Virtu KCG Holdings LLC - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - Virtu KCG Holdings LLC	kcgexhibit311q115.htm
EX-32.1 - EXHIBIT 32.1 - Virtu KCG Holdings LLC	kcgexhibit321q115.htm
EX-31.2 - EXHIBIT 31.2 - Virtu KCG Holdings LLC	kcgexhibit312q115.htm
EX-32.2 - EXHIBIT 32.2 - Virtu KCG Holdings LLC	kcgexhibit322q115.htm
EXCEL - IDEA: XBRL DOCUMENT - Virtu KCG Holdings LLC	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q



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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015



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

000-54991

Commission File Number

KCG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

(State or other jurisdiction of incorporation or organization)

38-3898306

(I.R.S. Employer Identification Number)

545 Washington Boulevard, Jersey City, NJ 07310

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (201) 222-9400

_______________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered
Class A Common Stock, $0.01 par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

_______________________________________________

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	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 ¨ No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest predictable date:

At May 7, 2015, the number of shares outstanding of the Registrant’s Class A Common Stock was 117,941,352 (including restricted stock units) and there were no shares outstanding of the Registrant’s Class B Common Stock or Preferred Stock.

KCG HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended March 31, 2015

TABLE OF CONTENTS



		Page

PART I	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Financial Condition	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	70

PART II	OTHER INFORMATION:

Item 1.	Legal Proceedings	71
Item 1A.	Risk Factors	71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
Signatures



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	For the three months ended March 31,
	2015			2014
	(In thousands, except per share amounts)
Revenues
Trading revenues, net	$	208,795		$	258,297
Commissions and fees	99,961			112,257
Interest, net	(23		)	948
Investment income and other, net	387,423			12,155
Total revenues	696,156			383,657
Expenses
Employee compensation and benefits	106,718			122,319
Execution and clearance fees	68,473			75,501
Communications and data processing	33,764			36,796
Depreciation and amortization	20,615			20,103
Payments for order flow	15,221			22,032
Professional fees	11,181			5,402
Debt interest expense	8,463			9,524
Collateralized financing interest	8,456			6,162
Occupancy and equipment rentals	7,340			8,285
Business development	1,857			1,683
Lease loss accrual, net	132			266
Writedown of capitalized debt costs	—			7,557
Other	7,808			8,643
Total expenses	290,028			324,273
Income from continuing operations before income taxes	406,128			59,384
Income tax expense	156,827			22,467
Income from continuing operations, net of tax	249,301			36,917
Loss from discontinued operations, net of tax	—			(1,253		)
Net income	$	249,301		$	35,664
Basic earnings per share from continuing operations	$	2.25		$	0.32
Diluted earnings per share from continuing operations	$	2.19		$	0.31
Basic loss per share from discontinued operations	$	—		$	(0.01	)
Diluted loss per share from discontinued operations	$	—		$	(0.01	)
Basic earnings per share	$	2.25		$	0.31
Diluted earnings per share	$	2.19		$	0.30
Shares used in computation of basic earnings (loss) per share	110,782			115,569
Shares used in computation of diluted earnings (loss) per share	113,615			117,898

The accompanying notes are an integral part of these consolidated financial statements.

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	For the three months ended March 31,
	2015			2014
	(In thousands)
Net income	$	249,301		$	35,664
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of tax	188			(137		)
Cumulative translation adjustment, net of tax	(623		)	201
Comprehensive income	$	248,866		$	35,728

The accompanying notes are an integral part of these consolidated financial statements.

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



	March 31,			December 31,
	2015			2014
Assets	(In thousands)
Cash and cash equivalents	$	990,542		$	578,768
Cash and cash equivalents segregated under federal and other regulations	3,000			3,361
Funds held in escrow	330,163			—
Financial instruments owned, at fair value, including securities pledged to counterparties that had the right to deliver or repledge of $506,532 at March 31, 2015 and $536,124 at December 31, 2014:
Equities	2,366,225			2,479,910
Listed options	87,412			144,586
Debt securities	187,314			82,815
Other financial instruments	—			60
Total financial instruments owned, at fair value	2,640,951			2,707,371
Collateralized agreements:
Securities borrowed	1,685,850			1,632,062
Receivable from brokers, dealers and clearing organizations	918,506			1,188,833
Fixed assets and leasehold improvements, less accumulated depreciation and amortization	129,171			134,051
Investments	105,624			100,726
Goodwill and Intangible assets, less accumulated amortization	146,539			152,594
Deferred tax asset, net	164,298			154,759
Assets of business held for sale	—			40,484
Other assets	217,407			137,645
Total assets	$	7,332,051		$	6,830,654
Liabilities and equity
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities	$	1,950,860		$	2,069,342
Listed options	78,427			115,362
Debt securities	112,763			101,003
Other financial instruments	234			—
Total financial instruments sold, not yet purchased, at fair value	2,142,284			2,285,707
Collateralized financings:
Securities loaned	792,887			707,744
Financial instruments sold under agreements to repurchase	905,567			933,576
Total collateralized financings	1,698,454			1,641,320
Payable to brokers, dealers and clearing organizations	538,843			676,089
Payable to customers	12,126			22,110
Accrued compensation expense	41,831			114,559
Accrued expenses and other liabilities	161,850			136,977
Income taxes payable	148,481			—
Capital lease obligations	5,080			6,700
Liabilities of business held for sale	—			2,356
Debt	799,847			422,259
Total liabilities	5,548,796			5,308,077
Equity
Class A Common Stock
Shares authorized: 1,000,000 at March 31, 2015 and December 31, 2014; Shares issued: 129,572 at March 31, 2015 and 127,508 at December 31, 2014; Shares outstanding: 118,091 at March 31, 2015 and 116,860 at December 31, 2014	1,296			1,275
Additional paid-in capital	1,391,368			1,369,298
Retained earnings	522,081			272,780
Treasury stock, at cost; 11,481 shares at March 31, 2015 and 10,649 shares at December 31, 2014	(133,188		)	(122,909		)
Accumulated other comprehensive income	1,698			2,133
Total equity	1,783,255			1,522,577
Total liabilities and equity	$	7,332,051		$	6,830,654

The accompanying notes are an integral part of these consolidated financial statements.

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the three months ended March 31, 2015

(Unaudited)



	Class A Common Stock							Treasury Stock
(in thousands)	Shares	Amount		Additional Paid-In Capital		Retained Earnings		Shares		Amount			Accumulated other comprehensive income			Total Equity
Balance, December 31, 2014	127,508	$	1,275	$	1,369,298	$	272,780	(10,649	)	$	(122,909	)	$	2,133		$	1,522,577
KCG Class A Common Stock repurchased	—	—		—		—		(832	)	(10,279		)	—			(10,279		)
Stock-based compensation	2,064	21		22,070		—		—		—			—			22,091
Unrealized gain on available for sale securities, net	—	—		—		—		—		—			188			188
Cumulative translation adjustment, net	—	—		—		—		—		—			(623		)	(623		)
Net income	—	—		—		249,301		—		—			—			249,301
Balance, March 31, 2015	129,572	$	1,296	$	1,391,368	$	522,081	(11,481	)	$	(133,188	)	$	1,698		$	1,783,255

The accompanying notes are an integral part of these consolidated financial statements.

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the three months ended March 31,
	2015			2014
Cash flows from operating activities	(In thousands)
Net income	$	249,301		$	35,664
Loss from discontinued operations, net of tax	—			(1,253		)
Income from continuing operations, net of tax	249,301			36,917
Adjustments to reconcile income from continuing operations, net of tax to net cash provided by operating activities
Realized gain from sale of KCG Hotspot	(385,026		)	—
Depreciation and amortization	20,615			20,103
Deferred taxes	(9,539		)	—
Stock and unit-based compensation	15,421			17,025
Writedown and amortization of debt offering costs	934			8,766
Lease loss accrual, net	132			266
Unrealized gain on investments	(2,460		)	(12,738		)
Deferred rent	(4		)	(68		)
Operating activities from discontinued operations	—			(1,253		)
(Increase) decrease in operating assets
Cash and cash equivalents segregated under federal and other regulations	361			(25,754		)
Financial instruments owned, at fair value	66,420			132,500
Securities borrowed	(53,788		)	(9,663		)
Receivable from brokers, dealers and clearing organizations	270,328			(215,609		)
Other assets	(5,011		)	9,485
(Decrease) increase in operating liabilities
Financial instruments sold, not yet purchased, at fair value	(143,422		)	(83,434		)
Securities loaned	85,143			(8,283		)
Financial instruments sold under agreements to repurchase	(28,009		)	224,035
Payable to brokers, dealers and clearing organizations	(137,247		)	43,472
Payable to customers	(9,984		)	71,078
Accrued compensation expense	(67,071		)	(86,388		)
Accrued expenses and other liabilities	(1,133		)	12,141
Income taxes payable	148,481			—
Net cash provided by operating activities	14,442			132,598
Cash flows from investing activities
Cash received from sale of KCG Hotspot, net of cash provided	358,445			—
Proceeds and distributions from investments	2,013			42,365
Purchases of fixed assets and leasehold improvements	(6,824		)	(5,816		)
Capitalized software development costs	(2,668		)	(2,321		)
Purchases of investments	(2,328		)	(582		)
Net cash provided by investing activities	348,638			33,646
Cash flows from financing activities
Partial repayment of Credit Agreement	—			(185,000		)
Proceeds from issuance of 6.875% Senior Secured Notes, net	494,810			—
Repayment of Convertible Notes	(117,259		)	—
Funding of collateral account for 8.25% Senior Secured Notes	(305,000		)	—
Borrowings under capital lease obligations	—			4,310
Payment of debt issuance costs	(11,335		)	—
Principal payments on capital lease obligations	(1,620		)	(4,248		)
Cost of common stock repurchased	(10,279		)	(4,555		)
Net cash provided by (used in) financing activities	49,317			(189,493		)
Effect of exchange rate changes on cash and cash equivalents	(623		)	64
Increase (decrease) in cash and cash equivalents	411,774			(23,185		)
Cash and cash equivalents at beginning of period	578,768			674,281
Cash and cash equivalents at end of period	$	990,542		$	651,096
Supplemental disclosure of cash flow information:
Cash paid for interest	$	11,637		$	13,577
Cash paid for income taxes	$	564		$	793
Non-cash investing activities	$	1,927		$	—

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Description of the Business

KCG Holdings, Inc. (collectively with its subsidiaries, "KCG" or the "Company") is a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and time zones. The Company combines advanced technology with specialized client service across market making, agency execution and trading venues and also engages in principal trading via direct-to-client and non-client exchange-based electronic market making. KCG has multiple access points to trade global equities, options, futures, fixed income, currencies and commodities via voice or automated execution.

KCG was formed as a result of a strategic business combination (the “Mergers”) of Knight Capital Group, Inc.(“Knight”) and GETCO Holding Company, LLC (“GETCO”) in July 2013.

As of March 31, 2015, the Company's operating segments comprised the following: (i) Market Making; (ii) Global Execution Services; and (iii) Corporate and Other.

Market Making

The Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making, including trade executions conducted as an equities Designated Market Maker (“DMM”) on the New York Stock Exchange ("NYSE") and NYSE Amex Equities ("NYSE Amex"). The Company is an active participant on all major global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a complement to electronic market making, the Company’s cash trading business handles specialized orders and also transacts on the OTC Bulletin Board, marketplaces operated by the OTC Markets Group Inc. and the Alternative Investment Market (“AIM”) of the London Stock Exchange.

Global Execution Services

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, futures, options, and fixed income to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals for transactions that are executed within this segment; however, the Company may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income electronic communications network ("ECN") that also offers trading applications; and (iv) an alternative trading system ("ATS") for global equities.

Corporate and Other

The Corporate and Other segment invests principally in strategic financial services-oriented opportunities; allocates, deploys and monitors all capital; and maintains corporate overhead expenses and all other income and expenses that are not attributable to the other segments. The Corporate and Other segment also contains functions that support the Company’s other segments.

Sales of Businesses

Management from time to time conducts a strategic review of its businesses and evaluates their potential value in the marketplace relative to their current and expected returns. To the extent management and the Company's Board of Directors determine a business may return a higher value to stockholders, or is no longer core to our strategy, the Company may divest or exit such business.

In November 2013, KCG sold Urban Financial of America, LLC, (“Urban”), the reverse mortgage origination and securitization business that was previously owned by Knight to an investor group.

In November 2014, KCG sold certain assets and liabilities related to its Futures Commission Merchant (“FCM”) business to Wedbush Securities Inc.

In March 2015, the Company sold KCG Hotspot, the Company's spot institutional foreign exchange ECN, to BATS Global Markets, Inc. ("BATS").

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

See Footnote 3 "Sales of Businesses".

2. Significant Accounting Policies

Basis of consolidation and form of presentation

The Consolidated Financial Statements, prepared in conformity with generally accepted accounting principles ("GAAP"), include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Certain reclassifications have been made to the prior periods’ Consolidated Financial Statements in order to conform to the current period presentation. Such reclassifications are immaterial to both current and all previously issued financial statements taken as a whole and have no effect on previously reported Consolidated Net income.

Change in accounting principle

As discussed in Footnote 9 "Investments", as a result of the merger of BATS and Direct Edge Holdings LLC ("Direct Edge") in the first quarter of 2014, the Company changed its method of accounting for its investment in BATS from the cost method to the equity method.

During the first quarter of 2014, the Company recognized income of $9.6 million related to the merger of BATS and Direct Edge which is recorded within Investment income and other, net in the Consolidated Statement of Operations. The $9.6 million comprises a partial realized gain with respect to the Company's investment in Direct Edge of $16.2 million offset, in part, by the Company's share of BATS' and Direct Edge's merger related transaction costs that were charged against their respective earnings of $6.6 million.

Cash and cash equivalents

Cash and cash equivalents include money market accounts, which are payable on demand, and short-term investments with an original maturity of less than 90 days. The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.

Cash and cash equivalents segregated under federal and other regulations

The Company maintains custody of customer funds and is obligated by rules and regulations mandated by the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) to segregate or set aside cash and/or qualified securities to satisfy these regulations, which have been promulgated to protect customer assets. The amounts recognized as Cash and cash equivalents segregated under federal and other regulations approximate fair value.

Market making, sales, trading and execution activities

Financial instruments owned and Financial instruments sold, not yet purchased, relate to market making and trading activities, include listed and other equity securities, listed equity options and fixed income securities which are recorded on a trade date basis and carried at fair value. Trading revenues, net, which comprises trading gains, net of trading losses, are also recorded on a trade date basis.

Commissions, which primarily includes commission equivalents earned on institutional client orders and related expenses are also recorded on a trade date basis. In 2014, commissions earned by the Company’s former FCM, which was sold in November 2014, were recorded net of any commissions paid to independent brokers and recognized on a half-turn basis.

The Company’s third party clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by such clearing brokers, for facilitating the settlement and financing of securities transactions. Interest income and interest expense which have been netted within Interest, net on the Consolidated Statements of Operations are as follows (in thousands):

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)



	For the three months ended March 31,
	2015			2014
Interest Income	$	3,771		$	3,351
Interest Expense	(3,794		)	(2,403		)
Interest, net	$	(23	)	$	948

Dividend income relating to financial instruments owned and dividend expense relating to financial instruments sold, not yet purchased, derived primarily from the Company’s market making activities are included as a component of Trading revenues, net on the Consolidated Statements of Operations. Trading revenues, net includes dividend income and expense as follows (in thousands):



	For the three months ended March 31,
	2015			2014
Dividend Income	$	16,743		$	9,783
Dividend Expense	$	(10,253	)	$	(7,575	)

Payments for order flow represent payments to broker dealer clients, in the normal course of business, for directing their order flow in U.S. equities and options to the Company.

Fair value of financial instruments

The Company values its financial instruments using a hierarchy of fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The fair value hierarchy can be summarized as follows:


•	Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.


•	Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Changes in fair value are recognized in earnings each period for financial instruments that are carried at fair value. See Footnote 5 “Fair Value of Financial Instruments” for a description of valuation methodologies applied to the classes of financial instruments at fair value.

Collateralized agreements and financings

Collateralized agreements consist of securities borrowed and collateralized financings include securities loaned and financial instruments sold under agreements to repurchase.

•

Securities borrowed and securities loaned transactions are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions facilitate the securities settlement process and require the Company to deposit cash or other collateral with the lender. Securities loaned transactions help finance the Company’s securities inventory whereby the Company lends stock to counterparties in exchange for the receipt of cash or other collateral from the borrower. In these transactions, the Company receives or lends cash or other collateral in an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of securities borrowed or loaned on a daily basis, and obtains additional collateral or refunds excess collateral as necessary.

•

Financial instruments sold under agreements to repurchase are used to finance inventories of securities and other financial instruments and are recorded at their contractual amount. The Company has entered into bilateral and tri-party term and overnight repurchase agreements which bear interest at negotiated rates. The Company receives cash and makes delivery of financial instruments to a custodian who monitors the market value of these instruments on a daily basis. The market value of the instruments delivered must be

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

equal to or in excess of the principal amount loaned under the repurchase agreements plus the agreed upon margin requirement. The custodian may request additional collateral, if appropriate.

The Company’s securities borrowed, securities loaned and financial instruments sold under agreements to repurchase are recorded at amounts that approximate fair value. These items are recorded based upon their contractual terms and are not materially sensitive to shifts in interest rates because they are short-term in nature and are substantially collateralized pursuant to the terms of the underlying agreements. These items would be categorized as Level 2 in the fair value hierarchy if they were required to be recorded at fair value.

Investments

Investments primarily comprise strategic noncontrolling equity ownership interests in financial services-related businesses and are held by the Company's non-broker dealer subsidiaries. These strategic investments are accounted for under the equity method, at cost or at fair value. The equity method of accounting is used when the Company has significant influence. Strategic investments are held at cost, less impairment if any, when the investment does not have a readily determined fair value, and the Company is not considered to exert significant influence on operating and financial policies of the investee. Strategic investments that are publicly traded are held at fair value and classified as available for sale securities on the Consolidated Statements of Financial Condition.

Strategic investments are reviewed on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If the Company determines that an impairment loss on a strategic investment has occurred due to a decline in fair value or other market conditions, the investment is written down to its estimated fair value.

The Company maintains a non-qualified deferred compensation plan for certain employees and directors. This plan provides a return to the participants based upon the performance of various investments. In order to hedge its liability under this plan, the Company generally acquires the underlying investments and holds such investments until the deferred compensation liabilities are satisfied. Changes in value of such investments are recorded in Investment income and other, net, with a corresponding charge or credit to Employee compensation and benefits on the Consolidated Statements of Operations. Deferred compensation investments primarily consist of mutual funds, which are accounted for at fair value.

Goodwill and intangible assets

The Company tests goodwill and intangible assets with an indefinite useful life for impairment annually or when an event occurs or circumstances change that signifies that the carrying amounts may not be recoverable. The Company capitalizes certain costs associated with the acquisition or development of internal-use software and amortizes the software over its estimated useful life of three years, commencing at the time the software is placed in service. The Company amortizes intangible assets with a finite life on a straight line basis over their estimated useful lives and tests for recoverability whenever events indicate that the carrying amounts may not be recoverable.

Payable to customers

Payable to customers primarily relate to amounts due on cash and margin transactions. Due to their short-term nature, such amounts approximate fair value.

Treasury stock

The Company records its purchases of treasury stock at cost as a separate component of stockholders’ equity. The Company may obtain treasury stock through purchases in the open market or through privately negotiated transactions. Certain treasury stock repurchases represent shares of KCG Class A Common Stock repurchased in satisfaction of tax withholding obligations upon vesting of restricted awards. The Company may re-issue treasury stock, at average cost, for the acquisition of new businesses and in certain other circumstances.

Foreign currency translation and foreign currency forward contracts

The Company's foreign subsidiaries generally use the U.S. dollar as their functional currency. Effective January 1, 2014, one of the Company's U.K. subsidiaries changed its functional currency from British pounds to U.S. dollars. The Company has a subsidiary in India that utilizes the Indian Rupee as its functional currency.

Assets and liabilities of the Indian subsidiary are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. Gains and losses resulting from translating foreign currency financial statements into U.S. dollars are included in Accumulated other comprehensive income on

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

the Consolidated Statements of Financial Condition and Cumulative translation adjustment, net of tax on the Consolidated Statements of Comprehensive Income.

Gains or losses resulting from foreign currency transactions are included in Investment income and other, net on the Company’s Consolidated Statements of Operations. For the three months ended March 31, 2015 and 2014, the Company recorded losses of $0.2 million and $0.8 million, respectively on foreign currency transactions.

The Company seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For foreign currency forward contracts designated as hedges, the Company assesses its risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts.

