Edgar Filing: Interactive Brokers Group, Inc.

ibkr_10q3q2013.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, 2013

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

SS 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 8, 2013, there were 49,971,727 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, 2013

Table of Contents

		Page
		No.
PART I:	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)	3

	Condensed Consolidated Statements of Financial Condition	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Changes in Equity	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4:	Controls and Procedures	57

PART II:	OTHER INFORMATION

Item 1:	Legal Proceedings	58

Item 1A:	Risk Factors	58

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3:	Defaults upon Senior Securities	58

Item 5:	Other Information	58

Item 6:	Exhibits	59

SIGNATURES		60

PART I. FINANCIAL INFORMATION

Financial Statements Introductory Note

Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a holding company whose primary asset is its ownership of approximately 12.4% of the membership interests of IBG LLC (the “Group”). 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 executing and clearing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world and offering custody, prime brokerage, stock and margin borrowing services to our customers. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and from Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, China (Hong Kong and Shanghai), India, Australia and Japan. At September 30, 2013, we had 878 employees worldwide.

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

		September 30,			December 31,
(in thousands, except share data)		2013			2012
Assets
Cash and cash equivalents	$	1,548,520		$	1,614,592
Cash and securities - segregated for regulatory purposes		12,681,070			12,482,388
Securities borrowed		3,363,242			2,833,145
Securities purchased under agreements to resell		487,774			428,904
Financial instruments owned, at fair value:
Financial instruments owned		3,454,897			3,617,879
Financial instruments owned and pledged as collateral		970,376			926,857
Total financial instruments owned		4,425,273			4,544,736
Receivables:
Customers, less allowance for doubtful accounts of $3,540 and $1,416 at September 30, 2013 and December 31, 2012		12,727,552			9,851,018
Brokers, dealers and clearing organizations		490,859			844,584
Receivable from affiliate		651			620
Interest		24,236			22,829
Total receivables		13,243,298			10,719,051
Other assets		527,867			576,741
Total assets	$	36,277,044		$	33,199,557

Liabilities and equity
Liabilities:
Financial instruments sold but not yet purchased, at fair value	$	3,593,292		$	4,286,260
Securities loaned		2,193,008			1,839,274
Short-term borrowings		2,579			110,420
Payables:
Customers		24,809,349			21,421,978
Brokers, dealers and clearing organizations		234,833			361,834
Payable to affiliate		259,723			259,441
Accounts payable, accrued expenses and other liabilities		108,895			102,695
Interest		2,483			4,508
Total payables		25,415,283			22,150,456

Total liabilities		31,204,162			28,386,410

Commitments, contingencies and guarantees

Equity
Stockholders’ equity
Common stock, $0.01 par value per share:
Class A – Authorized - 1,000,000,000, Issued - 50,096,562 and 47,797,844 shares, Outstanding – 49,971,727 and 47,499,739 shares at September 30, 2013 and December 31, 2012		501			478
Class B – Authorized, Issued and Outstanding – 100 shares at September 30, 2013 and December 31, 2012		-			-
Additional paid-in capital		517,865			493,912
Retained earnings		100,712			82,072
Accumulated other comprehensive income, net of income taxes of $1,081 and $1,417 at September 30, 2013 and December 31, 2012		26,038			29,754
Treasury stock, at cost, 124,835 and 298,105 shares at September 30, 2013 and December 31, 2012		(2,518	)		(7,718	)
Total stockholders’ equity		642,598			598,498
Noncontrolling interests		4,430,284			4,214,649
Total equity		5,072,882			4,813,147
Total liabilities and stockholders’ equity	$	36,277,044		$	33,199,557

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)		2013		2012		2013			2012

Revenues:
Trading gains	$	123,286	$	149,700	$	201,386		$	371,987
Commissions and execution fees		120,331		100,584		377,961			309,540
Interest income		74,000		65,410		220,572			200,607
Other income		20,826		17,104		64,999			50,750
Total revenues		338,443		332,798		864,918			932,884

Interest expense		12,191		14,199		38,636			49,475

Total net revenues		326,252		318,599		826,282			883,409

Non-interest expenses:
Execution and clearing		56,016		61,646		180,283			192,441
Employee compensation and benefits		44,242		57,676		148,578			180,202
Occupancy, depreciation and amortization		9,387		9,043		28,705			28,934
Communications		6,125		6,089		17,281			17,249
General and administrative		14,100		11,525		38,904			33,779
Total non-interest expenses		129,870		145,979		413,751			452,605

