additional paid-in capital			492,412			-
		Retained earnings (accumulated deficit)			125,203			(465,138	)
		Accumulated other comprehensive income, net of income taxes of
			$10,914 and $10,454 at September 30, 2012 and December 31, 2011		19,301			18,487
		Treasury stock, at cost, 300,306 and 484,465 shares
			at September 30, 2012 and December 31, 2011		(7,784	)		(13,310	)
	Total stockholders’ equity (deficit)				629,609			(459,501	)
	Noncontrolling interests				4,525,233			1,837
	Total equity (deficit)				5,154,842			(457,664	)
	Total liabilities and stockholders’ equity (deficit)			$	33,861,696		$	30,404,365

	See accompanying notes to the unaudited condensed consolidated financial statements.

	Interactive Brokers Group, Inc. and Subsidiaries
	Condensed Consolidated Statements of Comprehensive Income
	(Unaudited)

				Three months ended					Nine months ended
				September 30,					September 30,
(in thousands, except for shares or per share amounts)				2012		2011			2012		2011
						(As Restated)					(As Restated)
Revenues:
	Trading gains		$	149,700	$	193,778		$	371,987	$	514,685
	Commissions and execution fees			100,584		130,665			309,540		346,296
	Interest income			65,410		73,694			200,607		211,757
	Other income			17,104		10,726			50,750		43,137
		Total revenues		332,798		408,863			932,884		1,115,875

Interest expense				14,199		23,337			49,475		65,521

		Total net revenues		318,599		385,526			883,409		1,050,354

Non-interest expenses:
	Execution and clearing			61,646		82,080			192,441		214,391
	Employee compensation and benefits			57,676		56,157			180,202		161,167
	Occupancy, depreciation and amortization			9,043		8,984			28,934		27,289
	Communications			6,089		5,736			17,249		17,849
	General and administrative			11,525		14,812			33,779		40,785
		Total non-interest expenses		145,979		167,769			452,605		461,481

Income before income taxes				172,620		217,757			430,804		588,873

Income tax expense				14,747		15,270			34,458		46,498
Net income				157,873		202,487			396,346		542,375
	Less net income attributable to noncontrolling interests			145,385		179,993			364,790		494,069
Net income attributable to common stockholders			$	12,488	$	22,494		$	31,556	$	48,306

Earnings per share:
	Basic		$	0.26	$	0.48		$	0.70	$	1.10
	Diluted		$	0.26	$	0.48		$	0.70	$	1.09

Weighted average common shares outstanding:
	Basic			47,488,459		44,832,545			46,588,213		43,370,291
	Diluted			47,679,818		45,208,557			46,865,770		43,832,558


Comprehensive income:
Net income attributable to common stockholders			$	12,488	$	22,494		$	31,556	$	48,306
	Other comprehensive income:
		Cumulative translation adjustment, before income taxes		2,965		(10,127	)		1,274		(2,055	)
		Income taxes related to items of other comprehensive income		1,071		(3,722	)		460		(755	)
	Other comprehensive income (loss), net of tax			1,894		(6,405	)		814		(1,300	)
Comprehensive income attributable to common stockholders			$	14,382	$	16,089		$	32,370	$	47,006


Comprehensive income attributable to noncontrolling interests:
	Net income attributable to noncontrolling interests		$	145,385	$	179,993		$	364,790	$	494,069
	Other comprehensive income (loss) - cumulative translation adjustment			21,934		(75,945	)		9,876		(9,184	)
Comprehensive income attributable to noncontrolling interests			$	167,319	$	104,048		$	374,666	$	484,885

	See accompanying notes to the unaudited condensed consolidated financial statements.

			Interactive Brokers Group, Inc. and Subsidiaries
			Condensed Consolidated Statements of Cash Flows
			(Unaudited)

