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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 194 added, 204 removed, 753 unchanged (35% of the section changed)

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.

The following management’s discussion and analysis covers the three and nine months ended September 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 September 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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• proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S.

and other jurisdictions;

(and certain states therein) and other jurisdictions;

• obligations to comply with laws and regulations applicable to our operations in the U.S.

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Basis of Preparation

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.

Our condensed consolidated financial statements for the three and nine months ended September 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.

Under the acquisition method of accounting, the assets and liabilities of ITG, as of the ITG Closing Date (as defined below), were recorded at their respective fair values and added to the carrying value of our existing assets and liabilities.

Under the acquisition method of accounting, the assets and liabilities of Investment Technology Group, Inc.

("ITG"), as of March 1, 2019 (the "ITG Closing Date"), were recorded at their respective fair values and added to the carrying value of our existing assets and liabilities.

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 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.

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

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

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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 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 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 during certain periods, 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.

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We interact directly with hundreds of retail brokers, Registered Investment Advisors, private client networks, sell-side brokers, and buy-side institutions.

On July 20, 2017, the KCG Closing Date, the Company completed the all-cash Acquisition of KCG.

On July 20, 2017 (the "KCG Closing Date"), the Company completed the all-cash Acquisition of KCG Holdings, Inc.

KCG was a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and geographies.

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(b) institutional sales traders who offer portfolio trading and single stock sales trading which provides execution expertise for program, block and riskless principal trades in global equities and ETFs;

and (c) matching of client conditional orders in POSIT Alert and in our ATSs, including Virtu MatchIt, POSIT and MATCHNow.

and (c) matching of client conditional orders in POSIT Alert and in our ATSs, including Virtu MatchIt and POSIT.

We also earn revenues (a) by providing our proprietary technology and infrastructure to select third parties for a service fee, (b) through workflow technology and our integrated, broker-neutral trading tools delivered across the globe, including order and execution management systems and order management software applications and network connectivity and (c) through trading analytics, including (1) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (2) portfolio construction and optimization decisions and (3) securities valuation.

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

Subsequent to the IPO and through September 30, 2020, options to purchase 1,628,750 shares in the aggregate were forfeited and 5,173,098 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 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.

(i) cash and cash equivalents reflected on our Condensed Consolidated Statement of Financial Condition as of September 30, 2020 in the amount of $0.1 million;

(ii) deferred tax assets reflected on our Condensed Consolidated Statement of Financial Condition as of September 30, 2020 in the amount of $176.2 million and tax receivable agreement obligation in the amount of $256.0 million, in each case as described in greater detail in Note 6 “Tax Receivable Agreements” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q;

(iii) current income tax receivable within Other Assets on the Condensed Consolidated Statement of Financial Condition as of September 30, 2020 in the amount of $85.5 million, (iv) 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 September 30, 2020;

and (v) provision for corporate income tax in the amount of $32.1 million and $152.8 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 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 and six months ended June 30, 2020 and 2019:

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

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 nine months ended September 30, 2020 and 2019:

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,

Market Making 2020 2019 2020 2019

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Income (loss) before income taxes and noncontrolling interest $ 252,515 $ (5,828) $ 1,123,272 $ (88,610)

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 2019

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Our trading income is highly diversified by asset class and geography and is comprised of small amounts earned on millions of trades on various exchanges, primarily in the following two categories:

Global Equities and Global FICC, Options and Other.

(i) Global Equities and (ii) Global FICC, Options and Other.

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

Trading income, net, accounted for 78% and 61% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively.

Interest and dividends income.

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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 and six months ended June 30, 2020 and 2019.

Three Months Ended June 30, Six Months Ended

Three Months Ended September 30, Nine Months Ended

September 30,

(in thousands) 2020 2019 2020 2019

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Termination of office leases 60 1,278 343 66,490

Gain on sale of MATCHNow (58,652) — (58,652) —

Other (11,138) 787 (10,157) 2,278

Share based compensation (4,740) 16,374 37,510 39,564

Charges related to share based compensation at IPO, Amended and Restated 2015 Management Incentive Plan — (9) — 1,385

Adjusted EBITDA $ 248,733 $ 103,874 $ 1,304,196 $ 317,281

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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 and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Six Months Ended

Three Months Ended September 30, Nine Months Ended

September 30,

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

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Termination of office leases 60 1,278 343 66,490

Gain on sale of MATCHNow (58,652) — (58,652) —

Other (11,138) 787 (10,157) 2,278

Share based compensation (4,740) 16,374 37,510 39,564

Charges related to share based compensation at IPO, 2015 Management Incentive Plan — (9) — 1,385

Normalized Adjusted Net Income before income taxes 211,719 52,085 1,185,704 176,753

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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, 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

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 nine months ended September 30, 2020 and 2019 as well as warrants issued in connection with the Founder Member Loan during the three and nine months ended September 30, 2020.