Income before income taxes		196,382		172,620		412,531			430,804

Income tax expense		10,414		14,747		31,239			34,458
Net income		185,968		157,873		381,292			396,346
Less net income attributable to noncontrolling interests		169,521		145,385		347,910			364,790
Net income attributable to common stockholders	$	16,447	$	12,488	$	33,382		$	31,556

Earnings per share:
Basic	$	0.33	$	0.26	$	0.68		$	0.70
Diluted	$	0.32	$	0.26	$	0.67		$	0.70

Weighted average common shares outstanding:
Basic		49,966,050		47,488,459		48,807,321			46,588,213
Diluted		50,988,214		47,679,818		49,981,664			46,865,770



Comprehensive income:
Net income attributable to common stockholders	$	16,447	$	12,488	$	33,382		$	31,556
Other comprehensive income:
Cumulative translation adjustment, before income taxes		3,691		2,965		(4,051	)		1,274
Income taxes related to items of other comprehensive income		61		1,071		(335	)		460
Other comprehensive income (loss), net of tax		3,630		1,894		(3,716	)		814
Comprehensive income attributable to common stockholders	$	20,077	$	14,382	$	29,666		$	32,370


Comprehensive income attributable to noncontrolling interests:
Net income attributable to noncontrolling interests	$	169,521	$	145,385	$	347,910		$	364,790
Other comprehensive income (loss) - cumulative translation adjustment		26,013		21,934		(29,602	)		9,876
Comprehensive income attributable to noncontrolling interests	$	195,534	$	167,319	$	318,308		$	374,666

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)		2013			2012
Cash flows from operating activities:
Net income	$	381,292		$	396,346
Adjustments to reconcile net income to net cash provided by operating activities:
Translation losses (gains)		19,839			(678	)
Deferred income taxes		11,164			16,881
Depreciation and amortization		13,914			14,201
Employee stock plan compensation		28,086			54,032
(Gains) losses on other investments, net		(2,728	)		7,742
Bad debt expense and other		2,472			607
Change in operating assets and liabilities:
Increase in cash and securities - segregated for regulatory purposes		(199,142	)		(2,255,850	)
Increase in securities borrowed		(530,221	)		(303,477	)
(Increase) decrease in securities purchased under agreements to resell		(58,852	)		31,218
Decrease in financial instruments owned		110,268			911,667
Increase in receivables from customers		(2,876,532	)		(2,367,432	)
Decrease in other receivables		350,520			523,193
Decrease (increase) in other assets		23,258			(5,900	)
Decrease in financial instruments sold but not yet purchased		(695,806	)		(1,606,918	)
Increase in securities loaned		354,398			559,452
Increase in payable to customers		3,387,375			3,978,476
(Decrease) increase in other payables		(127,152	)		258,159
Net cash provided by operating activities		192,153			211,719
Cash flows from investing activities:
Purchases of other investments		(189,934	)		(326,784	)
Proceeds from sales of other investments		202,245			292,826
Distributions received from and redemptions of equity investments		11,054			1,567
Purchase of property and equipment		(12,006	)		(13,971	)
Net cash provided by (used in) investing activities		11,359			(46,362	)
Cash flows from financing activities:
Dividends paid to shareholders		(14,742	)		(14,055	)
Dividends paid to noncontrolling interests		(107,698	)		(105,264	)
Redemptions of senior notes		-			(101,411	)
(Decrease) increase in short-term borrowings, net		(110,566	)		10,008
Net cash used in financing activities		(233,006	)		(210,722	)
Effect of exchange rate changes on cash and cash equivalents		(36,578	)		9,375
Net decrease in cash and cash equivalents		(66,072	)		(35,990	)
Cash and cash equivalents at beginning of period		1,614,592			1,695,495
Cash and cash equivalents at end of period	$	1,548,520		$	1,659,505

Supplemental disclosures of cash flow information:
Cash paid for interest	$	40,661		$	51,168
Cash paid for taxes	$	45,243		$	25,352

Non-cash financing activities:
Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC	$	20,463		$	13,766
Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC	$	(20,463	)	$	(13,766	)
Changes in redemption value of redeemable noncontrolling interests	$	-		$	(5,269,619	)
Changes to total equity (deficit) for the change in the redemption value of redeemable noncontrolling interests	$	-		$	5,269,619