Stock and unit based compensation

Stock and unit based compensation is measured based on the grant date fair value of the awards. These costs are amortized over the requisite service period, which is typically the vesting period. Expected forfeitures are considered in determining stock-based employee compensation expense.

The Company applies a non-substantive vesting period approach for stock-based awards related to KCG Class A Common Stock whereby the expense is accelerated for those employees and directors that receive options, stock appreciation rights ("SARs") and restricted stock units ("RSUs") and are eligible to retire prior to the vesting of such awards and in certain other circumstances.

Soft dollar expense

Under a commission management program, the Company allows institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company acts as an agent in these transactions, it records such expenses on a net basis within Commissions and fees on the Consolidated Statements of Operations.

Depreciation, amortization and occupancy

Fixed assets are depreciated on a straight-line basis over their estimated useful lives of three to seven years. Leasehold improvements are being amortized on a straight-line basis over the shorter of the term of the related office lease or the expected useful life of the assets. The Company reviews fixed assets and leasehold improvements for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

The Company recognizes rent expense under operating leases with fixed rent escalations, lease incentives and free rent periods on a straight-line basis over the lease term beginning on the date the Company takes possession of or controls the use of the space, including during free rent periods.

Lease loss accrual

The Company’s policy is to identify excess real estate capacity and where applicable, accrue for related future costs, net of projected sub-lease income upon the date the Company ceases to use the excess real estate. Such accrual is adjusted to the extent the actual terms of sub-leased property differ from the assumptions used in the calculation of the accrual.

Income taxes

The Company is a corporation subject to U.S. corporate income tax as well as non-U.S. income taxes in the jurisdictions in which it operates. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measures them using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences and forecasted operating earnings.

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Variable interest entities

A variable interest entity (“VIE”) is an entity that lacks one or more of the following characteristics (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity.

The Company will be considered to have a controlling financial interest and will consolidate a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Effective January 2015, the Company owns 50% of the voting shares and 50% of the equity of a joint venture (“JV”) which maintains microwave communication networks in the U.S. and Europe. The Company and its JV partner each use the microwave networks in connection with their respective trading activities, and the JV sells excess bandwidth that is not utilized by the JV members to third parties. The Company pays the JV for the communication services that it uses, and such amounts are recorded within Communications and data processing on the Consolidated Statements of Operations.

The Company does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; therefore it does not have a controlling financial interest in the JV and does not consolidate the JV. The Company records its interest in the JV under the equity method of accounting and records its investment in the JV within Investments and its amounts payable for communication services within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The Company records its pro-rata share of the JV’s earnings or losses within Investment income and other, net on the Consolidated Statements of Operations.

The Company’s exposure to the obligations of this VIE is generally limited to its interests in the JV, which is the carrying value of the equity investment in the JV.

The following table presents the Company’s nonconsolidated VIE at March 31, 2015 (in thousands):



	Carrying Amount				Maximum Exposure to loss
	Asset		Liability		Maximum Exposure to loss		VIE's assets
Equity investment	$	2,906	$	727	$	2,906	$	8,876

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Recently adopted accounting guidance

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) that amends the requirements for reporting discontinued operations. Under the new guidance, discontinued operations reporting are limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. The updated guidance is effective prospectively to all disposals occurring for interim and annual reporting periods after December 15, 2014, with early adoption permitted. The Company early adopted this ASU in 2014, which resulted in additional disclosures within the Company's Consolidated Financial Statements.

In June 2014, the FASB issued an ASU that amends the accounting and disclosure guidance on repurchase agreements. The amended guidance requires entities to account for repurchase-to-maturity transactions as secured borrowings. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales were effective for reporting periods beginning after December 15, 2014. The additional disclosures for securities financing transactions are required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Other than

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additional disclosure requirements, the adoption of this ASU did not have an impact on the Company’s Consolidated Financial Statements.

Recent accounting guidance to be adopted in future periods

In May 2014, the FASB issued an ASU that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In June 2014, the FASB issued an ASU to resolve diverse accounting treatment for share based awards in which the terms of the award are related to a performance target that affects vesting. The ASU requires an entity to treat a performance target that could be achieved after the requisite service period as a performance condition. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied prospectively or retrospectively. The Company does not expect adoption of this ASU to have an impact on the Company’s Consolidated Financial Statements.

In August 2014, the FASB issued an ASU that requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for reporting periods beginning after December 15, 2016. Other than additional disclosure requirements, the adoption of this ASU is not expected to have an impact on the Company’s Consolidated Financial Statements.

In February 2015, the FASB issued an ASU which requires entities to evaluate whether they should consolidate certain legal entities. The ASU simplifies consolidation accounting by reducing the number of consolidation models that an entity may apply. The guidance is effective for the Company beginning after December 15, 2015 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In April 2015, the FASB issued an ASU regarding simplification of the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the Consolidated Statement of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective for the Company retrospectively for fiscal years beginning after December 15, 2015 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

3. Sales of Businesses

In July 2013, the Company entered into an agreement to sell to an investor group Urban, the reverse mortgage origination and securitization business that was previously owned by Knight. The transaction was completed in November 2013, and, as a result, the revenues and expenses of Urban's operations and costs of the related sale have been included in Loss from discontinued operations, net of tax within the Consolidated Statements of Operations for the three months ended March 31, 2014.

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The revenues and results of operations of discontinued operations are summarized as follows (in thousands):



	For the three months ended March 31, 2014
Additional Loss on Sale	$	(1,312	)

Expenses:
Compensation	$	46
Other expenses	662
Total Expenses	708
Loss from discontinued operations	(2,020		)
Income tax benefit	767
Loss from discontinued operations, net of tax	$	(1,253	)

In September 2014, KCG entered into an agreement to sell certain assets and liabilities related to its FCM business to Wedbush Securities Inc. The transaction closed on November 30, 2014 and as such, there are no assets or liabilities related to the FCM business on the December 31, 2014 Consolidated Statement of Financial Condition. As a result of KCG’ s decision to early adopt the aforementioned ASU that amended the requirements for reporting discontinued operations, the FCM is not considered a discontinued operation, and therefore the results of the FCM’s operations for the three months ended March 31, 2014 are included in the Global Execution Services segment and in Continuing Operations on the Consolidated Statements of Operations.

In October 2014, the Company announced that it began to explore strategic options for KCG Hotspot. KCG Hotspot was a single disposal group that was considered to be held-for-sale as of December 31, 2014 and, as a result, certain assets and liabilities related to KCG Hotspot were included in Assets of business held for sale and Liabilities of business held for sale on the Consolidated Statement of Financial Condition as of December 31, 2014. The Company determined that the sale of KCG Hotspot did not represent a strategic shift that will have a major effect on its operations and financial results, and therefore KCG Hotspot did not meet the requirements to be treated as a discontinued operation under the recently adopted ASU relating to discontinued operations. As such, the results of KCG Hotspot's operations are included in the Global Execution Services segment and in Continuing Operations on the Consolidated Statements of Operations for all applicable periods presented, including the first quarter of 2015, through the sale date of March 13, 2015.

In March 2015, the Company completed the sale of KCG Hotspot to BATS. The Company and BATS have agreed to share certain tax benefits, which could result in future payments to the Company of up to approximately $70.0 million in the three-year period following the close. The additional potential payments were recorded in Other assets on the Consolidated Statements of Financial Condition as of March 31, 2015, at their estimated fair value of $62.1 million. A portion of these additional payments is contingent on KCG Hotspot achieving various levels of trading volumes through June 2015 and BATS generating sufficient taxable net income to receive the tax benefits. The Company recorded a gain on the sale of $385.0 million, which is recorded as Investment income and other, net on the Consolidated Statements of Operations for the three months ended March 31, 2015. The net gain on the sale of Hotspot was $373.8 million including direct costs associated with the sale which comprised professional fees of $6.7 million and compensation of $4.5 million, which are recorded in Professional fees and Employee compensation and benefits, respectively, on the Consolidated Statements of Operations for the three months ended March 31, 2015.

The Company has elected the fair value option related to the $62.1 million receivable from BATS. It considers the $62.1 million receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable inputs such as projected cash flows and market discount rates.

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The KCG Hotspot assets and liabilities held for sale as of December 31, 2014 are summarized as follows (in thousands):



	December 31,
	2014
Assets:
Fixed assets, less accumulated depreciation	$	391
Intangible assets, net accumulated amortization	34,696
Other assets	5,397
Total assets of business held for sale	$	40,484

Liabilities:
Accrued compensation expense	$	2,298
Accrued expenses and other liabilities	58
Total liabilities of business held for sale	$	2,356

4. Assets Segregated or Held in Separate Accounts Under Federal or Other Regulations

Cash and securities segregated under U.S. federal and other regulations relate to the Company’s regulated businesses and consist of the following (in thousands):



	March 31, 2015		December 31, 2014
Cash and cash equivalents segregated under federal or other regulations	$	3,000	$	3,361
Total assets segregated or held in separate accounts under federal or other regulations	$	3,000	$	3,361

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5. Fair Value

The Company’s financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance, as described in Footnote 2 “Significant Accounting Policies.” The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value (in thousands):



	Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	2,366,225	$	—	$	—	$	2,366,225
Listed options	87,412		—		—		87,412
U.S. government and Non-U.S. government obligations	118,563		—		—		118,563
Corporate debt ⁽²⁾	68,751		—		—		68,751
Total Financial instruments owned, at fair value	2,640,951		—		—		2,640,951
Investment in CME Group ⁽³⁾	4,738		—		—		4,738
Other investments⁽³⁾	—		1,569		—		1,569
Total assets held at fair value	$	2,645,689	$	1,569	$	—	$	2,647,258
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	1,950,860	$	—	$	—	$	1,950,860
Listed options	78,427		—		—		78,427
U.S. government obligations	42,108		—		—		42,108
Corporate debt ⁽²⁾	70,655		—		—		70,655
Foreign currency forward contracts	—		234		—		234
Total liabilities held at fair value	$	2,142,050	$	234	$	—	$	2,142,284


⁽¹⁾	Equities of $696.3 million have been netted by their respective long and short positions by CUSIP number.


⁽²⁾	Corporate debt securities of $16,000 have been netted by their respective long and short positions by CUSIP number


⁽³⁾	Investment in CME Group and Other investments, which primarily consist of deferred compensation investments, are included within Investments on the Consolidated Statements of Financial Condition.

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	Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	2,479,910	$	—	$	—	$	2,479,910
Listed options	144,586		—		—		144,586
U.S. government and Non-U.S. government obligations	22,983		—		—		22,983
Corporate debt ⁽²⁾	59,832		—		—		59,832
Foreign currency forward contracts	—		60		—		60
Total Financial instruments owned, at fair value	2,707,311		60		—		2,707,371
Investment in CME Group ⁽³⁾	4,435		—		—		4,435
Other investments ⁽³⁾	—		1,014		—		1,014
Total assets held at fair value	$	2,711,746	$	1,074	$	—	$	2,712,820
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	2,069,342	$	—	$	—	$	2,069,342
Listed options	115,362		—		—		115,362
U.S. government obligations	18,953		—		—		18,953
Corporate debt ⁽²⁾	82,050		—		—		82,050
Total liabilities held at fair value	$	2,285,707	$	—	$	—	$	2,285,707

⁽¹⁾ Equities of $743.1 million have been netted by their respective long and short positions by CUSIP number.

⁽²⁾Corporate debt instruments of $0.3 million have been netted by their respective long and short positions by CUSIP number.

⁽³⁾ Investment in CME Group and Other investments, which primarily consist of deferred compensation investments, are included within Investments on the Consolidated Statements of Financial Condition.

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

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

As of March 31, 2015 and December 31, 2014 the Company had no financial instruments classified within Level 3 of the fair value hierarchy.

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

There were no transfers of assets or liabilities held at fair value between levels of the fair value hierarchy for any periods presented.

The Company’s foreign currency forward contracts, and other investments are classified within Level 2 of the fair value hierarchy.

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

Foreign currency forward contracts

At March 31, 2015 and December 31, 2014, the Company had a foreign currency forward contract with a notional value of 700.0 million Indian Rupees ($10.9 million U.S. dollars). This forward contract is used to hedge the Company’s investment in its Indian subsidiary. The Indian Rupee foreign currency forward contract does not qualify as a net investment hedge and any gains and losses are recorded in Investment income and other, net on the Consolidated Statements of Operations.

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(Unaudited)

The fair value of this forward contract was determined based upon spot foreign exchange rates, LIBOR interest rates and dealer quotations.

Other investments

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

6. Derivative Financial Instruments

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

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

The amounts and positions included in the tables below for futures contracts are classified as Level 1 while swaps and forward contracts are classified as Level 2 in the fair value hierarchy.

The following tables summarize the fair value and number of derivative instruments held at March 31, 2015 and December 31, 2014 and the gains and losses included in the Consolidated Statements of Operations for the periods then ended. These instruments include those classified as Financial Instruments, owned at fair value, Financial instruments sold, not yet purchased at fair value, as well as futures contracts which are reported within Receivable from or Payable to brokers, dealers and clearing organizations in the Consolidated Statements of Financial Condition (fair value and gain (loss) in thousands):



		March 31, 2015
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	$	722	9,673	$	1,279	10,754
Forward contracts	Financial instruments owned at fair value	—		—	234		1
Equity
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	2,250		2,208	894		3,429
Swap contracts	Receivable from brokers, dealers and clearing organizations	46		1	—		—
Listed options	Financial instruments owned/sold, not yet purchased, at fair value	87,412		261,752	78,427		256,523
Fixed income
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	4,409		6,896	8,061		11,399
Commodity
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	21,535		12,459	22,332		12,050
Total		$	116,374	292,989	$	111,227	294,156

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(Unaudited)



		December 31, 2014
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	$	1,212	8,108	$	651	9,090
Forward contracts	Financial instruments owned at fair value	60		1	—		—
Equity
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	1,790		2,590	2,047		3,085
Swap contracts	Receivable from/Payable to brokers, dealers and clearing organizations	98		1	13		1
Listed options	Financial instruments owned/sold, not yet purchased, at fair value	144,586		426,747	115,362		437,383
Fixed income
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	6,432		11,901	6,891		10,628
Commodity
Futures contracts	Receivable from/Payable to brokers, dealers and clearing organizations	15,246		8,894	14,847		9,105
Total		$	169,424	458,242	$	139,811	469,292



		Gain (Loss) Recognized
	Financial Statements	For the three months ended March 31,
	Location	2015			2014
Derivative instruments not designated as hedging instruments:
Foreign currency
Futures contracts	Trading revenues, net	$	1,008		$	2,842
Forward contracts	Investment income and other, net	(294		)	432
Equity
Futures contracts	Trading revenues, net	2,377			8,737
Swap contracts	Trading revenues, net	329			1,282
Listed options ⁽¹⁾	Trading revenues, net	(13,550		)	(73,876		)
Fixed income
Futures contracts	Trading revenues, net	8,544			8,829
Commodity
Futures contracts	Trading revenues, net	15,435			13,570
		$	13,849		$	(38,184	)
Derivative instruments designated as hedging instruments:
Foreign exchange - forward contract	Accumulated other comprehensive income	$	—		$	168

⁽¹⁾

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

The Company has entered into and may continue to enter into International Swaps and Derivative Association, Inc (“ISDA”) master netting agreements with counterparties. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

Under the ISDA master netting agreements, the Company typically also executes credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted or paid by a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support

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annex. In the event of counterparty’s default, provisions of the ISDA master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The Company is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.

The table below provides information regarding (1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights of offset associated with these arrangements exist and could have had an effect on our financial position (in thousands):



March 31, 2015	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition⁽³⁾		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
Assets
Listed options	$	87,412	$	—	$	87,412	$	—	$	—	$	87,412
Swaps	46		—		46		—		—		46
Futures	28,916		28,916		—		—		—		—
Total Assets	$	116,374	$	28,916	$	87,458	$	—	$	—	$	87,458
Liabilities
Listed options	$	78,427	$	—	$	78,427	$	—	$	14,841	$	63,586
Foreign currency forward contracts	234		—		234		—		—		234
Futures	32,566		32,566		—		—		—		—
Total Liabilities	$	111,227	$	32,566	$	78,661	$	—	$	14,841	$	63,820

⁽¹⁾Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

⁽²⁾Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.

⁽³⁾The full amount of the Liabilities related to Futures of $32.6 million has been netted against the Asset related to Futures of $28.9 million as the Company maintains margin in excess of the net liability and such margin is utilized to offset any excess liability.

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December 31, 2014	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
Assets
Listed options	$	144,586	$	—	$	144,586	$	—	$	—	$	144,586
Foreign currency forward contracts	60		—		60		—		—		60
Swaps	98		13		85		—		—		85
Futures	24,680		24,436		244		—		—		244
Total Assets	$	169,424	$	24,449	$	144,975	$	—	$	—	$	144,975
Liabilities
Listed options	$	115,362	$	—	$	115,362	$	—	$	17,359	$	98,003
Futures	24,436		24,436		—		—		—		—
Swaps	13		13		—		—		—		—
Total Liabilities	$	139,811	$	24,449	$	115,362	$	—	$	17,359	$	98,003

⁽²⁾Under master netting agreements with its counterparties, the company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.

7. Collateralized Transactions

The Company receives financial instruments as collateral in connection with securities borrowed and financial instruments purchased under agreements to resell. Such financial instruments generally consist of equities, convertible securities and obligations of the U.S. government, but may also include obligations of federal agencies, foreign governments and corporations. In most cases the Company is permitted to deliver or repledge these financial instruments in connection with securities lending, other secured financings or for meeting settlement obligations.

The table below presents financial instruments at fair value received as collateral and included within Securities borrowed or Receivable from brokers, dealers and clearing organizations on the Consolidated Statements of Financial Condition that were permitted to be delivered or repledged and that were delivered or repledged by the Company as well as the fair value of financial instruments which could be further repledged by the receiving party (in thousands):



	March 31, 2015		December 31, 2014
Collateral permitted to be delivered or repledged	$	1,614,177	$	1,586,700
Collateral that was delivered or repledged	1,508,355		1,485,267
Collateral permitted to be further repledged by the receiving counterparty	239,757		147,696

In order to finance securities positions, the Company also pledges financial instruments that it owns to counterparties who, in turn, are permitted to deliver or repledge them. Under these transactions, the Company pledges certain financial instruments owned to collateralize repurchase agreements and other secured financings. Repurchase agreements and other secured financings are short-term and mature within one year. Financial instruments owned and pledged to counterparties that do not have the right to sell or repledge such financial instruments consist of equity securities.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The table below presents information about assets pledged by the Company (in thousands):



	March 31, 2015		December 31, 2014
Financial instruments owned, at fair value, pledged to counterparties that have the right to deliver or repledge	$	506,532	$	536,124
Financial instruments owned, at fair value, pledged to counterparties that do not have the right to deliver or repledge	951,587		979,652

The Company may enter into master netting agreements and collateral arrangements with counterparties in order to manage its exposure to credit risk associated with securities financing transactions. Such transactions are generally executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions). Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

In the event of counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

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



March 31, 2015	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
Assets
Securities borrowed	$	1,685,850	$	—	$	1,685,850	$	1,612,086	$	13,355	$	60,409
Receivable from brokers, dealers and clearing organizations ⁽³⁾	133,935		—		133,935		133,829		—		106
Total Assets	$	1,819,785	$	—	$	1,819,785	$	1,745,915	$	13,355	$	60,515
Liabilities
Securities loaned	$	792,887	$	—	$	792,887	$	760,775	$	13,355	$	18,757
Financial instruments sold under agreements to repurchase	905,567		—		905,567		905,508		—		59
Total Liabilities	$	1,698,454	$	—	$	1,698,454	$	1,666,283	$	13,355	$	18,816

⁽³⁾Represents financial instruments repurchased under agreement to resell.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)



December 31, 2014	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
							Available Collateral⁽¹⁾		Counterparty Netting⁽²⁾
Assets
Securities borrowed	$	1,632,062	$	—	$	1,632,062	$	1,570,194	$	15,782	$	46,086
Receivable from brokers, dealers and clearing organizations ⁽³⁾	21,545		—		21,545		21,425		—		120
Total Assets	$	1,653,607	$	—	$	1,653,607	$	1,591,619	$	15,782	$	46,206
Liabilities
Securities loaned	$	707,744	$	—	$	707,744	$	682,389	$	15,782	$	9,573
Financial instruments sold under agreements to repurchase	933,576		—		933,576		933,560		—		16
Total Liabilities	$	1,641,320	$	—	$	1,641,320	$	1,615,949	$	15,782	$	9,589

⁽³⁾Represents financial instruments purchased under agreement to resell.

See Footnote 6 "Derivative Financial Instruments" for information related to the offsetting of derivatives in the Company's Consolidated Financial Statements.