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

Three Months Ended September 30, 2020

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 257,235 $ 105,023 $ — $ 362,258

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 141,719 $ 108,073 $ — $ 249,792

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 1,461,622 $ 353,830 $ — $ 1,815,452

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

(in thousands) Market Making Execution Services Corporate Total

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Adjusted Net Trading Income $ 453,304 $ 264,217 $ — $ 717,521

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

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

Three Months Ended September 30, 2020

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

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Adjusted Net Trading Income $ 211,592 $ 45,643 $ — $ 257,235

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

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

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Adjusted Net Trading Income $ 102,491 $ 39,348 $ (120) $ 141,719

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

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

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Adjusted Net Trading Income $ 1,257,370 $ 204,252 $ — $ 1,461,622

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

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

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Adjusted Net Trading Income $ 349,639 $ 103,781 $ (116) $ 453,304

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,

Three Months Ended September 30,

Adjusted Net Trading Income by Category:

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Execution Services 105,023 108,073 (2.8)%

Corporate — — NM

Adjusted Net Trading Income $ 362,258 $ 249,792 45.0%

Three Months Ended June 30,

Three Months Ended September 30,

Average Daily Adjusted Net Trading Income by Category:

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Execution Services 1,641 1,689 (2.8)%

Corporate — — NM

Average Daily Adjusted Net Trading Income $ 5,660 $ 3,903 45.0%

Six Months Ended June 30,

Nine Months Ended September 30,

Adjusted Net Trading Income by Category:

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Execution Services 353,830 264,217 33.9%

Corporate — — NM

Adjusted Net Trading Income $ 1,815,452 $ 717,521 153.0%

Six Months Ended June 30,

Nine Months Ended September 30,

Average Daily Adjusted Net Trading Income by Category:

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Execution Services 1,872 1,398 33.9%

Corporate — — NM

Average Daily Adjusted Net Trading Income $ 9,606 $ 3,796 153.0%

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GAAP rules, and when we calculate Adjusted Net Trading Income for corresponding reporting periods, we start with trading income, net, so calculated.

By contrast, when we calculate Adjusted Net Trading Income by category, we do so on a daily basis, and as a result prices used in recognizing revenues may differ.

By contrast, when we calculate Adjusted Net Trading Income by category, we do so

on a daily basis, and as a result prices used in recognizing revenues may differ.

Because we provide liquidity on a global basis, across asset classes and time zones, the timing of any particular Adjusted Net Trading Income calculation may defer or accelerate the amount in a particular category from one day to another, and, at the end of a reporting period, from one reporting period to another.

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

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

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

Total Revenues

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,

Our total revenues increased $273.8 million, or 71.6%, to $656.1 million for the three months ended September 30, 2020, compared to $382.3 million for the three months ended September 30, 2019.

The increase was primarily driven by an increase of $221.1 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 September 30, 2020 compared to the prior period.

There was a significant increase in Other, net of $70.8 million, which was primarily due to the gain on the sale of MATCHNow.

On August 4, 2020, we completed the sale of MATCHNow to Cboe Global Markets, Inc.("CBOE") for total gross proceeds of $60.6 million in cash and recognized a gain on sale of $58.7 million, which is recorded in Other, net (see Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q).

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

Three Months Ended September 30,

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

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Interest and dividends income 10,763 22,617 (52.4)%

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

Commissions, net and technology services 9,391 7,252 29.5%

Other, net 12,615 398 3,069.6%

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Total revenues from Execution Services 182,680 133,805 36.5%

Trading income, net — — NM

Interest and dividends income — — NM

Commissions, net and technology services — — NM

Other, net (1,166) (1,267) (8.0)

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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.

Trading income, net increased $221.1 million, or 100.5%, to $441.3 million for the three months ended September 30, 2020, compared to $220.1 million for the three months ended September 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 September 30, 2020 compared to the same period in 2019.

