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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-11 · 333 added, 190 removed, 624 unchanged (46% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis covers the three months ended March 31, 2020 and 2019 and should be read in conjunction with the condensed consolidated financial statements of Virtu Financial, Inc.

(the “Company”) for the period ended March 31, 2020 , which are included in Part I, Item I of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and accompanying notes and MD&A for the year ended December 31, 2019, which are included in Items 8 and 7, respectively, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - IN PROGRESS

The following management’s discussion and analysis covers the three and six months ended June 30, 2020 and 2019 and should be read in conjunction with the condensed consolidated financial statements of Virtu Financial, Inc.

(the “Company”)

for the period ended June 30, 2020, which are included in Part I, Item I of this Quarterly Report on Form 10-Q, and the

audited consolidated financial statements and accompanying notes and MD&A for the year ended December 31, 2019, which are included in Items 8 and 7, respectively, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

This management's discussion and analysis contains forward-looking statements that involve risks and uncertainties.

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Although we believe that the forward-looking statements contained in this Quarterly Report on Form 10-Q are based on reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission ("SEC") on February 28, 2020 (the "2019 Form 10-K"), could affect our actual financial results or results of operations and cash flows, and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

the continuing impacts of COVID-19 and the governmental and other responses thereto, including but not limited to the deployment of our business continuity plan pursuant to which a significant number of our employees currently work remotely, which may increase operational risk, as well as increases in market, counterparty and other forms of operational risk;

• the continuing impacts of COVID-19 and the governmental and other responses thereto, including but not limited to the deployment of our business continuity plan pursuant to which a significant number of our employees currently work remotely and our return to office plan, each of which may increase operational risk, as well as increases in market, counterparty and other forms of operational risk;

• reduced levels of overall trading activity;

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Basis of Preparation

Our condensed consolidated financial statements for the three months ended March 31, 2020 and 2019 reflect our operations and those of our consolidated subsidiaries.

Our condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019 reflect our operations and those of our consolidated subsidiaries.

As discussed in Note 1 “Organization and Basis of Presentation” and in Note 3 “ITG Acquisition” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q, we have accounted for the ITG Acquisition under the acquisition method of accounting.

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Our reported financial condition, results of operations and cash flows for the periods following the ITG Closing Date reflect ITG's and our balances, and reflect the impact of purchase accounting adjustments, including revised amortization and depreciation expense for acquired assets.

The financial results for the three months ended March 31, 2019 comprise our results for the entire applicable period and the results of ITG from the ITG Closing Date through March 31, 2019 .

The financial results for the six months ended June 30, 2019 comprise our results for the entire applicable period and the results of ITG from the ITG Closing Date through June 30, 2019.

All periods prior to the ITG Closing Date comprise our results without the results of ITG.

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On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

The spread of COVID-19 has caused, among other matters, illness, death, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.

The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals.

Several states, including New York, where we are headquartered, have declared states of emergency.

Similar impacts have been experienced in every country in which we do business.

The Company has been impacted in various ways by the COVID-19 outbreak, including experiencing elevated levels of trading volumes and market volatility in the market in which we operate, increases in short term funding requirements as a consequence of these elevated levels, the implementation of our business continuity plan including remote work arrangements for a significant majority of our employees, among other observed impacts.

The Company has been impacted in various ways by the COVID-19 outbreak, including experiencing elevated levels of trading volumes and market volatility in the markets in which we operate, which contributed positively to our results, and increases in short term funding requirements with clearing houses and counterparties as a consequence of these elevated trading volumes and market volatility.

The Company also implemented its business continuity plan, including remote work arrangements for the majority of our employees during this pandemic.

We will continue to monitor the impact of COVID-19, but at the date of this report it is too early to determine the full impact this virus may have on the global financial markets and the overall economy, as well as our business.

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As described below, we completed the ITG Acquisition on the ITG Closing Date.

ITG was a global financial technology company that offered a suite of trading and financial technology products to help leading brokers and asset

managers improve returns for investors around the world.

ITG was a global financial technology company that offered a suite of trading and financial technology products to help leading brokers and asset managers improve returns for investors around the world.

ITG empowered traders and investors to reduce the end-to-end cost of implementing investments via liquidity, execution, analytics and workflow technology solutions.

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The Amended and Restated 2015 Management Incentive Plan provides for the grant of stock options, restricted stock units, and other awards based on an aggregate of 16,000,000 shares of Class A common stock, par value $0.00001 per share (the “Class A Common Stock”), subject to additional sublimits, including limits on the total option grant to any one participant in a single year and the total performance award to any one participant in a single year.

On April 23, 2020, the Company’s board of directors adopted an amendment to the Company’s Amended and Restated 2015 Management Incentive Plan in order to increase the number of shares of the Company’s Class A Common Stock reserved for issuance, and in respect of which awards may be granted under the Amended and Restated 2015 Plan from 16,000,000 shares of Class A Common Stock to an aggregate of 21,000,000 shares of Class A Common Stock.

The amendment is subject to the approval of the Company’s shareholders at the Annual Meeting on June 5, 2020.

In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO per share price, each of which vests in equal annual installments over a period of four years from the grant date and expires not later than 10 years from the grant date.

Subsequent to the IPO and through March 31, 2020 , options to purchase 1,613,750 shares in the aggregate were forfeited and 4,578,600 options were exercised.

Subsequent to the IPO and through June 30, 2020, options to purchase 1,628,750 shares in the aggregate were forfeited and 4,983,394 options were exercised.

The fair value of the stock option grants was determined through the application of the Black-Scholes-Merton model and was recognized on a straight-line basis over the vesting period.

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There are no material differences between our condensed consolidated financial statements and the financial statements of Virtu Financial except as follows:

(i) cash and cash equivalents reflected on our Condensed Consolidated Statement of Financial Condition in the amount of $0.8 million ;

(ii) deferred tax assets reflected on our Condensed Consolidated Statement of Financial Condition in the amount of $193.3 million and tax receivable agreement obligation in the amount of $256.0 million , in each case as described in greater detail in Note 5 “Tax Receivable Agreements” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q ;

(iii) a portion of the member's equity of Virtu Financial is represented as non-controlling interest on our consolidated Statement of Financial Condition;

and (iv) provision for corporate income tax in the amount of $65.5 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 .

(i) cash and cash equivalents reflected on our Condensed Consolidated Statement of Financial Condition as of June 30, 2020 in the amount of $104.0 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statement of Financial Condition as of June 30, 2020 in the amount of $169.7 million and tax receivable agreement obligation in the amount of $256.0 million, in each case as described in greater detail in Note 5 “Tax Receivable Agreements” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q;

(iii) a portion of the member's equity of Virtu Financial is represented as non-controlling interest on our Condensed Consolidated Statement of Financial Condition as of June 30, 2020;

and (iv) provision for corporate income tax in the amount of $55.2 million and $120.6 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020, respectively.

Components of Our Results of Operations

The following table shows our i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and noncontrolling interest by segment for the three months ended March 31, 2020 and 2019 :

(in thousands)

Three Months Ended March 31,

The following table shows our i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and noncontrolling interest by segment for the three and six months ended June 30, 2020 and 2019:

(in thousands) Three Months Ended June 30, Six Months Ended June 30,

Market Making 2020 2019 2020 2019

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Income (loss) before income taxes and noncontrolling interest $ 404,535 $ (66,579) $ 870,760 $ (82,783)

The following table shows our results of operations for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31,

The following table shows our results of operations for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2020 2019 2020 2019

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Commissions, net and technology services 147,736 145,120 318,481 220,267

Other, net 4,831 (104) 5,726 (1,490)

Total revenue 905,903 375,101 1,906,524 735,533

Operating Expenses:

Brokerage, exchange and clearance fees, net

Brokerage, exchange, clearance fees and payments for order flow, net 203,503 99,487 377,321 187,101

Communication and data processing 55,662 54,423 110,689 96,237

Employee compensation and payroll taxes 120,934 83,702 291,292 191,540

Payments for order flow

Interest and dividends expense 28,841 36,824 70,281 82,193

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Our trading income, net, results from gains and losses associated with trading strategies, which are designed to capture small bid-ask spreads, while hedging risks.

Trading income, net, accounted for 80% and 71% of our total revenues for the three months ended March 31, 2020 and 2019 , respectively.

Trading income, net, accounted for 81% and 63% of our total revenues for the six months ended June 30, 2020 and 2019, respectively.

Interest and dividends income.