Maturities of Securities loaned and Financial instruments sold under agreements to repurchase are provided in the table below (dollars in thousands):



As of March 31, 2015	Overnight		0 - 30 days		31 - 60 days		61 - 90 days		Total
Securities loaned	$	792,887	$	—	$	—	$	—	$	792,887
Financial instruments sold under agreements to repurchase	85,567		445,000		225,000		150,000		905,567
Total	$	878,454	$	445,000	$	225,000	$	150,000	$	1,698,454



As of December 31, 2014	Overnight		0 - 30 days		31 - 60 days		61 - 90 days		Total
Securities loaned	$	707,744	$	—	$	—	$	—	$	707,744
Financial instruments sold under agreements to repurchase	73,576		410,000		325,000		125,000		933,576
Total	$	781,320	$	410,000	$	325,000	$	125,000	$	1,641,320

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

8. Receivable from and Payable to Brokers, Dealers and Clearing Organizations

Amounts receivable from and payable to brokers, dealers and clearing organizations consist of the following (in thousands):



	March 31, 2015		December 31, 2014
Receivable:
Clearing organizations and other	$	622,225	$	1,073,480
Financial instruments purchased under agreement to resell	133,935		21,545
Securities failed to deliver	162,346		93,808
Total Receivable	$	918,506	$	1,188,833
Payable:
Clearing organizations and other	$	485,866	$	350,627
Securities failed to receive	52,977		325,462
Total Payable	$	538,843	$	676,089

Management believes that the carrying value of amounts receivable from and payable to brokers, dealers and clearing organizations approximates fair value since they are short term in nature.

9. Investments

Investments primarily comprise strategic investments and deferred compensation investments. Investments consist of the following (in thousands):



	March 31, 2015		December 31, 2014
Strategic investments:
Investments accounted for under the equity method	$	90,369	$	86,328
Investments held at fair value	4,738		4,435
Common stock or equivalent of companies representing less than 20% equity ownership held at adjusted cost	8,948		8,949
Total Strategic investments	104,055		99,712
Other investments	1,569		1,014
Total Investments	$	105,624	$	100,726

For the three months ended March 31, 2015 and 2014, the Company recorded income of $2.2 million and $13.0 million, respectively, related to Investments accounted for under the equity method of accounting, which is recorded within Investment income and other, net in the Consolidated Statements of Operations. The majority of the Company's income from investments accounted for under the equity method was from investees which are considered to be related parties. See Footnote 12 "Related Parties".

Investments held at fair value are accounted for as available for sale securities and any unrealized gains or losses are recorded net of tax in Other comprehensive income.

Merger of BATS and Direct Edge

In January 2014, BATS and Direct Edge, each of whose equity the Company held as an investment, merged, with BATS being the surviving entity in the merger. Prior to the merger, the Company accounted for its investment in BATS under the cost method and accounted for its investment in Direct Edge under the equity method. Following the merger, the Company owns 16.7% of the overall equity of BATS and holds 19.9% of the voting equity and has appointed a director to BATS' board of directors. Based on these facts, the Company accounts for its interest in BATS under the equity method.

The Company received approximately $42.2 million from the aggregate distributions paid by BATS and Direct Edge at or around the close of the merger, which the Company recorded as a return of capital under the equity method of accounting.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

During the first quarter of 2014 the Company recognized income of $9.6 million related to the merger of BATS and Direct Edge which is recorded within Investment income and other, net in the Consolidated Statements of Operations. The $9.6 million comprises a partial realized gain with respect to the Company's investment in Direct Edge of $16.2 million offset, in part, by the Company's share of BATS' and Direct Edge's merger related transaction costs that were charged against their earnings of $6.6 million.

10. Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives are assessed for impairment annually or when events indicate that the amounts may be impaired. The Company assesses goodwill for impairment at the reporting unit level. The Company’s reporting units are the components of its business segments for which discrete financial information is available and is regularly reviewed by the Company’s management. As part of the assessment for impairment, the Company considers the cash flows of the respective reporting unit and assesses the fair value of the respective reporting unit as well as the overall market value of the Company compared to its net book value. The assessment of fair value of the reporting units is principally performed using a discounted cash flow methodology with a risk-adjusted weighted average cost of capital which the Company believes to be the most reliable indicator of the fair values of its respective reporting units. The Company also assesses the fair value of each reporting unit based upon its estimated market value and assesses the Company’s overall market value based upon the market price of KCG Class A Common Stock.

Intangible assets are assessed for recoverability when events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. The Company assesses intangible assets for impairment at the “asset group” level which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. As part of the assessment for impairment, the Company considers the cash flows of the respective asset group and assesses the fair value of the respective asset group. Step 1 of the impairment assessment for intangibles is performed using undiscounted cash flow models, which indicates whether the future cash flows of the asset group are sufficient to recover the book value of such asset group. When an asset is not considered to be recoverable, step 2 of the impairment assessment is performed using a discounted cash flow methodology with a risk-adjusted weighted average cost of capital to determine the fair value of the intangible asset group. In cases where amortizable intangible assets and goodwill are assessed for impairment at the same time, the amortizable intangibles are assessed for impairment prior to goodwill being assessed.

No events occurred in the three months ended March 31, 2015 or 2014 that would indicate that the carrying amounts of the Company’s goodwill or intangible assets may not be recoverable. In the fourth quarter of 2014, the Company assessed the impairment of goodwill and intangible assets as part of its annual assessment and concluded that there was no impairment.

The following table summarizes the Company’s goodwill by segment (in thousands):



	March 31, 2015		December 31, 2014
Market Making	$	16,404	$	16,404
Global Execution Services	907		907
Total	$	17,311	$	17,311

Intangible assets with definite useful lives are amortized over their estimated remaining useful lives, the majority of which have been determined to range from one to 8 years. The weighted average remaining life of the Company’s intangible assets with definite useful lives at March 31, 2015 and December 31, 2014 was approximately five years.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following tables summarize the Company’s Intangible assets, net of accumulated amortization by segment and type (in thousands):



	March 31, 2015		December 31, 2014
Market Making
Technology	$	48,090	$	50,542
Trading rights	43,191		44,358
Total	91,281		94,900
Global Execution Services ⁽¹⁾
Technology	16,900		18,200
Customer relationships	10,472		10,833
Trade names	825		850
Total	28,197		29,883
Corporate and Other
Technology	9,750		10,500
Total	$	129,228	$	135,283


⁽¹⁾	Excluded from the December 31, 2014 balance is $34.7 million of intangibles related to the KCG Hotspot which was held for sale. As noted in Footnote 3 "Sales of businesses", such amount is included in Assets of business held for sale at December 31, 2014.



		March 31, 2015			December 31, 2014
Technology ⁽¹⁾	Gross carrying amount	$	117,729		$	115,804
	Accumulated amortization	(42,989		)	(36,562		)
	Net carrying amount	74,740			79,242
Trading rights ⁽²⁾	Gross carrying amount	62,468			62,468
	Accumulated amortization	(19,277		)	(18,110		)
	Net carrying amount	43,191			44,358
Customer relationships ⁽³⁾	Gross carrying amount	13,000			13,000
	Accumulated amortization	(2,528		)	(2,167		)
	Net carrying amount	10,472			10,833
Trade names ⁽⁴⁾	Gross carrying amount	1,000			1,000
	Accumulated amortization	(175		)	(150		)
	Net carrying amount	825			850
Total	Gross carrying amount	194,197			192,272
	Accumulated amortization	(64,969		)	(56,989		)
	Net carrying amount	$	129,228		$	135,283


⁽¹⁾	The weighted average remaining life for technology, including capitalized software, was approximately 3 years for both March 31, 2015 and December 31, 2014. Excluded from the December 31, 2014 balance is $13.1 million of technology assets related to KCG Hotspot which as noted in Footnote 3 "Sales of businesses", is included in Assets of business held for sale at December 31, 2014.


⁽²⁾	Trading rights provide the Company with the rights to trade on certain exchanges. The weighted average remaining life of trading rights with definite useful lives was approximately 7 years for both March 31, 2015 and December 31, 2014. As of March 31, 2015 and December 31, 2014, $6.8 million of trading rights had indefinite useful lives.

⁽³⁾

Customer relationships relate to KCG BondPoint. The weighted average remaining life was approximately 7 and 8 years as of March 31, 2015 and December 31, 2014, respectively. Lives may be reduced depending upon actual retention rates. Excluded from the December 31, 2014 balance is $19.0 million of customer relationships related to KCG Hotspot which as noted in Footnote 3 "Sales of businesses", is included in Assets of business held for sale at December 31, 2014.


⁽⁴⁾	Trade names relate to KCG BondPoint. The weighted average remaining life was approximately 8 and 9 years as of March 31, 2015 and December 31, 2014, respectively. Excluded from the December 31, 2014 balance is $2.6 million of the trade name related to KCG Hotspot which as noted in Footnote 3 "Sales of businesses", is included in Assets of business held for sale at December 31, 2014.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following table summarizes the Company’s amortization expense from continuing operations relating to Intangible assets (in thousands):



	For the three months ended March 31,
	2015		2014
Amortization expense	$	9,249	$	8,494

As of March 31, 2015, the following table summarizes the Company’s estimated amortization expense for future periods (in thousands):



	Amortization expense
For the nine months ended December 31, 2015	$	23,671
For the year ended December 31, 2016	30,679
For the year ended December 31, 2017	27,892
For the year ended December 31, 2018	15,788
For the year ended December 31, 2019	6,211

11. Debt

The carrying value and fair value of the Company's debt is as follows (in thousands):



	March 31, 2015				December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash Convertible Senior Subordinated Notes	$	—	$	—	$	117,259	$	116,819
8.25% Senior Secured Notes	305,000		329,747		305,000		309,194
6.875% Senior Secured Notes	494,847		484,950		—		—
Total Debt	$	799,847	$	814,697	$	422,259	$	426,013

The fair value of the Company's 6.875% Senior Secured Notes and Cash Convertible Senior Subordinated Notes are based upon the value of such debt in the secondary market.

The fair value of the $305.0 million 8.25% Senior Secured Notes represents the settlement amount of $329.7 million paid to the holders of these Notes as discussed in further detail below.

All of the above liabilities would be categorized as Level 2 in the fair value hierarchy if they were required to be recorded at fair value.

Cash Convertible Senior Subordinated Notes

In March 2010, Knight issued $375.0 million aggregate principal amount of Cash Convertible Senior Subordinated Notes (the “Convertible Notes”), due on March 15, 2015, in a private offering exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). In connection with the closing of the Mergers, on July 1, 2013, KCG became a party to the indenture under which the which the Convertible Notes were issued.

On March 16, 2015, the Convertible Notes became due and were paid off in full with a payment of $119.3 million comprising $117.3 million in principal and $2.1 million in interest.

The Convertible Notes bore interest at a rate of 3.50% per year, payable semi-annually in arrears, on March 15 and September 15 of each year, commencing on September 15, 2010.

8.25% Senior Secured Notes

On June 5, 2013 GETCO Financing Escrow LLC (“Finance LLC”), a wholly-owned subsidiary of GETCO, issued 8.250% senior secured notes due 2018 in the aggregate principal amount of $305.0 million (the “8.25% Senior Secured Notes”) pursuant to an indenture, dated June 5, 2013 (as amended and supplemented, the "8.25% Senior Secured Notes Indenture"). On July 1, 2013, KCG entered into a first supplemental indenture (the “First Supplemental Indenture”)

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

pursuant to which KCG assumed all of the obligations of Finance LLC which comprised the 8.25% Senior Secured Notes plus certain escrow agent fees and expenses of $3.0 million.

The 8.25% Senior Secured Notes were scheduled to mature on June 15, 2018 and bore interest at a rate of 8.250% per year, payable on June 15 and December 15 of each year, beginning on December 15, 2013.

The 8.25% Senior Secured Notes Indenture provided that KCG could redeem the 8.25% Senior Secured Notes, in whole or in part, at any time prior to June 15, 2015 at a price equal to 100% of the aggregate principal amount of the 8.25% Senior Secured Notes to be redeemed, plus a make-whole premium and accrued and unpaid interest, if any.

On March 13, 2015, KCG provided 30 days’ notice that it would be calling its existing 8.25% Senior Secured Notes, effective April 13, 2015. On March 13, 2015, the Company used a portion of the gross proceeds from the 6.875% Senior Secured Notes (as defined below), to deposit in an escrow account maintained by The Bank of New York Mellon, the trustee of the 8.25% Senior Secured Notes (“Bank of New York”) an amount sufficient to redeem the 8.25% Senior Secured Notes in full and accordingly satisfied and discharged the 8.25% Senior Secured Notes Indenture. The Company funded $330.2 million into an escrow account maintained by Bank of New York comprising the following: principal of $305.0 million, accrued interest for the period from December 16, 2014 to April 13, 2015 of $8.2 million, make whole premium which includes 4.125% early redemption cost plus additional interest due from April 13, 2015 through June 15, 2015 totaling $16.5 million, and additional funds to cover other miscellaneous charges of $0.4 million. As discussed in Footnote 22, “Subsequent Events”, on April 13, 2015, the escrow amount of $330.2 million was released and $329.7 million was paid out to the 8.25% Senior Secured Notes holders to redeem the 8.25% Senior Secured Notes.

The 8.25% Senior Secured Notes Indenture contained customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, prepayments of other indebtedness, restrictions on subsidiaries and issuance of capital stock. As of December 31, 2014 the Company was in compliance with the covenants.

6.875% Senior Secured Notes

On March 10, 2015, the Company entered into a purchase agreement with Jefferies LLC, as initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to sell, and the Initial Purchaser agreed to purchase, $500.0 million aggregate principal amount of 6.875% Senior Secured Notes (the “6.875% Senior Secured Notes ”), pursuant to an indenture dated, March 13, 2015 (the “6.875% Indenture”), in a private offering exempt from registration under the Securities Act. The 6.875% Senior Secured Notes were resold by the Initial Purchaser to qualified institutional buyers in reliance on Rule 144A and Regulation S under the Securities Act.

The 6.875% Senior Secured Notes mature on March 15, 2020 and bear interest at a rate of 6.875% per year, payable on March 15 and September 15 of each year, beginning on September 15, 2015. The 6.875% Senior Secured Notes were issued at 98.962% with net proceeds (before fees and expenses) of $494.8 million and a yield to maturity of 7.083%.

On March 13, 2015, KCG and certain subsidiary guarantors (the "6.875% Guarantors") under the 6.875% Indenture, fully and unconditionally guaranteed on a joint and several basis the 6.875% Senior Secured Notes. The 6.875% Senior Secured Notes and the obligations under the 6.875% Indenture are currently secured by pledges of all of the equity interests in each of KCG’s and the 6.875% Guarantors’ existing and future domestic subsidiaries (but limited to 66% of the voting equity interests of controlled foreign company subsidiaries and excluding equity interests in regulated subsidiaries to the extent that such pledge would have a material adverse regulatory effect or is not permitted by applicable law) and security interests in substantially all other tangible and intangible assets of KCG and the 6.875% Guarantors, in each case subject to customary exclusions; provided, however, that if in the future KCG or any of the 6.875% Guarantors enter into certain first lien obligations (as described in the 6.875% Indenture) the collateral agent is authorized by the holders of the 6.875% Senior Secured Notes to enter into an Intercreditor Agreement pursuant to which the lien securing the 6.875% Senior Secured Notes would be contractually subordinated to the lien securing such first lien obligations, to the extent of the value of the collateral securing such obligations. The 6.875% Senior Secured Notes are effectively subordinated to any existing and future indebtedness that is secured by assets that do not constitute collateral under the 6.875% Senior Secured Notes to the extent of the value of such assets. All of the 6.875% Guarantors are wholly-owned subsidiaries of KCG.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

On or after March 15, 2017, KCG may redeem all or a part of the 6.875% Senior Secured Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and additional interest on the 6.875% Senior Secured Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on March 15 of the years indicated below:



Year	Percentage
2017	103.438	%
2018	101.719	%
2019 and thereafter	100.000	%

KCG may also redeem the 6.875% Senior Secured Notes, in whole or in part, at any time prior to March 15, 2017 at a price equal to 100% of the aggregate principal amount of the 6.875% Senior Secured Notes to be redeemed, plus a make-whole premium and accrued and unpaid interest. In addition, at any time on or prior to March 15, 2017, KCG may redeem up to 40% of the aggregate principal amount of the 6.875% Senior Secured Notes with the net cash proceeds of certain equity offerings, at a price equal to 106.875% of the aggregate principal amount of the 6.875% Senior Secured Notes, plus accrued and unpaid interest, if any.

The 6.875% Indenture contains customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, prepayments of other indebtedness, restrictions on subsidiaries, and issuance of capital stock. As of March 31, 2015, the Company was in compliance with the covenants.

If at any time the 6.875% Senior Secured Notes are rated investment grade by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Group and no default or event of default has occurred and is continuing under the 6.875% Indenture, certain of the restrictive covenants will be suspended and will not apply to KCG or its restricted subsidiaries; provided, however, that such covenants will be reinstated if the 6.875% Senior Secured Notes subsequently cease to be rated or are no longer assigned an investment grade rating by both rating agencies.

The 6.875% Senior Secured Notes and the guarantee of the 6.875% Senior Secured Notes have not been registered under the Securities Act or the securities laws of any other jurisdiction and have no registration rights and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Company has determined that the terms of the 6.875% Senior Secured Notes do not give rise to a bifurcatable derivative instrument under GAAP.

The Company incurred issuance costs of approximately $12.4 million in connection with the issuance of 6.875% Senior Secured Notes. The issuance costs are recorded within Other assets on the Consolidated Statements of Financial Condition and are being amortized over the remaining term of the 6.875% Senior Secured Notes. Including issuance costs, the 6.875% Senior Secured Notes had an effective yield of 7.580%.

First Lien Credit Facility

On July 1, 2013, KCG, as borrower, entered into a first lien senior secured credit agreement (the “Credit Agreement”) with Jefferies Finance LLC and Goldman Sachs Bank USA. The Credit Agreement was in the amount of $535.0 million (the “First Lien Credit Facility”), all of which was drawn on July 1, 2013. The First Lien Credit Facility also provided for a future uncommitted incremental first lien senior secured revolving credit facility of up to $50.0 million, including letter of credit and swingline sub-facilities, on certain terms and conditions contained in the Credit Agreement.

In 2013, the Company repaid $300.0 million of principal of the First Lien Credit Facility. A portion of the $300.0 million totaling $117.3 million was drawn from cash held in the Collateral Account and the remainder of the $300.0 million was paid out of available cash, including proceeds from the sale of Urban.

In the first quarter of 2014, the Company repaid $185.0 million of principal of the First Lien Credit Facility out of available cash. In conjunction with these payments, the Company wrote down $7.6 million of its capitalized debt costs associated with the Credit Agreement. In the second quarter of 2014, the Company made a final $50.0 million payment of principal on the First Lien Credit Facility out of available cash and the Credit Agreement was terminated.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

Revolving Credit Agreement

On July 1, 2013, OCTEG, LLC (“OCTEG”) and Knight Capital Americas LLC ("KCA"), wholly-owned broker dealer subsidiaries of KCG, as borrowers, and KCG, as guarantor, entered into a credit agreement (the "KCGA Facility Agreement”) with a consortium of banks and financial institutions. The KCGA Facility Agreement replaced an existing credit agreement, dated as of June 6, 2012, among OCTEG and three banks.

The KCGA Facility Agreement comprises two classes of revolving loans in a total committed amount of $450.0 million, together with a swingline facility with a $50.0 million sub-limit, subject to two borrowing bases (collectively, the “KCGA Revolving Facility”): Borrowing Base A and Borrowing Base B. The KCGA Revolving Facility also provides for a future increase of the revolving credit facility of up to $300.0 million to a total of $750.0 million on certain terms and conditions.

The KCGA Revolving Facility was amended on October 24, 2013 to permit OCTEG to be removed as a borrower under the KCGA Revolving Facility. As of January 1, 2014, OCTEG was merged with and into KCA and KCA was renamed KCG Americas LLC ("KCGA").

Borrowings under the KCGA Revolving Facility bear interest, at the borrower's option, at a rate based on the federal funds rate (“Base Rate Loans”) or based on LIBOR (“Eurodollar Loans”), in each case plus an applicable margin. For each Base Rate Loan, the interest rate per annum is equal to the greater of the federal funds rate or an adjusted one-month LIBOR rate plus (a) for each Borrowing Base A loan, a margin of 1.75% per annum and (b) for each Borrowing Base B loan, a margin of 2.25% per annum. For each Eurodollar Loan, the interest rate per annum is equal to an adjusted LIBOR rate corresponding to the interest period plus (a) for each Borrowing Base A loan, a margin of 1.75% per annum and (b) for each Borrowing Base B loan, a margin of 2.25% per annum. As of March 31, 2015 and December 31, 2014, there were no outstanding borrowings under the KCGA Facility Agreement.