Average daily realized volatility of the S&P 500 Index increased 14.7% during the period as compared to the prior period, while average daily U.S.

equity consolidated volumes increased 43.5%.

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.

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.

Interest and dividends income decreased $12.4 million, or 53.2%, to $10.9 million for the three months ended September 30, 2020, compared to $23.4 million for the three months ended September 30, 2019.

This decrease was primarily attributable to the lower interest income earned on cash collateral posted as part of securities borrowing transactions driven by lower interest rates as well as a slight reduction in balances 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.

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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 $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).

Commissions, net and technology services revenues decreased $5.8 million, or 4.1%, to $133.9 million for the three months ended September 30, 2020, compared to $139.6 million for the three months ended September 30, 2019.

The decrease was primarily attributable to a reduction in commissions associated with the previously registered U.S.

broker dealer, Virtu Alternet Securities, whose SEC registration was withdrawn in August 2020, as well as the loss of revenues associated with MATCHNow, which was sold to CBOE on August 4, 2020.

Other, net was $70.0 million for the three months ended September 30, 2020, compared to a loss of $(0.8) million for the three months ended September 30, 2019.

The increase was primarily due to a $58.7 million gain recognized on the sale of MATCHNow, as discussed in Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q.

In addition, we recognized a $12.3 million gain on the minority investment in SBI Japannext (see Note 11 "Financial Assets and Liabilities" of Part I Item I "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 increased $112.5 million, or 45.0%, to $362.3 million for the three months ended September 30, 2020, compared to $249.8 million for the three months ended September 30, 2019.

In the Market Making segment, Global Equities increased by $109.1 million, or 106.4%, and Global FICC, Options and Other increased by $6.3 million, or 16.0%, for the three months ended September 30, 2020.

Adjusted Net Trading Income per day increased $1.8 million, or 45.0%, to $5.7 million for the three months ended September 30, 2020, compared to $3.9 million for the three months ended September 30, 2019.

There were 64 trading days for both the three months ended September 30, 2020 and 2019.

Adjusted Net Trading Income is a non-GAAP measure.

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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.

Our operating expenses increased $15.4 million, or 4.0%, to $403.6 million for the three months ended September 30, 2020, compared to $388.2 million for the three months ended September 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 employee compensation and payroll taxes 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.

Brokerage exchange, clearance fees and payments for order flow, net, increased $97.7 million, or 98.9%, to $196.4 million for the three months ended September 30, 2020, compared to $98.8 million for the three months ended September 30, 2019.

This increase was primarily attributable to the increase in payments for order flow as well as an increase in volumes we traded in Global Equities instruments and other asset categories.

The increase in payments for order flow 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 compared to the prior period.

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.

Communication and data processing expense decreased $8.1 million, or 13.6%, to $51.6 million for the three months ended September 30, 2020, compared to $59.8 million for the three months ended September 30, 2019.

This decrease was primarily due to 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.

Employee compensation and payroll taxes decreased $54.8 million, or 60.5%, to $35.8 million for the three months ended September 30, 2020, compared to $90.6 million for the three months ended September 30, 2019.

The decrease in compensation levels was primarily attributable to a reduction in accrued incentive compensation in the third quarter, which is recorded at management’s discretion and is generally accrued in connection with the overall level of profitability on a year-to-date basis, as well as the anticipated mix of cash and stock-based awards.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $8.7 million and $8.6 million for the three months ended September 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.

Interest and dividends expense decreased $7.2 million, or 20.8%, to $27.4 million for the three months ended September 30, 2020, compared to $34.5 million for the three months ended September 30, 2019.

This decrease was primarily attributable to lower interest expense incurred on cash collateral received as part of securities lending transactions, as well as a reduction in securities lending transactions for the period compared to the same period during the prior year.

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.

Operations and administrative expense decreased $0.7 million, or 2.8%, to $24.6 million for the three months ended September 30, 2020, compared to $25.3 million for the three months ended September 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.

Depreciation and amortization decreased $0.9 million, or 5.4%, to $16.7 million for the three months ended September 30, 2020, compared to $17.6 million for the three months ended September 30, 2019.

This decrease was primarily attributable to certain assets being fully depreciated partially offset by 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.

Amortization of purchased intangibles and acquired capitalized software decreased $0.6 million, or 3.4%, to $18.3 million for the three months ended September 30, 2020, compared to $18.9 million for the three months ended September 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.