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We record our pro-rata share of each JV’s earnings or losses within other, net, while fees related to the use of communication services provided by the JVs are recorded within communications and data processing.

As a result of the Acquisition of KCG and the ITG Acquisition and subsequent streamlining of operations, we have subleased certain office space that is not needed for Virtu operations.

Sublease income is recorded on a straight-line basis over the life of the sublease.

In addition, we record gains or losses on certain one-time transactions within Other, net.

We have a minority investment (the “SBI Investment”) in SBI, a proprietary trading system based in Tokyo.

We have a noncontrolling investment (the “SBI Investment”) in SBI, a proprietary trading system based in Tokyo.

In connection with the investment, we issued bonds to certain affiliates of SBI and used the proceeds to partially finance the transaction.

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Operating Expenses

Brokerage, exchange and clearance fees, net.

Brokerage, exchange and clearance fees are our most significant expenses, which include the direct expenses of executing and clearing transactions that we consummate in the course of our market making activities.

Brokerage, exchange and clearance fees primarily consist of fees charged by third parties for executing, processing and settling trades.

Brokerage, exchange, clearance fees and payments for order flow, net.

Brokerage, exchange, clearance fees and payments for order flow are our most significant expenses, which include the direct expenses of executing and clearing transactions that we consummate in the course of our market making activities.

Brokerage, exchange, clearance fees and payments for order flow primarily consist of fees charged by third parties for executing, processing and settling trades.

These fees generally increase and decrease in direct correlation with the level of our trading activity.

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Clearance fees are paid to clearing houses and clearing agents.

Rebates based on volume discounts, credits or payments received from exchanges or other marketplaces are netted against brokerage, exchange and clearance fees.

Payments for order flow.

Payments for order flow represent payments to broker-dealer clients, in the normal course of business, for directing their order flow to us primarily in U.S.

Payments for order flow will fluctuate as we modify our rates and as the portion of our clients that do not accept payments for order flow varies.

Payments for order flow also fluctuate based on U.S.

equity share and option volumes we interact with and the mix of customer market and limit orders.

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 to the Company.

Rebates based on volume discounts, credits or payments received from exchanges or other marketplaces are netted against brokerage, exchange, clearance fees and payments for order flow.

Communication and data processing.

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Employee compensation and payroll taxes include employee salaries, cash and non-cash incentive compensation, employee benefits, payroll taxes, severance and other employee related costs.

Employee compensation and payroll taxes also includes non-cash compensation expenses with respect to the stock options and restricted stock units granted in connection with and subsequent to the IPO pursuant to the Amended and Restated 2015 Management Incentive Plan and Class A Common Stock underlying certain awards assumed pursuant to the Amended and Restated ITG 2007 Equity Plan.

Employee compensation and payroll taxes also includes non-cash compensation expenses with respect to restricted stock units and restricted stock awards granted in connection with and subsequent to the IPO pursuant to the Amended and Restated 2015 Management Incentive Plan and Class A Common Stock underlying certain awards assumed pursuant to the Amended and Restated ITG 2007 Equity Plan.

Interest and dividends expense.

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GAAP (“Non-GAAP”) financial measures of financial performance:

“Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or Trading income, net, plus Commissions, net and technology services, plus Interest and dividends income, less direct costs associated with those revenues, including Brokerage, exchange and clearance fees, net, Payments for order flow, and Interest and dividends expense.

• “Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or Trading income, net, plus Commissions, net and technology services, plus Interest and dividends income, less direct costs associated with those revenues, including Brokerage, exchange, clearance fees and payments for order flow, net, and Interest and dividends expense.

Management believes that this measurement is useful for comparing general operating performance from period to period.

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Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future results will be unaffected by revenues or expenses that are not directly associated with our market making activities.

“EBITDA”, which measures our operating performance by adjusting net income to exclude Financing interest expense on long-term borrowings, Debt issue cost related to debt refinancing, prepayment, and commitment fees, Depreciation and amortization, Amortization of purchased intangibles and acquired capitalized software, and Income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, reserve for legal matters, transaction advisory fees and expenses, termination of office leases, COVID-19 one-time costs and donations, other, net, and charges related to share based compensation.

“Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was between approximately 24%.

• “EBITDA”, which measures our operating performance by adjusting net income to exclude Financing interest expense on long-term borrowings, Debt issue cost related to debt refinancing, prepayment, and commitment fees, Depreciation and amortization, Amortization of purchased intangibles and acquired capitalized software, and Income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, transaction advisory fees and expenses, termination of office leases, charges related to share based compensation and other expenses, which includes reserves for legal matters, COVID-19 one-time costs and donations and Other, net.

• “Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was approximately 24%.

• Operating Margins, which are calculated by dividing net income, EBITDA, and Adjusted EBITDA by Adjusted Net Trading Income.

Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins (collectively, the “Company's Non-GAAP Measures”) are non-GAAP financial measures used by management in evaluating

operating performance and in making strategic decisions.

Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins (collectively, the “Company's Non-GAAP Measures”) are Non-GAAP financial measures used by management in evaluating operating performance and in making strategic decisions.

Additional information provided regarding the breakdown of total Adjusted Net Trading Income by category is also a Non-GAAP financial measure but is not used by the Company in evaluating operating performance and in making strategic decisions.

In addition, these non-GAAP financial measures or similar non-GAAP financial measures are used by research analysts, investment bankers and lenders to assess our operating performance.

In addition, the Company's Non-GAAP Measures or similar Non-GAAP financial measures are used by research analysts, investment bankers and lenders to assess our operating performance.

Management believes that the presentation of the Company's Non-GAAP Measures provides useful information to investors regarding our results of operations and cash flows because they assist both investors and management in analyzing and benchmarking the performance and value of our business.

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Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period.

For the period ended March 31, 2020, we believe that identifying one-time costs and donations associated with COVID-19, comprised of charitable donations made by the Company to affected groups and costs incurred in support of our employee population, and excluding these amounts from our calculation of Adjusted EBITDA and Normalized Adjusted Net Income helps management and investors assess the impact of COVID-19 on our business as well as our general economic performance during the period.

Furthermore, our Credit Agreement contains covenants and other tests based on metrics similar to Adjusted EBITDA.

Other companies may define Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins differently, and as a result the Company's Non-GAAP Measures may not be directly comparable to those of other companies.

Although we use these non-GAAP measures as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business.

Although we use the Company's Non-GAAP Measures as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business.

The Company's Non-GAAP Measures should be considered in addition to, and not as a substitute for, Net Income in accordance with U.S.

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GAAP measure.

The following table reconciles the Condensed Consolidated Statements of Comprehensive Income to arrive at Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, and Operating Margins for the three months ended March 31, 2020 and 2019 .

Three Months Ended

Three Months Ended June 30, Six Months Ended

(in thousands) 2020 2019 2020 2019

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Commissions, net and technology services 147,736 145,120 318,481 220,267

Brokerage, exchange and clearance fees, net

Payments for order flow

Brokerage, exchange, clearance fees and payments for order flow, net (203,503) (99,487) (377,321) (187,101)

Interest and dividends expense (28,841) (36,824) (70,281) (82,193)

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Provision for (benefit from) income taxes 69,250 (11,094) 147,237 (13,679)

Reserve for legal matters

EBITDA $ 475,133 $ 2,207 $ 1,007,517 $ 45,377

Severance (38) 7,873 4,161 61,224

Transaction advisory fees and expenses 86 1,798 274 16,907

Termination of office leases 7 65,208 283 65,208

COVID-19 one-time costs and donations

Other (5,935) 104 980 1,491

Share based compensation 16,505 11,983 42,249 21,796

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(3) Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income.

The following table reconciles Net Income to arrive at Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS for the three months ended March 31, 2020 and 2019 :

Three Months Ended

Three Months Ended June 30, Six Months Ended

(in thousands, except share and per share data) 2020 2019 2020 2019

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Debt issue cost related to debt refinancing, prepayment, and commitment fees 13,195 (1,319) 17,366 7,894

Reserve for legal matters

Severance (38) 7,873 4,161 61,224

Transaction advisory fees and expenses 86 1,798 274 16,907

Termination of office leases 7 65,208 283 65,208

COVID-19 one-time costs and donations

Other (5,935) 104 980 1,491

Share based compensation 16,505 11,983 42,249 21,796

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(2) Assumes that (1) holders of all vested and unvested non-vesting Virtu Financial Units (together with corresponding shares of the Company's Class C common stock, par value $0.00001 per share (the “Class C Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of Class A Common Stock on a one-for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of the Company's Class D common stock, par value $0.00001 per share (the “Class D Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of the Company's Class B common stock, par value $0.00001 per share (the “Class B Common Stock”) on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B Common Stock into shares of Class A Common Stock on a one-for-one basis.