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, 2013 and September 30, 2012
(Unaudited)
(in thousands, except for share amounts)
	Common Stock
														Accumulated
				Additional										Other			Total			Non-
	Issued		Par	Paid-In				Treasury			Retained			Comprehensive			Stockholders'			controlling			Total
	Shares		Value	Capital				Stock			Earnings			Income			Equity			Interests			Equity

Balance, January 1, 2013	47,797,844	$	478	$	493,912		$	(7,718	)	$	82,072		$	29,754		$	598,498		$	4,214,649		$	4,813,147

Common Stock distributed pursuant to stock plans	2,298,718		23		(23	)		5,200									5,200						5,200
Compensation for stock grants vesting in the future					3,513												3,513			25,488			29,001
Dividends paid to stockholders											(14,742	)					(14,742	)					(14,742	)
Dividends paid by IBG LLC to noncontrolling interests																	-			(107,698	)		(107,698	)
Adjustments for changes in proportionate ownership in IBG LLC					20,463												20,463			(20,463	)		-
Comprehensive income, net of tax											33,382			(3,716	)		29,666			318,308			347,974
Balance, September 30, 2013	50,096,562	$	501	$	517,865		$	(2,518	)	$	100,712		$	26,038		$	642,598		$	4,430,284		$	5,072,882



	Common Stock
											Retained			Accumulated			Total
					Additional						Earnings/			Other			Stockholders'		Other Non-				Total			Redeemable
	Issued		Par		Paid-In			Treasury			(Accumulated			Comprehensive			Equity			controlling			Equity			Noncontrolling
	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 to redemption value					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 stockholders											(14,055	)					(14,055	)					(14,055	)
Dividends paid by IBG LLC to other 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		$	-

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 12.4% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “IBG LLC” or the “Group”). The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in IBG LLC for all periods presented (Note 4). IBG LLC is an automated global electronic broker and market maker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.

IBG 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 certain 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 Financial Accounting Standards Board (“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, 2013 and December 31, 2012, the results of operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and cash flows for the nine months ended September 30, 2013 and 2012. 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 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013. The condensed consolidated financial statement information as of December 31, 2012 has been derived from the 2012 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.

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 IBG LLC, IBG, Inc. exerts control over the Group’s operations. In accordance with ASC 810, Consolidation, the Company consolidates the Group’s consolidated financial statements and records the interests in the Group that IBG, Inc. does not own as noncontrolling interests.

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)

Prior to the June 6, 2012 amendment (the “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. Redemption value of these redeemable noncontrolling interests was measured as the number of equivalent shares of member interests in IBG 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 did not affect net income attributable to common stockholders or cash flows, was required to be accounted for as a reduction of the Company’s stockholders’ equity.

The Company elected to recognize changes in redemption value in each reporting period immediately as they occurred 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).

For periods after the above referenced amendment, the noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of equity.

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, the estimated 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 income taxes and estimated contingency reserves.

Fair Value

At September 30, 2013 and December 31, 2012, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and were marked to market, or were assets which are short-term in nature 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 are generally classified as Level 1 financial instruments. The Company’s Level 1 financial instruments, which are valued using quoted 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 are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded. Other securities that are not traded in active markets are also

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)

classified in Level 2. Level 3 financial instruments are comprised of securities that have been delisted or otherwise are no longer tradable and have been valued by the Company based on internal estimates, excluding securities subject to corporate actions that have a determinable external price, which remain classified as Level 1 securities.

Other fair value investments, reported in other assets in the accompanying unaudited condensed consolidated statement of financial condition and in Note 6 - Financial Assets and Financial Liabilities, are comprised of securities that the Company does not carry in its market making business, and include listed common stocks, corporate and municipal debt and mortgage backed and other asset backed securities. These investments are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are classified as Level 1 financial instruments. The fair values of other fair value investments are determined using broker and vendor prices that have been independently validated by the Company. Validation methods applied by the Company include comparisons of the broker and vendor prices to other independent pricing services and reviews of the underlying assumptions and other inputs (such as estimated cash flows, underlying default rates and variable interest rate sensitivity analysis) used by brokers or vendors to calculate these investments’ fair values.

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.

For periods prior to June 6, 2012 (Note 4), 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 awards 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 awards are expensed when granted.

Awards granted under the stock-based compensation plans 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, other than those used to support margin and clearing requirements or assets held in segregated accounts for regulatory purposes.

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

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)

or securities are deposited as required to conduct day-to-day clearance activities. Securities segregated for regulatory purposes consisted of U.S. Treasury Bills of $2.50 billion and $2.30 billion at September 30, 2013 and December 31, 2012, respectively, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $6.51 billion and $6.37 billion as of September 30, 2013 and December 31, 2012, respectively, which amounts approximate fair value.

Securities Borrowed and Securities Loaned

Securities borrowed and securities loaned are recorded at the amount of collateral advanced or received. Securities borrowed transactions require the Company 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, which are reported as collateralized financing transactions, 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. The Company does not net securities purchased under agreements to resell transactions with securities sold under agreements to repurchase transactions entered into with the same counterparty.

Financial Instruments Owned and Sold But Not Yet Purchased

Financial instrument transactions are accounted for on a trade date basis. 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 accounted for 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.

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 expensed as a component of general and administrative expense.

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

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

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)

Investments

IBG, Inc. makes certain strategic investments related to financial services 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. The recorded amounts of IBG, Inc.’s equity method investments, $27.0 million at September 30, 2013 ($34.7 million at December 31, 2012), which are reported as a component of other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly. Contributions paid to and distributions received from equity investees are recorded as additions or reductions, respectively, 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. IBG, Inc.’s equity investments do not have readily determinable market values. All equity method 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, $27.8 million at September 30, 2013 ($36.2 million at December 31, 2012), 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 also components of other assets in the unaudited condensed consolidated statements of financial condition. Dividends received from cost basis investments are recognized as a component of other income as such dividends are received.

The Company also makes other fair value investments (which are not considered core business activities) that 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, consists 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 comprehensive income, but are excluded from reported net income. IBG, Inc.’s OCI is comprised of foreign currency translation adjustments, net of related income taxes, where applicable.

IBG, Inc.’s non-U.S. domiciled subsidiaries have a functional currency 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. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated OCI. In general, the practice and intention of the Company is to reinvest the earnings of its non-U.S. subsidiaries in those operations. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on unremitted earnings that have been indefinitely reinvested.

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)

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 financial instruments owned and financial instruments sold but not yet purchased (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 financial instruments owned and financial instruments sold but not yet purchased are reported on a net basis as a component of trading gains in the accompanying unaudited condensed consolidated statements of comprehensive income.

—Commissions and Execution Fees

Commissions charged for executing and clearing customer transactions are recorded 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.

—Foreign Currency Transaction Gains and Losses

Foreign currency transaction gains and losses from market making are reported as a component of trading gains in the unaudited condensed consolidated statements of comprehensive income. Electronic brokerage foreign currency transaction gains and losses are included in interest (if arising from currency swap transactions) or other income.

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 are based on enacted tax laws (Note 11) and reflect management’s best assessment of estimated future taxes to be paid. The Company is 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 the ability to recover deferred tax assets within the jurisdictions from which they arise, the Company considers 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, historical results are adjusted for 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 the Company is using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s 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.

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)

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 payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.

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 2013, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASUs 2013-01 through 2013-11 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 2011-11	Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities	Effective for fiscal periods beginning on or after January 1, 2013. Retrospective disclosures have been made for comparative periods presented.

ASU 2013-01	Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities	Effective for fiscal periods beginning on or after January 1, 2013 (the same as the effective date of ASU 2011-11).

ASU 2013-02	Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income	Effective for fiscal periods beginning on or after December 15, 2012.

ASU 2013-04	Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date	Effective prospectively for fiscal periods beginning on or after December 15, 2013. Early adoption is permitted.

ASU 2013-05	Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity	Effective for fiscal periods beginning on or after December 15, 2013. Early adoption is permitted.

Adoption of those ASUs that became effective during 2013, 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 in the future.

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

•

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.

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)

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, 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 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.

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)

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, 2013, the Company did not have any material concentrations of credit risk outside the ordinary course of business.

Off-Balance Sheet Risks

IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements to settle futures and certain over-the-counter contracts at contracted prices, which may require repurchase or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such 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 initial public offering of Class A common stock (“IPO”) in May 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC from Holdings, became the sole managing member of IBG LLC and began to consolidate IBG 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 IBG LLC, approximately 87.6% as of September 30, 2013. The consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC. Prior to the June 6, 2012 amendment to the Exchange Agreement (described below), Holdings’ ownership interests in IBG LLC were accounted for and reported in these 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. For periods after the Amendment, beginning with the quarter ended June 30, 2012, the noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of total equity, as described below.