Termination of office leases decreased $1.2 million, or 95.3%, to $0.1 million for the three months ended September 30, 2020, compared to $1.3 million for the three months ended September 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.

There were minimal expenses incurred on termination of office leases for the three months ended September 30, 2019.

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.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees was $9.9 million for the three months ended September 30, 2020.

There were no debt issue costs related to debt refinancing and prepayment for the three months ended September 30, 2019 as there were no refinancings or repayments during this period.

The increase was primarily driven by the amortization of debt issue costs related to the Founder Member Loan Facility (as described in Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q), in addition to debt issue costs related to the $100.0 million prepayment made during the three months ended September 30, 2020.

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.

Transaction advisory fees and expenses decreased $4.7 million, or 65.6% to $2.5 million for the three months ended September 30, 2020, compared to $7.2 million during the three months ended September 30, 2019.

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

For the three months ended September 30, 2020, we incurred one-time transaction costs of $2.5 million in relation to the sale of MATCHNow, as discussed in Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q.

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.

Financing interest expense on long-term borrowings decreased $13.8 million, or 40.5%, to $20.4 million for the three months ended September 30, 2020, compared to $34.2 million for the three months ended September 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 in the second and third quarter of 2020.

Provision for (benefit from) income taxes

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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

Our provision for (benefit from) income taxes was $52.8 million for the three months ended September 30, 2020, compared to $(0.6) million for the three months ended September 30, 2019.

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

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 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,

Our total revenues increased $1,444.8 million, or 129.2%, to $2,562.6 million for the nine months ended September 30, 2020, compared to $1,117.9 million for the nine months ended September 30, 2019.

This increase was primarily attributable to an increase in Trading income, net, of $1,304.1 million, which was driven by higher market volatility and trading volumes during the first three quarters 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 September 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 nine 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 nine months ended September 30, 2020 and 2019.

Nine Months Ended September 30,

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

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Total revenues from Execution Services 500,621 358,325 39.7%

Trading income, net — — NM

Interest and dividends income — — NM

Commissions, net and technology services — — NM

Other, net (2,286) (2,528) (9.6)%

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

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.

Trading income, net, increased $1,304.1 million, or 190.8%, to $1,987.8 million for the nine months ended September 30, 2020, compared to $683.6 million for the nine months ended September 30, 2019.

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

Average daily realized volatility of the S&P 500 Index increased 165.2% compared to the prior period, while average daily U.S.

equity consolidated volumes increased 55.5%.

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

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.

Interest and dividends income decreased $29.9 million, or 39.0%, to $46.8 million for the nine months ended September 30, 2020, compared to $76.6 million for the nine months ended September 30, 2019.

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

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.

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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 $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).

Commissions, net and technology services revenues increased $92.4 million, or 25.7%, to $452.3 million for the nine months ended September 30, 2020, compared to $359.9 million for the nine months ended September 30, 2019.

The increase was primarily attributable to 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.

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 $78.0 million, or 3,427.1%, to $75.8 million for the nine months ended September 30, 2020, compared to $(2.3) million for the nine months ended September 30, 2019.

The increase was primarily due to a $58.7 million gain recognized on the sale of MATCHNow (see Note 4 "Sale of MATCHNow" of Part I Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q).

In addition, we recognized a $17.4 million gain on the minority investment in SBI Japannext (see Note 11 "Financial Assets and Liability" of Part I Item I "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 $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.

Adjusted Net Trading Income increased $1,097.9 million, or 153.0%, to $1,815.5 million for the nine months ended September 30, 2020, compared to $717.5 million for the nine months ended September 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 nine months ended September 30, 2020 compared to the prior period.

Average daily realized volatility of the S&P 500 Index and average daily CVIX realized volatility increased 165.2% and 101.1%, 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 55.5%.

There were increases in Trading income, net in Global Equities of $907.7 million, and in Global FICC, Options and Other of $100.5 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 $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.

There was also an increase of $89.6 million, or 33.9%, in the Execution Services segment primarily driven by the increase in Commissions, net and technology services that was primarily attributable to 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.

Adjusted Net Trading Income per day increased $5.8 million, or 153.0%, to $9.6 million for the nine months ended September 30, 2020, compared to $3.8 million for the nine months ended September 30, 2019.

The number of trading days was 189 for both the nine months ended September 30, 2020 and 2019, respectively.

Adjusted Net Trading Income is a non-GAAP measure.

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Operating Expenses

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.

Our operating expenses increased $232.9 million, or 19.3%, to $1,439.4 million for the nine months ended September 30, 2020, compared to $1,206.5 million for the nine months ended September 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 nine months ended September 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 caused an overall increase in expenses in multiple expense categories as 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 $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.

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.

Brokerage, exchange, clearance fees and payments for order flow, net, increased $287.9 million, or 100.7%, to $573.8 million for the nine months ended September 30, 2020, compared to $285.9 million for the nine months ended September 30, 2019.

This increase was primarily attributable to an increase in payments for order flow and increases in volumes we traded in Global Equities instruments and other asset categories.

The increase in payments for order flow 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 nine months compared to the same period during 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 $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.

Communication and data processing expense increased $6.3 million, or 4.1%, to $162.3 million for the nine months ended September 30, 2020, compared to $156.0 million for the nine months ended September 30, 2019.

This increase was primarily attributatble to the results of ITG for the full first quarter in 2020 compared to the results of ITG from the ITG Closing Date through March 31, 2019, as well as 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 $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.

Employee compensation and payroll taxes increased $45.0 million, or 15.9%, to $327.1 million for the nine months ended September 30, 2020, compared to $282.1 million for the nine months ended September 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 $19.5 million and $16.7 million for the six months ended June 30, 2020 and 2019, respectively.

We have capitalized and therefore excluded employee compensation and benefits related to software development of $28.1 million and $25.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Interest and dividends expense.

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.

Interest and dividends expense decreased $19.1 million, or 16.3%, to $97.7 million for the nine months ended September 30, 2020, compared to $116.7 million for the nine months ended September 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 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.

Operations and administrative expense decreased $2.8 million, or 3.7%, to $73.5 million for the nine months ended September 30, 2020, compared to $76.3 million for the nine months ended September 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 $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.

Depreciation and amortization increased $1.9 million, or 3.8%, to $50.7 million for the nine months ended September 30, 2020, compared to $48.9 million for the nine months ended September 30, 2019.

This increase was primarily attributable to depreciation and amortization of additional assets resulting from the ITG acquisition for the full first quarter of 2020 compared to the prior period which excluded depreciation and amortization on ITG assets prior to the ITG Closing Date, partially offset by certain assets being fully depreciated in 2020.

Amortization of purchased intangibles and acquired capitalized software.

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.

Amortization of purchased intangibles and acquired capitalized software increased $5.7 million, or 11.4%, to $56.2 million for the nine months ended September 30, 2020, compared to $50.4 million for the nine months ended September 30, 2019.

This increase was due to the amortization of intangible assets acquired in connection with the ITG Acquisition for a full three quarters in 2020 versus the period from the ITG Closing Date through September 30, 2019.

Termination of office leases.

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.

Termination of office leases was $0.3 million for the nine months ended September 30, 2020, compared to $66.5 million for the nine months ended September 30, 2019.

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

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.

Expense from debt issue costs related to debt refinancing, prepayment and commitment fees increased $19.4 million, or 245.6%, to $27.3 million for the nine months

ended September 30, 2020, compared to $7.9 million for the nine months ended September 30, 2019.

This was primarily driven by amortization of debt issue costs related to the Founder Member Loan Facility (see Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q), which expired as of September 20, 2020 , in addition to debt issue costs related to a $288.5 million prepayment made during the nine months ended September 30, 2020.

The amount for the nine months ended September 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 $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.

Transaction advisory fees and expenses decreased $21.3 million, or 88.6%, to $2.7 million for the nine months ended September 30, 2020, compared to $24.1 million for the nine months ended September 30, 2019.

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

The decrease was partially offset by increases related to the one-time transaction costs incurred as a result of the sale of MATCHNow.

Financing interest expense on long term borrowings.

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.

Financing interest expense on long-term borrowings decreased $23.9 million, or 26.1%, to $67.8 million for the nine months ended September 30, 2020, compared to $91.7 million for the nine months ended September 30, 2019.

This decrease was primarily attributable to a decrease in outstanding principal as a result of the First Lien Term Loan Facility and the Incremental Term Loans in addition to lower interest rates as discussed in Note 10 “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 $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.

Our provision for income taxes was $200.0 million for the nine months ended September 30, 2020, compared to a benefit from income taxes of $(14.3) million for the nine months ended September 30, 2019.

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

Liquidity and Capital Resources

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

As of September 30, 2020, we had $567.7 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 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.

As of September 30, 2020, we had borrowings under our prime brokerage credit facilities of approximately $163.6 million, borrowings under our broker dealer facilities of $78.0 million, short-term bank overdrafts of $47.0 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,669.7 million.

As of September 30, 2020, our regulatory capital requirements for Virtu Americas LLC, our domestic U.S.

broker-dealer subsidiary, was $2.5 million.

The majority of our trading assets consist of exchange-listed marketable securities, which are marked-to-market daily, and collateralized receivables from broker-dealers and clearing organizations arising from proprietary securities transactions.

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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 relative to the equivalent period in the prior year.

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.

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 second and third 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.

Increases to our available short-term liquidity included entering into the Founder Member Loan Facility (as defined below, and which expired in the third quarter of 2020), the Demand Loan (as defined below, which was fully repaid

during the second quarter of 2020) and certain changes to the Committed Broker Dealer Facility, each of which are described in further detail below as well as in Note 10 “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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Regulatory Capital Requirements

Certain of our operating subsidiaries are subject to separate regulation and capital requirements in the United States and other jurisdictions.

Virtu Americas LLC, Virtu ITG LLC, and Virtu Alternet Securities LLC are registered U.S.

broker-dealers, and their primary regulators include the SEC and FINRA.

Our principal U.S.

subsidiary is subject to separate regulation and capital requirements in the United States and other jurisdictions.

Virtu Americas LLC is a registered U.S.

broker-dealer, and its primary regulator include the SEC and FINRA.

The SEC and FINRA impose rules that require notification when regulatory capital falls below certain pre-defined criteria.

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Additionally, certain applicable rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to and/or approval from the SEC and FINRA for certain capital withdrawals.

Virtu Americas LLC is also subject to rules set forth by NYSE and is required to maintain a certain level of capital in connection with the operation of its designated market maker business.

Our Canadian subsidiaries, Virtu ITG Canada Corp, TriAct Canada Marketplace LP, and Virtu Financial Canada ULC, are subject to regulatory capital requirements and periodic requirements to report their regulatory capital and submit other regulatory reports set forth by the Investment Industry Regulatory Organization of Canada.

Virtu Americas LLC is also

subject to rules set forth by NYSE and is required to maintain a certain level of capital in connection with the operation of its designated market maker business.

Our Canadian subsidiaries, Virtu ITG Canada Corp and Virtu Financial Canada ULC, are subject to regulatory capital requirements and periodic requirements to report their regulatory capital and submit other regulatory reports set forth by the Investment Industry Regulatory Organization of Canada.

Virtu Financial Ireland Limited and Virtu ITG Europe Limited are regulated by the Central Bank of Ireland as Investment Firms and in accordance with European Union law are required to maintain a minimum amount of regulatory capital based upon their positions, financial conditions, and other factors.

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See Note 10 “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 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.

As of September 30, 2020, the outstanding principal balance on our broker-dealer facilities was $78.0 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 $163.6 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.

The Demand Loan bears interest at a rate of 10% per annum, increased by 2.0% with respect to any principal amounts not paid when due and owing.

If an event of default occurs and is continuing, the lender may declare all loans immediately due and payable.

The Demand Loan bore interest at a rate of 10% per annum, increased by 2.0% with respect to any principal amounts not paid when due and payable.

The Demand Loan was repaid in full as of April 17, 2020.

On March 20, 2020, a broker-dealer subsidiary of the Company entered into a loan agreement (the “Founder Member Loan Facility”) with TJMT Holdings LLC (the “Founder Member”), as lender and administrative agent, providing for unsecured term loans from time to time (the “Founder Member Loans”) in an aggregate original principal amount not to exceed $300 million.

The Founder Member Loans may be borrowed in one or more borrowings on or after March 20, 2020 and prior to September 20, 2020, as further described below.

The Borrower intends use the proceeds of the Founder Member Loans solely to finance the purchase and settlement of securities and to fund margin deposits with the National Securities Clearing Corporation and Options Clearing Corporation.

The Founder Member Loans were available to be borrowed in one or more borrowings on or after March 20, 2020 and prior to September 20, 2020, though no borrowings were made during such period, which is now expired.