Includes additional shares from dilutive impact of options and restricted stock units outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three months ended March 31, 2020 and 2019.

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31, 2020

Market Making

Execution Services

Includes additional shares from dilutive impact of options, restricted stock units and restricted stock awards outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three and six months ended June 30, 2020 and 2019 as well as warrants issued in connection with the Founder Member Loan during the three and six months ended June 30, 2020.

The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 2020

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 744,685 $ (689) $ — $ 743,996

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Interest and dividends income 9,020 320 — 9,340

Brokerage, exchange and clearance fees, net

Payments for order flow

Brokerage, exchange, clearance fees and payments for order flow, net (172,872) (30,631) — (203,503)

Interest and dividends expense (28,085) (756) — (28,841)

Adjusted Net Trading Income $ 552,114 $ 116,614 $ — $ 668,728

Three Months Ended March 31, 2019

Market Making

Execution Services

Three Months Ended June 30, 2019

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 205,568 $ 355 $ — $ 205,923

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Interest and dividends income 23,284 878 — 24,162

Brokerage, exchange and clearance fees, net

Payments for order flow

Brokerage, exchange, clearance fees and payments for order flow, net (63,630) (35,857) — (99,487)

Interest and dividends expense (36,395) (429) — (36,824)

Adjusted Net Trading Income $ 133,788 $ 105,106 $ — $ 238,894

The following tables reconcile our Market Making segment Trading income, net to Adjusted Net Trading Income by category for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31, 2020

Global Equities

Global FICC, Options and Other

Total Market Making

Six Months Ended June 30, 2020

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 1,547,347 $ (886) $ — $ 1,546,461

Commissions, net and technology services 136 318,345 — 318,481

Brokerage, exchange and clearance fees, net

Payments for order flow

Interest and dividends income 35,453 403 — 35,856

Brokerage, exchange, clearance fees and payments for order flow, net (309,476) (67,845) — (377,321)

Interest and dividends expense (69,071) (1,210) — (70,281)

Adjusted Net Trading Income $ 1,204,389 $ 248,807 $ — $ 1,453,196

Six Months Ended June 30, 2019

(in thousands) Market Making Execution Services Corporate Total

Trading income, net $ 460,689 $ 2,774 $ — $ 463,463

Commissions, net and technology services 9,961 210,306 — 220,267

Interest and dividends income 41,787 11,506 — 53,293

Brokerage, exchange, clearance fees and payments for order flow, net (130,197) (56,904) — (187,101)

Interest and dividends expense (70,655) (11,538) — (82,193)

Adjusted Net Trading Income $ 311,585 $ 156,144 $ — $ 467,729

The following tables reconcile our Market Making segment Trading income, net to Adjusted Net Trading Income by category for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 2020

(in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making

Trading income, net $ 660,390 $ 84,295 $ — $ 744,685

Commissions, net and technology services (634) — — (634)

Brokerage, exchange, clearance fees and payments for order flow, net (168,683) (4,189) — (172,872)

Interest and dividends, net (17,055) (2,010) — (19,065)

Adjusted Net Trading Income $ 474,018 $ 78,096 $ — $ 552,114

Three Months Ended March 31, 2019

Global Equities

Global FICC, Options and Other

Total Market Making

Three Months Ended June 30, 2019

(in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making

Trading income, net $ 163,044 $ 41,126 $ 1,398 $ 205,568

Commissions, net and technology services 4,961 — — 4,961

Brokerage, exchange and clearance fees, net

Payments for order flow

Brokerage, exchange, clearance fees and payments for order flow, net (50,070) (10,024) (3,536) (63,630)

Interest and dividends, net (10,395) (2,754) 38 (13,111)

Adjusted Net Trading Income $ 107,540 $ 28,348 $ (2,100) $ 133,788

The following table shows our Adjusted Net Trading Income, average daily Adjusted Net Trading Income and percentage of Adjusted Net Trading Income by asset class for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31,

Six Months Ended June 30, 2020

(in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making

Trading income, net $ 1,368,715 $ 178,632 $ — $ 1,547,347

Commissions, net and technology services 136 — — 136

Brokerage, exchange, clearance fees and payments for order flow, net (292,922) (16,554) — (309,476)

Interest and dividends, net (30,149) (3,469) — (33,618)

Adjusted Net Trading Income $ 1,045,780 $ 158,609 $ — $ 1,204,389

Six Months Ended June 30, 2019

(in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making

Trading income, net $ 371,677 $ 90,916 $ (1,904) $ 460,689

Commissions, net and technology services 9,989 (28) — 9,961

Brokerage, exchange, clearance fees and payments for order flow, net (111,591) (20,712) 2,106 (130,197)

Interest and dividends, net (22,927) (5,743) (198) (28,868)

Adjusted Net Trading Income $ 247,148 $ 64,433 $ 4 $ 311,585

The following table shows our Adjusted Net Trading Income, average daily Adjusted Net Trading Income and percentage of Adjusted Net Trading Income by asset class for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Adjusted Net Trading Income by Category:

2020 2019 % Change

Market Making:

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Global FICC, Options and Other 78,096 28,348 175.5%

Unallocated(1)

Unallocated(1) — (2,100) NM

Total Market Making 552,114 133,788 312.7%

Execution Services 116,614 105,106 10.9%

Corporate — — NM

Adjusted Net Trading Income $ 668,728 $ 238,894 179.9%

Three Months Ended March 31,

Three Months Ended June 30,

Average Daily Adjusted Net Trading Income by Category:

2020 2019 % Change

Market Making:

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Global FICC, Options and Other 1,240 450 175.5%

Unallocated(1)

Unallocated(1) — (33) NM

Total Market Making 8,764 2,124 312.6%

Execution Services 1,851 1,668 11.0%

Corporate — — NM

Average Daily Adjusted Net Trading Income $ 10,615 $ 3,792 179.9%

Six Months Ended June 30,

Adjusted Net Trading Income by Category:

2020 2019 % Change

Market Making:

Global Equities $ 1,045,780 $ 247,148 323.1%

Global FICC, Options and Other 158,609 64,433 146.2%

Unallocated(1) — 4 NM

Total Market Making 1,204,389 311,585 286.5%

Execution Services 248,807 156,144 59.3%

Corporate — — NM

Adjusted Net Trading Income $ 1,453,196 $ 467,729 210.7%

Six Months Ended June 30,

Average Daily Adjusted Net Trading Income by Category:

2020 2019 % Change

Market Making:

Global Equities $ 8,366 $ 1,977 323.2%

Global FICC, Options and Other 1,269 515 146.4%

Unallocated(1) — — NM

Total Market Making 9,635 2,492 286.6%

Execution Services 1,990 1,249 59.4%

Corporate — — NM

Average Daily Adjusted Net Trading Income $ 11,626 $ 3,740 210.8%

(1) Under our methodology for recording “trading income, net” in our Condensed Consolidated Statements of Comprehensive Income from Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q, we recognize revenues based on the exit price of assets and liabilities in accordance with applicable U.S.

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We do not allocate any resulting differences based on the timing of revenue recognition.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Total Revenues

Our total revenues increased $641.1 million , or 176.6% , to $1,004.1 million for the three months ended March 31, 2020 , compared to $363.0 million for the three months ended March 31, 2019 .

This increase was primarily attributable to an increase in Trading income, net, of $544.9 million , which was primarily attributable to the higher market volatility and trading volumes during the first quarter of 2020 compared to 2019, which are largely attributed to the impacts of COVID-19 and the governmental and other responses thereto.

In addition, there was an increase in Commissions, net and technology services of $95.6 million which was primarily attributable to the higher market volatility and trading volumes during the first quarter of 2020 compared to 2019, as well as the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019 in the prior period.

Though our total revenues increased during the period, we note

that because of the extraordinary volume and volatility environment during the period and the operational challenges caused directly or indirectly by COVID-19, including the deployment of our business continuity plan and increases in short term liquidity requirements, we selectively limited our client trading and market making businesses during certain periods throughout the quarter.

The following table shows the total revenues by segment for the three months ended March 31, 2020 and 2019 .

Three Months Ended March 31,

(in thousands, except for percentage)

Our total revenues increased $530.8 million, or 141.5%, to $905.9 million for the three months ended June 30, 2020, compared to $375.1 million for the three months ended June 30, 2019.