The proceeds of the Borrowing Base A loans may be used solely to finance the purchase and settlement of securities. The proceeds of Borrowing Base B loans may be used solely to fund clearing deposits with the National Securities Clearing Corporation ("NSCC").

The borrower is being charged a commitment fee at a rate of 0.35% per annum on the average daily amount of the unused portion of the KCGA Facility Agreement.

The loans under the KCGA Facility Agreement will mature on June 6, 2015. The KCGA Revolving Facility is fully and unconditionally guaranteed on an unsecured basis by KCG and, to the extent elected by KCGA, any of their respective subsidiaries. It is secured by first-priority pledges of and liens on certain eligible securities, subject to applicable concentration limits, in the case of Borrowing Base A loans, and by first-priority pledges of and liens on the right to the return of certain eligible NSCC margin deposits, in the case of Borrowing Base B loans.

The KCGA Facility Agreement includes customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, restrictions on subsidiaries, issuance of capital stock, negative pledges and business activities. It contains financial maintenance covenants establishing a minimum total regulatory capital for KCGA, a maximum total asset to total regulatory capital ratio for KCGA, a minimum excess net capital limit for KCGA, a minimum liquidity ratio for KCGA, and a minimum tangible net worth threshold for KCGA. As of March 31, 2015 and December 31, 2014, the Company was in compliance with the covenants.

In connection with the KCGA Revolving Facility, the Company incurred issuance costs of $1.2 million which is recorded within Other assets on the Consolidated Statements of Financial Condition and it is being amortized over the term of the facility.

The Company is seeking to renew the existing KCGA Facility Agreement under similar terms, which is dependent on current credit market conditions. As of March 31, 2015, the final structure and terms has not yet been finalized.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The Company recorded expenses with respect to the Debt as follows (in thousands):



	For the three months ended March 31,
	2015		2014
Interest expense	$	8,158	$	9,416
Amortization of debt issuance cost ⁽¹⁾	934		8,766
Commitment fee	394		397
Total	$	9,486	$	18,579


⁽¹⁾	For the three months ended March 31, 2014, $7.6 million of amortization of debt issuance cost incurred is included in Writedown of debt issuance costs while $1.6 million which includes the remaining amortization of the debt issuance costs and the commitment fee is included in Other expenses.

12. Related Parties

The Company interacts with two parties which are the beneficial owners of more than 10 percent of KCG’s Class A Common Stock. It also has trading and other activities with four investees whereby KCG accounts for its investment under the equity method of accounting. Each is considered a related party for all applicable periods. See Footnote 9 "Investments" for the carrying value of these investees at March 31, 2015 and 2014 and for the Company's income with respect to its equity earnings from these investees for the three months ended March 31, 2015 and 2014.

The Company earns revenues, incurs expenses and maintains balances with these related parties or their affiliates in the ordinary course of business. As of the date and period indicated below, the Company had the following balances and transactions with the related parties or their affiliates (in thousands):



	For the three months ended March 31,
Statements of Operations	2015			2014
Revenues
Commissions and fees	$	3,492		$	5,146
Trading revenues, net	2,101			814
Interest, net	226			188
Total revenues from related parties	$	5,819		$	6,148
Expenses
Execution and clearance fees⁽¹⁾	$	(4,628	)	$	(4,011	)
Communications and data processing	1,110			—
Payment for order flow	1,180			—
Collateralized financing interest	113			159
Professional fees	5,507			—
Other expense	621			400
Total expenses incurred with respect to related parties	$	3,903		$	(3,452	)

⁽¹⁾ Represents net volume based fees received from providing liquidity to related trading venues.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)



Statements of Financial Condition	March 31, 2015		December 31, 2014
Assets
Securities borrowed	$	41,600	$	26,110
Receivable from brokers, dealers and clearing organizations	92,739		20,075
Other assets	12,247		—
Liabilities
Securities loaned	$	3,543	$	7,376
Payable to brokers, dealers and clearing organizations	64,757		8,509
Accrued expenses and other liabilities	4,693		5,667

In March 2015, the Company completed the sale of KCG Hotspot to BATS, a related party. The Company recorded a gain on sale of $385.0 million which is recorded as Investment income and other, net on the Consolidated Statements of Operations for the three months ended March 31, 2015.

Additionally, in the first quarter of 2015, the Company paid one of the related parties $16.8 million in fees related to financing and advisory activities. The $16.8 million comprised $11.3 million that was capitalized as deferred debt costs within Other assets on the Consolidated Statement of Financial Condition and $5.5 million that was recorded as Professional fees in the Consolidated Statement of Operations.

In the ordinary course of business, the Company enters into foreign exchange contracts with related parties.

13. Stock-Based Compensation

KCG Equity Incentive Plan

KCG Holdings, Inc. Amended and Restated Equity Incentive Plan (the "KCG Plan") was initially assumed from Knight in connection with the Mergers, and since, has been maintained by the Company for the purpose of granting long-term incentive awards to officers, employees and directors of the Company. As of March 31, 2015, there were approximately 28.9 million shares authorized for issuance under the KCG Plan, of which approximately 15.1 million shares are available for grant (subject to adjustment as provided under the KCG Plan).

The KCG Plan is administered by the Compensation Committee of the Company’s Board of Directors (the "Compensation Committee"), and allows for the grant of stock options, SARs, restricted stock and RSUs (collectively, the “awards”), as defined by the KCG Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the KCG Plan also limits the number of awards that may be granted to a single individual.

Restricted Shares and Restricted Stock Units

The Company has historically awarded RSUs to eligible officers, employees and directors as a component of annual incentive compensation, and has also made off-cycle grants of RSUs for purposes of one-time, special or retention awards. The majority of RSUs that have been granted by the Company vest ratably over three years and are subject to accelerated vesting, or continued vesting, following the grantee’s termination of employment, in accordance with the applicable award documents and employment agreements between the Company and the grantee. Officers, employees and directors generally become vested in outstanding RSUs upon a qualifying retirement, and the KCG Plan otherwise provides the Compensation Committee with the discretion to fully vest participants in outstanding RSUs in certain other circumstances.

The Company measures compensation cost related to RSUs on the fair value of KCG Class A Common Stock at the date of grant. Compensation expense from continuing operations relating to RSUs, which is primarily recorded in Employee compensation and benefits, and the corresponding income tax benefit, which is recorded in Income tax expense on the Consolidated Statements of Operations are presented in the following table (in thousands):



	For the three months ended March 31,
	2015		2014
Stock award compensation expense	$	14,255	$	16,238
Income tax benefit	5,417		6,170

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following table summarizes restricted awards activity for the three months ended March 31, 2015 (awards in thousands):



	Restricted Stock Units
	Number of Units		Weighted- Average Grant date Fair Value
Outstanding at December 31, 2014	9,147		$	10.77
Granted	2,385		12.22
Vested	(2,055	)	11.04
Forfeited	(322	)	11.25
Outstanding at March 31, 2015	9,155		$	11.07

There is $59.2 million of unamortized compensation related to unvested RSUs outstanding at March 31, 2015. The cost of these unvested RSUs, unless a modification occurs, is expected to be recognized over a weighted average life of 1.64 years.

Stock Options and Stock Appreciation Rights

The Company’s policy is to grant options for the purchase of shares of KCG Class A Common Stock and SARs to purchase or receive the cash value of shares of KCG Class A Common Stock. The stock options and SARs outstanding as of the date hereof have each been granted with an exercise price not less than the market value of KCG Class A Common Stock on the grant date and generally vest ratably over a three year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the applicable award agreement. Like RSUs, stock options and SARs are subject to accelerated vesting, or continued vesting following certain termination circumstances, in accordance with the applicable award agreements and employment agreements between the Company and the participant. The Company issues new shares upon stock option exercises by its employees and directors, and may either issue new shares or provide a cash payment upon SARs exercises by its employees.

The Company estimates the fair value of each stock option and SAR granted as of its respective grant date using the Black-Scholes option-pricing model. The principal assumptions utilized in valuing stock options and SARs and the methodology for estimating the inputs to such model include: 1) risk-free interest rate, the estimate of which is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the stock option or SAR; 2) expected volatility, the estimate of which is based on several factors including implied volatility of market-traded stock options on the Company’s common stock on the grant date and the volatility of the Company’s common stock; and 3) expected option or SAR life, the estimate of which is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific stock option and SAR characteristics, including the effect of employee terminations. There were no stock options or SARs granted during the three months ended March 31, 2015 or 2014.

Compensation expense from continuing operations relating to stock options and SARs, all of which was recorded in Employee compensation and benefits, as well as the corresponding income tax benefit, which is recorded in Income tax expense on the Consolidated Statements of Operations are as follows (in thousands):



	For the three months ended March 31,
	2015		2014
Stock option and SAR compensation expense	$	1,013	$	961
Income tax benefit	385		365

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following table summarizes stock option and SAR activity and stock options exercisable for the three months ended March 31, 2015 (awards in thousands):



	Number of Stock Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Life (years)
Outstanding at December 31, 2014 ⁽¹⁾	4,691		$	17.41
Granted at market value	—		—
Exercised	—		—
Forfeited or expired	(84	)	17.10
Outstanding at March 31, 2015 ⁽¹⁾	4,607		$	17.42	$	4,687	3.15
Exercisable at March 31, 2015	1,782		$	20.72	$	1,640	2.95
Available for future grants at March 31, 2015 ⁽²⁾	15,086

⁽¹⁾ Includes 1.7 million of SARs.

⁽²⁾ Represents options, SARs and awards available for grant under the KCG Plan.

The aggregate intrinsic value is the amount by which the closing price of the Company’s Class A Common Stock exceeds the exercise price of the stock options multiplied by the number of shares. There were no stock options or SARs exercised during the three months ended March 31, 2015 and 2014.

There is $2.3 million of unamortized compensation related to unvested stock options and SARs outstanding at March 31, 2015. The cost of these unvested awards is expected to be recognized over a weighted average life of 0.65 years.

Incentive units

Prior to the Mergers, GETCO awarded deferred compensation to its employees in the form of incentive units that generally vested over time. The value of these incentive units was determined at the date of grant based on the estimated enterprise value of GETCO and the amount expensed was determined based on this valuation multiplied by the percent vested. In connection with the Mergers, all outstanding unvested incentive units vested and were converted into units based on the applicable exchange ratio of GETCO units to the Company's Class A Common Stock. The units are marked to the current stock price of the Company's Class A Common Stock at the end of each period with the resulting change in the liability reflected as either an expense or gain included in Employee compensation and benefits on the Consolidated Statements of Operations. Given that the units vested in connection with the Mergers, the Company fully amortized the costs associated with these units as of June 30, 2013. Deferred compensation payable at March 31, 2015 and December 31, 2014 related to incentive units was $3.1 million and $2.9 million, respectively, and is included in Accrued compensation expense on the Consolidated Statements of Financial Condition.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following is a summary of the changes in the incentive units for the three months ended March 31, 2015 (units in thousands):



	Vested
Incentive units at December 31, 2014	38
Issued	—
Vested	—
Exercised	—
Canceled	—
Incentive units at March 31, 2015	38

Compensation expense (benefit) related to the Incentive units which are recorded within Employee compensation and benefits on the Consolidated Statements of Operations are as follows (in thousands):



	For the three months ended March 31,
	2015		2014
Incentive units	$	153	$	(174	)

14. Income Taxes

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

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



	For the three months ended March 31,
	2015		2014

U.S. federal statutory income tax rate	35.0	%	35.0	%
U.S. state and local income taxes, net of U.S.
Federal income tax effect	3.6	%	2.2	%
Nondeductible expenses⁽¹⁾	0.0	%	0.3	%
Foreign Taxes	0.0	%	0.1	%
Other, net	0.0	%	0.2	%
Actual income tax rate	38.6	%	37.8	%

⁽¹⁾ Nondeductible expenses include nondeductible compensation and meals and entertainment

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

Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize the majority of its federal deferred tax assets in the future, and except as noted below with respect to certain NOLs, no valuation allowance has been recorded at March 31, 2015 with respect to such federal deferred tax assets. Management believes that positive evidence including the Company's history of sustainable profitability, actual profitability, and its forecasts of future profitability outweighs the negative evidence. The Company has recorded a partial valuation allowance against state and local deferred tax assets as it is more likely than not that the benefit of such items will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

In accordance with Section 382 of the Internal Revenue Code, a change in equity ownership of greater than 50% of a corporation within a three-year period results in an annual limitation on the corporation’s ability to utilize its net operating loss ("NOL") carryforwards that were created during tax periods prior to the change in ownership. As a result of the Mergers as well as prior ownership changes, Knight experienced ownership changes under Section 382 and as a result, the rate of utilization of NOL carryforwards generated by Knight may be limited. The Company does not believe these limitations will have a significant effect on the Company's ability to utilize its anticipated federal NOL carryforward. The Company's U.S. federal NOL carryforwards will begin to expire in 2019.

At March 31, 2015, the Company had total U.S. federal NOL carryforwards of $133.5 million, of which $28.5 million resulted from the acquisition of Knight. At March 31, 2015 the Company recorded a deferred tax asset related to these federal NOLs of $46.7 million and a partially offsetting valuation allowance of $6.8 million which represents the portion of these NOL carryforwards that are considered more likely than not to expire unutilized.

At March 31, 2015, the Company recorded a valuation allowance for certain of its state and local NOL carryforwards as it is more likely than not that the benefit of these carryforwards will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates. Certain of these carryforwards are subject to annual limitations on utilization and they will begin to expire in 2019.

At March 31, 2015, the Company had, in multiple jurisdictions, aggregate state and local NOL carryforwards of $1.28 billion, all of which resulted from the acquisition of Knight. The Company recorded deferred income tax assets related to these NOLs of $18.5 million as of March 31, 2015 and a partially offsetting valuation allowances of $8.1 million, which represents the portion of these NOLs that are considered more likely than not to expire unutilized. In 2014 the Company reversed $10.8 million of the valuation related to its state and local NOLs as a portion of such loss carryforwards are now expected to be utilized based upon the expected profitability of certain of the Company’s subsidiaries. Certain of these carryforwards are subject to annual limitations on utilization and these NOLs will begin to expire in 2019.

At March 31, 2015, the Company had non-U.S. NOL carryforwards of $86.4 million of which $65.7 million were generated by Knight in periods prior to the Mergers. The Company recorded a foreign deferred income tax asset of $19.5 million for these NOL carryforwards as of March 31, 2015 along with an offsetting U.S. federal deferred tax liability of $19.5 million for the expected future reduction in U.S. foreign tax credits associated with the use of the non-U.S. loss carryforwards. These non-U.S. net operating losses may be carried forward indefinitely.

At March 31, 2015, the Company had U.S. Federal tax credit carryforwards comprising general business credit carryforwards of $4.4 million and alternative minimum tax credit carryforwards $6.8 million.

As of March 31, 2015, the Company is subject to U.S. Federal income tax examinations for the tax years 2011 through 2013, and to non-U.S. income tax examinations for the tax years 2007 through 2014. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2013. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the results of operations or financial condition.

At March 31, 2015, the Company had $2.3 million of unrecognized tax benefits, all of which would affect the Company's effective tax rate if recognized. At March 31, 2014, the Company had $1.5 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized.

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

15. Accumulated Other Comprehensive Income

The following table presents changes in Accumulated other comprehensive income, net of tax by component for the three months ended March 31, 2015 and 2014 (in thousands):



	Unrealized Gains (Losses) on Available-for-Sale Securities		Foreign Currency Translation Adjustments			Total
Balance December 31, 2014	$	352	$	1,781		$	2,133
Other comprehensive income (loss)	188		(623		)	(435		)
Balance March 31, 2015	$	540	$	1,158		$	1,698



	Unrealized Gains (Losses) on Available-for-Sale Securities			Foreign Currency Translation Adjustments		Total
Balance December 31, 2013	$	36		$	1,365	$	1,401
Other comprehensive income (loss)	(137		)	201		64
Balance March 31, 2014	$	(101	)	$	1,566	$	1,465

16. Writedowns and Other Charges

Writedown of capitalized debt costs

During the first quarter of 2014, the Company made principal repayments under the Credit Agreement of $185.0 million. As a result, $7.6 million in capitalized debt costs were written off.

17. Earnings Per Share

Basic earnings or loss per common share (“EPS”) has been calculated by dividing net income from continuing operations by the weighted average shares of the Company's Class A Common Stock outstanding during each respective period. Diluted EPS reflects the potential reduction in EPS using the treasury stock method to reflect the impact of common stock equivalents if stock options, SARs and warrants to purchase shares of the Company's Class A Common Stock were exercised and restricted awards were to vest.

The number of such RSUs, options, warrants and SARs excluded from the EPS calculation was approximately 18.3 million and 28.4 million for the three months ended March 31, 2015 and 2014, respectively. Such options, warrants and SARS were excluded from the EPS calculation as their inclusion would have an anti-dilutive impact on the EPS calculation. The computation of diluted shares can vary among periods due in part to the change in the average price of the Company's Class A Common Stock.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations from continuing operations for the three months ended March 31, 2015 and 2014 (in thousands):



	For the three months ended March 31,
	2015				2014
	Numerator / net income		Denominator / shares		Numerator / net income		Denominator / shares
Income from continuing operations and shares used in basic calculations	$	249,301	110,782		$	36,917	115,569
Effect of dilutive stock based awards
Restricted awards			2,410				2,233
Stock options and SARs			286				96
Warrants			137				—
Income from continuing operations and shares used in diluted calculations	$	249,301	113,615		$	36,917	117,898
Basic earnings per common share from continuing operations			$	2.25			$	0.32
Diluted earnings per common share from continuing operations			$	2.19			$	0.31

18. Significant Clients

The Company considers significant clients to be those clients who account for 10% or more of the total U.S. equity market making dollar value traded by the Company. No clients accounted for more than 10% of the Company’s U.S. equity dollar value traded during the three months ended March 31, 2015 or 2014.

19. Commitments and Contingent Liabilities

Legal Proceedings

In the ordinary course of business, the nature of the Company’s business subjects it to claims, lawsuits, regulatory examinations and other proceedings. The Company and its subsidiaries are subject to several of these matters at the present time. Given the inherent difficulty of predicting the outcome of the litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, the Company cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. In addition, there are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to other types of litigation. Due to the many intricacies involved in class-action lawsuits particularly in the early stages of such matters, obtaining clarity on a reasonable estimate is difficult which may call into question its reliability. There can be no assurance that these matters will not have a material adverse effect on the Company’s results of operations in any future period, and a material judgment could have a material adverse impact on the Company’s financial condition and results of operations. However, it is the opinion of management, after consultation with legal counsel that, based on information currently available, the ultimate outcome of these ordinary matters will not have a material adverse impact on the business, financial condition or operating results of the Company although they might be material to the operating results for any particular reporting period, depending, in part, upon operating results for that period. The Company carries directors and officers liability insurance coverage for potential claims, including securities actions, against the Company, Knight and GETCO and their respective directors and officers.

As previously disclosed in KCG's and Knight's public filings, Knight experienced a technology issue at the open of trading at the NYSE on August 1, 2012. This issue was related to the installation of trading software and resulted in KCA sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market. Thereafter, Knight was named as a defendant in two putative class action complaints (one of which was voluntarily dismissed and the other of which is described in more detail below) and one purported derivative lawsuit, all of which related to the technology issue. The purported derivative action was resolved as part of a settlement entered by the Delaware Court of Chancery in September 2014. Knight also received several derivative demand letters and/or requests for the inspection or production of certain books and records pursuant to Delaware law related to the technology issue and the raising of $400.0 million in equity financing through a convertible preferred stock offering to certain investors. The claims described in the derivative demand letters were resolved as part of the aforementioned Delaware settlement and the requests for inspection of documents have not been pursued.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

While the Company is currently unable to predict the outcome of any existing or future litigation related to the August 1, 2012 technology issue, an unfavorable outcome in one of these matters could have a material adverse effect on its financial condition or ongoing results of operations. In addition, the Company expects to incur additional expenses in defending against such litigation.