The Founder Member is an affiliate of Mr.

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Upon the execution of and in consideration for the Lender’s commitments under the Loan Agreement, the Company delivered to the Founder Member a warrant to purchase shares of the Company’s Class A Common Stock, as described below.

The interest rate for the Founder Member Loans, to the extent drawn and outstanding, will be 8.0% per annum, and the Founder Member Loans will be due on September 20, 2020.

If an event of default occurs and is continuing, the Lender may increase the interest rate 2.0% above what would otherwise be applicable on overdue amounts, and declare all Founder Member Loans immediately due and payable.

The Borrower may prepay the Founder Member Loans in whole or in part at any time without penalty.

On March 20, 2020, in connection with and in consideration of the Founder Member’s commitments under the Founder Member Loan Facility, the Company delivered to the Founder Member a warrant (the “Warrant”) to purchase shares of the Company’s Class A Common Stock.

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 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.

Pursuant to the Warrant, the Founder Member may purchase up to 3,000,000 shares of Class A Common Stock.

The number of shares would have been 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 remained outstanding for a certain period of time specified in the Warrant, however as indicated above, no borrowings were made during the term of the Founder Member Loan Facility and therefore there was no such increase of shares issuable pursuant to the terms of the Warrant.

The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant is $22.98, and the Warrant may be exercised to purchase up to 3,000,000 shares of the Company's Class A Common Stock on or after May 22, 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.

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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.

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.

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.

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

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On January 29, 2020, the Company entered into a five-year $1,000 million floating-to-fixed interest rate swap agreement.

The Company also previously entered into a five-year $525 million floating-to-fixed interest rate swap agreement.

As these two interest rate swaps meet the criteria to be considered qualifying cash flow hedges under ASC 815, they effectively fix interest payment obligations on $1,000 million and $525.0 million of principal under the First Lien Term Loan Facility at rates of 4.4% and 4.3% through January 2025 and September 2024, respectively, based on the interest rates set forth in the Amended Credit Agreement.

The Company also previously entered into a five-year $525 million floating-to-fixed interest rate swap agreement in the fourth quarter of 2019.

These two interest rate swaps meet the criteria to be considered and were designated as qualifying cash flow hedges under ASC 815 in the first quarter of 2020, and they effectively fix interest payment obligations on $1,000 million and $525.0 million of principal under the First Lien Term Loan Facility at rates of 4.4% and 4.3% through January 2025 and September 2024, respectively, based on the interest rates set forth in the Amended Credit Agreement.

The First Lien Revolving Facility under the Amended Credit Agreement is subject to a springing net first lien leverage ratio which may spring into effect as of the last day of a fiscal quarter if usage of the aggregate revolving commitments exceeds a specified level as of such date.

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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 June 30, 2020.

We were in compliance with all applicable covenants under the Amended Credit Agreement as of September 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 six months ended June 30, 2020 and 2019.

Six Months Ended June 30,

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

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities

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.

Net cash provided by operating activities was $483.6 million for the nine months ended September 30, 2020, compared to net cash used in operating activities of $346.2 million for the nine months ended September 30, 2019.

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

Investing Activities

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.

Net cash provided by investing activities was $3.4 million for the nine months ended September 30, 2020, compared to net cash used in investing activities of $882.8 million for the nine months ended September 30, 2019.

The decrease in cash provided by investing activities for the nine months ended September 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), partially offset by $60.6 million cash provided by the sale of MATCHNow in the third quarter of 2020 (see Note 4 "Sale of MATCHNow" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q).

Financing Activities

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.

Net cash used in financing activities was $598.2 million for the nine months ended September 30, 2020, while net cash provided by financing activities was $897.8 million for the nine months ended September 30, 2019.

The cash used in financing activities for the nine months ended September 30, 2020 was primarily attributable to a $288.5 million prepayment on our long-term borrowings and by distributions made to noncontrolling interests of $247.8 million.

The cash provided by financing activities of $897.8 million during the same period of 2019 primarily reflects 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 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.

As of September 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 September 30, 2020, and December 31, 2019, or on our results of operations and cash flows for the three and nine months ended September 30, 2020 and 2019.

Critical Accounting Policies and Estimates

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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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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, restricted stock awards ("RSAs") 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.

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

With respect to the RSUs, we account for forfeitures as

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

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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