The increase was primarily driven by an increase of $538.1 million in Trading income, net, which was driven by higher market volatility and trading volumes from the continued impacts of the COVID-19 pandemic during the three months ended June 30, 2020 compared to the prior year.

The following table shows total revenues by segment for the three months ended June 30, 2020 and 2019.

Three Months Ended June 30,

(in thousands, except for percentage) 2020 2019 % Change

Market Making

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Interest and dividends income 9,020 23,284 (61.3)%

Commissions, net and technology services

Commissions, net and technology services (634) 4,961 NM

Other, net 6,046 216 2,699.1%

Total revenues from Market Making 759,117 234,029 224.4%

Execution Services

Trading income, net

Trading income, net (689) 355 NM

Interest and dividends income 320 878 (63.6)%

Commissions, net and technology services 148,370 140,159 5.9%

Other, net 75 78 (3.8)%

Total revenues from Execution Services 148,076 141,470 4.7%

Trading income, net — — NM

Interest and dividends income — — NM

Commissions, net and technology services — — NM

Other, net (1,290) (398) 224.1

Total revenues from Corporate (1,290) (398) 224.1

Trading income, net 743,996 205,923 261.3%

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Commissions, net and technology services 147,736 145,120 1.8%

Other, net 4,831 (104) NM

Total revenues $ 905,903 $ 375,101 141.5%

Trading income, net.

Trading income, net was primarily earned by our Market Making segment.

Trading income, net increased $538.1 million, or 261.3%, to $744.0 million for the three months ended June 30, 2020, compared to $205.9 million for the three months ended June 30, 2019.

The increase was primarily driven by the higher market volatility and trading volumes across global markets and major asset categories during the three months ended June 30, 2020 compared to the same period in 2019.

Average daily realized volatility of the S&P 500 Index increased 178.7% compared to the prior year, while average daily U.S.

equity consolidated volumes increased 78.1%.

Rather than analyzing trading income, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income, together with Interest and dividends income, Interest and dividends expense, Commissions, net and technology services and Brokerage, exchange, clearance fees and payments for order flow, net, each of which is described below.

Interest and dividends income.

Interest and dividends income was primarily earned by our Market Making segment.

Interest and dividends income decreased $14.8 million, or 61.3%, to $9.3 million for the three months ended June 30, 2020, compared to $24.2 million for the three months ended June 30, 2019.

This decrease was primarily attributable to the lower interest income earned on cash collateral posted as part of securities lending transactions driven by lower interest rates compared to the same period in 2019.

As indicated above, rather than analyzing interest and dividends income in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Commissions, net and technology services.

Commissions, net and technology services revenues were primarily earned by our Execution Services segment.

Commissions, net and technology services revenues increased $2.6 million, or 1.8%, to $147.7 million for the three months ended June 30, 2020, compared to $145.1 million for the three months ended June 30, 2019.

The increase was primarily driven by the higher market volatility and trading volumes compared to the same period in 2019.

Other, net was $4.8 million for the three months ended June 30, 2020, compared to a loss of $(0.1) million for the three months ended June 30, 2019.

The increase was primarily due to a $5.1 million gain recognized on the minority

investment in SBI Japannext (see Note 10 "Financial Assets and Liabilities" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q for details on the SBI Investment).

Adjusted Net Trading Income

Adjusted Net Trading Income increased $429.8 million, or 179.9%, to $668.7 million for the three months ended June 30, 2020, compared to $238.9 million for the three months ended June 30, 2019.

This increase was primarily attributable to higher Trading income, net in the Market Making segment driven by higher market volatility and trading volumes across major asset categories during the three months ended June 30, 2019 compared to the same period in 2019.

In the Market Making segment, Global Equities increased by $366.5 million, or 340.8%, and Global FICC, Options and Other increased by $49.7 million, or 175.5%, for the three months ended June 30, 2020.

Adjusted Net Trading Income per day increased $6.8 million, or 179.9%, to $10.6 million for the three months ended June 30, 2020, compared to $3.8 million for the three months ended June 30, 2019.

There were 63 trading days for both the three months ended June 30, 2020 and 2019.

Adjusted Net Trading Income is a non-GAAP measure.

For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this Item 2.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Operating Expenses

Our operating expenses increased $59.7 million, or 13.5%, to $501.4 million for the three months ended June 30, 2020, compared to $441.7 million for the three months ended June 30, 2019.

The increase in operating expenses is primarily due to an increase in brokerage, exchange, clearance fees and payments for order flow, net driven by higher market volatility and trading volumes partially offset by decreases in interest and dividends expense and other operating expenses described in more detail below.

Brokerage, exchange, clearance fees and payments for order flow, net.

Brokerage exchange, clearance fees and payments for order flow, net, increased $104.0 million, or 104.6%, to $203.5 million for the three months ended June 30, 2020, compared to $99.5 million for the three months ended June 30, 2019.

This increase was primarily attributable to the increase in volume we traded in Global Equities instruments and other asset categories.

Within that, payments for order flow increased $77.4 million, or 327.6%, to $101.1 million for the three months ended June 30, 2020, compared to $23.6 million for the three months ended June 30, 2019.

The increase was driven by the increases in volumes from our broker-dealer clients eligible for payments for order flow, driven by high participation of retail investors in the market during the past quarter.

We evaluate this category representing direct costs associated with transacting business, in the broader context of our Adjusted Net Trading Income.

Communication and data processing.

Communication and data processing expense increased $1.2 million, or 2.3%, to $55.7 million for the three months ended June 30, 2020, compared to $54.4 million for the three months ended June 30, 2019.

This increase was primarily due to additional telecommunication and networking services from activating our back-up facilities and enabling the majority of our employees to work from home.

The increase was partially offset by reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing subscriptions.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes increased $37.2 million, or 44.5%, to $120.9 million for the three months ended June 30, 2020, compared to $83.7 million for the three months ended June 30, 2019.

The increase in compensation levels was primarily attributable to increased incentive compensation, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability.

The increase reflected strong results for the quarter.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $11.7 million and $9.9 million for the three months ended June 30, 2020, and 2019, respectively.

Interest and dividends expense.

Interest and dividends expense decreased $8.0 million, or 21.7%, to $28.8 million for the three months ended June 30, 2020, compared to $36.8 million for the three months ended June 30, 2019.

This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions.

As indicated above, rather than analyzing interest and dividends expense in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Operations and administrative.

Operations and administrative expense decreased $9.7 million, or 30.9%, to $21.7 million for the three months ended June 30, 2020, compared to $31.5 million for the three months ended June 30, 2019.

This decrease was primarily attributable to decreases in travel and entertainment due to the on-going effects of the COVID-19 pandemic as well as the on-going efforts to consolidate office premises and professional services after the ITG Acquisition.

Depreciation and amortization.

Depreciation and amortization increased $1.9 million, or 12.8%, to $16.7 million for the three months ended June 30, 2020, compared to $14.8 million for the three months ended June 30, 2019.

This increase was primarily attributable to an increase in capital expenditures on telecommunication, networking and other assets.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software decreased $1.7 million, or 8.0%, to $19.0 million for the three months ended June 30, 2020, compared to $20.6 million for the three months ended June 30, 2019.

This decrease was due to certain technology intangible assets acquired in connection with the KCG Acquisition being fully amortized.

Termination of office leases.

There was no expense incurred related to termination of office leases for the three months ended June 30, 2020, compared to $65.2 million for the three months ended June 30, 2019.

The decrease in termination of office leases was due to the impairment of operating lease right-of-use assets and leasehold improvements and fixed assets incurred in 2019 for certain abandoned office space as part of the effort to integrate and consolidate office space in connection with the ITG Acquisition.

Debt issue cost related to debt refinancing and prepayment.

There was a $188.5 million prepayment made during the three months ended June 30, 2020;

as such, debt issue costs incurred related to debt refinancing or prepayment were $13.2 million for the three months ended June 30, 2020.

Debt issue costs related to debt refinancing and prepayment were $(1.3) million for the three months ended June 30, 2019.

Transaction advisory fees and expenses.

Transaction advisory fees and expenses decreased $(1.7) million, or 95.2% to $0.1 million for the three months ended June 30, 2020, compared to $1.8 million during the three months ended June 30, 2019.

The decrease was due to professional fees incurred in 2019 as a result of the ITG Acquisition.

Financing interest expense on long-term borrowings.

Financing interest expense on long-term borrowings decreased $13.0 million, or 37.3%, to $21.7 million for the three months ended June 30, 2020, compared to $34.7 million for the three months ended June 30, 2019.