Recapitalization and Post-IPO Capital Structure

Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, IBG LLC and the members of IBG 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 IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in Holdings in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG 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 IBG LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. in proportion to Holdings’ ownership of IBG 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’ and IBG, Inc.’s respective ownership of IBG LLC. At September 30, 2013 and December 31, 2012, 1,000,000,000 shares of Class A common stock were authorized, of which 50,096,562 and 47,797,844 shares have been issued; and 49,971,727 and 47,499,739 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, 2013 and December 31, 2012, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of September 30, 2013 and December 31, 2012, respectively.

As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG 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, 2013 and December 31, 2012, the unamortized balance of these deferred tax assets was $266.6 million and $281.6 million, 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)

IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to pay Holdings (for the benefit of the former members of IBG LLC) 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 cumulative amounts of deferred tax assets, payables to Holdings and credits to additional paid-in capital arising from stock offerings from the date of the IPO through September 30, 2013 were $387.1 million, $329.0 million and $58.1 million, respectively. Amounts 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 $70.4 million through September 30, 2013 pursuant to the terms of the Tax Receivable Agreement.

The Exchange Agreement provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, holders of Holdings member interests are able to request redemption of such member interests 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 Common Stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings redeemed 5,013,259 IBG LLC shares with a total value of $114.0 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption these IBG LLC shares were retired. In 2011, the Company issued 1,983,624 shares of Common Stock directly to Holdings in exchange for an equivalent number of shares of member interests in IBG LLC.

As a consequence of these redemption transactions, and distribution of shares to employees (Note 10), IBG, Inc.’s interest in IBG LLC has increased to approximately 12.4%, with Holdings owning the remaining 87.6% as of September 30, 2013. 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 86.4% at September 30, 2013.

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 IBG LLC being redeemed by Holdings. 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, IBG 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 IBG LLC as component of total equity, reducing redeemable noncontrolling interests to zero and reversing the cumulative effect of adjustments through June 6, 2012 to redemption value previously recorded to additional paid-in capital. The effect of these adjustments 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

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)

Earnings per Share

For periods prior to June 6, 2012, the Company reflected 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:

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
Basic earnings per share:
Net income attributable to common stockholders	$	16,447	$	12,488	$	33,382	$	31,556
Add (deduct) net income attributable to non-fair value redemption rights		-		-		-		1,108
Net income available for common stockholders	$	16,447	$	12,488	$	33,382	$	32,664

Weighted average shares of common stock outstanding:
Class A		49,965,950		47,488,359		48,807,221		46,588,113
Class B		100		100		100		100
		49,966,050		47,488,459		48,807,321		46,588,213

Basic earnings per share	$	0.33	$	0.26	$	0.68	$	0.70

Diluted earnings (loss) 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:

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
Diluted earnings per share:
Net income available for common stockholders	$	16,447	$	12,488	$	33,382	$	32,664

Weighted average shares of common stock outstanding:
Class A:
Issued and outstanding		49,965,950		47,488,359		48,807,221		46,588,113
Potentially dilutive common shares issuable pursuant to employee incentive plans		1,022,164		191,359		1,174,343		277,557
Class B		100		100		100		100
		50,988,214		47,679,818		49,981,664		46,865,770

Diluted earnings per share	$	0.32	$	0.26	$	0.67	$	0.70

Member and Stockholder Dividends

Through September 30, 2013, IBG LLC paid dividends totaling $122.7 million to its members, of which IBG, Inc.’s proportionate share was $15.0 million. In March, June and September 2013, the Company paid cash dividends of $0.10 per share of Common Stock, totaling $4.7 million, $5.0 million and $5.0 million, respectively.

On October 15, 2013, the Company declared a cash dividend of $0.10 per common share, payable on December 13, 2013 to shareholders of record as of November 29, 2013.

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 (“OCI”). 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 subsidiaries whose functional currency is other than U.S. dollars during respective reporting periods. The following table presents comprehensive income and earnings per share on comprehensive income (calculated using the two-class method for periods prior to June 6, 2012):

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012

Comprehensive income attributable to common stockholders, net of tax	$	20,077	$	14,382	$	29,666	$	32,370
Add (deduct) net income attributable to non-fair value redemption rights		-		-		-		1,108

Comprehensive income available for common stockholders	$	20,077	$	14,382	$	29,666	$	33,478


Earnings per share on comprehensive income:
Basic	$	0.40	$	0.30	$	0.61	$	0.72
Diluted	$	0.39	$	0.30	$	0.59	$	0.71


Weighted average common shares outstanding:
Basic		49,966,050		47,488,459		48,807,321		46,588,213
Diluted		50,988,214		47,679,818		49,981,664		46,865,770

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. Financial Assets and Financial Liabilities

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, 2013 and December 31, 2012. As required by ASC 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement.

		Financial Assets At Fair Value as of September 30, 2013

		Level 1		Level 2		Level 3		Total

Securities segregated for regulatory purposes	$	2,500,627	$	-	$	-	$	2,500,627
Financial instruments owned:
Stocks		1,167,306		-		181		1,167,487
Options		2,119,958		19,426		-		2,139,384
Warrants and discount certificates		55,392		-		-		55,392
U.S. and foreign government obligations		1,967		2,309		-		4,276
Corporate and municipal bonds		64,057		20,148		-		84,205
Currency forward contracts		-		4,153		-		4,153
Total financial instruments owned		3,408,680		46,036		181		3,454,897

Financial instruments owned and pledged as collateral:
Stocks		865,051		-		-		865,051
Warrants		312		-		-		312
U.S. and foreign government obligations		103,015		-		-		103,015
Corporate and municipal bonds		1,998		-		-		1,998
Total financial instruments owned and pledged as collateral		970,376		-		-		970,376

Subtotal		4,379,056		46,036		181		4,425,273

Other fair value investments, included in other assets:
Stocks		7,545		407		-		7,952
Corporate and municipal bonds		1,820		39,120		-		40,940
Mortgage backed securities		-		28,081		-		28,081
Other asset backed securities		-		14,607		-		14,607
Other		-		8,717		-		8,717

Total Financial Assets at Fair Value	$	6,889,048	$	136,968	$	181	$	7,026,197

		Financial Liabilities At Fair Value as of September 30, 2013

		Level 1		Level 2		Level 3		Total
Financial instruments sold, not yet purchased:
Stocks	$	1,443,990	$	-	$	64	$	1,444,054
Options		2,058,289		9,084		-		2,067,373
Warrants and discount certificates		1,640		-		-		1,640
U.S. and foreign government obligations		-		1,229		-		1,229
Corporate bonds		70,056		7,981		-		78,037
Currency forward contracts		-		959		-		959
Total financial instruments sold, not yet purchased	$	3,573,975	$	19,253	$	64	$	3,593,292

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)

		Financial Assets At Fair Value as of December 31, 2012

		Level 1		Level 2		Level 3		Total

Securities segregated for regulatory purposes	$	2,297,024	$	-	$	-	$	2,297,024
Financial instruments owned:
Stocks		887,031		-		-		887,031
Options		2,388,173		-		-		2,388,173
Warrants and discount certificates		147,317		-		-		147,317
U.S. and foreign government obligations		30,087		-		-		30,087
Corporate and municipal bonds		104,387		59,533		-		163,920
Currency forward contracts		-		1,351		-		1,351
Total financial instruments owned		3,556,995		60,884		-		3,617,879

Financial instruments owned and pledged as collateral:
Stocks		775,222		-		-		775,222
Warrants		350		-		-		350
U.S. and foreign government obligations		146,953		-		-		146,953
Corporate and municipal bonds		4,332		-		-		4,332
Total financial instruments owned and pledged as collateral		926,857		-		-		926,857

Subtotal		4,483,852		60,884		-		4,544,736

Other fair value investments, included in other assets:
Stocks		17,707		3,549		-		21,256
Corporate and municipal bonds		2,249		53,325		-		55,574
Mortgage backed securities		-		21,311		-		21,311
Other asset backed securities		-		17,023		-		17,023
Other		-		1,068		-		1,068

Total Financial Assets at Fair Value	$	6,800,832	$	157,160	$	-	$	6,957,992

		Financial Liabilities At Fair Value as of December 31, 2012

		Level 1		Level 2		Level 3		Total
Financial instruments sold, not yet purchased:
Stocks	$	1,787,741	$	-	$	-	$	1,787,741
Options		2,389,871		-		-		2,389,871
Warrants and discount certificates		2,104		-		-		2,104
U.S. and foreign government obligations	<