Legal

Litigation Related to the August 1, 2012 Technology Issue

On October 26, 2012, Knight, its then-Chairman and Chief Executive Officer, Thomas M. Joyce, and its then-Executive Vice President, Chief Operating Officer and Chief Financial Officer, Steven Bisgay, were named as defendants in an action entitled Fernandez v. Knight Capital Group, Inc. in the U.S. District Court for the District of New Jersey, Case No. 2:12-cv-06760 (the “Fernandez Action”). Generally, this putative class action complaint alleged that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that he and a purported class of Knight's stockholders who purchased Knight's Class A Common Stock between January 19, 2012 and August 1, 2012 paid an inflated price. Following the appointment of a lead plaintiff and counsel, the plaintiff filed an amended complaint on March 14, 2013, alleging generally that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that it and a purported class of Knight's stockholders who purchased Knight's securities between November 30, 2011 and August 1, 2012 paid an inflated price. On May 13, 2013, Knight filed a motion to dismiss the amended complaint, which was fully briefed as of August 2013. Before the court rendered a decision on the motion to dismiss, the plaintiff filed a second amended complaint on December 20, 2013, alleging generally that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. More specifically, the plaintiff referred to KCA's October 2013 settlement with the SEC and alleged that the defendants made false and misleading statements concerning Knight's risk management procedures and protocols, available cash and liquidity, Value at Risk and internal controls over financial reporting. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that it and a purported class of Knight's stockholders who purchased Knight's securities between May 10, 2011 and August 1, 2012 (the "Class Period") paid an inflated price. The defendants filed a motion to dismiss the second amended complaint on February 18, 2014 which was fully briefed as of June 5, 2014.

In November 2014, prior to the court’s decision on defendants’ motion to dismiss, the parties participated in a court-ordered mediation. Following the mediation, in December 2014 the parties reached an agreement in principle to settle the Fernandez Action. On February 9, 2015, the parties entered into a Stipulation of Settlement that, if approved by the District Court, will resolve the litigation and result in the Fernandez Action being dismissed with prejudice. Pursuant to an Order filed on March 2, 2015, the District Court preliminarily approved the settlement of the Fernandez Action and set July 1, 2015 for the final settlement hearing. Under the terms of the proposed settlement, Knight has agreed that certain of its insurance carriers would pay $13.0 million to stockholders in the class. The settlement requires no direct payment by any of the defendants. Under the proposed settlement, defendants and various of their related persons and entities will receive a full release of all claims that were or could have been brought in the action as well as all claims that arise out of, are based upon or relate to the allegations, transactions, facts, representations, omissions or other matters involved in the complaints filed in the action or any statement communicated to the public during the Class Period, and the purchase, acquisition or sale of the Company’s stock during the Class Period. The proposed settlement contains no admission of any liability or wrongdoing on the part of the defendants, each of whom continues to deny all of the allegations against them and believes that the claims are without merit. The settlement will not have an effect on the Company’s results of operations because the full amount of the proposed settlement will be paid by the Company’s insurance carriers. As of April 1, 2015, the full amount of the proposed settlement was deposited by the insurance carriers into an escrow account. Though the Company believes the likelihood of approval of the settlement is probable, the Company cannot predict with certainty whether the settlement will be finally approved, and, if the settlement is not finally approved by the Court, the Company believes that it has meritorious defenses to the claims in the operative complaint.

Other Legal and Regulatory Matters

The Company owns subsidiaries including regulated entities that are subject to extensive oversight under federal, state and applicable international laws as well as self-regulatory organization ("SRO") rules. Changes in market structure and the need to remain competitive require constant changes to the Company's systems and order handling procedures. The Company makes these changes while continuously endeavoring to comply with many complex laws and rules.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

Compliance, surveillance and trading issues common in the securities industry are monitored by, reported to, and/or reviewed in the ordinary course of business by the Company's regulators in the U.S. and abroad. As a major order flow execution destination, the Company is named from time to time in, or is asked to respond to a number of regulatory matters brought by U.S. regulators, foreign regulators. SROs, as well actions brought by private plaintiffs, which arise from its business activities. There has recently been an increased focus by regulators on Anti-Money Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on transactions involving microcap securities. The Company is currently the subject of various regulatory reviews and investigations by both U.S. and foreign regulators and SROs, including the SEC, FINRA, FCA and the AMF. In some instances, these matters may rise to a disciplinary action and/or a civil or administrative action.

In addition, there has been an increased focus by Congress, federal and state regulators, the SROs and the media on market structure issues, and in particular, high frequency trading, ATS manner of operations, market fragmentation and complexity, colocation, access to market data feeds and remuneration arrangements, such as payment for order flow and exchange fee structures. The Company has received information requests from various authorities, including the SEC, requesting, among other items, information regarding these market structure matters, which the Company is in the process of responding.

Lease and Contract Obligations

Capital Leases

The Company enters into capitalized lease obligations related to certain computer equipment. These obligations represent drawdowns under a revolving secured lending facility with a single lender. At March 31, 2015, the obligations have a weighted-average interest rate of 3.46% per annum and are on varying 3-year terms. The carrying amounts of the capital leases approximate fair value. The future minimum payments including interest under the capitalized leases at March 31, 2015 consist of (in thousands):



	Minimum Payments
Nine months ended December 31, 2015	$	2,535
2016	2,126
2017	620
Total	$	5,281

The total interest expense related to capital leases for the three months ended March 31, 2015, and 2014 included in the Consolidated Statements Operations is as follows (in thousands):



	For the three months ended March 31,
	2015		2014
Interest expense - Capital leases	$	68	$	88

Operating Leases

The Company leases office space under noncancelable operating leases. Certain office leases contain fixed dollar-based escalation clauses. Rental expense from continuing operations under the office leases was $4.6 million and $5.1 million for the three months ended March 31, 2015 and 2014, respectively, and is included in Occupancy and equipment rentals on the Consolidated Statements of Operations.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The Company leases certain computer and other equipment under noncancelable operating leases. As of March 31, 2015, future minimum rental commitments under all noncancelable office, computer and equipment leases (“Gross Lease Obligations”), and Sublease Income were as follows (in thousands):



	Gross Lease Obligations		Sublease Income		Net Lease Obligations
Nine months ending December 31, 2015	$	21,159	$	3,903	$	17,256
Year ending December 31, 2016	27,934		4,994		22,940
Year ending December 31, 2017	26,395		4,508		21,887
Year ending December 31, 2018	25,550		4,211		21,339
Year ending December 31, 2019	23,671		3,630		20,041
Thereafter through December 31, 2027	64,589		10,244		54,345
Total	$	189,298	$	31,490	$	157,808

Contract Obligations

During the normal course of business, the Company collateralizes certain leases or other contractual obligations through letters of credit or segregated funds held in escrow accounts. At March 31, 2015, the Company had provided letters of credit for $11.6 million, collateralized by cash, as a guarantee for several of its lease obligations and for a trading JV. In the ordinary course of business, KCG also has provided, and may provide in the future, unsecured guarantees with respect to the payment obligations of certain of its subsidiaries under trading, repurchase, financing and stock loan arrangements, as well as under certain leases. There were no compensation guarantees at March 31, 2015 or 2014 that extended beyond the respective year.

20. Financial instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

As a market maker in global equities, fixed income, futures, options, commodities and currencies, the majority of the Company’s securities transactions are conducted as principal or riskless principal with broker dealers and institutional counterparties primarily located in the United States. The Company self-clears substantially all of its U.S. equity and option securities transactions. The Company clears a portion of its securities transactions through third party clearing brokers. Foreign transactions are settled pursuant to global custody and clearing agreements with major U.S. banks. Substantially all of the Company’s credit exposures are concentrated with its clearing brokers, broker dealer and institutional counterparties. The Company’s policy is to monitor the credit standing of counterparties with which it conducts business.

In the normal course of its operations, the Company enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company believes the risk of significant loss is minimal.

Financial instruments sold, not yet purchased, at fair value represent obligations to purchase such securities (or underlying securities) at a future date. The Company may incur a loss if the market value of the securities subsequently increases.

The Company currently has no loans outstanding to any former or current executive officer or director.

21. Business Segments

As of March 31, 2015, the Company's operating segments comprised the following: (i) Market Making; (ii) Global Execution Services; and (iii) Corporate and Other.

The Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making, including trade executions conducted as an equities DMM on the NYSE and NYSE Amex. The Company is an active participant on all major global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a complement to electronic market making, the Company’s cash trading

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

business handles specialized orders and also transacts on the OTC Bulletin Board, marketplaces operated by the OTC Markets Group Inc. and the AIM of the London Stock Exchange.

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, futures, options, and fixed income to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals for transactions that are executed within this segment; however, the Company may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and ETFs; (iii) a fixed income ECN that also offers trading applications; and (iv) an ATS for global equities.

The Company’s revenues, income (loss) from continuing operations before income taxes (“Pre-tax earnings”) and total assets by segment are summarized in the following table (in thousands):



	Market Making		Global Execution Services		Corporate and Other			Consolidated Total
For the three months ended March 31, 2015:
Revenues	$	224,548	$	464,266	$	7,342		$	696,156
Pre-tax earnings	39,340		381,058		(14,270		)	406,128
Total assets	4,700,273		783,501		1,848,277			7,332,051
For the three months ended March 31, 2014:
Revenues	$	277,346	$	87,220	$	19,091		$	383,657
Pre-tax earnings	76,032		2,016		(18,664		)	59,384
Total assets	3,931,292		1,264,245		1,834,739			7,030,276

In the first quarter of 2015, the Company began to allocate costs incurred to operate its self-clearing function to the Market Making and Global Execution Services segments and no longer report it as a distinct business within the Corporate and Other segment. Previously, these support costs were embedded within the internal clearing rates charged by the Corporate and Other segment to the various businesses, which eliminated during consolidation.

Additionally, prior to 2015, funding costs of inventory positions were recorded in the Corporate and Other segment, primarily within Collateralized financing interest on the Consolidated Statements of Operations. These costs were subsequently charged out to the Market Making and Global Execution Services segments primarily through the Interest, net line item, with an equal and offsetting revenue item within the Corporate and Other segment. With the move of the self clearing team to a support function, these third party costs are now charged directly to the businesses within the Market Making and Global Execution Services segments. This shift in how the Company’s self clearing unit is reported has no impact to the Consolidated Statements of Operations, nor any of the individual line items within it. However, on a segment level, this decreases the amount of total revenues reported by the Corporate and Other segment, as it no longer records the offsetting revenue for these third party funding costs. This change in the measurement of segment profitability, which has no impact to the consolidated results, is reported prospectively, and, therefore, is not reflected in the financial results for any period prior to January 1, 2015.

Included in Revenues and Pre-tax earnings within Global Execution Services for the three months ended March 31, 2015 are results of KCG Hotspot up through March 13, 2015, the date of the sale. Also included in these results is a gain related to the sale of KCG Hotspot of $385.0 million in Revenues and $373.8 million in Pre-tax earnings. Additionally, Revenue and Pre-tax earnings from KCG Hotspot and the Company's former FCM business are included in the Global Execution Services segment for the three months ended March 31, 2014.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

22. Subsequent Events

The Company has evaluated subsequent events through the date the consolidated financial statements were issued. The Company did not have any subsequent events requiring adjustment or disclosure in the consolidated financial statements except the following:

Tender Offer

On April 2, 2015, the Company’s Board of Directors authorized an expanded share repurchase program of up to $400.0 million of the Company’s Class A Common Stock and warrants (including the $55.0 million of remaining capacity under the previously authorized repurchase program). As part of this authority, the Company commenced, on May 4, 2015, a “modified Dutch auction” tender offer that will remain open for at least 20 business days. Under the terms of the tender offer, stockholders have the opportunity to sell the Company's Class A Common Stock to the Company at a specified price per share not less than $13.50 and not greater than $14.00. Upon expiration of the tender offer, and based on the number of shares tendered and the prices specified by the tendering stockholders, the Company will determine the lowest price within the range that will allow it to repurchase up to $330.0 million of the Company's Class A Common Stock (or all shares properly tendered and not properly withdrawn if the tender offer is not fully subscribed). All shares purchased by the Company in the tender offer will be purchased at the same price. If the aggregate purchase price for shares tendered at or below the specified purchase price exceeds $330.0 million, allocations will be made on a pro rata basis from stockholders tendering at or below the purchase price. Assuming the offer is fully subscribed, the Company will repurchase a minimum of 23.6 million shares, or 22 percent of its total shares outstanding excluding RSUs as of April 30, 2015. Assuming the tender offer is fully subscribed, approximately $70.0 million in authority will remain in the share repurchase program.

The description above is for informational purposes only, is not a recommendation to buy or sell the Company's Class A Common Stock, and does not constitute an offer to buy or the solicitation to sell shares of KCG Class A Common Stock. The tender offer will be made only pursuant to the Offer to Purchase, Letter of Transmittal and related materials that KCG filed on May 4, 2015 with the SEC. Stockholders should read carefully the Offer to Purchase, Letter of Transmittal and related materials because they contain important information, including the various terms of, and conditions to, the tender offer. Stockholders may obtain a free copy of the tender offer statement on Schedule TO, the Offer to Purchase, Letter of Transmittal and other documents that the Company filed with the SEC at the SEC’s website at www.sec.gov or the investor information section of the Company’s website at www.kcg.com.

Release of Escrow account

As described in Footnote 11 "Debt", on March 13, 2015, the Company funded an escrow account maintained by Bank of New York with $330.2 million, which was an amount sufficient to redeem the 8.25% Senior Secured Notes in full and satisfy and discharge the 8.25% Senior Secured Notes Indenture.

On April 13, 2015, the escrow amount of $330.2 million was released and the required amount was paid out to the 8.25% Senior Secured Notes holders and satisfied and discharged the Senior Secured Notes Indenture. As of April 13, 2015, the Company's Debt was approximately $495.0 million.

With the release of the $330.2 million escrow account, charges for the make-whole premium of $16.5 million were recognized, and capitalized debt costs of $8.5 million associated with the 8.25% Senior Secured Notes were written off in April 2015.



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

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein (“MD&A”), “Quantitative and Qualitative Disclosures About Market Risk” in Part I, Item 3, “Legal Proceedings” and "Risk Factors" in Part II and the documents incorporated by reference herein may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could” or “may,” or by variations of such words or by similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about KCG Holdings, Inc.’s (the “Company” or “KCG”) industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with: (i) the strategic business combination (the "Mergers") of Knight Capital Group, Inc. (“Knight”) and GETCO Holding Company, LLC (“GETCO”) including, among other things, (a) difficulties and delays in integrating the Knight and GETCO businesses or fully realizing cost savings and other benefits, (b) the inability to sustain revenue and earnings growth, and (c) customer and client reactions to the Mergers; (ii) the August 1, 2012 technology issue that resulted in Knight’s broker dealer subsidiary sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market and the impact to Knight’s business as well as actions taken in response thereto and consequences thereof; (iii) the sales of KCG's reverse mortgage origination and securitization business, KCG's futures commission merchant and KCG Hotspot; (iv) changes in market structure, legislative, regulatory or financial reporting rules, including the increased focus by regulators, the New York Attorney General, Congress and the media on market structure issues, and in particular, the scrutiny of high frequency trading, alternative trading systems, market fragmentation, colocation, access to market data feeds, and remuneration arrangements such as payment for order flow and exchange fee structures; (v) past or future changes to KCG's organizational structure and management; (vi) KCG's ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by KCG's customers and potential customers; (vii) KCG's ability to keep up with technological changes; (viii) KCG's ability to effectively identify and manage market risk, operational and technology risk, legal risk, liquidity risk, reputational risk, counterparty and credit risk, international risk, regulatory risk, and compliance risk; (ix) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; (x) the effects of increased competition and KCG's ability to maintain and expand market share; and (xi) the completion of the tender offer commenced by KCG on May 4, 2015. The above list is not exhaustive. Because forward-looking statements involve risks and uncertainties, the actual results and performance of the Company may materially differ from the results expressed or implied by such statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made herein. Readers should carefully review the risks and uncertainties disclosed in the Company’s reports with the U.S. Securities and Exchange Commission (“SEC”), including those detailed under “Certain Factors Affecting Results of Operations” in this MD&A and in “Risk Factors” in Part II, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time. This information should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto contained in this Quarterly Report on Form 10-Q, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time.

Executive Overview

We are a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and time zones. The Company combines advanced technology with specialized client service across market making, agency execution and trading venues and also engages in principal trading via exchange-based electronic market making. KCG has multiple access points to trade global equities, options, futures, fixed income, currencies and commodities via voice or automated execution.

KCG was formed as a result of a strategic business combination (the “Mergers”) of Knight Capital Group, Inc.(“Knight”) and GETCO Holding Company, LLC (“GETCO”) in July 2013.

Results of Operations

As of March 31, 2015, our operating segments comprised the following:

•

Market Making— Our Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, we commit capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making, including trade executions conducted as an equities Designated Market Maker (“DMM”) on the New York Stock Exchange ("NYSE") and NYSE Amex Equities ("NYSE Amex"). We are an active participant on all major global equity and futures exchanges and also trade on substantially all domestic electronic options exchanges. As a complement to electronic market making, our cash trading business handles specialized orders and also transact on the OTC Bulletin Board, marketplaces operated by the OTC Markets Group Inc. and the Alternative Investment Market (“AIM”) of the London Stock Exchange.

•

Global Execution Services— Our Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, futures, options, and fixed income to institutions, banks and broker dealers. We generally earn commissions as an agent between principals for transactions that are executed within this segment; however, we may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income electronic communications network ("ECN") that also offers trading applications; and (iv) an alternative trading system ("ATS") for global equities.

•

Corporate and Other— Our Corporate and Other segment invests principally in strategic financial services-oriented opportunities; allocates, deploys and monitors all capital; and maintains corporate overhead expenses and all other income and expenses that are not attributable to the other segments. Our Corporate and Other segment also contains functions that support the Company’s other segments.

Management from time to time conducts a strategic review of our businesses and evaluates their potential value in the marketplace relative to their current and expected returns. To the extent management and our Board of Directors determine a business may return a higher value to stockholders, or is no longer core to our strategy, the Company may divest or exit such business.

In November 2013, we sold Urban Financial of America, LLC, (“Urban”), the reverse mortgage origination and securitization business that was previously owned by Knight to an investor group.

In November 2014, we sold certain assets and liabilities related to our Futures Commission Merchant (“FCM”) business to Wedbush Securities Inc.

In March 2015, we completed the sale of KCG Hotspot to BATS Global Markets, Inc. ("BATS"). The Company and BATS have agreed to share certain tax benefits, which could result in future payments to us of up to approximately $70.0 million in the three-year period following the close. The additional potential payments were recorded in Other assets on the Consolidated Statements of Financial Condition as of March 31, 2015, at their estimated fair value of $62.1 million. A portion of the additional payments is contingent on KCG Hotspot achieving various levels of trading volumes through June 2015 and BATS generating sufficient taxable net income to receive the tax benefits. We recorded a gain on sale of $385.0 million which is recorded as Investment income and other, net on the Consolidated Statements of Operations for the three months ended March 31, 2015. The net gain on the sale of Hotspot was $373.8 million including direct costs associated with the sale which comprised professional fees of $6.7 million and compensation of $4.5 million, which are recorded in Professional fees and Employee compensation and benefits, respectively, on the Consolidated Statements of Operations for the three months ended March 31, 2015.

The results of the business and gains on sale of the FCM and KCG Hotspot are included in the Global Execution Services segment and continuing operations, up through the dates of their respective sales. For additional information, see Footnote 3 "Sales of Businesses" to the Company's Consolidated Financial Statements included in Part I, Item 1 "Financial Statements (Unaudited)" herein.

The following table sets forth: (i) Revenues, (ii) Expenses and (iii) Pre-tax (loss) earnings from continuing operations of our segments and on a consolidated basis (in thousands):



	For the three months ended March 31,
	2015			2014
Market Making
Revenues	$	224,548		$	277,346
Expenses	185,208			201,314
Pre-tax earnings	39,340			76,032
Global Execution Services
Revenues	464,266			87,220
Expenses	83,208			85,204
Pre-tax earnings	381,058			2,016
Corporate and Other
Revenues	7,342			19,091
Expenses	21,612			37,755
Pre-tax loss	(14,270		)	(18,664		)
Consolidated
Revenues	696,156			383,657
Expenses	290,028			324,273
Pre-tax earnings	$	406,128		$	59,384

Totals may not add due to rounding.

In the first quarter of 2015, we began to allocate costs incurred to operate our self-clearing function to the Market Making and Global Execution Services segments and no longer report it as a distinct business within the Corporate and Other segment. Previously, these support costs were embedded within the internal clearing rates charged by the Corporate and Other segment to the various businesses, which eliminated during consolidation.

Additionally, prior to 2015, funding costs of inventory positions remained in the Corporate and Other segment, primarily within Collateralized financing interest on the Consolidated Statements of Operations. These costs were subsequently charged out to the Market Making and Global Execution Services segments primarily through the Interest, net line item, with an equal and offsetting revenue item within the Corporate and Other segment. With the move of the self clearing team to a support function, these third party costs are now charged directly to the businesses within the Market Making and Global Execution Services segments. This shift in how our self clearing unit is reported has no impact to the Consolidated Statements of Operations, nor any of the individual line items within it. However, on a segment level, this decreases the amount of total revenues reported by the Corporate and Other segment, as it no longer records the offsetting revenue for these third party funding costs. This change in the measurement of segment profitability, which has no impact to the consolidated results, is reported prospectively and, therefore, is not reflected in the financial results for any period prior to January 1, 2015.