This decrease was primarily attributable to the decrease in outstanding principal as a result of the prepayment on the First Lien Term Loan Facility.

Provision for (benefit from) income taxes

We incur corporate tax at the U.S.

federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial.

Our income tax expense reflects such U.S.

federal income tax as well as taxes payable by certain of our non-U.S.

subsidiaries.

Our provision for (benefit from) income taxes was $69.3 million for the three months ended June 30, 2020, compared to $(11.1) million for the three months ended June 30, 2019.

The change was primarily due to the income before income taxes and noncontrolling interest for the three months ended June 30, 2020, compared to a loss before income taxes and noncontrolling interest for the three months ended June 30, 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Total Revenues

Our total revenues increased $1,171.0 million, or 159.2%, to $1,906.5 million for the six months ended June 30, 2020, compared to $735.5 million for the six months ended June 30, 2019.

This increase was primarily attributable to an increase in Trading income, net, of $1,083.0 million, which was driven by higher market volatility and trading volumes during the first half of 2020 compared to 2019, from the impacts of COVID-19 and the governmental and other responses thereto.

In addition, 2020 included the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through June 30, 2019 in the prior year.

Though our total revenues increased during the period, Commissions, net and technology services within the Execution Services segment did not have the same relative increase in part because we selectively limited our client trading business during certain periods throughout the past six months due to the extraordinary volume and volatility during the period and the operational challenges caused directly or indirectly by COVID-19, including working remotely and increases in short term liquidity requirements.

The following table shows the total revenues by segment for the six months ended June 30, 2020 and 2019.

Six Months Ended June 30,

(in thousands, except for percentage) 2020 2019 % Change

Market Making

Trading income, net $ 1,547,347 $ 460,689 235.9%

Interest and dividends income 35,453 41,787 (15.2)%

Commissions, net and technology services 136 9,961 (98.6)%

Other, net 6,767 (163) NM

Total revenues from Market Making 1,589,703 512,274 210.3%

Execution Services

Trading income, net (886) 2,774 NM

Interest and dividends income 403 11,506 (96.5)%

Commissions, net and technology services 318,345 210,306 51.4%

Other, net 79 (66) NM

Total revenues from Execution Services 317,941 224,520 41.6%

Trading income, net — — NM

Interest and dividends income — — NM

Commissions, net and technology services — — NM

Other, net (1,120) (1,261) (11.2)%

Total revenues from Corporate (1,120) (1,261) (11.2)%

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Commissions, net and technology services 318,481 220,267 44.6%

Other, net 5,726 (1,490) NM

Total revenues $ 1,906,524 $ 735,533 159.2%

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Trading income, net was primarily earned by our Market Making segment.

Trading income, net, increased $544.9 million , or 211.6% , to $802.5 million for the three months ended March 31, 2020 , compared to $257.5 million for the three months ended March 31, 2019 .

The increase was primarily driven by the higher market volatility and trading volumes across global markets and major asset categories during the three months ended March 31, 2020 compared to the prior period.

Average daily realized volatility of the S&P 500 Index increased 314.8% compared to the prior period, while average daily U.S.

Trading income, net, increased $1,083.0 million, or 233.7%, to $1,546.5 million for the six months ended June 30, 2020, compared to $463.5 million for the six months ended June 30, 2019.

The increase was primarily driven by the higher market volatility and trading volumes across global markets and major asset categories during the six months ended June 30, 2020 compared to the same period in the prior year.

Average daily realized volatility of the S&P 500 Index increased 253.2% compared to the prior year, while average daily U.S.

equity consolidated volumes increased 61.3%.

Rather than analyzing trading income, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income, together with Interest and dividends income, Interest and dividends expense, Commissions, net and technology services, Payments for order flow, and Brokerage, exchange and clearance fees, net, each of which are described below.

Interest and dividends income.

Interest and dividends income was primarily earned by our Market Making segment.

Interest and dividends income decreased $2.6 million , or 9.0% , to $26.5 million for the three months ended March 31, 2020 , compared to $29.1 million for the three months ended March 31, 2019 .

Interest and dividends income decreased $17.4 million, or 32.7%, to $35.9 million for the six months ended June 30, 2020, compared to $53.3 million for the six months ended June 30, 2019.

This decrease was primarily attributable to lower interest income earned on cash collateral posted as part of securities loaned transactions driven by lower interest rates compared to the prior period.

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Commissions, net and technology services revenues were primarily earned by our Execution Services segment.

Commissions, net and technology services revenues increased $95.6 million , or 127.2% , to $170.7 million for the three months ended March 31, 2020 , compared to $75.1 million for the three months ended March 31, 2019 .

The increase was primarily attributable to the higher market volatility and trading volumes across major asset categories during the three months ended March 31, 2020 compared to the prior period, as well as the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019 in the prior period.

The ITG Acquisition brought recurring connectivity revenues generated from workflow technology and subscription revenues from analytics services to Commissions, net and technology services.

Other, net increased $3.2 million , or 272.7% , to $4.4 million for the three months ended March 31, 2020 , compared to $1.2 million for the three months ended March 31, 2019 .

The balance of Other income for the three months ended March 31, 2020 reflects rental income from subleasing certain office space and net gains on the Company's equity method investments.

Commissions, net and technology services revenues increased $98.2 million, or 44.6%, to $318.5 million for the six months ended June 30, 2020, compared to $220.3 million for the six months ended June 30, 2019.

The increase was primarily attributable to the higher market volatility and trading volumes across major asset categories during the six months ended June 30, 2020 compared to the prior period, as well as the results of ITG for the full first quarter of 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019 in the prior period.

The ITG Acquisition

brought recurring connectivity revenues generated from workflow technology and subscription revenues from analytics services to Commissions, net and technology services.

Other, net increased $7.2 million, or 484.3%, to $5.7 million for the six months ended June 30, 2020, compared to $(1.5) million for the six months ended June 30, 2019.

The increase was primarily due to a $5.1 million gain recognized on the minority investment in SBI Japannext (see Note 10 "Financial Assets and Liabilities" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q for details on the SBI Investment).

Adjusted Net Trading Income

Adjusted Net Trading Income increased $555.6 million , or 242.8% , to $784.5 million for the three months ended March 31, 2020 , compared to $228.8 million for the three months ended March 31, 2019 .

This increase was primarily attributable to higher Trading income, net, driven by higher market volatility and trading volumes across major asset categories during the three months ended March 31, 2020 compared to the prior period.

Adjusted Net Trading Income increased $985.5 million, or 210.7%, to $1,453.2 million for the six months ended June 30, 2020, compared to $467.7 million for the six months ended June 30, 2019.

This increase was primarily attributable to higher Trading income, net, driven by higher market volatility and trading volumes across major asset categories during the six months ended June 30, 2020 compared to the prior period.

[Average daily realized volatility of the S&P 500 Index and average daily CVIX realized volatility increased 314.8% and 237.0%, respectively, compared to the prior period, while average daily U.S.

equity consolidated volumes increased 50.5%.

There was also an increase in Commissions, net and technology services as a result of higher market volatility and trading volumes across major asset categories, and the ITG Acquisition.

equity consolidated volumes increased 50.5%.] There was also an increase in Commissions, net and technology services as a result of higher market volatility and trading volumes across major asset categories, and the ITG Acquisition.

There were increases in Trading income, net in Global Equities of $798.6 million, and in Global FICC, Options and Other of $94.2 million, from the Market Making segment.

There was also an increase of $92.7 million, or 59.3%, in the Execution Services segment.

Adjusted Net Trading Income per day increased $8.9 million , or 237.3% , to $12.7 million for the three months ended March 31, 2020 , compared to $3.8 million for the three months ended March 31, 2019 .

The number of trading days was 62 and 61 for the three months ended March 31, 2020 and 2019 , respectively.

Adjusted Net Trading Income per day increased $7.9 million, or 210.8%, to $11.6 million for the six months ended June 30, 2020, compared to $3.7 million for the six months ended June 30, 2019.

The number of trading days was 125 for both the six months ended June 30, 2020 and 2019, respectively.

Adjusted Net Trading Income is a non-GAAP measure.

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Operating Expenses

Our operating expenses increased $158.7 million , or 41.8% , to $537.9 million for the three months ended March 31, 2020 , compared to $379.2 million for the three months ended March 31, 2019 .

The increase in operating expenses was primarily due to higher trading related expenses as a result of the increases in volumes traded during the three months ended March 31, 2020 compared to the prior period.