						Nine months ended September 30,
(in thousands)						2012			2011
	Cash flows from operating activities:								(As Restated)
		Net income			$	396,346		$	542,375
		Adjustments to reconcile net income to net cash provided by
		operating activities:
			Translation (gains) losses			(678	)		14,091
			Deferred income taxes			16,881			35,189
			Depreciation and amortization			14,201			13,629
			Employee stock plan compensation			54,032			30,986
			Losses on non-market making investments, net			7,742			7,159
			Bad debt expense and other			607			4,239
		Change in operating assets and liabilities:
			Increase in cash and securities - segregated for regulatory purposes			(2,255,850	)		(2,414,857	)
			Increase in securities borrowed			(303,477	)		(92,698	)
			Decrease (increase) in securities purchased under agreements to resell			31,218			(127,099	)
			Decrease (increase) in trading assets			911,667			(1,469,587	)
			(Increase) decrease in receivables from customers			(2,367,432	)		157,297
			Decrease (increase) in other receivables			523,193			(440,673	)
			(Increase) decrease in other assets			(5,900	)		11,521
			(Decrease) increase in trading liabilities			(1,606,918	)		2,233,372
			Increase (decrease) in securities loaned			559,452			(86,759	)
			Increase in payable to customers			3,978,476			2,216,034
			Increase in other payables			258,159			40,169
				Net cash provided by operating activities		211,719			674,388
	Cash flows from investing activities:
			Purchases of non-market making investments			(326,784	)		(114,945	)
			Sales of non-market making investments			292,826			18,683
			Distribution received from equity investment			1,567			-
			Purchase of property and equipment			(13,971	)		(9,673	)
				Net cash used in investing activities		(46,362	)		(105,935	)
	Cash flows from financing activities:
			Dividends paid to shareholders			(14,055	)		(8,915	)
			Dividends paid to noncontrolling interests			(105,264	)		(138,548	)
			Redemption of former member interest			-			(1,595	)
			Issuance of senior notes			-			340,311
			Redemptions of senior notes			(101,411	)		(409,041	)
			Repayments of senior secured credit facility			-			(100,000	)
			Increase (decrease) in short-term borrowings, net			10,008			(22,575	)
				Net cash used in financing activities		(210,722	)		(340,363	)
	Effect of exchange rate changes on cash and cash equivalents					9,375			(26,574	)
	Net (decrease) increase in cash and cash equivalents					(35,990	)		201,516
	Cash and cash equivalents at beginning of period					1,695,495			1,354,219
	Cash and cash equivalents at end of period				$	1,659,505		$	1,555,735

Supplemental disclosures of cash flow information:
	Cash paid for interest				$	51,168		$	65,354
	Cash paid for taxes				$	25,352		$	68,956

Non-cash financing activities:
		Issuance of common stock in exchange of member interests in IBG LLC			$	-		$	29,199
		Redemption of member interests from IBG Holdings LLC			$	-		$	(29,199	)
		Adjustments to additional paid-in capital for changes in proportionate
			ownership in IBG LLC		$	13,766		$	(19,210	)
		Adjustments to noncontrolling interests for changes in proportionate
			ownership in IBG LLC		$	(13,766	)	$	19,210
		Changes in redemption value of redeemable noncontrolling interests			$	(5,269,619	)	$	(1,407,476	)
		Changes to total equity (deficit) for the change in the redemption value of
			redeemable noncontrolling interests		$	5,269,619		$	1,407,476

			See accompanying notes to the unaudited condensed consolidated financial statements.

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
Nine months ended September 30, 2012 and 2011 (2011 Restated)

(Unaudited)

	Common Stock
							Retained		Accumulated		Total
			Additional				Earnings		Other		Stockholders'		Non-		Total		Redeemable
	Issued	Par	Paid-In		Treasury		(Accumulated		Comprehensive		Equity		controlling		Equity		Noncontrolling
(in thousands, except for share amounts)	Shares	Value	Capital		Stock		Deficit)		Income		(Deficit)		Interests		(Deficit)		Interests

Balance, January 1, 2012	46,061,256	$460	$-		$(13,310	)	$(465,138	)	$18,487		$(459,501	)	$1,837		$(457,664	)	$5,269,619

Adjustment of redeemable noncontrolling interests
from temporary to permanent equity (Note 4)			472,409				572,840				1,045,249		4,322,304		5,367,553		(5,269,619	)
Common Stock distributed pursuant to stock plans	1,727,973	17	(17	)	5,526						5,526				5,526
Compensation for stock grants vesting in the future			5,759								5,759		18,262		24,021
Deferred tax benefit retained			495								495				495
Dividends paid to shareholders							(14,055	)			(14,055	)			(14,055	)
Dividends paid by IBG LLC to noncontrolling interests											-		(70,271	)	(70,271	)
Adjustments for changes in proportionate ownership in IBG LLC			13,766								13,766		(25	)	13,741
Comprehensive income, net of tax							31,556		814		32,370		253,126		285,496
Balance, September 30, 2012	47,789,229	$477	$492,412		$(7,784	)	$125,203		$19,301		$629,609		$4,525,233		$5,154,842		$-


	Common Stock
							Retained		Accumulated		Total
			Additional				Earnings		Other		Stockholders'		Non-		Total		Redeemable
	Issued	Par	Paid-In		Treasury		(Accumulated		Comprehensive		Equity		controlling		Equity		Noncontrolling
(in thousands, except for share amounts)	Shares	Value	Capital		Stock		Deficit)		Income		(Deficit)		Interests		(Deficit)		Interests

Balance, January 1, 2011	42,903,718	$429	$-		$(19,132	)	$(2,031,656	)	$21,137		$(2,029,222	)	$1,458		$(2,027,764	)	$6,320,849