Reconciliation of GAAP Revenues and Pre-Tax Earnings to Non-GAAP Revenues and Pre-Tax Earnings

We believe that certain non-GAAP financial presentations, when taken into consideration with the corresponding GAAP financial presentations, are important in understanding our operating results. The non-GAAP adjustments incorporate the effects of gains related to the sale of KCG Hotspot as well as the professional fees and other compensation costs associated with it; income resulting from the merger of BATS and Direct Edge, net; and net lease loss accruals.

We believe the presentation of results excluding these adjustments provides meaningful information to stockholders and investors as they provide a useful summary of our results of operations for the three months ended March 31, 2015 and 2014.

The following tables provide a full reconciliation of GAAP to non-GAAP revenues ("adjusted revenues") and pre- tax results ("adjusted pre-tax earnings") for the three months ended March 31, 2015 and 2014 (in thousands):



Three months ended March 31, 2015	Market Making		Global Execution Services			Corporate and Other		Consolidated
Reconciliation of GAAP Revenues to Non-GAAP Revenues:
GAAP Revenues	$	224,548	$	464,266		$	7,342	$	696,156
Gain on sale of KCG Hotspot	—		(385,026		)	—		(385,026		)
Adjusted revenues	$	224,548	$	79,240		$	7,342	$	311,130

Totals may not add due to rounding



	Market Making		Global Execution Services			Corporate and Other			Consolidated
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:
GAAP Income (loss) from continuing operations before income taxes	$	39,340	$	381,058		$	(14,270	)	$	406,128
Gain on sale of KCG Hotspot	—		(385,026		)	—			(385,026		)
Professional fees related to the sale of KCG Hotspot	—		6,736			—			6,736
Compensation expense related to the sale of KCG Hotspot	—		4,457			—			4,457
Lease loss accrual, net	—		—			132			132
Adjusted pre-tax earnings	$	39,340	$	7,225		$	(14,138	)	$	32,427

Totals may not add due to rounding



Three months ended March 31, 2014	Market Making		Global Execution Services		Corporate and Other			Consolidated
Reconciliation of GAAP Revenues to Non-GAAP Revenues:
GAAP Revenues	$	277,346	$	87,220	$	19,091		$	383,657
Income resulting from the merger of BATS and Direct Edge, net	—		—		(9,644		)	(9,644		)
Adjusted revenues	$	277,346	$	87,220	$	9,447		$	374,013

Totals may not add due to rounding



	Market Making		Global Execution Services		Corporate and Other			Consolidated
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:
GAAP Income (loss) from continuing operations before income taxes	$	76,032	$	2,016	$	(18,664	)	$	59,384
Writedown of capitalized debt costs	—		—		7,557			7,557
Income resulting from the merger of BATS and Direct Edge, net	—		—		(9,644		)	(9,644		)
Lease loss accrual, net	359		—		(93		)	266
Adjusted pre-tax earnings	$	76,391	$	2,016	$	(20,844	)	$	57,563

Totals may not add due to rounding

Consolidated adjusted revenues for the three months ended March 31, 2015 decreased $62.9 million from the same period a year ago. Consolidated adjusted pre-tax earnings from continuing operations for the three months ended March 31, 2015 was $32.4 million as compared to $57.6 million in 2014.

The Company’s net revenues, which we define as adjusted revenues, less execution and clearance fees, payments for order flow, and collateralized financing interest (“adjusted net revenues”) were $219.0 million for the three months ended March 31, 2015, compared to $270.3 million for the comparable period in 2014.

Adjusted pre-tax earnings for the three months ended March 31, 2015 exclude net non-GAAP adjustments totaling a benefit of $373.7 million. These items primarily comprise the gain related to the sale of KCG Hotspot offset, in part, by professional fees and compensation expense related to the sale and net lease loss accruals. Adjusted pre-tax earnings for the three months ended March 31, 2014 exclude net non-GAAP adjustments totaling a net benefit of $1.8 million comprising a gain on the BATS and Direct Edge Holdings LLC ("Direct Edge") merger offset, in part by writedowns

of capitalized debt costs. A detailed breakdown of these items can be found in the Reconciliation of GAAP pre-tax to Non-GAAP pre-tax earnings tables above.

The changes in our adjusted pre-tax earnings by segment from the three months ended March 31, 2014 are summarized as follows:


•	Market Making— Our adjusted pre-tax earnings from Market Making for the three months ended March 31, 2015 was $39.3 million, compared to adjusted pre-tax earnings of $76.4 million for the comparable period in 2014. Results for the three months ended March 31, 2015 were affected by lower market volumes and volatility as well as by the effects of high levels of competition.

•

Global Execution Services— Our adjusted pre-tax earnings from Global Execution Services for the three months ended March 31, 2015 was $7.2 million, compared to adjusted pre-tax earnings of $2.0 million for the comparable period in 2014. The results for the three months ended March 31, 2015 were aided by improved results and improved client activity from businesses such as KCG BondPoint and KCG EMS, which includes Knight Direct and GETAlpha as well as solid results from our Institutional Agency businesses including our ETF franchise offset, in part, by a decrease in results from KCG Hotspot, which was sold before the end of the quarter.


•	Corporate and Other— Our adjusted pre-tax earnings from our Corporate and Other segment was a loss of $14.1 million for the three months ended March 31, 2015 compared to a loss of $20.8 million for the comparable period in 2014. The decrease is due to the reporting of self clearing as a support function as described earlier in this MD&A.

Certain Factors Affecting Results of Operations

We may experience significant variation in our future results of operations. Fluctuations in our future performance may result from numerous factors, including, among other things, global financial market conditions and the resulting competitive, credit and counterparty risks; cyclicality, seasonality and other economic conditions; the value of our securities positions and other financial instruments and our ability to manage the risks attendant thereto; the volume, notional dollar value traded and volatility levels within the core markets where our market making and trade execution businesses operate; the composition, profile and scope of our relationships with institutional and broker dealer clients; the performance, size and volatility of our direct-to-client market making portfolios; the performance, size and volatility of our non-client exchange-based trading activities; the overall size of our balance sheet and capital usage; impairment of goodwill and/or intangible assets; the performance of our global operations, trading technology and technology infrastructure; the effectiveness of our self-clearing and futures platforms and our ability to manage risks related thereto; the availability of credit and liquidity in the marketplace; our ability to prevent erroneous trade orders from being submitted due to technology or other issues (such as the events that affected Knight on August 1, 2012) and avoiding the consequences thereof; the performance, operation and connectivity to various market centers; our ability to manage personnel, compensation, overhead and other expenses, including our occupancy expenses under our office leases and expenses and charges relating to legal and regulatory proceedings; the strength of our client relationships; changes in payments for order flow; changes to execution quality and changes in clearing, execution and regulatory transaction costs; interest rate movements; the addition or loss of executive management, sales, trading and technology professionals; geopolitical, legislative, legal, regulatory and financial reporting changes specific to financial services and global trading; legal or regulatory matters and proceedings; the Mergers and the costs and integration associated therewith; the amount, timing and cost of business divestitures/acquisitions or capital expenditures; the integration, performance and operation of acquired businesses; the incurrence of costs associated with acquisitions and dispositions; investor sentiment; and technological changes and events.

Such factors may also have an impact on our ability to achieve our strategic objectives, including, without limitation, increases in market share, growth and profitability in the businesses in which we operate. If demand for our services declines or our performance deteriorates significantly due to any of the above factors, and we are unable to adjust our cost structure on a timely basis, our operating results could be materially and adversely affected. As a result of the foregoing factors, period-to-period comparisons of our revenues and operating results are not necessarily meaningful and such comparisons cannot be relied upon as indicators of future performance. There also can be no assurance that we will be able to continue to achieve the level of revenues that we have experienced in the past or that we will be able to improve our operating results.

Trends

Global Economic Trends

Our businesses are affected by a number of economic, political and market factors that could affect global financial markets. These factors and the existence of transparent, efficient and liquid financial markets, the level of trading volumes and volatility in such markets could have a material adverse effect on our business, financial condition and results of operations.

During the three months ended March 31, 2015, trade volume and volatility levels across equity markets decreased from the comparable prior year period as did similar trading metrics generally across all products we trade. Overall, there are still concerns about global stability and growth, inflation and declining asset values.

Trends Affecting Our Company

We believe that our businesses are affected by the aforementioned global economic trends as well as more specific trends. Some of the specific trends that impact our operations, financial condition and results of operations are:

•

Clients continue to focus on statistics measuring the quality of equity executions (including speed of execution and amount of price improvement). In an effort to improve the quality of their executions as well as increase efficiencies, market makers continue to increase the level of sophistication and automation within their operations and the extent of price improvement they provide to their clients. The continued focus on execution quality has resulted in greater competition in the marketplace, which, along with market structure changes and market conditions, has negatively impacted the performance of our trading models and margin metrics and those of other market making firms.


•	Market Making and Global Execution Services transaction volumes executed by clients have fluctuated over the past few years due to retail and institutional investor sentiment, market conditions and a variety of other factors. Market Making and Global Execution Services transaction volumes may not be sustainable and are not predictable.

•

Over the past several years exchanges have become far more competitive, and market participants have created ATS, ECNs and other execution venues which compete with the OTC and listed trading venues. Initiatives by these and other market participants could draw market share away from the Company, and thus negatively impact our business. In addition, while there is the possibility for consolidation among trading venues, there are many new entrants into the market, including ATS, Multilateral Trading Facilities, systematic internalizers, dark liquidity pools, high frequency trading firms and market making firms competing for retail and institutional order flow. Further, many broker dealers offer their own internal crossing networks. These factors continue to create further fragmentation and competition in the marketplace.

•

Market structure changes, competition, market conditions and a steady increase in electronic trading have resulted in a reduction in institutional commission rates and volumes which may continue in the future. Additionally, many institutional clients allocate commissions to broker dealers based not only on the quality of executions, but also in exchange for research or participation in soft dollar and commission recapture programs.

•

There continues to be growth in electronic trading, including direct market access platforms, algorithmic and program trading, high frequency trading ECNs, ATS and dark liquidity pools. In addition, electronic trading continues to expand to other asset classes, including options, currencies and fixed income. The expansion of electronic trading may result in the growth of innovative electronic products and competition for order flow and may further reduce demand for traditional institutional voice services.

•

Market structure changes, competition and technology advancements have led to an industry focus on increasing execution speeds and a dramatic increase in electronic message traffic. Increases in execution speeds and message traffic require additional expenditures for technology infrastructure and place heavy strains on the technology resources, bandwidth and capacities of market participants. Additionally, the expansion by market participants into trading of non-equities products offers similar challenges.


•	There has been increased scrutiny of the capital markets industry by the regulatory and legislative authorities, both in the U.S. and abroad, which could result in increased regulatory costs in the future. As has been widely reported, there has been an increased focus by securities regulators, the New York Attorney General,

Congress and the media on market structure issues, and, in particular, high frequency trading, ATS manner of operations, market fragmentation, public disclosures around execution protocols, market structure complexity, colocation, access to market data feeds and remuneration arrangements such as payment for order flow and exchange fee structures. New legislation or new or modified regulations and rules could occur in the future. Members of the U.S. Congress continue to ask the SEC and other regulators to closely review the financial markets regulatory structure and make the changes necessary to insure the rule framework governing the U.S. financial markets is comprehensive and complete. The SEC and other regulators, both in the U.S. and abroad, have adopted and will continue to propose and adopt rules and take other policy actions where necessary, on a variety of marketplace issues – including, but not limited to: high frequency trading, market fragmentation and complexity, transaction taxes, off-exchange trading, dark liquidity pools, internalization, post-trade attribution, colocation, market access, short sales, consolidated audit trails, policies and procedures relating to technology controls and systems, optimal tick sizes, and market volatility rules (including, Regulation Systems Compliance and Integrity commonly referred to as, Regulation SCI). For example, on May 6, 2015, the SEC approved a proposal by the national securities exchanges and FINRA for a two-year pilot program that would widen the minimum tick sizes for securities of some smaller companies, including a “trade-at” requirement that could cause some trading to shift away from dark liquidity pools.


•	There could be continued fluctuations, including possible substantial increases, in Section 31 fees and fees imposed by other regulators. In addition, the Depository Trust & Clearing Corporation ("DTCC") and National Securities Clearing Corporation ("NSCC") are considering proposals which could require substantial increases in clearing margin, liquidity and collateral requirements.


•	The Dodd-Frank Act affects nearly all financial institutions that operate in the U.S. While the weight of the Dodd-Frank Act falls more heavily on large, complex financial institutions, smaller institutions will continue to face a more complicated and expensive regulatory framework.


•	There has recently been an increased focus by regulators on Anti-Money Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on transactions involving microcap securities.

Income Statement Items

The following section briefly describes the key components of, and drivers to, our significant revenues and expenses.

Revenues

Our revenues consist principally of Trading revenues, net and Commissions and fees from all of our business segments.

Trading profits and losses on principal transactions primarily relate to our global market making activities and are included within Trading revenues, net. These revenues are primarily affected by trading volumes, including the number and dollar value of equities, fixed income, options, futures and FX trades; volatility in the marketplace; the performance of our direct-to-client and non-client trading models; our ability to derive trading gains by taking proprietary positions; changes in our execution standards and execution quality that we provide to customers; our market share; the mix of order flow from broker dealer and institutional clients; client service and relationships; and regulatory changes and evolving industry customs and practices.

Revenues on transactions for which we charge explicit commissions or commission equivalents, which include the majority of our institutional client orders and commissions on futures transactions, prior to the sale of our FCM, are included within Commissions and fees. Also included in Commissions and fees are volume based fees earned from providing liquidity to other trading venues. Commissions and fees are primarily affected by changes in our equity, fixed income, futures and, prior to the sale of KCG Hotspot, foreign exchange transaction volumes with institutional clients; client relationships; changes in commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to other trading venues; and the level of our soft dollar and commission recapture activity.

Interest, net is earned from our cash held at banks, cash held in trading accounts at third party clearing brokers and from collateralized financing arrangements, such as securities borrowing. The Company’s third party clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions. Net interest is primarily affected by interest rates; the level of cash balances held at banks and third party clearing brokers including those held for customers; the level

of our securities borrowing activity; our level of securities positions in which we are long compared to our securities positions in which we are short; and the extent of our collateralized financing arrangements.

Investment income and other, net primarily represents returns on our strategic and deferred compensation investments. Such income or loss is primarily affected by the performance and activity of our strategic investments.

Expenses

Employee compensation and benefits expense primarily consists of salaries and wages paid to all employees; performance-based compensation, which includes compensation paid to sales personnel and incentive compensation paid to other employees based on individual performance and the performance of our business; employee benefits; and stock and unit-based compensation. Employee compensation and benefits expense fluctuates, for the most part, based on changes in our revenues and business mix, profitability and the number and mix of employees. Compensation for certain employees engaged in sales activities is determined primarily based on a percentage of their gross revenues net of certain transaction-based expenses.

Execution and clearance fees primarily represent fees paid to third party clearing brokers for clearing equities, options and fixed income transactions; transaction fees paid to Nasdaq and other exchanges, clearing organizations and regulatory bodies; and fees paid to third parties, primarily for executing, processing and settling trades on the NYSE, other exchanges, ECNs and other third party execution destinations. Execution and clearance fees primarily fluctuate based on changes in trade and share volume, execution strategies, rate of clearance fees charged by clearing brokers and rate of fees paid to ECNs, exchanges, other third party execution destinations and certain regulatory bodies.

Communications and data processing expense primarily consists of costs for obtaining market data, connectivity, telecommunications services, colocation and systems maintenance.

Payments for order flow primarily represent payments to broker dealer clients, in the normal course of business, for directing to us their order flow in U.S. equities and options. Payments for order flow will fluctuate as we modify our rates and as our percentage of clients whose policy is not to accept payments for order flow varies. Payments for order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.

Depreciation and amortization expense results from the depreciation of fixed assets, which consist of computer hardware, furniture and fixtures, and the amortization of purchased software, capitalized software development costs, acquired intangible assets and leasehold improvements. We depreciate our fixed assets and amortize our intangible assets on a straight-line basis over their expected useful lives. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease.

Debt interest expense consists primarily of costs associated with our debt and capital lease obligations.

Collateralized financing interest consists primarily of costs associated with financing arrangements such as securities lending and sale of financial instruments under our agreements to repurchase.

Occupancy and equipment rentals consist primarily of rent and utilities related to leased premises and office equipment.

Professional fees consist primarily of legal, accounting, consulting, and other professional fees.

Business development consists primarily of costs related to sales and marketing, conferences and client relationship management.

Writedown of capitalized debt costs represents charges recorded as the result of the repayment of our debt.

Lease loss accrual consist primarily of costs associated with excess office space.

Other expenses include regulatory fees, corporate insurance, employment fees, amortization of capitalized debt costs and general office expense.

Three Months Ended March 31, 2015 and 2014

Revenues

Market Making



	For the three months ended March 31,
	2015			2014			Change			% of Change
Trading revenues, net (thousands)	$	196,762		$	254,631		$	(57,869	)	(22.7	)%
Commissions and fees (thousands)	31,186			28,168			3,017			10.7	%
Interest, net and other (thousands)	(3,399		)	(5,453		)	2,054			N/M
Total revenues from Market Making (thousands)	$	224,548		$	277,346		(52,798		)	(19.0	)%
U.S. equity Market Making statistics:
Average daily dollar volume traded ($ millions)	31,025			27,321			3,704			13.6	%
Average daily trades (thousands)	3,947			3,958			(11		)	(0.3	)%
NYSE and Nasdaq shares traded (millions)	933			862			71			8.2	%
OTC Bulletin Board and OTC Market shares traded (millions)	4,115			14,045			(9,930		)	(70.7	)%
Average revenue capture per U.S. equity dollar value traded(bps)	0.92			1.26			(0.34		)	(27.0	)%

Totals may not add due to rounding.

N/M - Not meaningful

Total revenues from the Market Making segment, which primarily comprises Trading revenues, net and Commissions and fees from our domestic businesses, were $224.5 million for the three months ended March 31, 2015 and $277.3 million for the comparable period in 2014. Revenues for the first quarter of 2015 were affected by decreased overall market volumes and volatility which affected the performance of both our direct-to-client and non-client trading strategies and also due to increased competition and an increased client focus on execution quality including price improvement, which gives our clients better prices on trades, but lowers our revenues earned on trades.

We calculate average revenue capture per U.S. equity market making dollar value traded (“revenue capture”) to measure the revenue that we earn per dollar traded within U.S. equity market making. Average revenue capture per U.S. equity dollar traded was 0.92 basis points ("bps") in the first quarter of 2015, down 27.0% from 1.26 bps from the first quarter of 2014. The revenue capture metric is calculated as the total of net domestic market making trading revenues plus volume based fees from providing liquidity to other trading venues (included in Commissions and fees), (collectively “U.S. Equity Market Making Revenues”), divided by the total dollar value of the related equity transactions for the relevant period. U.S. Equity Market Making Revenues were $174.7 million and $210.0 million for the three months ended March 31, 2015 and 2014, respectively.

Revenue capture is a calculated metric that is impacted in a similar manner to the components that make it up including market volumes and volatility and the performance of our equity trading strategies.

Global Execution Services



	For the three months ended March 31,
	2015			2014			Change			% of Change
Commissions and fees (thousands)	$	68,775		$	84,088		$	(15,313	)	(18.2	)%
Trading revenues, net (thousands)	12,029			3,749			8,280			220.9	%
Interest, net and other (thousands)	(1,564		)	(618		)	(946		)	N/M
Total adjusted revenues from Global Execution Services (thousands)	$	79,240		$	87,220		(7,980		)	(9.1	)%
Average daily KCG algorithmic trading and order routing U.S. equities shares traded (millions)	299.0			281.0			18.0			6.4	%
Average daily KCG BondPoint fixed income par value traded ($ millions)	145.8			144.2			1.6			1.1	%
Average daily KCG Hotspot FX notional foreign exchange dollar value traded ($ billions)*	31.1			32.2			(1.1		)	(3.4	)%

Totals may not add due to rounding.

N/M - Not meaningful

* For Q1 2015, represents KCG Hotspot ADV from January 1, 2015 to March 12, 2015.

Total adjusted revenues from the Global Execution Services segment, which primarily comprises Commissions and fees and, to a lesser extent, Trading revenues, net from agency execution activity and activity on our venues were $79.2 million for the three months ended March 31, 2015 and $87.2 million for the comparable period in 2014. Revenues were primarily affected by lower volumes and revenues from our institutional equity sales trading, algorithmic trading and order routing business as well as the sale of KCG Hotspot offset, in part, by the improved performance of our ETF franchise.