Our operating expenses increased $217.4 million, or 26.6%, to $1,035.8 million for the six months ended June 30, 2020, compared to $818.3 million for the six months ended June 30, 2019.

The increase in operating expenses was primarily due to higher trading related expenses as a result of the increases in volumes traded during the six months ended June 30, 2020 compared to the prior period.

Additionally, the results of ITG for the full first quarter of 2020 compared to the one-month results of ITG from the ITG Closing Date through March 31, 2019 in the prior period caused an overall increase in expenses in multiple expense categories as described in more detail below.

Brokerage, exchange and clearance fees, net.

Brokerage exchange and clearance fees, net, increased $47.5 million , or 74.1% , to $111.5 million for the three months ended March 31, 2020 , compared to $64.1 million for the three months ended March 31, 2019 .

Brokerage, exchange, clearance fees and payments for order flow, net.

Brokerage, exchange, clearance fees and payments for order flow, net, increased $190.2 million, or 101.7%, to $377.3 million for the six months ended June 30, 2020, compared to $187.1 million for the six months ended June 30, 2019.

This increase was primarily attributable to an increase in volume we traded in Global Equities instruments and other asset categories.

As indicated above, rather than analyzing brokerage, exchange and clearance fees, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

Within that, payments for order flow increased $116.1 million, or 246.1%, to $163.3 million for the six months ended June 30, 2020, compared to $47.2 million for the six months ended June 30, 2019.

The increase was primarily attributable to the increase in volumes from our broker-dealer clients eligible for payments for order flow, driven by high participation of retail investors in the market during the past six months compared to the prior year.

We evaluate this category, representing direct costs associated with transacting our business in the broader context of our Adjusted Net Trading Income.

Communication and data processing.

Communication and data processing expense increased $13.2 million , or 31.6% , to $55.0 million for the three months ended March 31, 2020 , compared to $41.8 million for the three months ended March 31, 2019 .

This increase was primarily due to the additional connectivity and market data service subscriptions acquired as part of the ITG Acquisition.

Communication and data processing expense increased $14.5 million, or 15.0%, to $110.7 million for the six months ended June 30, 2020, compared to $96.2 million for the six months ended June 30, 2019.

This increase was primarily due to the additional connectivity and market data service subscriptions acquired as part of the ITG Acquisition and for additional telecommunication and networking services from activating our back-up facilities and enabling the majority of our employees to work from home.

The increase was partially offset by reductions in connectivity connections as a result of an on-going effort to consolidate various communication and data processing subscriptions.

Employee compensation and payroll taxes.

Employee compensation and payroll taxes increased $62.5 million , or 58.0% , to $170.4 million for the three months ended March 31, 2020 , compared to $107.8 million for the three months ended March 31, 2019 .

Employee compensation and payroll taxes increased $99.8 million, or 52.1%, to $291.3 million for the six months ended June 30, 2020, compared to $191.5 million for the six months ended June 30, 2019.

Furthermore, we incurred additional compensation expense as a result of one-time cash bonuses awarded to certain employees to mitigate the effects of the COVID-19 pandemic.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $7.8 million and $6.8 million for the three months ended March 31, 2020 and 2019 , respectively.

Payments for order flow.

Payments for order flow increased $38.7 million , or 164.3% , to $62.3 million for the three months ended March 31, 2020 , compared to $23.6 million for the three months ended March 31, 2019 .

The increase was primarily attributable to the increase in volumes from our broker-dealer clients eligible for payments for order flow.

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.

As indicated above, rather than analyzing payments for order flow in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $19.5 million and $16.7 million for the six months ended June 30, 2020 and 2019, respectively.

Interest and dividends expense.

Interest and dividends expense decreased $3.9 million , or 8.7% , to $41.4 million for the three months ended March 31, 2020 , compared to $45.4 million for the three months ended March 31, 2019 .

Interest and dividends expense decreased $11.9 million, or 14.5%, to $70.3 million for the six months ended June 30, 2020, compared to $82.2 million for the six months ended June 30, 2019.

This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions.

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Operations and administrative.

Operations and administrative expense increased $8.5 million , or 38.6% , to $30.6 million for the three months ended March 31, 2020 , compared to $22.1 million for the three months ended March 31, 2019 .

The increase was primarily attributable to the additional occupancy, professional and consulting expenses resulting from the ITG Acquisition, offset by on-going efforts to consolidate office premises and professional services, as well as additional costs incurred in connection with the deployment of our business continuity plan in response to the COVID-19 pandemic, including additional hardware and other technology spending to facilitate remote work arrangements for our employees, in addition to corporate donations made in support of first responders and other groups impacted by COVID-19.

Operations and administrative expense decreased $2.1 million, or 4.1%, to $48.9 million for the six months ended June 30, 2020, compared to $51.0 million for the six months ended June 30, 2019.

The decrease was primarily attributable to decreases in travel and entertainment due to the on-going effects of the COVID-19 pandemic as well the on-going efforts to consolidate office premises and professional services after the ITG Acquisition.

Depreciation and amortization.

Depreciation and amortization increased $0.9 million , or 5.5% , to $17.4 million for the three months ended March 31, 2020 , compared to $16.5 million for the three months ended March 31, 2019 .

This increase was primarily attributable to depreciation and amortization of additional assets resulting from the ITG Acquisition.

The overall increase was partially offset by the decrease in depreciation and amortization as a result of assets being written-off as part of the cessation of use of certain leased office space (see “Termination of office leases” below).

Depreciation and amortization increased $2.8 million, or 9.0%, to $34.1 million for the six months ended June 30, 2020, compared to $31.3 million for the six months ended June 30, 2019.

This increase was primarily attributable to an increase in capital expenditures on telecommunication, networking and other assets.

Amortization of purchased intangibles and acquired capitalized software.

Amortization of purchased intangibles and acquired capitalized software increased $8.0 million , or 73.6% , to $19.0 million for the three months ended March 31, 2020 , compared to $10.9 million for the three months ended March 31, 2019 .

Amortization of purchased intangibles and acquired capitalized software increased $6.4 million, or 20.2%, to $37.9 million for the six months ended June 30, 2020, compared to $31.5 million for the six months ended June 30, 2019.

This increase was due to the amortization of intangible assets acquired in connection with the ITG Acquisition.

Termination of office leases.

Termination of office leases was $0.3 million for the three months ended March 31, 2020 , compared to $0.0 million for the three months ended March 31, 2019 .

The increase in termination of office leases was due to dilapidation charges incurred for certain abandoned office space as part of the effort to integrate and consolidate office space in connection with the ITG Acquisition.

Termination of office leases was $0.3 million for the six months ended June 30, 2020, compared to $65.2 million for the six months ended June 30, 2019.

The decrease in termination of office leases was due to the impairment of operating lease right-of-use asset and leasehold improvements and fixed assets incurred in 2019 for certain abandoned office space as part of the effort to integrate and consolidate office space in connection with the ITG Acquisition.

Debt issue costs related to debt refinancing, prepayment and commitment fees.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees decreased $5.0 million , or 54.7% , to $4.2 million for the three months ended March 31, 2020 , compared to $9.2 million for the three months ended March 31, 2019 .

The higher amount for the three months ended March 31, 2019 mainly reflects costs incurred related to the termination of the Existing Term Loan Facility (as defined below) in the first quarter of 2019.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees increased $9.5 million, or 120.0%, to $17.4 million for the six months ended June 30, 2020, compared to $7.9 million for the six months ended June 30, 2019.

This was primarily driven by a $188.5 million prepayment made during the six months ended June 30, 2020.

The higher amount for the six months ended June 30, 2019 mainly reflects costs incurred related to the termination of the Existing Term Loan Facility (as defined below) in the first quarter of 2019.

Transaction advisory fees and expenses.

Transaction advisory fees and expenses decreased $14.9 million , or 98.8% , to $0.2 million for the three months ended March 31, 2020 , compared to $15.1 million for the three months ended March 31, 2019 .

The decrease was primarily attributable to the ITG Acquisition, for which we incurred significant transaction advisory fees during the first quarter of 2019.

Transaction advisory fees and expenses decreased $16.6 million, or 98.4%, to $0.3 million for the six months ended June 30, 2020, compared to $16.9 million for the six months ended June 30, 2019.

The decrease was primarily attributable to the ITG Acquisition, for which we incurred significant transaction advisory fees during the first half of 2019.