Adjustment of redeemable noncontrolling interests
to redemption value			(10,231	)			1,703,722				1,693,491				1,693,491		(1,407,476	)
Net proceeds from issuance of Common Stock in follow-on offering	1,983,624	20	29,179								29,199				29,199
Common Stock distributed pursuant to stock plans	1,170,001	12	(12	)	5,519						5,519				5,519
Redemption of former member interest			(174	)							(174	)			(174	)
Deferred tax benefit retained			448								448				448
Dividends paid to shareholders							(8,915	)			(8,915	)			(8,915	)
Dividends paid to other noncontrolling interests											-		(16	)	(16	)
Adjustments for changes in proportionate ownership in IBG LLC			(19,210	)							(19,210	)			(19,210	)
Comprehensive income, net of tax							48,306		(1,300	)	47,006		309		47,315
Balance, September 30, 2011	46,057,343	$461	$-		$(13,613	)	$(288,543	)	$19,837		$(281,858	)	$1,751		$(280,107	)	$4,913,373

See accompanying notes to the unaudited condensed consolidated financial statements.

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

1. Organization and Nature of Business

Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a Delaware holding company whose primary asset is its ownership of approximately 11.9% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “LLC” or the “Group”). The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in LLC for all periods presented (Note 4). LLC is an automated global electronic broker and market maker specializing in routing orders and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds.

LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”): Timber Hill LLC (“TH LLC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiary, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), IB Brasil Participações Ltda (“IBBH”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).

IBG, Inc. operates in two business segments, electronic brokerage and market making. IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.

Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (Note 14). IB LLC, IBUK, IBC, IBI and IBSJ carry securities accounts for customers or perform custodial functions relating to customer securities.

2. Significant Accounting Policies

Basis of Presentation

These unaudited condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the FASB Accounting Standards Codification (“ASC” or the “Codification”). These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of September 30, 2012 and December 31, 2011, the results of operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s Amended Annual Report on Form 10-K/A filed with the SEC on August 31, 2012 and IBG, Inc.’s Amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2012, also filed with the SEC on August 31, 2012. The condensed consolidated financial statement information as of December 31, 2011 has been derived from the 2011 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Gains and losses from foreign currency transactions are included in trading gains and losses where related to market making activities or in interest income where related to the investment of customer funds as part of electronic brokerage activities in the unaudited condensed consolidated statements of comprehensive income. Non-U.S. subsidiaries have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated to U.S. dollars at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S. dollar are reported as a component of other comprehensive income.

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

Principles of Consolidation, including Noncontrolling Interests

The unaudited condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole managing member of LLC, IBG, Inc. exerts control over the Group’s operations. In accordance with ASC 810, Consolidation, the Company consolidates the Group’s unaudited condensed consolidated financial statements and records as noncontrolling interest the interests in the Group that IBG, Inc. does not own.

Prior to the June 6, 2012 amendment to the Exchange Agreement (Note 4), the Company was required to report IBG Holdings LLC's (“Holdings”) ownership as redeemable noncontrolling interests (i.e., temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A (formerly FASB Emerging Issues Task Force Topic D-98), outside of total equity (Note 17) in the unaudited condensed consolidated financial statements. Redemption value of these redeemable noncontrolling interests is measured as the number of equivalent shares of member interests in LLC owned by Holdings multiplied by the then current market price per share of the Company’s common stock. The excess of the redemption value over the book value of these interests, which does not affect net income attributable to common stockholders or cash flows, is required to be accounted for as a reduction of the Company’s stockholders’ equity in the consolidated statement of financial condition.

The Company has elected to recognize changes in redemption value in each reporting period immediately as they occur as if the end of each reporting period was also the redemption date for the entire redeemable noncontrolling interest under paragraph 15(b) of ASC 480-10-S99-3A, notwithstanding that the redeemable noncontrolling interests are redeemable over a period of time pursuant to a redemption schedule (Note 4).

The Company’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been eliminated. IBG, Inc. would also consolidate any Variable Interest Entities (“VIEs”) pursuant to ASC 860, Transfers and Servicing and ASC 810 of which it is the primary beneficiary. IBG, Inc. currently is not the primary beneficiary of any such entities and therefore no VIEs are included in the unaudited condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements and accompanying notes. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ materially from those estimates. Such estimates include the estimated fair values of IBG LLC and the Company in connection with accounting for redeemable noncontrolling interests, value of investments accounted for under the equity method of accounting, the estimated useful lives of property and equipment, including capitalized internally developed software, the allowance for doubtful accounts, compensation accruals, current and deferred taxes and estimated contingency reserves.

Fair Value

At September 30, 2012 and December 31, 2011, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and are marked to market daily, or were assets which are short-term in nature (such as U.S. government treasury bills or spot foreign exchange) and were carried at amounts that approximate fair value.

IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurement, to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are:

Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2	Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3	Prices or valuations that require inputs that are both significant to fair value measurement and unobservable

Financial instruments owned and financial instruments sold, but not yet purchased, except forward currency contracts, over-the-counter (“OTC”) currency options and certain corporate and municipal debt securities, which are classified as Level 2 financial instruments, are classified within Level 1 of the fair value hierarchy. The Company’s financial instruments are valued using quoted

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt securities. IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.

Currency forward contracts and OTC currency options are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded. Corporate and municipal debt securities, including Federal Deposit Insurance Corporation insured corporate bonds held as securities segregated for regulatory purposes, that are not actively traded are also classified in Level 2.

Investments in listed common stock and investments in other non-market making securities, which investments are reported in other assets in the accompanying unaudited condensed consolidated statement of financial condition, are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are Level 1 financial instruments. Investments in other non-market making securities include corporate, municipal and asset-backed debt securities, which are Level 2 financial instruments whose fair values are determined using broker and vendor prices.

Earnings Per Share

Earnings per share (“EPS”) are computed in accordance with ASC 260, Earnings per Share. Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period. Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.

The Company has determined to reflect Topic D-98 measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common shareholders. Furthermore, in accordance with footnote 17 of ASC 480-10-S99-3A, the Company has elected to treat only the portion of the periodic measurement adjustments that reflect a redemption in excess of fair value as being akin to a dividend, reducing net income attributable to common stockholders for purposes of applying the two-class method. Decreases in the carrying amount of redeemable noncontrolling interests through Topic D-98 measurement adjustments are reflected in the application of the two-class method only to the extent they represent recoveries of amounts previously accounted for by applying the two-class method.

Stock-Based Compensation

IBG, Inc. follows ASC 718, Compensation—Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires all share-based payments to employees to be recognized in the financial statements using a fair value-based method. As a result, IBG, Inc. expenses the fair value of stock granted to employees, generally 50% in the year of grant in recognition of plan forfeiture provisions (described below) and the remaining 50% over the related vesting period utilizing the “graded vesting” method permitted under ASC 718-10. In the case of “retirement eligible” employees (those employees older than 59), 100% of share awards are expensed when granted.

Awards granted under the ROI Unit Stock Plan and the Stock Incentive Plan are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested awards previously granted.

Cash and Cash Equivalents

IBG, Inc. defines cash equivalents as short-term, highly liquid securities and cash deposits with original maturities of three months or less, other than those used for trading purposes.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

Cash and Securities—Segregated for Regulatory Purposes

As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash or securities are deposited as required to conduct day-to-day clearance activities. Securities segregated for regulatory purposes consisted of Federal Deposit Insurance Corporation insured corporate bonds, which are recorded as Level 2 financial assets, in the amount of $79.9 million and $440.4 million at September 30, 2012 and December 31, 2011, U.S. Treasury Bills of $2,046.9 million and $747.9 million at September 30, 2012 and December 31, 2011, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $6.4 billion and $3.8 billion as of September 30, 2012 and December 31, 2011, respectively, which amounts approximate fair value.

Securities Borrowed and Securities Loaned

Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require IBG, Inc. to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities. With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned.

IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. Receivables and payables with the same counterparty are not offset in the unaudited condensed consolidated statements of financial condition. For these transactions, the fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the unaudited condensed consolidated statements of comprehensive income.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value. The Company’s policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.

Financial Instruments Owned and Sold But Not Yet Purchased

Stocks, government, corporate and municipal bonds, futures and options transactions are reported in the unaudited condensed consolidated financial statements on a trade date basis. The majority of financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices. All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the unaudited condensed consolidated statements of financial condition.

IBG, Inc. also enters into currency forward contracts. These transactions, which are also reported on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term. Unrealized mark-to-market gains and losses on currency forward contracts are reported as components of financial instruments owned or financial instruments sold but not yet purchased in the unaudited condensed consolidated statements of financial condition. Net earnings or losses are reported as components of interest income in the unaudited condensed consolidated statements of comprehensive income.

Customer Receivables and Payables

Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the unaudited condensed consolidated statements of financial condition. Amounts receivable from customers that are determined by management to be uncollectible are written off to general and administrative expense.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Receivables from brokers, dealers and clearing organizations include amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and margin deposits. Payables to brokers, dealers and clearing organizations include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”). Receivables and payables to brokers, dealers and clearing organizations also include amounts related to futures contracts executed on behalf of customers as well as net payables and receivables from unsettled trades.

Investments

IBG, Inc. makes certain strategic investments in electronic exchange and investment banking platforms and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323, Investments—Equity Method and Joint Ventures. Investments are accounted for under the equity method of accounting when IBG, Inc. has significant influence over the investee. Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s initial investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss. IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the unaudited condensed consolidated statements of comprehensive income and the recorded amounts of IBG, Inc.’s equity investments, which are included in other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly. Distributions received from equity investees are recorded as reductions to the respective investment balance.

A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred. The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing. None of IBG, Inc.’s equity investments have readily determinable market values. All equity investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable. If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made. IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting. Such investments are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management’s estimate of the impairment, and are included in other assets in the unaudited condensed consolidated statements of financial condition. Dividends are recognized as a component of other income as such dividends are received.

The Company makes non-market making investments in listed common stock and corporate debt securities. In addition, other non-market making investments are made to further diversify the Company’s holdings. These investments are accounted for at fair value (Note 6), with gains and losses recorded as a component of other income.

Property and Equipment

Property and equipment, which is a component of other assets, consist of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment. Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.

Comprehensive Income and Foreign Currency Translation

The Company’s operating results are reported in the unaudited condensed consolidated statement of comprehensive income pursuant to Accounting Standards Update 2011-05, Comprehensive Income.

Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income section of the statement of

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

comprehensive income, but are excluded from reported net income. IBG, Inc.’s OCI is comprised of foreign currency translation adjustments.

IBG, Inc.’s international Operating Companies have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Translation gains and losses from market making and electronic brokerage activities, respectively, are included in trading gains and in other income in the accompanying unaudited condensed consolidated statements of comprehensive income. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated other comprehensive income.

Revenue Recognition

—Trading Gains

Trading gains and losses are recorded on trade date and are reported on a net basis. Trading gains are comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses. Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends and interest income and expense attributable to specific trading assets and liabilities are reported on a net basis as a component of trading gains in the unaudited condensed consolidated statements of comprehensive income.

—Commissions and Execution Fees

Commissions charged for executing and clearing customer transactions are accrued on a trade date basis and are reported as commissions and execution fees in the unaudited condensed consolidated statements of comprehensive income, and the related expenses are reported as execution and clearing expenses, also on a trade date basis.

—Interest Income and Expense

The Company earns interest income and incurs interest expense primarily in connection with its Electronic Brokerage customer business and its securities lending activities. Such interest is recorded on the accrual basis.

Income Taxes

IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Determining income tax expense requires significant judgments and estimates.

Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows, or financial position.

ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

The Company records tax liabilities in accordance with ASC 740 and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

IBG, Inc. recognizes interest related to income tax matters as interest income or expense and penalties related to income tax matters as income tax expense.

Recently Issued Accounting Pronouncements

Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASUs”) as the means to add to or delete from, or otherwise amend the ASC. In 2012, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASUs 2012-01 through 2012-07 have been issued. Following is a summary of recently issued ASUs that have affected or may affect the Company’s unaudited condensed consolidated financial statements:

	Affects	Status

ASU 2011-03	Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements	Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early application is not permitted.

ASU 2011-04	Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS	To be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted for public entities.

ASU 2011-08	Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment	Effective for fiscal years beginning after December 15, 2011. Early adoption is permitted.

ASU 2011-11	Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities	Effective for fiscal periods beginning on or after January 1, 2013. Retrospective disclosures for comparative periods presented will be required.

ASU 2012-02	Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment	Effective for fiscal years beginning after September 15, 2012. Early adoption is permitted.

ASU 2012-03	Technical Amendments and Corrections to SEC Sections - Amendments to SEC section of ASC pursuant to SEC Staff Bulletin 114, Technical Amendments Pursuant to SEC Release No. 33-9520 and Corrections Relating to Accounting Standards Update 2010-22.	Effective upon issuance in August 2012, adopted for the quarter ended September 30, 2012.

ASU 2012-04	Technical Corrections and Improvements - Amendments to the ASC correcting for differences between source literature and the ASC, guidance clarification and reference corrections and relocation of guidance to more appropriate locations within the ASC, and Conforming Amendments Related to Fair Value (Topic 820).	Effective upon issuance in October 2012 or, in the case of amendments subject to transitional guidance, for fiscal years beginning after December 15, 2012.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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Adoption of those ASUs that became effective during 2012, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, did not have a material effect on those financial statements. Management is assessing the potential impact on the Company’s financial statements of adopting ASUs that will become effective during the remainder of fiscal 2012, and in the future.

ASC/IFRS Convergence

In February 2010, the SEC issued Commission Statement in Support of Convergence and Global Accounting Standards, a formal statement updating the status of its November 2008 Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers (“IFRS Roadmap”). The statement supported convergence of accounting standards and the development of a single set of global accounting standards. As directed in this statement, the SEC staff issued Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers (the “Work Plan”) in May 2010, and issued a follow-up Staff Paper, subtitled Exploring a Possible Method of Incorporation in May 2011. The Work Plan outlines the steps to be taken to provide the SEC with information to be able to conclude whether IFRS should be adopted for U.S. registrants and the Staff Paper discusses alternative approaches (“Convergence” and “Endorsement”) to adoption that could be applied. Within the Staff Paper, the SEC Staff has issued a Request for Comment on these alternatives. The Comment period ended July 31, 2011 and the SEC Staff issued two Staff Papers, A Comparison of U.S. GAAP and IFRS and Analysis of IFRS in Practice on November 16, 2011.

In June 2012 the FASB and IASB issued a joint statement on their continuing deliberations regarding changes to lease accounting. When issued, new lease accounting standards under the ASC and IFRS will require the reporting of lease assets and related liabilities on issuers’ statements of financial condition under a mutually agreed upon two-method approach. Exposure Drafts detailing applicability and implementation considerations are expected to be issued during the second half of 2012, and final standards are expected to be issued in 2013. Management will be assessing the potential effects of this change in lease accounting as the standard setting process moves forward. Based on the scope of existing lease commitments (approximately 0.1% of total assets as of December 31, 2011 – see Note 16 to the audited financial statements contained in the Company’s 2011 Annual Report on Form 10-K/A), the effect on the Company’s financial statements is not expected to be material.

On July 13, 2012, the SEC’s Office of the Chief Accountant issued its Final Staff Report on the Work Plan. This report considered possible means of aligning IFRS with U.S. GAAP, and raised numerous concerns about the possible effects of adoption on registrants and investors. The Staff Report did not reject some form of convergence between U.S. GAAP and IFRS, but also did not endorse adoption and did not commit to the extent or timing of adoption. While a formal commitment regarding possible incorporation of IFRS into U.S. GAAP has not been determined, based on continuing joint efforts between the FASB and IASB, it is likely that convergence to some extent will occur in the future. The Company applies versions of IFRS for the stand alone financial statements of several of the Operating Companies, where required, and continues to assess the potential impact of adopting IFRS on the Company’s unaudited condensed consolidated financial statements.

SEC Derivatives Regulation Roadmap

In June 2012, the SEC issued for comment a policy statement on its proposed plan that would sequence the phasing in of final rules to be adopted by the Commission regulating security-based swaps in order to comply with the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank” Act). The policy statement provides a proposed “roadmap” for adoption of final rules, but does not mandate specific registrant compliance deadlines. Management is monitoring this and other accounting and regulatory rulemaking developments for their potential effect on the Company’s financial statements and internal controls over financial reporting.

3. Trading Activities and Related Risks

IBG, Inc.’s trading activities include providing securities market making and brokerage services. Trading activities expose IBG, Inc. to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes:

•

a regular review of the risk management process by executive management as part of its oversight role;

•

defined risk management policies and procedures supported by a rigorous analytic framework; and

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•

articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.

Market Risk

IBG, Inc. is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates. IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities. IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The following discussion describes the types of market risk faced:

Equity Price Risk

Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. IBG, Inc. is subject to equity price risk primarily in financial instruments owned and sold but not yet purchased. IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.

Currency Risk

Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. Exchange rate contracts may include cross-currency swaps and currency futures contracts. Currency swaps are agreements to exchange future payments in one currency for payments in another currency. These agreements are used to effectively convert assets or liabilities denominated in different currencies. Currency futures are contracts for delayed delivery of currency at a specified future date. IBG, Inc. uses currency swaps to manage the levels of its non-U.S. dollar currency balances and currency cash and futures to hedge its global exposure.

Interest Rate Risk

Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options and futures and on its debt obligations. These risks are managed through investment policies and by entering into interest rate futures contracts.

Credit Risk

IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose IBG, Inc. to default risk. IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.

The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources. IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.

In the normal course of business, IBG, Inc. executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.

For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all

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of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. In accordance with industry practice, repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities. IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.

Concentrations of Credit Risk

IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of September 30, 2012 and December 31, 2011, respectively, the Company did not have any material concentrations of credit risk.

Off-Balance Sheet Risks

IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements for futures products, which represent obligations of IBG, Inc. to settle at contracted prices, which may require repurchase or sale in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such futures contracts may exceed the amounts reported in IBG, Inc.’s unaudited condensed consolidated statements of financial condition.

4. Equity and Earnings Per Share

In connection with its IPO in May 2007, IBG, Inc. purchased 10.0% of the membership interests in LLC from Holdings, became the sole managing member of LLC and began to consolidate LLC’s financial results into its financial statements. Holdings wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in LLC, approximately 88.1% as of September 30, 2012. The unaudited condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in LLC, and Holdings’ interests in LLC, prior to the June 6, 2012 amendment to the Exchange Agreement, were accounted for and reported in the Company’s unaudited condensed consolidated financial statements as redeemable noncontrolling interests (temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A (see Note 17 to the unaudited condensed consolidated financial statements). For periods after the Amendment, beginning with the quarter ended June 30, 2012, the noncontrolling interests in LLC attributable to Holdings are reported as a component of permanent equity, as described below.

Recapitalization and Post-IPO Capital Structure

Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, LLC and the members of LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of LLC received membership interests in Holdings in exchange for their membership interests in LLC. Additionally, IBG, Inc. became the sole managing member of LLC.

In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members’ interests in Holdings in proportion to their interests. Immediately following the Recapitalization and IPO, Holdings owned approximately 90% of LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. proportionate to the extent of Holdings’ ownership of LLC.

Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock. All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of Holdings’ ownership of LLC. At September 30, 2012 and December 31, 2011, 1,000,000,000 shares of Class A common stock were authorized, of which 47,789,229 and 46,061,256 shares have been issued; and 47,488,923 and 45,576,791 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of September 30, 2012 and December 31, 2011, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of September 30, 2012 and December 31, 2011, respectively.

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

As a result of a federal income tax election made by LLC applicable to the acquisition of LLC member interests by IBG, Inc., the income tax basis of the assets of LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with the 2011 redemption of Holdings’ member interests in exchange for Common Stock, which deferred tax assets are a component of Other Assets in the unaudited condensed consolidated statement of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the 2011 redemption date, respectively, as allowable under current tax law.

As of September 30, 2012 and December 31, 2011, the unamortized balance of these deferred tax assets was $286,477 and, $297,881, respectively.

IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to make payments to Holdings (for the benefit of the former members of LLC) equal to 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases. These payables, net of payments made to Holdings, are reported as Payable to Affiliate in the unaudited condensed consolidated statement of financial condition.

The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the unaudited condensed consolidated statement of financial condition.

The deferred tax assets, payables to Holdings and credits to additional paid in capital arising from stock offerings through September 30, 2012 are:

Deferred Tax Assets		Payable to Holdings		Additional Paid In Capital

$	387,069	$	329,009	$	58,060

These differ from amounts previously reported as a result of provision to tax return differences.

Amounts received and payable under the Tax Receivable Agreement are payable to Holdings annually upon the filing of IBG, Inc.’s federal income tax return. The Company has paid Holdings a total of $54.6 million through September 30, 2012 pursuant to the terms of the Tax Receivable Agreement.

The Exchange Agreement also provides for future redemptions of member interests and for the purchase of member interests in LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in LLC that it does not own. On an annual basis, owners of Holdings member interests are able to request redemption of such member interests from Holdings over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.

At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized Class A common stock were reserved for future sales and redemptions. From 2008 through 2010, redemptions totaling $114 million were funded using cash on hand at LLC. In 2011, the Company issued 1,983,624 shares of Class A common stock directly to Holdings in exchange for an equivalent number of shares of member interests in LLC.

As a consequence of these redemption transactions, and distribution of shares to employees (Note 10), IBG, Inc.’s interest in LLC has increased to approximately 11.9%, with Holdings owning the remaining 88.1% as of September 30, 2012. The redemptions also resulted in an increase in the Holdings interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 86.3% at September 30, 2012.

The Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the issuance of shares of common stock through a public offering in exchange for the interests in LLC being redeemed by Holdings. The June 6, 2012 amendment (the “Amendment”) eliminated from the Exchange Agreement an alternative funding method, which provided that upon approval by the board of directors and by agreement of the Company, LLC and Holdings, redemptions could be made in cash.

Subsequent to the amendment to the Exchange Agreement on June 6, 2012, the Company recorded adjustments to report Holdings’ noncontrolling interests in LLC as permanent equity, reducing redeemable noncontrolling interests to zero and reversing the cumulative effect of adjustments to redemption value previously recorded to additional paid-in capital. The effect of these adjustments, before the allocation of comprehensive income and other capital transactions to Holdings’ noncontrolling interests in

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

LLC subsequent to June 6, 2012, and before the recording of capital transactions and comprehensive income attributable to the Company and to other noncontrolling interests was:

(in thousands)		Adjustments as of June 6, 2012

Redeemable noncontrolling interests	$	(5,367,553	)

Additional Paid in Capital	$	472,409

Retained earnings	$	572,840

Noncontrolling interests	$	4,322,304

Stock Repurchase Program

In September 2008, the Company’s Board of Directors approved the repurchase of up to eight (8) million shares of its Class A common stock by LLC. Shares may be purchased from time to time in the open market and in private transactions if the Company deems the price appropriate. In November 2008, 65,800 shares were repurchased at a cost of $866, and are being held as Treasury Stock.

Earnings Per Share

The Company has determined to reflect measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common stockholders.

Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period (2011 restated):

				Three months ended					Nine months ended
				September 30,					September 30,
				2012		2011			2012		2011
Basic earnings per share:
Net income attributable to common stockholders			$	12,488	$	22,494		$	31,556	$	48,306
	Add (deduct) net income attributable to non-fair value redemption rights			-		(846	)		1,108		(436	)
	Net income available for common stockholders		$	12,488	$	21,648		$	32,664	$	47,870

	Weighted average shares of common stock outstanding:
		Class A		47,488,359		44,832,445			46,588,113		43,370,191
		Class B		100		100			100		100
				47,488,459		44,832,545			46,588,213		43,370,291

	Basic earnings per share		$	0.26	$	0.48		$	0.70	$	1.10

Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares (2011 restated):

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

					Three months ended				Nine months ended
					September 30,				September 30,
					2012		2011		2012		2011
Diluted earnings per share:
	Net income available for common stockholders - basic				$	12,488	$	21,648	$	32,664	$	47,870
	Adjustments for potentially dilutive common shares					-		-		-		-

	Net income available for common stockholders				$	12,488	$	21,648	$	32,664	$	47,870

	Weighted average shares of common stock outstanding:
		Class A:
			Issued and outstanding			47,488,359		44,832,445		46,588,113		43,370,191
			Potentially dilutive common shares:
				Issuable pursuant to 2007 ROI Unit Stock Plan		191,359		376,012		277,557		462,267
		Class B:				100		100		100		100
						47,679,818		45,208,557		46,865,770		43,832,558

	Diluted earnings per share				$	0.26	$	0.48	$	0.70	$	1.09

Potentially dilutive common shares could include unvested shares awarded under the SIP. During the three and nine months ended September 30, 2012 and 2011, the additional shares of common stock attributable to the SIP that would have been assumed to be issued, as calculated under the Treasury Stock method, were anti-dilutive and, accordingly, have been excluded from the calculation of diluted earnings per share.

Member and Stockholder Dividends

In March, June and September 2012, LLC paid dividends to its members totaling $119.3 million, of which IBG, Inc.’s proportionate share was $14.1 million. Also in March, June and September 2012, the Company paid quarterly cash dividends of $0.10 per share of Common Stock, totaling $14.1 million.

On October 16, 2012, the Company declared a cash dividend of $0.10 per common share, payable December 14, 2012 to shareholders of record as of November 30, 2012.

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

5. Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income. The Company’s OCI is comprised of foreign currency translation adjustments, which arise from changes in the U.S. dollar value of the net worth of the Company’s international Operating Companies during respective reporting periods. The following table presents comprehensive income, net of income taxes, and earnings per share, calculated using the two-class method on comprehensive income (2011 restated):

				Three months ended					Nine months ended
				September 30,					September 30,
				2012		2011			2012		2011

	Net income attributable to common stockholders		$	12,488	$	22,494		$	31,556	$	48,306
	Add (deduct) net income attributable to non-fair value redemption rights			-		(846	)		1,108		(436	)
	Net income available for common stockholders			12,488		21,648			32,664		47,870
	Other comprehensive income:
		Cumulative translation adjustment, before income taxes		2,965		(10,127	)		1,274		(2,055	)
		Income taxes related to items of other comprehensive income		1,071		(3,722	)		460		(755	)
	Other comprehensive income (loss), net of tax			1,894		(6,405	)		814		(1,300	)

	Comprehensive income available for common stockholders		$	14,382	$	15,243		$	33,478	$	46,570


Earnings per share on comprehensive income:
		Basic	$	0.30	$	0.34		$	0.72	$	1.07
		Diluted	$	0.30	$	0.34		$	0.71	$	1.06


Weighted average common shares outstanding:
		Basic		47,488,459		44,832,545			46,588,213		43,370,291
		Diluted		47,679,818		45,208,557			46,865,770		43,832,558

Interactive Brokers Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(dollars in thousands, except shares and per share amounts, unless otherwise noted)

6. Fair Value

The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of September 30, 2012 and December 31, 2011. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			Financial Assets At Fair Value as of September 30, 2012

			Level 1		Level 2		Level 3		Total

Securities segregated for regulatory purposes		$	2,046,887	$	79,881	$	-	$	2,126,768
Financial instruments owned:
	Stocks		57,245		-		-		57,245
	Options		3,097,458		-		-		3,097,458
	U.S. and foreign government obligations		37,715		-		-		37,715
	Warrants		70,288		-		-		70,288
	Corporate and municipal bonds		54,387		69,107		-		123,494
	Discount certificates		73,758		-		-		73,758
	Currency forward contracts		-		955		-		955
			3,390,851		70,062		-		3,460,913
Financial instruments owned and pledged as collateral:
	Stocks		2,051,158		-		-		2,051,158
	Corporate and municipal bonds		19,581		-		-		19,581
	U.S. and foreign government obligations		173,317		-		-		173,317
			2,244,056		-		-		2,244,056
			5,634,907		70,062		-		5,704,969


Other assets - investments in non-market making securities
	Investments in common stock		19,669		-		-		19,669
	Investments in other non-market making securities		1,670		97,571		-		99,241

		$	7,703,133	$	247,514	$	-	$	7,950,647


			Financial Liabilities At Fair Value as of September 30, 2012

			Level 1		Level 2		Level 3		Total
Financial instruments sold, not yet purchased:
	Stocks	$	1,153,322	$	-	$	-	$	1,153,322
	Options		3,269,411		-		-		3,269,411