Corporate and Other



	For the three months ended March 31,
	2015		2014		Change			% of Change
Total adjusted revenues from Corporate and Other (thousands)	$	7,342	$	9,447	$	(2,105	)	(22.3	)%

Total adjusted revenues from the Corporate and Other segment, which primarily represents gains or losses on strategic investments were $7.3 million for the three months ended March 31, 2015 and $9.4 million for the comparable period in 2014. Adjusted revenues for 2014 include interest income from our stock borrow activity, which , as described earlier in this MD&A, is now directly reported within the Market Making and Global Execution Services segments.

Expenses

Employee compensation and benefits expense fluctuates, for the most part, based on changes in our business mix, adjusted net revenues, profitability and the number and mix of employees. Employee compensation and benefits expense was $106.7 million for the three months ended March 31, 2015 and $122.3 million for the comparable period in 2014. The decrease on a dollar basis was primarily due to the decreased headcount as well as lower accruals for discretionary bonuses as a result of decreased operating profitability. Excluding compensation expense related to the sale of KCG Hotspot of $4.5 million, employee compensation and benefits was $102.3 million or 46.7% of adjusted net revenues for the first quarter of 2015. For the comparable period in 2014, employee compensation was 45.3% of adjusted net revenues.

The number of full time employees decreased to 1,038 at March 31, 2015 as compared to 1,230 at March 31, 2014. The decrease was primarily due to the reduction in workforce completed in 2014 and the sale of KCG Hotspot and our FCM business.

Execution and clearance fees were $68.5 million for the three months ended March 31, 2015 and $75.5 million for the comparable period in 2014. Execution and clearance fees fluctuate based on changes in transaction volumes, shift in business mix, regulatory fees and operational efficiencies and scale. The decrease was primarily due to a decrease in regulatory fees and shares traded. Execution and clearance fees were 22.0% of adjusted revenues for the three months ended March 31, 2015 and 20.2% for the comparable period in 2014.

Communications and data processing expenses were $33.8 million for the three months ended March 31, 2015 and $36.8 million for the comparable period in 2014. The decrease in communications and data processing expense

primarily relates to lower market data and connectivity expenses impacted by headcount reductions as well as cost cutting throughout the integration in 2014.

Depreciation and amortization expense results from the depreciation of fixed assets and the amortization of purchased software, capitalized software development costs, acquired intangible assets and leasehold improvements. Depreciation and amortization expense was $20.6 million for the three months ended March 31, 2015 and $20.1 million for the comparable period in 2014. The increase relates to additional depreciation as a result of purchases of fixed assets and additional capitalized software costs offset, in part, by the reduction of intangible expense due to the sale of KCG Hotspot.

Payments for order flow fluctuate as a percentage of revenue due to changes in volume, client and product mix, client preference, profitability, and competition. Payments for order flow were $15.2 million for the three months ended March 31, 2015 and $22.0 million for the comparable period in 2014. The variance is primarily a result of client preference and lower share volumes. As a percentage of adjusted revenues, Payments for order flow were 4.9% for the three months ended March 31, 2015 and 5.9% for the comparable period in 2014.

Professional fees were $11.2 million for the three months ended March 31, 2015 and $5.4 million for the comparable period in 2014. Excluding the $6.7 million in legal, consulting and investment banking fees related to the sale of KCG Hotspot, professional fees were $4.4 million for the three months ended March 31, 2015. Professional fees decreased due to a decrease in legal, consulting and auditing fees compared to the prior year.

Debt interest expense was $8.5 million for the three months ended March 31, 2015 and $9.5 million for the comparable period in 2014. Interest expense decreased as a result of the pay down of the remaining $235.0 million of the First Lien Credit Facility in the first half of 2014 including $185.0 million paid down during the first quarter of 2014 offset, in part, by the issuance of $500.0 million in 6.785% Senior Secured Notes in March 2015.

Collateralized financing interest expense was $8.5 million for the three months ended March 31, 2015 and $6.2 million for the comparable period in 2014. Collateralized financing interest expense relates to the funding of our securities positions through stock loan and repurchase agreements. The increase is a result of additional funding being secured from additional parties.

Lease loss accrual, net of $0.1 million for the three months ended March 31, 2015 primarily relates to adjustments to the previous calculations of lease losses due to actual and updated assumptions. Lease loss accrual, net of $0.3 million for the three months ended March 31, 2014 primarily relates to a writedown of excess real estate as we consolidated several offices located in the same city.

Writedown of capitalized debt costs for the three months ended March 31, 2014 was $7.6 million and relates to the repayment of $185.0 million principal of the First Lien Credit Facility.

All other expenses were $17.0 million for the three months ended March 31, 2015 and $18.6 million for the comparable period in 2014. The decrease primarily relates to the decrease in Occupancy and equipment rental costs.

Our effective tax rate for the three months ending March 31, 2015 and 2014 from continuing operations of 38.6% and 37.8%, respectively, differed from the federal statutory rate of 35% primarily due to state and local taxes and the effect of nondeductible expenses including certain compensation and meals and entertainment.

Financial Condition, Liquidity and Capital Resources

Financial Condition

We have historically maintained a highly liquid balance sheet, with a substantial portion of our total assets consisting of cash, highly liquid marketable securities and short term receivables. As of March 31, 2015 and December 31, 2014, we had total assets of $7.33 billion and $6.83 billion, respectively, a significant portion of which consisted of cash or assets readily convertible into cash as follows (in thousands):



	March 31, 2015		December 31, 2014
Cash and cash equivalents	$	990,542	$	578,768
Financial instruments owned, at fair value:
Equities	2,366,225		2,479,910
Listed options	87,412		144,586
Debt securities	187,314		82,815
Collateralized agreements:
Securities borrowed	1,685,850		1,632,062
Receivable from brokers, dealers and clearing organizations⁽¹⁾	756,160		1,095,025
Total cash and assets readily convertible to cash	$	6,073,503	$	6,013,166

* Totals may not add due to rounding.

⁽¹⁾ Excludes $162.3 million and $93.8 million of securities failed to deliver as of March 31, 2015 and December 31, 2014, respectively.

Substantially all of the non-cash amounts disclosed in the table above can be liquidated into cash within five business days under normal market conditions, however, the liquidated values may be subjected to haircuts during distressed market conditions.

Cash and cash equivalents increased as a result of our new debt offering of $500.0 million and the sale of KCG Hotspot offset, in part, by the repayment of our convertible note and placing $330.2 million into an escrow account to fund the redemption of our 8.25% Senior Secured Notes as described in Footnote 11 "Debt" included in Part I, Item 1 "Financial Statements" of this Form 10-Q.

Financial instruments owned principally consist of equities and listed options that trade on the NYSE, NYSE Amex and NYSE Arca markets, Nasdaq and on the OTC Bulletin Board as well as U.S. government and non-U.S. government obligations and corporate debt securities, which include short-term bond funds. These financial instruments are used to generate revenues in our Market Making and Global Execution Services segments.

Securities borrowed represent the value of cash or other collateral deposited with securities lenders to facilitate our trade settlement process.

Receivable from brokers, dealers and clearing organizations include interest bearing cash balances held with third party clearing brokers, including, or net of, amounts related to securities transactions that have not yet reached their contracted settlement date, which is generally within three business days of the trade date.

As of March 31, 2015, $1.46 billion of equities have been pledged as collateral to third-parties under financing arrangements. As of December 31, 2014, $1.52 billion of equities were pledged as collateral to third-parties under financing arrangements.

Intangible assets were lower at March 31, 2015 primarily due to the amortization of our intangible assets, offset by capitalized software.

Other assets primarily comprises deposits, prepaids and other miscellaneous receivables.

The change in the balances of financial instruments owned, receivable from brokers, dealers and clearing organizations and securities borrowed are all consistent with activity of our trading strategies. Our securities inventory fluctuates based on trading volumes, market conditions, trading strategies utilized and our pre-determined risk limits.

Total liabilities were $5.55 billion at March 31, 2015 and $5.31 billion at December 31, 2014. Similar to the asset side, the change in Financial instruments sold, not yet purchased, Collateralized financings and Payable to brokers, dealers and clearing organizations is related to activity of our trading strategies. As noted throughout the document, we issued new debt while repaying our convertible note during the first quarter 2015. The “Liquidity and Capital Resources” section below includes a detailed description of the debt. The decrease in our Accrued compensation expense is due to the cash payment of 2014 bonus. The balance in Income taxes payable is a result of gains on the sale of KCG Hotspot. At December 31, 2014, we had a net income taxes receivable balance, which was included in Other assets.

Equity increased by $260.7 million, from $1.52 billion at December 31, 2014 to $1.78 billion at March 31, 2015. The increase in equity from December 31, 2014 was primarily a result of our gain on sale of KCG Hotspot, other earnings and stock-based compensation activity during the first quarter of 2015, offset by our stock repurchase activity.

Liquidity and Capital Resources

We have financed our business primarily through cash generated by operations, sales of businesses, a series of debt transactions and the issuance of equity.

At March 31, 2015, we had net current assets, which consist of net assets readily convertible into cash including assets segregated or held in separate accounts under federal and other regulations, less current liabilities, of approximately $1.52 billion.

Income from continuing operations, net of tax was $249.3 million during the three months ended March 31, 2015 compared to $36.9 million during the three months ended March 31, 2014. Included in these amounts were certain non-cash income and expenses such as gains on investments, stock and unit-based compensation, depreciation, amortization and certain non-cash writedowns. Stock and unit-based compensation was $15.4 million and $17.0 million during the three months ended March 31, 2015 and 2014, respectively. Depreciation and amortization expense was $20.6 million and $20.1 million during the three months ended March 31, 2015 and 2014, respectively. We had non-cash charges of $0.1 million and $0.3 million for the writedown of excess real estate during the three months ended March 31, 2015 and 2014, respectively, and $7.6 million for the writedown of capitalized debt costs in conjunction with our debt repayment in the first quarter of 2014. We also had charges of $0.9 million and $0.8 million for the amortization of debt offering cost during the three months ended March 31, 2015 and 2014, respectively

We received $358.4 million, net of cash provided and recorded a $385.0 million realized gain from the sale of KCG Hotspot during the three months ended March 31, 2015.

We also had non-cash income for the three months ended March 31, 2014 of $9.6 million resulting from the merger of BATS and Direct Edge in January 2014.

Capital expenditures related to our continuing operations were $9.5 million and $8.1 million during three months ended March 31, 2015 and 2014, respectively. Purchases of investments were $2.3 million and $0.6 million during three months ended March 31, 2015 and 2014, respectively. Proceeds and distributions received from investments were $2.0 million and $42.4 million during three months ended March 31, 2015 and 2014, respectively.

Cash Convertible Senior Subordinated Notes

On March 16, 2015, the Convertible Notes became due and were paid off in full with a payment of $119.3 million comprising $117.3 million in principal and $2.1 million in interest.

The Convertible Notes bore interest at a rate of 3.50% per year, payable semi-annually in arrears, on March 15 and September 15 of each year, commencing on September 15, 2010.

8.25% Senior Secured Notes

the 8.25% Senior Secured Notes to be redeemed, plus a make-whole premium and accrued and unpaid interest, if any.

6.875% Senior Secured Notes



Year	Percentage
2017	103.438	%
2018	101.719	%
2019 and thereafter	100.000	%

The Company has determined that the terms of the 6.875% Senior Secured Notes do not give rise to a bifurcatable derivative instrument under GAAP.

First Lien Credit Facility

Revolving Credit Agreement

The borrower is being charged a commitment fee at a rate of 0.35% per annum on the average daily amount of the unused portion of the KCGA Facility Agreement.

See Footnote 11 “Debt” included in Part I, Item 1 “Financial Statements” of this Form 10-Q.

Stock repurchase

During the second quarter of 2014, the Company approved an initial program to repurchase up to a total of $150.0 million in shares of the Company's outstanding KCG Class A Common Stock and KCG Warrants. Through March 31, 2015, we had repurchased 8.1 million shares for $95.0 million under this program. As of March 31, 2015, we had $55.0 million available to repurchase additional shares under the program. We may repurchase shares from time to time in open market transactions, accelerated stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. We caution that there are no assurances that any further repurchases will actually occur. As of March 31, 2015

we had 118.1 million shares of KCG Class A Common Stock outstanding including RSUs. See "Subsequent Events" below for additional information on our stock repurchase program.

Regulatory requirements

KCGA, our U.S. registered broker dealer is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker dealers and FCMs and require the maintenance of minimum levels of net capital, as defined in SEC Rule 15c3-1 as well as other capital requirements from several commodity organizations including the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association. These regulations also prohibit a broker dealer from repaying subordinated borrowings, paying cash dividends, making loans to its parent, affiliates or employees, or otherwise entering into transactions which would result in a reduction of its total net capital to less than 120% of its required minimum capital. Moreover, broker dealers are required to notify the SEC, CFTC and other regulators prior to repaying subordinated borrowings, paying dividends and making loans to its parent, affiliates or employees, or otherwise entering into transactions, which, if executed, would result in a reduction of 30% or more of its excess net capital (net capital less minimum requirement). The SEC and the CFTC have the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the broker dealer. As of March 31, 2015, KCGA was in compliance with the applicable regulatory net capital rules.

The following table sets forth the net capital level and requirements for KCGA at March 31, 2015, as reported in its regulatory filing (in thousands):



Entity	Net Capital		Net Capital Requirement		Excess Net Capital
KCG Americas LLC	$	337,734	$	1,372	$	336,362

Our U.K. registered broker dealer is subject to certain financial resource requirements of Financial Conduct Authority ("FCA") while our Singapore and Australian broker dealers are subject to certain financial resource requirements of the Securities and Futures Commission and the Australian Securities and Investment Commission, respectively. The following table sets forth the financial resource requirement for KCG Europe Limited at March 31, 2015 (in thousands):



Entity	Financial Resources		Resource Requirement		Excess Financial Resources
KCG Europe Limited	$	187,717	$	98,621	$	89,096

Our other U.K. registered broker dealer, GETCO Europe Limited withdrew from its membership with the FCA during the first quarter of 2015. All business of GETCO Europe Limited had previously been transferred to KCG Europe Limited.

Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Effects of Inflation

The majority of our assets are liquid in nature and therefore are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of the services offered by us. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial position and results of operations.

Subsequent Events

We have evaluated subsequent events through the date the consolidated financial statements were issued. We did not have any subsequent events requiring adjustment or disclosure in the consolidated financial statements except the following:

Tender Offer

On April 2, 2015, our Board of Directors authorized an expanded share repurchase program of up to $400.0 million of the Company’s Class A Common Stock and warrants (including the $55.0 million of remaining capacity under the

previously authorized repurchase program). As part of this authority, we commenced, on May 4, 2015, a “modified Dutch auction” tender offer that will remain open for at least 20 business days. Under the terms of the tender offer, stockholders have the opportunity to sell the Company's Class A Common Stock to us at a specified price per share not less than $13.50 and not greater than $14.00. Upon expiration of the tender offer, and based on the number of shares tendered and the prices specified by the tendering stockholders, we will determine the lowest price within the range that will allow us to repurchase up to $330.0 million of the Company's Class A Common Stock (or all shares properly tendered and not properly withdrawn if the tender offer is not fully subscribed). All shares purchased by us in the tender offer will be purchased at the same price. If the aggregate purchase price for shares tendered at or below the specified purchase price exceeds $330.0 million, allocations will be made on a pro rata basis from stockholders tendering at or below the purchase price. Assuming the offer is fully subscribed, we will repurchase a minimum of 23.6 million shares, or 22 percent of its total shares outstanding excluding RSUs as of April 30, 2015. Assuming the tender offer is fully subscribed, approximately $70.0 million in authority will remain in the share repurchase program.

The description above is for informational purposes only, is not a recommendation to buy or sell the Company's Class A Common Stock, and does not constitute an offer to buy or the solicitation to sell shares of the Company's Class A Common Stock. The tender offer will be made only pursuant to the Offer to Purchase, Letter of Transmittal and related materials that KCG filed on May 4, 2015 with the SEC. Stockholders should read carefully the Offer to Purchase, Letter of Transmittal and related materials because they contain important information, including the various terms of, and conditions to, the tender offer. Stockholders may obtain a free copy of the tender offer statement on Schedule TO, the Offer to Purchase, Letter of Transmittal and other documents that the Company filed with the SEC at the SEC’s website at www.sec.gov or the investor information section of the Company’s website at www.kcg.com.

Release of Escrow account

As described in Footnote 11 "Debt", on March 13, 2015, we funded an escrow account maintained by Bank of New York with $330.2 million, which was an amount sufficient to redeem the 8.25% Senior Secured Notes in full and satisfy and discharge the 8.25% Senior Secured Notes Indenture.

Proposed changes to KCG Holdings, Inc. Amended and Restated Equity Incentive Plan

On April 1, 2015, upon recommendation of the Compensation Committee, the Board of Directors unanimously approved and adopted an amendment to the KCG Holdings, Inc. Amended and Restated Equity Incentive Plan (the “KCG Plan”) to remove a legacy provision requiring that a certain percentage of awards be subject to minimum vesting standards (as amended, the “Amended KCG Plan”). Subject to receiving stockholder approval of the Amended KCG Plan at the Company’s 2015 annual meeting of stockholders on May 12, 2015, we anticipate that future equity awards granted as a component of annual incentive compensation will provide for continued vesting following a grantee’s voluntary resignation of employment, subject to ongoing compliance with applicable non-competition and non-solicitation requirements through the duration of the vesting period.

In addition, subject to receiving KCG stockholder approval of the Amended KCG Plan, the Compensation Committee expects it will take action to amend RSUs granted by Knight to its employees in January 2013 (for the 2012 performance year), as well as the RSUs granted by the Company to employees in February 2014 and February 2015 (for the 2013 and 2014 performance years, respectively) to include the continued vesting provision described above (the “Continued Vesting Amendment”). If the Amended KCG Plan is approved by the KCG stockholders and the Compensation Committee implements the Continued Vesting Amendment, the remaining expense associated with the aforementioned awards will be accelerated and recognized in full in the second quarter of 2015, when we expect the Continued Vesting Amendment to be effective and the Compensation Committee to take the required actions. Based on the May 7, 2015 closing price of KCG’s Class A common stock on the NYSE of $13.45 per share, we estimate that the total charge associated with this acceleration of expense will be between $30.0 million and $32.0 million.

Critical Accounting Policies

Our Consolidated Financial Statements are based on the application of GAAP which requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates and any such differences may be material to our Consolidated Financial Statements. We believe that the estimates set forth below may involve a higher degree of judgment and complexity in their application than our other accounting estimates and represent the critical accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments related to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the results could be materially different from the amounts recorded.

Financial Instruments and Fair Value—We value our financial instruments using a hierarchy of fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The fair value hierarchy can be summarized as follows:


•	Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.


•	Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Changes in fair value are recognized in earnings each period for financial instruments that are carried at fair value.

Our financial instruments owned and financial instruments sold, not yet purchased will generally be classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations with reasonable levels of price transparency.

Our foreign currency forward contracts, investment in the Deephaven Funds and deferred compensation investments are also classified within Level 2 of the fair value hierarchy.

We have no financial instruments classified within Level 3 of the fair value hierarchy.

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

Goodwill and Intangible Assets—As a result of our various acquisitions, we have acquired goodwill and identifiable intangible assets. We determine the values and estimated useful lives of intangible assets upon acquisition. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. We test goodwill and intangible assets with an indefinite useful life for impairment at least annually or when an event occurs or circumstances change that signifies the existence of impairment.

Goodwill

Goodwill of $17.3 million at March 31, 2015 is primarily a result of the Mergers and primarily relates to our Market Making segment. We test the goodwill in each of our reporting units for impairment at least annually by comparing the estimated fair value of each reporting unit with its estimated net book value. We will derive the fair value of each of our reporting units based on valuation techniques we believe market participants would use for each segment (observable market multiples and discounted cash flow analyses) and we will derive the net book value of our reporting units by estimating the amount of stockholders’ equity required to support the activities of each reporting unit. As part of our test for impairment, we will also consider the profitability of the applicable reporting unit as well as our overall market value, compared to our book value. No events occurred during the three months ended March 31, 2015 that would indicate that our goodwill may not be recoverable.

Intangible Assets

Intangible assets, less accumulated amortization, of $129.2 million at March 31, 2015 primarily result from the Mergers and are primarily attributable to our Market Making and Global Execution Services segments.

We amortize intangible assets with finite lives on a straight-line basis over their estimated useful lives, the majority of which have been determined to range from one to 8 years. We will test amortizable intangibles for recoverability whenever events indicate that the carrying amounts may not be recoverable. No events occurred during the three months ended March 31, 2015 that would indicate that the carrying amounts of our intangible assets may not be recoverable.

Investments—Investments primarily comprise strategic investments and deferred compensation investments. Strategic investments include noncontrolling equity ownership interests in financial services-related businesses held by us within our non-broker dealer subsidiaries. Strategic investments are accounted for under the equity method, at cost or at fair value. We use the equity method of accounting when we have significant influence, generally considered to be between 20% and 50% equity ownership or greater than 3% to 5% of a partnership interest. We hold strategic investments at cost, less impairment if any, when we are not considered to exert significant influence on operating and financial policies of the investee. Strategic investments which are publicly traded are held at fair value.

We review investments on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If we assess that an impairment loss on a strategic investment has occurred due to a decline in fair value or other market conditions, we write the investment down to its estimated impaired value.

We maintain a deferred compensation plan related to certain employees and directors. This plan provides a return to the participants based upon the performance of various investments. In order to hedge our liability under this plan, we generally acquire the underlying investments and hold such investments until the deferred compensation liabilities are satisfied. We record changes in value of such investments in Investment income and other, net, with a corresponding charge or credit to Employee compensation and benefits on the Consolidated Statements of Operations.

Market Making, Sales, Trading and Execution Activities—Financial instruments owned and Financial instruments sold, not yet purchased, which relate to market making and trading activities, include listed and other equity securities, listed equity options and fixed income securities which are recorded on a trade date basis and carried at fair value. Trading revenues, net (trading gains, net of trading losses) and commissions (which includes commission equivalents earned on institutional client orders and, in 2014, futures transactions) and related expenses are also recorded on a trade date basis. Our third party clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions.

Dividend income relating to securities owned and dividend expense relating to securities sold, not yet purchased, derived from our market making activities are included as a component of Trading revenues, net on our Consolidated Statements of Operations.

Lease Loss Accrual—It is our policy to identify excess real estate capacity and where applicable, accrue for related future costs, net of estimated sublease income. In the event we are able to sublease the excess real estate after recording a lease loss, such accrual is adjusted to the extent the actual terms of sub-leased property differ from the assumptions used in the calculation of the accrual. In the event that we conclude that previously determined excess real estate is needed for our use, such lease loss accrual is adjusted accordingly. Any such adjustments to previous lease loss accruals are recorded in Lease loss accrual, net on the Consolidated Statements of Operations.

Income taxes—The Company is a corporation subject to U.S. corporate income tax as well as non-U.S. income taxes in the jurisdictions in which it operates. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measures them using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences and forecasted operating earnings.

Other Estimates—The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. In addition to the estimates that we make in connection with accounting for the items noted above, the use of estimates is also important in determining provisions for potential losses that may arise from discontinued operations, litigation, regulatory proceedings and tax audits.

When determining stock-based employee compensation expense, we make certain estimates and assumptions relating to volatility and forfeiture rates. We estimate volatility based on several factors including implied volatility of market-traded options on our Class A Common Stock on the grant date and the historical volatility of our Class A Common Stock. We estimate forfeiture rates based on historical rates of forfeiture of employee stock awards.

A portion of our Employee compensation and benefits expense on the Consolidated Statements of Operations represents discretionary bonuses, which are accrued for throughout the year and paid after the end of the year. Among many factors, discretionary bonus accruals are generally influenced by our overall performance and competitive industry compensation levels.

We accrue for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience and industry experience with similar cases and the opinions and views of internal and external legal counsel. Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. For more information on our legal and regulatory matters, see Footnote 19 "Commitments and Contingent Liabilities" included in Part I, Item 1 "Financial Statements" of this Form 10-Q and other reports or documents the Company files with, or furnishes, to the SEC from time to time.

Change in accounting principle

As a result of the merger of BATS and Direct Edge in the first quarter of 2014, the Company changed its method of accounting for its investment in BATS from the cost method to the equity method as the Company has significant influence following the merger. This change in accounting principal was applied retrospectively.

See Footnote 9 “Investments” and Footnote 2 "Significant Accounting Policies" included in Part I, Item 1 "Financial Statements" of this Form 10-Q for further discussion.

Accounting Standards Updates

Recently adopted accounting guidance

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) that amends the requirements for reporting discontinued operations. Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. The updated guidance is effective prospectively to all disposals occurring for interim and annual reporting periods after December 15, 2014, with early adoption permitted. We early adopted this ASU in 2014, which resulted in additional disclosures within our Consolidated Financial Statements.

Recent accounting guidance to be adopted in future periods

2016. Early adoption is not permitted. We are evaluating the impact of this ASU on our Consolidated Financial Statements.

In June 2014, the FASB issued an ASU to resolve diverse accounting treatment for share based awards in which the terms of the award are related to a performance target that affects vesting. The ASU requires an entity to treat a performance target that could be achieved after the requisite service period as a performance condition. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied prospectively or retrospectively. We do not expect adoption of this ASU to have an impact on our Consolidated Financial Statements.

In August 2014, the FASB issued an ASU that requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for reporting periods beginning after December 15, 2015. Other than additional disclosure requirements, the adoption of this ASU is not expected to have an impact on our Consolidated Financial Statements.

In February 2015, the FASB issued an ASU which requires entities to evaluate whether they should consolidate certain legal entities. The ASU simplifies consolidation accounting by reducing the number of consolidation models that an entity may apply. The guidance is effective for us beginning after December 15, 2015 and early adoption is permitted. We are evaluating the impact of this ASU on our Consolidated Financial Statements.

In April 2015, the FASB issued an ASU regarding simplification of the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the Consolidated Statement of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective for us retrospectively beginning after December 15, 2016 and early adoption is permitted. We are evaluating the impact of this ASU on our Consolidated Financial Statements.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

We are exposed to numerous risks in the ordinary course of our business and activities; therefore, effective risk management is critical to our financial soundness and profitability. We have a comprehensive risk management structure and processes to monitor and evaluate the principal risks we assume in conducting our business. Our risk management policies, procedures and methodologies are subject to ongoing review and modification. The principal risks we face are as follows:

Market Risk

Our market making and trading activities expose our capital to significant risks. These risks include, but are not limited to, absolute and relative price movements, price volatility, interest rates, credit spreads and changes in liquidity. Price risks result from exposure to changes in prices of individual financial instruments, baskets and indices. Further risks may result from changes in the factors determining options prices. Interest rate risks result primarily from exposure and changes in the yield curve, the volatility of interest rates and credit spreads. As market makers we are also exposed to “open order” risk where during unusual market conditions we could have an abnormally high percentage of our open orders filled simultaneously and therefore acquire a larger than average position in securities or derivative instruments.

For working capital purposes, we invest in money market funds and government securities or maintain interest bearing balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents and Receivable from brokers, dealers and clearing organizations, respectively, on the Consolidated Statements of Financial Condition. These financial instruments do not have maturity dates; the balances are short term, which helps to mitigate our market risks. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position.

We employ proprietary position management and trading systems that provide real-time, on-line position management and inventory control. We monitor our risks by reviewing trading positions and their appropriate risk measures. We have established a system whereby transactions are monitored by senior management and an

independent risk control function on a real-time basis as are individual and aggregate dollar and inventory position totals, capital allocations, and real-time profits and losses. Our management of trading positions is enhanced by our review of mark-to-market valuations and position summaries on a daily basis.

In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to a lesser extent, listed equity options and fixed income securities. The fair value of these financial instruments at March 31, 2015 and 2014 was $2.64 billion and $2.59 billion, respectively, in long positions and $2.14 billion and $2.08 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our Consolidated Statements of Financial Condition within Receivable from brokers, dealers and clearing organizations or Payable to brokers, dealers and clearing organizations as applicable.

We calculate daily the potential losses that might arise from a series of different stress events. These include both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior management and the independent risk function carefully monitor the highest stress scenarios to ensure that the Company is not unduly exposed to any extreme events.

The potential change in fair value is estimated to be a gain of $6.2 million using a hypothetical 10% increase in equity prices as of March 31, 2015, and an estimated loss of $7.6 million using a hypothetical 10% decrease in equity prices at March 31, 2015. These estimates take into account the offsetting effect of such hypothetical price movements on the fair value of short positions against long positions, and the effect on the fair value of options, futures, nonlinear positions and leverage. The Company uses both third party applications as well as its own internal systems in order to model and calculate stress risks to a variety of different scenarios.

Operational Risk

Operational risk can arise from many factors ranging from routine processing errors to potentially costly incidents arising, for example, from major systems failures or human errors. For example, on August 1, 2012, at the open of trading at the NYSE, Knight experienced a technology issue related to the installation of trading software which resulted in its broker dealer subsidiary, KCA, sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market. As a result of this technology issue, Knight incurred a pre-tax loss of $468.1 million which principally related to trading losses.

Following the events of August 1, 2012, the Firm has taken numerous remedial measures designed to enhance its processes and controls. Today KCG has a robust framework to manage operational risk events. The framework includes a sound risk management governance structure, including a Chief Risk Officer, a Risk function, a Board Risk Committee and Management Risk Committee. Within the Risk function KCG has created a formal Operational Risk Management team lead by Global Head of Operational Risk, responsible for managing the Firm’s operational risk exposure. The Emergency Response Center has been established and is tasked with monitoring and responding to operational incidents and natural disasters in real time. The Emergency Management Plan ("EMP") sets forth procedures for firm-wide crisis response, should incidents go beyond the emergency solving capabilities of individual businesses. The EMP is tested several times a year with simulated emergencies of various kinds. Furthermore, the framework incorporates market access controls designed to closely monitor inbound and outbound orders and enable the rapid automatic shut-down for specific applications.

Our businesses are highly dependent on our ability and our market centers' ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in several currencies and products. We incur operational risk across all of our business activities, including revenue generating activities as well as support functions. Legal and compliance risk is included in the scope of operational risk and is discussed below under “Legal Risk.”

We rely heavily on technology and automation to perform many functions within KCG, which exposes us to various forms of cyber-attacks, including data loss or destruction, unauthorized access, unavailability of service or the introduction of malicious code. We have taken significant steps to mitigate the various cyber threats, and we devote significant resources to maintain and regularly upgrade our systems and networks and review the ever changing threat landscape. We have created a dedicated Information Security Group, created and filled the role of Information Security officer and formed an Information Security Steering Committee. In addition, we have enhanced the communication channels with government and law enforcement agencies for better information sharing and awareness. We will continue to periodically review policies and procedures to ensure they are effective in mitigating current cyber and other information security threats. In addition to the policy reviews, we continue to look to implement technology solutions

that enhance preventive and detection capabilities. We also maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks. However, such insurance may be insufficient to cover all losses.

Primary responsibility for the management of operational risk lies with our operating segments and supporting functions, and secondary responsibility lies with the Operational Risk Management function. Our operating segments maintain controls designed to manage and mitigate operational risk for existing activities. As new products and business activities are developed, we endeavor to identify operational risks and design controls to seek to mitigate the identified risks.

Disaster recovery plans are in place for critical facilities related to our primary operations and resources, and redundancies are built into the systems as deemed reasonably appropriate. We have also established policies, procedures and technologies designed to seek to protect our systems and other assets from unauthorized access. There is no assurance that such plans, policies, procedures and technologies will prevent a significant disruption to our business.

Liquidity Risk

Liquidity risk is the risk that we would be unable to meet our financial obligations as they arise in both normal and strained funding environments. To that end, we have established a comprehensive and conservative set of policies and procedures that govern the management of liquidity risk for the Company at the corporate level and at the subsidiary entity level.

We maintain a liquidity pool consisting of primarily cash and other highly liquid instruments at the holding company level to satisfy intraday and day-to-day funding needs, as well as potential cash needs in a strained funding environment.

Secured funding for the majority of the firm’s inventory is done through the firm’s regulated U.S. broker dealer subsidiary, KCGA. As such, a significant portion of the firm’s liquidity risk lies within KCGA. We consider cash and other highly liquid instruments held within KCGA, up to $150.0 million, a part of the firm’s liquidity pool to support financial obligations in normal and strained funding environments. We target having $350.0 million in the Company's liquidity pool of cash and highly liquid instruments held at the holding company level and KCGA.

Cash and other highly liquid investments held by all other subsidiary entities are available to support financial obligations within those entities.

Our liquidity pool comprises the following (in thousands):



	March 31, 2015		December 31, 2014
Liquidity Pool Composition
Holding companies
Cash held at banks	$	400,563	$	150,622
Money market and other highly liquid investments	301,176		152,077
KCGA
Cash held at banks	54,672		58,972
Money market and other highly liquid investments	95,328		81,997
Total Liquidity Pool	$	851,739	$	443,668
Cash and other highly liquid investments held by other subsidiary entities	$	138,803	$	135,100

In addition, we maintain committed and uncommitted credit facilities with a number of unaffiliated financial institutions. In connection with the uncommitted credit facilities, the lenders are at no time under any obligation to make any advances under the credit facilities, and any outstanding loans must be repaid on demand. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding our credit facilities.

We regularly perform liquidity risk stress testing based on a scenario that considers both market-wide stresses and a company-specific stress over a one-month period. Given the nature of the Company’s business activity and balance sheet composition, survival over the first one to three days of a severe stress environment is most critical, after which management actions could be effectively implemented to navigate through prolonged periods of financial

stress. The modeled cash inflows and outflows from the stress test serve as a quantitative input to assist us in establishing the Company’s liquidity risk appetite and amount of liquid assets to be held at the corporate level. The liquidity stress test considers cash flow risks arising from, but not limited to, a dislocation of the secured funding market, additional unexpected margin requirements, and operational events.

We maintain a contingency funding plan (“CFP”) which clearly delineates the roles, responsibilities and actions that will be utilized as the Company encounters various levels of liquidity stress with the goal of fulfilling all financial obligations as they arise while maintaining business activity. We periodically update and test the operational functionality of various aspects of the CFP to ensure it remains current with changing business activity.

Capital Risk

Government regulators, both in the U.S. and globally, as well as self-regulated organizations, have supervisory responsibility over our regulated activities and require us to maintain specified minimum levels of regulatory capital in our broker dealer subsidiaries. If not properly monitored, our regulatory capital levels could fall below the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to imposing partial or complete restrictions on our ability to conduct business.

To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our regulated subsidiaries and adjust the amounts of regulatory capital as necessary to ensure compliance with regulatory capital requirements. We also maintain excess regulatory capital to accommodate periods of unusual or unforeseen market volatility. In addition, we monitor regulatory developments regarding capital requirements and prepare for changes in the required minimum levels of regulatory capital that may occur in the future.

Legal Risk

Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and commercial risk such as the risk that counterparty’s performance obligations will be unenforceable. We are generally subject to extensive regulation in the different jurisdictions in which we conduct our business. We have established procedures based on legal and regulatory requirements that are designed to foster compliance with applicable statutory and regulatory requirements. We have also established procedures that are designed to require that our policies relating to conduct, ethics and business practices are followed.

Credit Risk

Credit risk represents the loss that we would incur if a counterparty fails to perform its contractual obligations in a timely manner. We manage credit risk with a global, independent credit risk management function that is responsible for measuring, monitoring and controlling the counterparty credit risks inherent in our business activities.

Our credit risk function’s process for managing credit risk includes a qualitative and quantitative risk assessment of significant counterparties prior to engaging in business activity, as well as on an ongoing basis. The review includes formal financial analysis and due diligence when appropriate.

Our credit risk function is responsible for approving counterparties and establishing credit limits to manage credit risk exposure by counterparty and business line. The assigned limits reflect the various elements of assessed credit risk and are subsequently revised to correspond with changes in the counterparties’ credit profiles. Our credit risk function communicates counterparty limits to the business areas as well as senior management, and monitors compliance with the established limits.

Where appropriate, counterparty exposure is monitored on a daily basis and the collateral, if required, is marked to market daily to accurately reflect the current exposure.

Foreign Currency Risk

Our international businesses include transactions in currencies other than the U.S. dollar. As such, changes in foreign exchange rates relative to the U.S. dollar can affect the value of our non-U.S. dollar assets, liabilities, revenues and expenses. Additionally, our foreign subsidiary in India has a functional currency other than the U.S. dollar which exposes us to foreign currency transaction gains and losses. A portion of these risks are hedged, but fluctuations in currency exchange rates could impact our results of operations, financial position and cash flows.



Item 4.	Controls and Procedures

(a) Disclosure Controls and Procedures. KCG's management, with the participation of KCG's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, KCG's Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015, KCG's disclosure controls and procedures are effective.

(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in KCG's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, KCG's internal control over financial reporting.



PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

The information required by this Item is set forth in the “Legal Proceedings” section in Footnote 19 "Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements included in Part I, Item 1 "Financial Statements (Unaudited)" herein.



Item 1A.	Risk Factors

In addition to the other information set forth below and in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/ or operating results.

KCG may be exposed to certain risks associated with its recently commenced tender offer.

KCG and its stockholders may be exposed to certain risks as a result of the “modified Dutch auction” tender offer commenced by KCG on May 4, 2015. See Footnote 22, “Subsequent Events”. For example, the use of excess cash for the tender offer may reduce KCG’s ability to engage in significant acquisitions using cash. This may have an adverse effect on KCG’s ability to pursue opportunistic acquisitions of, or investments in, businesses and technologies, as there can be no assurance that KCG will be able to raise debt or equity financing for such acquisitions in the future. In addition, the tender offer will reduce KCG’s “public float” (the number of shares of the Company's Class A Common Stock owned by non-affiliate stockholders and available for trading in the securities markets). There can be no assurance that this reduction in KCG’s public float will not result in lower stock prices or reduced liquidity in the trading market for the Company's Class A Common Stock following completion of the tender offer. The reduction in shares of the Company's Class A Common Stock after the tender offer may also cause KCG to lose its status as a “well known seasoned issuer,” which may make any future debt or equity capital raisings more costly and time consuming. Finally, if certain large stockholders do not participate in the tender offer or do not participate significantly, it will further concentrate their ownership of KCG, which may limit the ability of KCG’s stockholders to influence corporate matters and may also have the effect of delaying, preventing or defeating a change of control. Any of the foregoing factors may have a material adverse effect on KCG’s business, financial condition or results of operations.



Item 2.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table contains information about our purchases of KCG Class A Common Stock during the first quarter of 2015 (in thousands, except average price paid per share):



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2015 - January 31, 2015
Common stock repurchases	—			—	$	55,038
Employee transactions ⁽²⁾	307			—
Total	307	$	12.17	—
February 1, 2015 - February 28, 2015
Common stock repurchases	—			—	$	55,038
Employee transactions ⁽²⁾	470			—
Total	470	$	12.47	—
March 1, 2015 - March 31, 2015
Common stock repurchases	—			—	$	55,038
Employee transactions ⁽²⁾	55			—
Total	55	$	12.34	—
Total
Common stock repurchases	—			—	$	55,038
Employee transactions ⁽²⁾	832			—
Total	832	$	12.35	—

________________________________________

Totals may not add due to rounding.

⁽¹⁾ During the second quarter of 2014, the Company’s Board of Directors approved an initial program to repurchase up to a total of $150.0 million in shares of the Company’s outstanding KCG Class A Common Stock and KCG Warrants. Under the program, the Company may repurchase shares from time to time in open market transactions, accelerated stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. The Company cautions that there are no assurances that any further repurchases will actually occur. Through March 31, 2015, the Company had repurchased 8.1 million shares for $95.0 million under this program leaving $55.0 million available for additional repurchases. Following the end of the first quarter of 2015, on April 2, 2015, the Company’s Board of Directors authorized an expanded share repurchase program of up to $400.0 million of the Company's Class A Common Stock and warrants (including the $55.0 million of remaining capacity under the previously authorized repurchase program). See Footnote 22, “Subsequent Events”.

⁽²⁾ Represents shares of the Company's Class A Common Stock withheld in satisfaction of tax withholding obligations upon vesting of employee restricted equity awards.



Item 3.	Defaults Upon Senior Securities

Not applicable.



Item 4.	Mine Safety Disclosures

Not applicable.



Item 5.	Other Information

Not Applicable.



Item 6.	Exhibits



NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K)		DESCRIPTION OF EXHIBITS

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**		The following financial statements from KCG Holdings, Inc's Quarterly Report on Form 10-Q for the three months ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014, (iii) Consolidated Statements of Financial Condition at March 31, 2015 and December 31, 2014, (iv) Consolidated Statement of Changes in Equity for the three months ended March 31, 2015, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 and (vi) the Notes to Consolidated Financial Statements.

________________________________________



*	Filed herewith.
**	Pursuant to rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 11th day of May 2015.



KCG HOLDINGS, INC.

By:	/s/ DANIEL COLEMAN
	Daniel Coleman
	Chief Executive Officer




By:	/s/ STEFFEN PARRATT
	Steffen Parratt
	Chief Financial Officer

Virtu KCG Holdings LLC - FORM 10-Q - May 11, 2015

Attached files

Virtu KCG Holdings LLC Reports