The decrease was partially offset by increases related to the Founder Member Loan Facility, and certain other borrowing arrangements, which we undertook to increase our available short term liquidity in response to the extraordinary volume and volatility environment during the quarter, driven largely by COVID-19 and responses.

Financing interest expense on long term borrowings.

Financing interest expense on long-term borrowings increased $2.9 million , or 12.6% , to $25.7 million for the three months ended March 31, 2020 , compared to $22.8 million for the three months ended March 31, 2019 .

This increase was primarily attributable to the increase in outstanding principal as a result of the First Lien Term Loan Facility and the Incremental Term Loans as discussed in Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q .

Financing interest expense on long-term borrowings decreased $10.1 million, or 17.5%, to $47.4 million for the six months ended June 30, 2020, compared to $57.5 million for the six months ended June 30, 2019.

This decrease was primarily attributable to the decrease in outstanding principal as a result of the First Lien Term Loan Facility and the Incremental Term Loans as discussed in Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Provision for (benefit from) income taxes

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subsidiaries.

Our provision for income taxes was $78.0 million for the three months ended March 31, 2020 , compared to a benefit from income taxes of $2.6 million for the three months ended March 31, 2019 .

The change was primarily due to the income before income taxes and noncontrolling interest for the three months ended March 31, 2020, compared to a loss before taxes during the prior year period.

Our provision for income taxes was $147.2 million for the six months ended June 30, 2020, compared to a benefit from income taxes of $(13.7) million for the six months ended June 30, 2019.

The change was primarily due to the income before income taxes and noncontrolling interest for the six months ended June 30, 2020, compared to a loss before taxes during the prior year period.

Liquidity and Capital Resources

As of March 31, 2020 , we had $710.5 million in Cash and cash equivalents.

As of June 30, 2020, we had $670.8 million in Cash and cash equivalents.

This balance is maintained primarily to support operating activities for capital expenditures and for short-term access to liquidity, and for other general corporate purposes.

As of March 31, 2020 , we had borrowings under our prime brokerage credit facilities of approximately $283.0 million , borrowing under broker dealer facilities of $239.0 million , short-term bank overdrafts of $180.5 million , and long-term debt outstanding in an aggregate principal amount of approximately $1,957.5 million .

As of March 31, 2020 , our regulatory capital requirements for domestic U.S.

As of June 30, 2020, we had borrowings under our prime brokerage credit facilities of approximately $112.4 million, no borrowing outstanding under our broker dealer facilities, short-term bank overdrafts of $26.3 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,768.9 million.

As of June 30, 2020, our regulatory capital requirements for domestic U.S.

broker-dealer subsidiaries were $6.4 million, in aggregate.

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For purposes of providing additional liquidity, we maintain a committed credit facility and an uncommitted credit facility for our wholly-owned broker-dealer subsidiaries, as discussed in Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

As a result of the substantially elevated volume and volatility environment during the quarter attributable largely to the COVID-19 pandemic and governmental and other responses thereto, our trading activities both in our market making segment and in our execution services segment increased materially.

This increase in our activity and our customers’ activity together with the extraordinary volatility during certain periods within the quarter drove our short-term liquidity needs significantly higher as compared to prior periods.

Specifically, our daily margin requirements with the National Securities Clearing Corporation (“NSCC”) rose substantially on select dates during the period.

In order to manage these increased daily funding obligations, we have taken steps during the period or shortly thereafter to increase available short-term liquidity and to reduce our short term funding requirements.

Increases to our available short-term liquidity included entering into the Founder Member Loan Facility (as defined below), the Demand Loan (as defined below) and the Committed Broker Dealer Facility Sublimit Increase, each of which are described in further detail below as well as in Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q .

This increase in our activity and our customers’ activity together with the extraordinary volatility during certain periods within the quarter has driven our short-term liquidity needs significantly higher as compared to prior periods, though these levels declined meaningfully during the quarter relative to their peaks in the first quarter of 2020.

In order to manage these increased daily funding obligations, we have taken steps to increase available short-term liquidity and to reduce our short term funding requirements.

Increases to our available short-term liquidity included entering into the Founder Member Loan Facility (as defined below), the Demand Loan (as defined below, which was fully repaid during the quarter) and certain changes to the Committed Broker Dealer Facility, each of which are described in further detail below as well as in Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Steps taken to reduce our short-term funding requirements have included arranging for select clients trades to be cleared by another large financial institution, reducing limits on daily client trading activity on a client-by-client basis and selectively reducing our market making activities in certain asset classes or products.

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We manage and monitor our margin and liquidity needs on a real-time basis and can adjust our requirements both intra-day and inter-day, as required.

We do not believe that the impacts

of COVID-19 or the governmental and other responses thereto to date have adversely impacted our long term financial condition or long term capital requirements.

We do not believe that the impacts of COVID-19 or the governmental and other responses thereto to date have adversely impacted our long term financial condition or long term capital requirements.

We expect our principal sources of future liquidity to come from cash flows provided by operating activities and financing activities.

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Failure to comply with their regulatory capital requirements could result in regulatory sanction or revocation of their regulatory license.

Virtu ITG UK Limited is regulated by

the Financial Conduct Authority in the United Kingdom and is subject to similar prudential capital requirements.

Virtu ITG UK Limited is regulated by the Financial Conduct Authority in the United Kingdom and is subject to similar prudential capital requirements.

Virtu ITG Australia Limited, Virtu ITG Hong Kong Limited, and Virtu ITG Singapore Pte Limited are also subject to local regulatory capital requirements and are regulated by the Australian Securities Exchange, the Securities and Futures Commission, and the Monetary Authority of Singapore, respectively.

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See Note 9 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on our various credit facilities.

As of March 31, 2020 , the outstanding principal balance on our broker-dealer facilities was $239.0 million , and the outstanding aggregate short-term credit facilities with various prime brokers and other financial institutions from which the Company receives execution or clearing services was approximately $283.0 million , which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statement of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q .

As of June 30, 2020, there was no outstanding principal balance on our broker-dealer facilities and the outstanding aggregate short-term credit facilities with various prime brokers and other financial institutions from which the Company receives execution or clearing services was approximately $112.4 million, which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statement of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

On March 10, 2020, a broker-dealer subsidiary of the Company entered into a short term loan arrangement with Jefferies Financial Group, Inc., as lender, for a $20 million demand loan (the "Demand Loan") repayable no later than ninety (90) days after the date of borrowing.

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Pursuant to the Warrant, the Founder Member may purchase up to 3,000,000 shares of Class A Common Stock, which number of shares will be increased to 10,000,000 if, at any time during the term of the Founder Member Facility, Founder Member Loans equal to or greater than $100 million remain outstanding for a certain period of time specified in the Warrant.

The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant shall be equal to the average of the volume weighted average prices of the Class A Common Stock for the ten ( 10 ) trading days following May 7, 2020, the date on which the Company publicly announced its earnings results for the first quarter of 2020.

The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant is $22.98, which in accordance with the terms of the Warrant, is the average of the volume weighted average prices of the Class A Common Stock for the ten (10) trading days following May 7, 2020, the date on which the Company publicly announced its earnings results for the first quarter of 2020.

The Warrant may be exercised on or after May 22, 2020, the eleventh (11th) trading day following the date on which the Company publicly announced its earnings results for the first quarter of 2020, up to and including January 15, 2022.

The Warrant and Class A Common Stock issuable pursuant to the Warrant were offered, and will be issued and sold, in reliance on the exemption from the registration requirements of the Securities Act, set forth under Section 4(a)(2) of the Securities Act relating to sales by an issuer not involving any public offering.

The foregoing descriptions of the Founder Member Loan Facility and the Warrant does not purport to be complete and is qualified in its entirety by reference to the complete text of the Warrant, which is filed as an exhibit hereto.

The foregoing descriptions of the Founder Member Loan Facility and the Warrant do not purport to be complete and are qualified in its entirety by reference to the complete text of the Founder Member Loan Facility and the Warrant, which are filed as exhibits to the Company's quarterly report on Form 10-Q for the period ending March 31, 2020, filed with the Securities and Exchange Commission on May 11, 2020.

Credit Agreement

In connection with the ITG Acquisition, Virtu Financial, VFH and the Acquisition Borrower entered into the Credit Agreement, with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners.

The Credit Agreement provided (i) a senior secured first lien term loan (the “First Lien Term Loan Facility”) in an aggregate principal amount of $1,500 million, drawn in its entirety on the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under the Existing Term Loan Facility (as defined below) and the remaining approximately $1,095 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving facility to VFH (the “First Lien Revolving Facility”), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility.

remaining approximately $1,095 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving facility to VFH (the “First Lien Revolving Facility”), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility.

After the ITG Closing Date, VFH assumed the obligations of the Acquisition Borrower in respect of the acquisition term loans.

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The Amended Credit Agreement contains certain customary covenants and events of default, including relating to a change of control.

If an event of default occurs and is continuing, the lenders under the Amended Credit Agreement will be

entitled to take various actions, including the acceleration of amounts outstanding under the Amended Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Amended Credit Agreement.

If an event of default occurs and is continuing, the lenders under the Amended Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding under the Amended Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Amended Credit Agreement.

To finance the Acquisition of KCG, on June 30, 2017, Virtu Financial and VFH previously entered into the Fourth Amended and Restated Credit Agreement which, upon the closing of the Acquisition of KCG, provided for an aggregate $1.15 billion of first lien secured term loans (the “Existing Term Loan Facility”).

As described above, the Existing Term Loan Facility was fully terminated following its repayment in full with the proceeds of the First Lien Term Loan Facility.

We were in compliance with all applicable covenants under the Amended Credit Agreement as of March 31, 2020 .

We were in compliance with all applicable covenants under the Amended Credit Agreement as of June 30, 2020.

Our main sources of liquidity are cash flow from the operations of our subsidiaries, our broker-dealer credit facilities (as described above), margin financing provided by our prime brokers and cash on hand.

The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2020 and 2019 .

Three Months Ended March 31,

The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2020 and 2019.

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities

Net cash used in operating activities was $218.7 million for the three months ended March 31, 2020 , compared to net cash used in operating activities of $210.0 million for the three months ended March 31, 2019 .

The increase in net cash used in operating activities was primarily attributable to increases in net receivables from broker-dealers and clearing organizations for the three months ended March 31, 2020 compared to changes during the prior period.

Net cash provided by operating activities was $499.3 million for the six months ended June 30, 2020, compared to net cash used in operating activities of $377.3 million for the six months ended June 30, 2019.

The increase in net cash provided by operating activities was primarily attributable to increases in trading income, net for the six months ended June 30, 2020 compared to the prior period.

Investing Activities

Net cash used in investing activities was $20.0 million for the three months ended March 31, 2020 , compared to net cash used in investing activities of $848.0 million for the three months ended March 31, 2019 .

The decrease in cash used in investing activities for the three months ended March 31, 2020 was primarily attributable to the $835.6 million cash used for the ITG Acquisition on the ITG Closing Date during the prior period.

Net cash used in investing activities was $36.7 million for the six months ended June 30, 2020, compared to net cash used in investing activities of $864.4 million for the six months ended June 30, 2019.

The decrease in cash used in investing activities for the six months ended June 30, 2020 was primarily attributable to the $835.6 million cash used for the ITG Acquisition on the ITG Closing Date during the same period of 2019.

See Note 3 “ITG Acquisition” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Financing Activities

Net cash provided by financing activities was $281.0 million for the three months ended March 31, 2020 , while net cash provided by financing activities was $1,113.6 million for the three months ended March 31, 2019 .

The cash provided by financing activities for the three months ended March 31, 2020 was primarily attributable to a net increase in short term borrowings of $358.9 million, driven by higher short-term liquidity needs as compared to prior periods, specifically our daily margin requirements with the NSCC as described above.

This increase was partially offset by dividends paid of $29.6 million and distributions made to noncontrolling interests of $19.2 million.

The cash provided by financing activities of $1,113.6 million during the prior period reflect net proceeds from long-term borrowings associated with our entering the Credit Agreement on the ITG Closing Date, as described above.

Net cash used in financing activities was $483.9 million for the six months ended June 30, 2020, while net cash provided by financing activities was $1,005.6 million for the six months ended June 30, 2019.

The cash used in financing activities for the six months ended June 30, 2020 was primarily attributable to a $188.6 million prepayment on our long-term borrowings and by distributions made to noncontrolling interests of $164.4 million.

The cash provided by financing activities of $1,005.6 million during the same period of 2019 reflect net proceeds from long-term borrowings associated with our entering into the Credit Agreement on the ITG Closing Date, as described above.

Secondary Offerings

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Vincent Viola and Mr.

Michael Viola, directors of the Company, and to confirm that certain other persons (including the Company’s CEO) remain parties to the Amended and Restated Registration Rights Agreement.

Michael Viola, directors of the Company, and to confirm

that certain other persons (including the Company’s CEO) remain parties to the Amended and Restated Registration Rights Agreement.

In May 2019, the Company completed a public offering (the “May 2019 Secondary Offering”) of 9,000,000 shares of Class A Common Stock at a purchase price per share paid by the underwriters of $22.00, the net proceeds of which were used to purchase an equivalent number of Virtu Financial Units and corresponding shares of Class D Common Stock from TJMT Holdings LLC pursuant to that certain Member Purchase Agreement, entered into on May 14, 2019 by and between the Company and TJMT Holdings LLC.

Off-Balance Sheet Arrangements

As of March 31, 2020 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have current or future effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

We believe inflation has not had a material effect on our financial condition as of March 31, 2020 , and December 31, 2019 , or on our results of operations and cash flows for the three months ended March 31, 2020 and 2019 .

As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have current or future effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

We believe inflation has not had a material effect on our financial condition as of June 30, 2020, and December 31, 2019, or on our results of operations and cash flows for the three and six months ended June 30, 2020 and 2019.

Critical Accounting Policies and Estimates

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As we act as an agent in these transactions, we record such expenses on a net basis within Commissions, net and technology services in the Condensed Consolidated Statements of Comprehensive Income.

The Company recognizes the related revenue when the third-party research services are rendered and payments are made.

The Company recognizes the related revenue when the third-party research services are rendered and payments are made to the service provider.

Technology services revenues consist of fees paid by third parties for licensing of our proprietary risk management and trading infrastructure technology and provision of associated management and hosting services.

These fees include both upfront and annual recurring fees, as well as, in certain cases, contingent fees based on client revenues, which represents

variable consideration.

These fees include both upfront and annual recurring fees, as well as, in certain cases, contingent fees based on client revenues, which represents variable consideration.

The services offered under these contracts have the same pattern of transfer;

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Customers agree to pay for analytics products and services with commissions generated from trade execution services, and commissions are allocated to the analytics performance obligation(s) using:

the commission value for each customer for the products and services it receives, which is priced using the value for similar stand-alone subscription arrangements;

a calculated ratio of the commission value for the products and services relative to the total amount of commissions generated from the customer.

(i) the commission value for each customer for the products and services it receives, which is priced using the value for similar stand-alone subscription arrangements;

(ii) a calculated ratio of the commission value for the products and services relative to the total amount of commissions generated from the customer.

For these bundled commission arrangements, the allocated commissions to each analytics performance obligation are then recognized as revenue when the analytics product is delivered, either over time or at a point in time.

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Share-based compensation transactions with employees are measured based on the fair value of equity instruments issued.

Share-based awards issued for compensation in connection with or subsequent to the Reorganization Transactions and the IPO pursuant to our Amended and Restated 2015 Management Incentive Plan, and assumed pursuant to the Amended and Restated ITG 2007 Equity Plan, were in the form of stock options, Class A Common Stock and restricted stock units.

The fair value of the stock option grants is determined through the application of the Black-Scholes-Merton model.

The fair value of the Class A Common Stock and restricted stock units is determined based on the volume weighted average price for the three days preceding the grant, and with respect to the restricted stock units, a projected annual forfeiture rate.

The fair value of share-

based awards granted to employees is expensed based on the vesting conditions and is recognized on a straight-line basis over the vesting period.

The fair value of the Class A Common Stock and restricted stock units is determined based on the volume weighted average price for the three days preceding the grant.

With respect to the RSUs, we account for forfeitures as they occur.

The fair value of RSAs is determined based on the closing price as of the date of grant.

The fair value of share-based awards granted to employees is expensed based on the vesting conditions and is recognized on a straight-line basis over the vesting period, or, in the case of RSAs subject to performance conditions, from the date that achievement becomes probable through the remainder of the vesting period.

We record as treasury stock shares repurchased from employees for the purpose of settling tax liabilities incurred upon the issuance of common stock, the vesting of restricted stock units or the exercise of stock options.

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We are currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us.

Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods.

Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles,

and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods.

We recognize the tax benefit from an uncertain tax position in accordance with ASC 740, Income Taxes, only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authority, including resolution of the appeals or litigation processes, based on the technical merits of the position.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis