Virtu Financial, Inc. 10-Q

ITEM 2. 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 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. Our actual results could differ materially from those discussed below. Unless otherwise stated, all amounts are presented in thousands of dollars. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. You should not place undue reliance on forward-looking statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project” or, in each case, their negative, or other variations or comparable terminology and expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that forward-looking statements are not guarantees of performance or results and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. By their nature, forward-looking statements involve known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q, because they relate to events and depend on circumstances that may or may not occur in the future. Although we believe that the forward-looking statements contained in this Quarterly Report on Form 10-Q are based on reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission ("SEC") on February 28, 2020 (the "2019 Form 10-K"), could affect our actual financial results or results of operations and cash flows, and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to: • the continuing impacts of COVID-19 and the governmental and other responses thereto, including but not limited to the deployment of our business continuity plan pursuant to which a significant number of our employees currently work remotely and our return to office plan, each of which may increase operational risk, as well as increases in market, counterparty and other forms of operational risk; • reduced levels of overall trading activity; • dependence upon trading counterparties and clearing houses performing their obligations to us; • failures of our customized trading platform; • risks inherent to the electronic market making business and trading generally; • increased competition in market making activities and execution services; • dependence on continued access to sources of liquidity; • risks associated with self-clearing and other operational elements of our business; • obligations to comply with applicable regulatory capital requirements; • litigation or other legal and regulatory-based liabilities; • proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S. (and certain states therein) and other jurisdictions; • obligations to comply with laws and regulations applicable to our operations in the U.S. and abroad; • enhanced media and regulatory scrutiny and its impact upon public perception of us or of companies in our industry; 58 Table of Contents • need to maintain and continue developing proprietary technologies; • the effect of the ITG Acquisition (as defined below) on existing business relationships, operating results, and ongoing business operations generally; • the significant costs and significant indebtedness that we have incurred in connection with the ITG Acquisition, and the integration of ITG (as defined below) into our business; • the risk that we may encounter significant difficulties or delays in integrating the ITG business with ours and that the anticipated benefits, cost savings and synergies or capital release may not be achieved; • the assumption of potential liabilities and risks relating to ITG's business; • capacity constraints, system failures, and delays; • dependence on third party infrastructure or systems; • use of open source software; • failure to protect or enforce our intellectual property rights in our proprietary technology; • failure to protect confidential and proprietary information; • failure to protect our systems from internal or external cyber threats that could result in damage to our computer systems, business interruption, loss of data or other consequences; • risks associated with international operations and expansion, including failed acquisitions or dispositions; • the effects of and changes in economic conditions (such as volatility in the financial markets, inflation, monetary conditions and foreign currency and exchange rate fluctuations, foreign currency controls and/or government mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets), political conditions (such as military actions and terrorist activities), and other global events such as fires, natural disasters, pandemics or extreme weather; • risks associated with potential growth and associated corporate actions; • inability to access, or delay in accessing the capital markets to sell shares or raise additional capital; • loss of key executives and failure to recruit and retain qualified personnel; and • risks associated with losing access to a significant exchange or other trading venue. Our forward-looking statements made herein are made only as of the date of this Quarterly Report on Form 10-Q. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q. Basis of Preparation 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 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 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. 59 Table of Contents Recent Developments The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused, among other matters, illness, death, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market volatility and instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. 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 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. We will continue to monitor the impact of COVID-19, but at the date of this report it is too early to determine the full impact this virus may have on the global financial markets and the overall economy, as well as our business. Should this emerging macro-economic risk continue for an extended period, there could be an adverse material financial impact to the Company's businesses and investments, including a material reduction in the Company's results of operations. For more information on the potential impacts of the COVID-19 outbreak on our business, see Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. Overview We are a leading financial services firm that leverages cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to our clients. Leveraging our global market structure expertise and scaled, multi-asset technology infrastructure, we provide our clients with a robust product suite including offerings in execution, liquidity sourcing, analytics and broker-neutral, multi-dealer platforms in workflow technology. Our product offerings allow our clients to trade on hundreds of venues across over 50 countries and in multiple asset classes, including global equities, ETFs, foreign exchange, futures, fixed income and other commodities. Our integrated, multi-asset analytics platform provides a range of pre and post-trade services, data products and compliance tools that our clients rely upon to invest, trade and manage risk across global markets. We believe that our broad diversification, in combination with our proprietary technology platform and low-cost structure gives us the scale necessary to grow our business around the globe as we service clients and facilitate risk transfer between global capital markets participants by providing liquidity, while at the same time earning attractive margins and returns. Technology and operational efficiency are at the core of our business, and our focus on technology is a key element of our success. We have developed a proprietary, multi-asset, multi-currency technology platform that is highly reliable, scalable and modular, and we integrate directly with exchanges, liquidity centers, and our clients. Our market data, order routing, transaction processing, risk management and market surveillance technology modules manage our market making and execution services activities in an efficient manner and enable us to scale our activities globally across additional securities and other financial instruments and asset classes without significant incremental costs or third party licensing or processing fees. We believe that technology-enabled market makers and execution services providers like Virtu serve an important role in maintaining and enhancing the overall health and efficiency of the global capital markets by ensuring that market participants have an efficient means to invest, transfer risk and analyze the quality of executions. We believe that market participants benefit from the increased liquidity, lower overall trading costs and execution transparency that Virtu provides. Our execution services and client solutions products are designed to be transparent, because we believe transparency makes markets more efficient and helps investors make better, more informed decisions. We use the latest technology to create and deliver liquidity to global markets and innovative trading solutions and analytics tools to our clients. 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 Holdings, Inc. ("KCG"). 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. 60 Table of Contents As described below, we completed the ITG Acquisition on the ITG Closing Date. ITG was a global financial technology company that offered a suite of trading and financial technology products to help leading brokers and asset managers improve returns for investors around the world. ITG empowered traders and investors to reduce the end-to-end cost of implementing investments via liquidity, execution, analytics and workflow technology solutions. We have two operating segments: Market Making and Execution Services, and one non-operating segment: Corporate. Our management allocates resources, assesses performance and manages our business according to these segments. Market Making We leverage cutting edge technology to provide competitive and deep liquidity that helps to create more efficient markets around the world. As a market maker and liquidity provider, we stand ready, at any time, to buy or sell a broad range of securities, and we generate profits by buying and selling large volumes of securities and other financial instruments and earning small bid/ask spreads. Our market structure expertise, broad diversification, and scalable execution technology enable us to provide competitive bids and offers in over 25,000 securities and other financial instruments, on over 235 venues, in 36 countries worldwide. We use the latest technology to create and deliver liquidity to the global markets and automate our market making, risk controls, and post-trade processes. As a market maker, we interact directly with hundreds of retail brokers, Registered Investment Advisors, private client networks, sell-side brokers, and buy-side institutions. We believe the overall level of volumes and realized volatility in the various markets we serve have the greatest impact on our market making businesses. Increases in market volatility can cause bid/ask spreads to widen as market participants are more willing to pay market makers like us to transact immediately and as a result, market makers' capture rate per notional amount transacted increases. Execution Services We offer client execution services and trading venues that provide transparent trading in global equities, ETFs, fixed income, currencies, and commodities to institutions, banks and broker-dealers. We generally earn commissions when transacting as an agent for our clients. Client-based, execution-only trading within this segment is done through a variety of access points including: (a) algorithmic trading and order routing; (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 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. Corporate Our Corporate segment contains investments principally in strategic financial services-oriented opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other segments. Acquisition of Investment Technology Group, Inc. On March 1, 2019, the ITG Closing Date, we announced the completion of the ITG Acquisition, a cash transaction valued at $30.30 per ITG share, or a total of approximately $1.0 billion. In connection with the ITG Acquisition, Virtu Financial, VFH, and the Acquisition Borrower entered into the Credit Agreement, with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners. The Credit Agreement provided (i) the First Lien Term Loan Facility (as defined below) in an aggregate principal amount of $1.5 billion, drawn in its entirety on the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under its existing term loan facility and the remaining approximately $1,095.0 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses to be paid in connection with the ITG Acquisition, and (ii) the First Lien Revolving Facility (as defined below), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the closing of the ITG Acquisition, VFH assumed the obligations of the Acquisition Borrower in respect of the acquisition term loans. Additionally, on the ITG Closing Date, the Company’s fourth amended and restated credit agreement, dated as of June 30, 2017 (as amended on January 2, 2018 and September 19, 2018, the “Fourth Amended and Restated Credit Agreement”) was terminated. 61 Table of Contents As described below, the Credit Agreement was amended on October 9, 2019, on which date VFH borrowed and additional $525.0 million of incremental first lien term loans, the proceeds of which were used together with cash on hand to redeem the Notes (as defined below). The Indenture (as defined below) was fully terminated following such redemption. The Credit Agreement was further amended on March 2, 2020 to, among other things, reduce the interest rate spread over LIBOR or the applicable benchmark by 0.50%. Amended and Restated 2015 Management Incentive Plan The Company’s board of directors and stockholders adopted the 2015 Management Incentive Plan, which became effective upon consummation of the Company's IPO and was subsequently amended and restated following receipt of approval from the Company’s stockholders on June 30, 2017 (the “Amended and Restated 2015 Management Incentive Plan”). The Amended and Restated 2015 Management Incentive Plan provides for the grant of stock options, restricted stock units, and other awards based on an aggregate of 16,000,000 shares of Class A common stock, par value $0.00001 per share (the “Class A Common Stock”), subject to additional sublimits, including limits on the total option grant to any one participant in a single year and the total performance award to any one participant in a single year. On April 23, 2020, the Company’s board of directors adopted an amendment to the Company’s Amended and Restated 2015 Management Incentive Plan in order to increase the number of shares of the Company’s Class A Common Stock reserved for issuance, and in respect of which awards may be granted under the Amended and Restated 2015 Plan from 16,000,000 shares of Class A Common Stock to an aggregate of 21,000,000 shares of Class A Common Stock and the amendment was approved by the Company’s shareholders at the Company's annual meeting of shareholders on June 5, 2020. In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO per share price, each of which vests in equal annual installments over a period of four years from the grant date and expires not later than 10 years from the grant date. Subsequent to the IPO and through 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. In connection with and subsequent to the IPO, 1,677,318 shares of immediately vested Class A Common Stock and 2,620,051 restricted stock units were granted, which vest over a period of up to 4 years and are settled in shares of Class A Common Stock. The fair value of the Class A Common Stock and restricted stock units was determined based on the volume weighted average price for the three days preceding the grant, and with respect to the restricted stock units is recognized on a straight-line basis over the vesting period. Amended and Restated Investment Technology Group, Inc. 2007 Omnibus Equity Compensation Plan On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Omnibus Equity Compensation Plan, dated as of June 8, 2017 (the “Amended and Restated ITG 2007 Equity Plan”) and certain stock option awards, restricted stock unit awards, deferred stock unit awards and performance stock unit awards granted under the Amended and Restated ITG 2007 Equity Plan (the “Assumed Awards”). The Assumed Awards are subject to the same terms and conditions that were applicable to them under the Amended and Restated ITG 2007 Equity Plan, except that (i) the Assumed Awards relate to shares of the Company’s Class A Common Stock, (ii) the number of shares of Class A Common Stock subject to the Assumed Awards was the result of an adjustment based upon an Exchange Ratio (as defined in the Agreement and Plan of Merger by and between the Company, Impala Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of the Company, and ITG, dated as of November 6, 2018, the “ITG Merger Agreement”) and (iii) the performance share unit awards were converted into service-based vesting restricted stock unit awards that were no longer subject to any performance based vesting conditions. As of the ITG Closing Date, the aggregate number of shares of Class A Common Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated ITG 2007 Equity Plan was 1,230,406. The Company filed a Registration Statement on Form S-8 on the ITG Closing Date to register such shares of Class A Common Stock. 62 Table of Contents Parent Company Financial Information 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 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. 63 Table of Contents 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 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 Total revenue $ 474,598 $ 249,802 $ 2,064,300 $ 762,076 Total operating expenses 312,866 219,427 1,053,429 662,200 Income before income taxes and noncontrolling interest 161,732 30,375 1,010,871 99,876 Execution Services Total revenue 182,680 133,805 500,621 358,325 Total operating expenses 80,651 163,007 362,742 453,628 Income (loss) before income taxes and noncontrolling interest 102,029 (29,202) 137,879 (95,303) Corporate Total revenue (1,166) (1,267) (2,286) (2,528) Total operating expenses 10,080 5,734 23,192 90,655 Income (loss) before income taxes and noncontrolling interest (11,246) (7,001) (25,478) (93,183) Consolidated Total revenue 656,112 382,340 2,562,635 1,117,873 Total operating expenses 403,597 388,168 1,439,363 1,206,483 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 nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Revenues: Trading income, net $ 441,295 $ 220,148 $ 1,987,756 $ 683,611 Interest and dividends income 10,932 23,352 46,788 76,645 Commissions, net and technology services 133,853 139,627 452,333 359,894 Other, net 70,032 (787) 75,758 (2,277) Total revenue 656,112 382,340 2,562,635 1,117,873 Operating Expenses: Brokerage, exchange, clearance fees and payments for order flow, net 196,448 98,789 573,769 285,890 Communication and data processing 51,647 59,767 162,336 156,004 Employee compensation and payroll taxes 35,798 90,595 327,091 282,135 Interest and dividends expense 27,374 34,546 97,656 116,739 Operations and administrative 24,612 25,333 73,480 76,293 Depreciation and amortization 16,656 17,598 50,728 48,859 Amortization of purchased intangibles and acquired capitalized software 18,265 18,908 56,177 50,436 Termination of office leases 60 1,278 343 66,490 Debt issue cost related to debt refinancing, prepayment and commitment fees 9,916 — 27,282 7,894 Transaction advisory fees and expenses 2,463 7,163 2,737 24,074 Financing interest expense on long-term borrowings 20,358 34,191 67,764 91,669 Total operating expenses 403,597 388,168 1,439,363 1,206,483 Income (loss) before income taxes and noncontrolling interest 252,515 (5,828) 1,123,272 (88,610) Provision for (benefit from) income taxes 52,807 (644) 200,044 (14,322) Net income (loss) $ 199,708 $ (5,184) $ 923,228 $ (74,288) 64 Table of Contents Total Revenues Revenues are generated through market marking activities, commissions and fees on execution services activities, which include recurring subscriptions on workflow technology and analytic products. The majority of our revenues are generated through market making activities, which are recorded as Trading income, net and Interest and dividends income. Commissions and fees are derived from commissions charged for trade executions in client execution services. We earn commissions and commission equivalents, as well as, in certain cases, contingent fees based on client revenues, which represent variable consideration. The services offered under these contracts have the same pattern of transfer; accordingly, they are being measured and recognized as a single performance obligation. The performance obligation is satisfied over time, and accordingly, revenue is recognized as time passes. Variable consideration has not been included in the transaction price as the amount of consideration is contingent on factors outside our control. Recurring revenues are primarily derived from workflow technology connectivity fees generated for matching client orders, and analytics services to select third parties. Revenues from connectivity fees are recognized and billed to clients on a monthly basis. Revenues from commissions attributable to analytic products under bundled arrangements are recognized over the course of the year as the performance obligations for those analytics products are satisfied. Trading income, net. Trading income, net represents revenue earned from bid/ask spreads. Trading income is generated in the normal course of our market making activities and is typically proportional to the level of trading activity, or volumes, and bid/ask spreads in the asset classes we serve. 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: (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 78% and 61% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively. Interest and dividends income. Our market making activities require us to hold securities on a regular basis, and we generate revenues in the form of interest and dividends income from these securities. Interest is also earned on securities borrowed from other market participants pursuant to collateralized financing arrangements and on cash held by brokers. Dividends income arises from holding market making positions over dates on which dividends are paid to shareholders of record. Commissions, net and technology services. We earn revenues on transactions for which we charge explicit commissions or commission equivalents, which include the majority of our institutional client orders. Commissions and fees are primarily affected by changes in our equities, fixed income and futures transaction volumes with institutional clients, which vary based on client relationships; changes in commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to other trading venues; and the level of our soft dollar and commission recapture activity. Client commission fees are charged for client trades executed by us on behalf of third party broker-dealers and other financial institutions. Revenue is recognized on a trade date basis, which is the point at which the performance obligation to the customer is satisfied, based on the trade being executed. In addition, we offer workflow technology and analytics services to select third parties. Revenues are derived from fees generated by matching sell-side and buy-side clients orders, and from analytic products delivered to the clients. Technology licensing fees are charged for the licensing of our proprietary technology and the provision of related services, including hosting, management and support. These fees include an up-front component and a recurring fee for the relevant terms, which may include both fixed and variable components. Revenue is recognized ratably for these services over the contractual term of the agreement. Other, net. We have interests in multiple strategic investments and telecommunications joint ventures (“JVs”). We record our pro-rata share of each JV’s earnings or losses within other, net, while fees related to the use of communication services provided by the JVs are recorded within communications and data processing. We have a noncontrolling investment (the “SBI Investment”) in SBI, a proprietary trading system based in Tokyo. In connection with the investment, we issued bonds to certain affiliates of SBI and used the proceeds to partially finance the transaction. Revenues or losses are recognized due to the changes in fair value of the investment or fluctuations in Japanese Yen conversion rates within Other, net. 65 Table of Contents Operating Expenses Brokerage, exchange, clearance fees and payments for order flow, net. Brokerage, exchange, clearance fees and payments for order flow are our most significant expenses, which include the direct expenses of executing and clearing transactions that we consummate in the course of our market making activities. Brokerage, exchange, clearance fees and payments for order flow primarily consist of fees charged by third parties for executing, processing and settling trades. These fees generally increase and decrease in direct correlation with the level of our trading activity. Execution fees are paid primarily to exchanges and venues where we trade. Clearance fees are paid to clearing houses and clearing agents. Payments for order flow represent payments to broker-dealer clients, in the normal course of business, for directing their order flow in U.S. equities to the Company. Rebates based on volume discounts, credits or payments received from exchanges or other marketplaces are netted against brokerage, exchange, clearance fees and payments for order flow. Communication and data processing. Communication and data processing represent primarily fixed expenses for leased equipment, equipment co-location, network lines and connectivity for our trading centers and co-location facilities. Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges, markets and liquidity pools around the world, and data processing expense consists primarily of market data subscription fees that we pay to third parties to receive price quotes and related information. Employee compensation and payroll taxes. Employee compensation and payroll taxes include employee salaries, cash and non-cash incentive compensation, employee benefits, payroll taxes, severance and other employee related costs. Employee compensation and payroll taxes also includes non-cash compensation expenses with respect to restricted stock units and restricted stock awards granted in connection with and subsequent to the IPO pursuant to the Amended and Restated 2015 Management Incentive Plan and Class A Common Stock underlying certain awards assumed pursuant to the Amended and Restated ITG 2007 Equity Plan. Interest and dividends expense. We incur interest expense from loaning certain equity securities in the general course of our market making activities pursuant to collateralized lending transactions. Typically, dividend expense is incurred when a dividend is paid on securities sold short. Operations and administrative. Operations and administrative expense represents occupancy, recruiting, travel and related expense, professional fees and other expenses. Depreciation and amortization. Depreciation and amortization expense results from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development. We depreciate our computer hardware and related software, office hardware and furniture and fixtures on a straight-line basis over a period of 3 to 7 years based on the estimated useful life of the underlying asset, and we amortize our capitalized software development costs on a straight-line basis over a period of 1.5 to 3 years, which represents the estimated useful lives of the underlying software. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the term of the lease. Amortization of purchased intangibles and acquired capitalized software. Amortization of purchased intangibles and acquired capitalized software represents the amortization of finite lived intangible assets acquired in connection with the acquisition of certain assets from Nyenburgh Holding B.V., Teza Technologies, the Acquisition of KCG, and the ITG Acquisition. These assets are amortized over their useful lives, ranging from 1 to 15 years, except for certain assets which were categorized as having indefinite useful lives. Termination of office leases. Termination of office leases represents the write-off expense related to certain office space we ceased use of as part of the effort to integrate and consolidate office space in connection with the Acquisition of KCG and the ITG Acquisition. The aggregate write-off amount includes the impairment of operating lease right-of-use assets, leasehold improvements and fixed assets, and dilapidation charges. Debt issue costs related to debt refinancing, prepayment and commitment fees. As a result of the refinancing or early termination of our long-term borrowings, we accelerate the capitalized debt issue costs and the discount on the term loan that would otherwise be amortized or accreted over the life of the term loan. Premium paid in connection with retiring outstanding bonds, and commitment fees paid for lines of credit are also included in this category. Transaction advisory fees and expenses. Transaction advisory fees and expenses primarily reflect professional fees incurred by us in connection with the ITG Acquisition in 2019. 66 Table of Contents Financing interest expense on long-term borrowings. Financing interest expense reflects interest accrued on outstanding indebtedness under our long-term borrowing arrangements. Provision for (benefit from) income taxes We are subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial. Our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the jurisdictions to which they relate, changes in how we do business, acquisitions and investments, audit-related developments, tax law developments (including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing jurisdiction in which we operate. In performing this assessment with respect to each jurisdiction, we review all available evidence, including actual and expected future earnings, capital gains, and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. See Note 14 “Income Taxes” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for additional information. 67 Table of Contents Non-GAAP Financial Measures and Other Items To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we use the following non-U.S. GAAP (“Non-GAAP”) financial measures of financial performance: • “Adjusted Net Trading Income”, which is the amount of revenue we generate from our market making activities, or Trading income, net, plus Commissions, net and technology services, plus Interest and dividends income, less direct costs associated with those revenues, including Brokerage, exchange, clearance fees and payments for order flow, net, and Interest and dividends expense. Management believes that this measurement is useful for comparing general operating performance from period to period. Although we use Adjusted Net Trading Income as a financial measure to assess the performance of our business, the use of Adjusted Net Trading Income is limited because it does not include certain material costs that are necessary to operate our business. Our presentation of Adjusted Net Trading Income should not be construed as an indication that our future results will be unaffected by revenues or expenses that are not directly associated with our market making activities. • “EBITDA”, which measures our operating performance by adjusting net income to exclude Financing interest expense on long-term borrowings, Debt issue cost related to debt refinancing, prepayment, and commitment fees, Depreciation and amortization, Amortization of purchased intangibles and acquired capitalized software, and Income tax expense, and “Adjusted EBITDA”, which measures our operating performance by further adjusting EBITDA to exclude severance, transaction advisory fees and expenses, termination of office leases, charges related to share based compensation and other expenses, which includes reserves for legal matters, COVID-19 one-time costs and donations and Other, net. • “Normalized Adjusted Net Income”, “Normalized Adjusted Net Income before income taxes”, “Normalized provision for income taxes”, and “Normalized Adjusted EPS”, which we calculate by adjusting Net Income to exclude certain items including IPO-related adjustments and other non-cash items, assuming that all vested and unvested Virtu Financial Units have been exchanged for Class A Common Stock, and applying an effective tax rate, which was approximately 24%. • Operating Margins, which are calculated by dividing net income, EBITDA, and Adjusted EBITDA by Adjusted Net Trading Income. Adjusted Net Trading Income, EBITDA, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins (collectively, the “Company's Non-GAAP Measures”) are Non-GAAP financial measures used by management in evaluating operating performance and in making strategic decisions. Additional information provided regarding the breakdown of total Adjusted Net Trading Income by category is also a Non-GAAP financial measure but is not used by the Company in evaluating operating performance and in making strategic decisions. In addition, the Company's Non-GAAP Measures or similar Non-GAAP financial measures are used by research analysts, investment bankers and lenders to assess our operating performance. Management believes that the presentation of the Company's Non-GAAP Measures provides useful information to investors regarding our results of operations and cash flows because they assist both investors and management in analyzing and benchmarking the performance and value of our business. The Company's Non-GAAP Measures provide indicators of general economic performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period. Furthermore, our Credit Agreement contains covenants and other tests based on metrics similar to Adjusted EBITDA. Other companies may define Adjusted Net Trading Income, Adjusted EBITDA, Normalized Adjusted Net Income, Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted EPS, and Operating Margins differently, and as a result the Company's Non-GAAP Measures may not be directly comparable to those of other companies. Although we use the Company's Non-GAAP Measures as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business. The Company's Non-GAAP Measures should be considered in addition to, and not as a substitute for, Net Income in accordance with U.S. GAAP as a measure of performance. Our presentation of the Company's Non-GAAP Measures should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. The Company's Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments; 68 Table of Contents • our EBITDA-based measures do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any cash requirement for such replacements or improvements; • they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; • they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and • they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us. Because of these limitations, the Company's Non-GAAP Measures are not intended as alternatives to Net Income as indicators of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using the Company's Non-GAAP Measures along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These U.S. GAAP measurements include operating Net Income, cash flows from operations and cash flow data. See below a reconciliation of each of the Company's Non-GAAP Measures to the most directly comparable U.S. 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 nine months ended September 30, 2020 and 2019. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Reconciliation of Trading income, net to Adjusted Net Trading Income Trading income, net $ 441,295 $ 220,148 $ 1,987,756 $ 683,611 Interest and dividends income 10,932 23,352 46,788 76,645 Commissions, net and technology services 133,853 139,627 452,333 359,894 Brokerage, exchange, clearance fees and payments for order flow, net (196,448) (98,789) (573,769) (285,890) Interest and dividends expense (27,374) (34,546) (97,656) (116,739) Adjusted Net Trading Income $ 362,258 $ 249,792 $ 1,815,452 $ 717,521 Reconciliation of Net Income to EBITDA and Adjusted EBITDA Net income (loss) $ 199,708 $ (5,184) $ 923,228 $ (74,288) Financing interest expense on long-term borrowings 20,358 34,191 67,764 91,669 Debt issue cost related to debt refinancing, prepayment, and commitment fees 9,916 — 27,282 7,894 Depreciation and amortization 16,656 17,598 50,728 48,859 Amortization of purchased intangibles and acquired capitalized software 18,265 18,908 56,177 50,436 Provision for (benefit from) income taxes 52,807 (644) 200,044 (14,322) EBITDA $ 317,710 $ 64,869 $ 1,325,223 $ 110,248 Severance 3,030 13,403 7,192 74,627 Transaction advisory fees and expenses 2,463 7,163 2,737 24,074 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 Adjusted EBITDA $ 248,733 $ 103,874 $ 1,304,196 $ 317,281 Selected Operating Margins Net Income Margin (1) 55.1 % (2.1) % 50.9 % (10.4) % EBITDA Margin (2) 87.7 % 26.0 % 73.0 % 15.4 % Adjusted EBITDA Margin (3) 68.7 % 41.6 % 71.8 % 44.2 % (1) Calculated by dividing net income by Adjusted Net Trading Income. (2) Calculated by dividing EBITDA by Adjusted Net Trading Income. 69 Table of Contents (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 nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2020 2019 2020 2019 Reconciliation of Net Income to Normalized Adjusted Net Income Net income (loss) $ 199,708 $ (5,184) $ 923,228 $ (74,288) Provision for (benefit from) income taxes 52,807 (644) 200,044 (14,322) Income (loss) before income taxes 252,515 (5,828) 1,123,272 (88,610) Amortization of purchased intangibles and acquired capitalized software 18,265 18,908 56,177 50,436 Debt issue cost related to debt refinancing, prepayment, and commitment fees 9,916 — 27,282 7,894 Severance 3,030 13,403 7,192 74,627 Transaction advisory fees and expenses 2,463 7,163 2,737 24,074 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 Normalized Adjusted Net Income before income taxes 211,719 52,085 1,185,704 176,753 Normalized provision for income taxes (1) 50,813 12,500 284,569 42,421 Normalized Adjusted Net Income $ 160,906 $ 39,585 $ 901,135 $ 134,332 Weighted Average Adjusted shares outstanding (2) 198,097,715 192,618,019 196,736,969 192,959,477 Normalized Adjusted EPS $ 0.81 $ 0.21 $ 4.58 $ 0.70 (1) Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 24% for 2020 and 24% for 2019. (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 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. 70 Table of Contents 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 Trading income, net $ 441,829 $ (534) $ — $ 441,295 Commissions, net and technology services 9,391 124,462 — 133,853 Interest and dividends income 10,763 169 — 10,932 Brokerage, exchange, clearance fees and payments for order flow, net (177,758) (18,690) — (196,448) Interest and dividends expense (26,990) (384) — (27,374) Adjusted Net Trading Income $ 257,235 $ 105,023 $ — $ 362,258 Three Months Ended September 30, 2019 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 219,535 $ 613 $ — $ 220,148 Commissions, net and technology services 7,252 132,375 — 139,627 Interest and dividends income 22,617 735 — 23,352 Brokerage, exchange, clearance fees and payments for order flow, net (73,463) (25,326) — (98,789) Interest and dividends expense (34,222) (324) — (34,546) Adjusted Net Trading Income $ 141,719 $ 108,073 $ — $ 249,792 Nine Months Ended September 30, 2020 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 1,989,176 $ (1,420) $ — $ 1,987,756 Commissions, net and technology services 9,526 442,807 — 452,333 Interest and dividends income 46,216 572 — 46,788 Brokerage, exchange, clearance fees and payments for order flow, net (487,234) (86,535) — (573,769) Interest and dividends expense (96,062) (1,594) — (97,656) Adjusted Net Trading Income $ 1,461,622 $ 353,830 $ — $ 1,815,452 Nine Months Ended September 30, 2019 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 680,224 $ 3,387 $ — $ 683,611 Commissions, net and technology services 17,213 342,681 — 359,894 Interest and dividends income 64,404 12,241 — 76,645 Brokerage, exchange, clearance fees and payments for order flow, net (203,660) (82,230) — (285,890) Interest and dividends expense (104,877) (11,862) — (116,739) Adjusted Net Trading Income $ 453,304 $ 264,217 $ — $ 717,521 71 Table of Contents 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 Trading income, net $ 385,594 $ 56,235 $ — $ 441,829 Commissions, net and technology services 9,391 — — 9,391 Brokerage, exchange, clearance fees and payments for order flow, net (169,279) (8,479) — (177,758) Interest and dividends, net (14,114) (2,113) — (16,227) Adjusted Net Trading Income $ 211,592 $ 45,643 $ — $ 257,235 Three Months Ended September 30, 2019 (in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making Trading income, net $ 166,031 $ 52,126 $ 1,378 $ 219,535 Commissions, net and technology services 7,252 — — 7,252 Brokerage, exchange, clearance fees and payments for order flow, net (61,903) (10,024) (1,536) (73,463) Interest and dividends, net (8,889) (2,754) 38 (11,605) Adjusted Net Trading Income $ 102,491 $ 39,348 $ (120) $ 141,719 Nine Months Ended September 30, 2020 (in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making Trading income, net $ 1,754,309 $ 234,867 $ — $ 1,989,176 Commissions, net and technology services 9,526 — — 9,526 Brokerage, exchange, clearance fees and payments for order flow, net (462,201) (25,033) — (487,234) Interest and dividends, net (44,264) (5,582) — (49,846) Adjusted Net Trading Income $ 1,257,370 $ 204,252 $ — $ 1,461,622 Nine Months Ended September 30, 2019 (in thousands) Global Equities Global FICC, Options and Other Unallocated Total Market Making Trading income, net $ 537,708 $ 143,042 $ (526) $ 680,224 Commissions, net and technology services 17,241 (28) — 17,213 Brokerage, exchange, clearance fees and payments for order flow, net (173,494) (30,736) 570 (203,660) Interest and dividends, net (31,816) (8,497) (160) (40,473) Adjusted Net Trading Income $ 349,639 $ 103,781 $ (116) $ 453,304 72 Table of Contents 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 nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Adjusted Net Trading Income by Category: 2020 2019 % Change Market Making: Global Equities $ 211,592 $ 102,491 106.4% Global FICC, Options and Other 45,643 39,348 16.0% Unallocated(1) — (120) NM Total Market Making 257,235 141,719 81.5% Execution Services 105,023 108,073 (2.8)% Adjusted Net Trading Income $ 362,258 $ 249,792 45.0% Three Months Ended September 30, Average Daily Adjusted Net Trading Income by Category: 2020 2019 % Change Market Making: Global Equities $ 3,306 $ 1,601 106.5% Global FICC, Options and Other 713 615 16.0% Unallocated(1) — (2) NM Total Market Making 4,019 2,214 81.5% Execution Services 1,641 1,689 (2.8)% Average Daily Adjusted Net Trading Income $ 5,660 $ 3,903 45.0% Nine Months Ended September 30, Adjusted Net Trading Income by Category: 2020 2019 % Change Market Making: Global Equities $ 1,257,370 $ 349,639 259.6% Global FICC, Options and Other 204,252 103,781 96.8% Unallocated(1) — (116) NM Total Market Making 1,461,622 453,304 222.4% Execution Services 353,830 264,217 33.9% Adjusted Net Trading Income $ 1,815,452 $ 717,521 153.0% Nine Months Ended September 30, Average Daily Adjusted Net Trading Income by Category: 2020 2019 % Change Market Making: Global Equities $ 6,653 $ 1,850 259.6% Global FICC, Options and Other 1,081 549 96.8% Unallocated(1) — (1) NM Total Market Making 7,733 2,398 222.5% Execution Services 1,872 1,398 33.9% Average Daily Adjusted Net Trading Income $ 9,606 $ 3,796 153.0% (1) Under our methodology for recording “trading income, net” in our Condensed Consolidated Statements of Comprehensive Income from Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q, we recognize revenues based on the exit price of assets and liabilities in accordance with applicable U.S. 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 73 Table of Contents 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. The purpose of the Unallocated category is to ensure that Adjusted Net Trading Income by category sums to total Adjusted Net Trading Income, which can be reconciled to Trading Income, net, calculated in accordance with U.S. GAAP. We do not allocate any resulting differences based on the timing of revenue recognition. Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Total Revenues 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 Market Making Trading income, net $ 441,829 $ 219,535 101.3% Interest and dividends income 10,763 22,617 (52.4)% Commissions, net and technology services 9,391 7,252 29.5% Other, net 12,615 398 3,069.6% Total revenues from Market Making 474,598 249,802 90.0% Execution Services Trading income, net (534) 613 NM Interest and dividends income 169 735 (77.0)% Commissions, net and technology services 124,462 132,375 (6.0)% Other, net 58,583 82 71,342.7% Total revenues from Execution Services 182,680 133,805 36.5% Corporate Other, net (1,166) (1,267) (8.0) Total revenues from Corporate (1,166) (1,267) (8.0) Consolidated Trading income, net 441,295 220,148 100.5% Interest and dividends income 10,932 23,352 (53.2)% Commissions, net and technology services 133,853 139,627 (4.1)% Other, net 70,032 (787) NM Total revenues $ 656,112 $ 382,340 71.6% Trading income, net. Trading income, net was primarily earned by our Market Making segment. 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 74 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 $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. Commissions, net and technology services. Commissions, net and technology services revenues were primarily earned by our Execution Services segment. Commissions, net and technology services revenues 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. 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 $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. 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 September 30, 2019 compared to the same period in 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. For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations”. Operating Expenses Our operating expenses increased $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 $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 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. 75 Employee compensation and payroll taxes. 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 $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 $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 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 $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. 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. 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 $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 $13.8 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. 76 Provision for (benefit from) income taxes We incur corporate tax at the U.S. federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our provision for (benefit from) income taxes was $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 $1,444.8 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 Market Making Trading income, net $ 1,989,176 $ 680,224 192.4% Interest and dividends income 46,216 64,404 (28.2)% Commissions, net and technology services 9,526 17,213 (44.7)% Other, net 19,382 235 NM Total revenues from Market Making 2,064,300 762,076 170.9% Execution Services Trading income, net (1,420) 3,387 NM Interest and dividends income 572 12,241 (95.3)% Commissions, net and technology services 442,807 342,681 29.2% Other, net 58,662 16 NM Total revenues from Execution Services 500,621 358,325 39.7% Corporate Other, net (2,286) (2,528) (9.6)% Total revenues from Corporate (2,286) (2,528) (9.6)% Consolidated Trading income, net 1,987,756 683,611 190.8% Interest and dividends income 46,788 76,645 (39.0)% Commissions, net and technology services 452,333 359,894 25.7% Other, net 75,758 (2,277) NM Total revenues $ 2,562,635 $ 1,117,873 129.2% 77 Table of Contents Trading income, net. Trading income, net was primarily earned by our Market Making segment. 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%. 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 are described below. Interest and dividends income. Interest and dividends income was primarily earned by our Market Making segment. 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. Commissions, net and technology services. Commissions, net and technology services revenues were primarily earned by our Execution Services segment. Commissions, net and technology services revenues increased $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. 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 $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 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 $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. For a full description of Adjusted Net Trading Income and a reconciliation of Adjusted Net Trading Income to trading income, net, see “Non-GAAP Financial Measures and Other Items” in this “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations”. Operating Expenses Our operating expenses increased $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. 78 Table of Contents Brokerage, exchange, clearance fees and payments for order flow, net. 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 $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 $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. 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. 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 $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 $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. As indicated above, rather than analyzing interest and dividends expense in isolation, we generally evaluate it in the broader context of our Adjusted Net Trading Income. Operations and administrative. 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 $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 $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 nine months ended September 30, 2020, compared to $66.5 million for the nine 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. 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 $19.4 million, or 245.6%, to $27.3 million for the nine months 79 Table of Contents 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 $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 $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 We incur corporate tax at the U.S. federal income tax rate on our taxable income, as adjusted for noncontrolling interest in Virtu Financial. Our income tax expense reflects such U.S. federal income tax as well as taxes payable by certain of our non-U.S. subsidiaries. Our provision for 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 General 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 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. Collateralized receivables consist primarily of securities borrowed, receivables from clearing houses for settlement of securities transactions and, to a lesser extent, securities purchased under agreements to resell. We actively manage our liquidity, and we maintain significant borrowing facilities through the securities lending markets and with banks and prime brokers. We have continually received the benefit of uncommitted margin financing from our prime brokers globally. These margin facilities are secured by securities in accounts held at the prime brokers. For purposes of providing additional liquidity, we maintain a committed credit facility and an uncommitted credit facility for our wholly-owned broker-dealer subsidiaries, as discussed in Note 10 “Borrowings” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. As a result of the substantially elevated volume and volatility environment during the quarter attributable largely to the COVID-19 pandemic and governmental and other responses thereto, our trading activities both in our market making segment and in our execution services segment increased materially 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 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, and which expired in the third quarter of 2020), the Demand Loan (as defined below, which was fully repaid 80 Table of Contents 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. Based on our current level of operations and following the steps taken as detailed above, we believe our cash flows from operations, available cash and cash equivalents, and available borrowings under our broker-dealer credit facilities will be adequate to meet our future liquidity needs for more than the next twelve months. We anticipate that our primary upcoming cash and liquidity needs will be increased margin requirements from increased trading activities in markets where we currently provide liquidity and in new markets into which we plan to expand. We manage and monitor our margin and liquidity needs on a real-time basis and can adjust our requirements both intra-day and inter-day, as required. We do not believe that the impacts of COVID-19 or the governmental and other responses thereto to date have adversely impacted our long term financial condition or long term capital requirements. We expect our principal sources of future liquidity to come from cash flows provided by operating activities and financing activities. Certain of our cash balances are insured by the Federal Deposit Insurance Corporation, generally up to $250,000 per account but without a cap under certain conditions. From time to time these cash balances may exceed insured limits, but we select financial institutions deemed highly credit worthy to minimize risk. We consider highly liquid investments with original maturities of less than three months, when acquired, to be cash equivalents. Tax Receivable Agreements Generally, we are required under the tax receivable agreements entered into in connection with our IPO to make payments to certain direct or indirect equity holders of Virtu Financial that are generally equal to 85% of the applicable cash tax savings, if any, that we realize as a result of favorable tax attributes that are available to us as a result of the Reorganization Transactions, for exchanges of membership interests for Class A Common Stock or Class B Common Stock and payments made under the tax receivable agreements. We will retain the remaining 15% of any such cash tax savings. We expect that future payments to certain direct or indirect equity holders of Virtu Financial described in Note 6 “Tax Receivable Agreements” to the condensed consolidated financial statements included in Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q are expected to range from approximately $3.3 million to $20.7 million per year over the next 15 years. Such payments will occur only after we have filed our U.S. federal and state income tax returns and realized the cash tax savings from the favorable tax attributes. We made our first payment of $7.0 million in February 2017, our second payment of $12.4 million in September 2018, and our third payment of $13.3 million in March 2020. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. We currently expect to fund these payments from realized cash tax savings from the favorable tax attributes. Under the tax receivable agreements, as a result of certain types of transactions and other factors, including a transaction resulting in a change of control, we may also be required to make payments to certain direct or indirect equity holders of Virtu Financial in amounts equal to the present value of future payments we are obligated to make under the tax receivable agreements. We would expect any acceleration of these payments to be funded from the realized favorable tax attributes. However, if the payments under the tax receivable agreements are accelerated, we may be required to raise additional debt or equity to fund such payments. To the extent that we are unable to make payments under the tax receivable agreements for any reason (including because our Amended Credit Agreement restricts the ability of our subsidiaries to make distributions to us) such payments will be deferred and will accrue interest until paid. Regulatory Capital Requirements 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. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a firm fails to maintain the required regulatory capital, it may be subject to suspension or revocation of registration by the applicable regulatory agency, and suspension or expulsion by these regulators could ultimately lead to the firm’s liquidation. 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 81 Table of Contents 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. In addition to periodic requirements to report their regulatory capital and submit other regulatory reports, Virtu Financial Ireland Limited and Virtu ITG Europe Limited are required to obtain consent prior to receiving capital contributions or making capital distributions from their regulatory capital. Failure to comply with their regulatory capital requirements could result in regulatory sanction or revocation of their regulatory license. Virtu ITG UK Limited is regulated by the Financial Conduct Authority in the United Kingdom and is subject to similar prudential capital requirements. Virtu ITG Australia Limited, Virtu ITG Hong Kong Limited, and Virtu ITG Singapore Pte Limited are also subject to local regulatory capital requirements and are regulated by the Australian Securities Exchange, the Securities and Futures Commission, and the Monetary Authority of Singapore, respectively. See Note 20 “Regulatory Requirement” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of regulatory capital requirements of our regulated subsidiaries. Broker Dealer Credit Facilities, Short-Term Bank Loans, and Prime Brokerage Credit Facilities We maintain various broker-dealer facilities and short-term credit facilities as part of our daily trading operations. 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 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 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 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. Vincent Viola, the Company’s founder and Chairman Emeritus. 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. 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. 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. 82 Table of Contents The foregoing descriptions of the Founder Member Loan Facility and the Warrant do not purport to be complete and are qualified in its entirety by reference to the complete text of the Founder Member Loan Facility and the Warrant, which are filed as exhibits to the Company's quarterly report on Form 10-Q for the period ending March 31, 2020, filed with the Securities and Exchange Commission on May 11, 2020. Credit Agreement In connection with the ITG Acquisition, Virtu Financial, VFH and the Acquisition Borrower entered into the Credit Agreement, with the lenders party thereto, Jefferies Finance LLC, as administrative agent and Jefferies Finance LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners. The Credit Agreement provided (i) a senior secured first lien term loan (the “First Lien Term Loan Facility”) in an aggregate principal amount of $1,500 million, drawn in its entirety on the ITG Closing Date, with approximately $404.5 million borrowed by VFH to repay all amounts outstanding under the Existing Term Loan Facility (as defined below) and the remaining approximately $1,095 million borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) a $50.0 million senior secured first lien revolving facility to VFH (the “First Lien Revolving Facility”), with a $5.0 million letter of credit subfacility and a $5.0 million swingline subfacility. After the ITG Closing Date, VFH assumed the obligations of the Acquisition Borrower in respect of the acquisition term loans. On October 9, 2019 (the “Amendment No. 1 Closing Date”), VFH entered into Amendment No. 1 (“Amendment No. 1”), which amended the Credit Agreement dated as of March 1, 2019, by and among VFH, Virtu Financial, the lenders party thereto, and Jefferies Finance, LLC, as administrative agent and collateral agent, to, among other things, provide for $525.0 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”), and amend the related collateral agreement. On the Amendment No. 1 Closing Date, VFH borrowed the Incremental Term Loans and used the proceeds together with available cash to redeem all of the $500.0 million aggregate principal amount of the outstanding 6.750% Senior Secured Second Lien Notes (as defined below) due 2022 issued by VFH and Orchestra Co Issuer, Inc., a Delaware corporation and indirect subsidiary of the Company (together with VFH, the “Issuers”), and pay related fees and expenses. The terms, conditions and covenants applicable to the Incremental Term Loans are the same as the terms, conditions and covenants applicable to the existing term loans under the Credit Agreement, including a maturity date of March 1, 2026. On March 2, 2020 (the “Amendment No. 2 Closing Date”), VFH entered into Amendment No. 2 (“Amendment No. 2”), which further amended the Credit Agreement (as amended by Amendment No. 1 and Amendment No. 2, the “Amended Credit Agreement”) to, among other things, reduce the interest rate spread over adjusted LIBOR or the alternate base rate by 0.50% per annum and eliminated any stepdown in the spread based on VFH's first lien leverage ratio. The term loan borrowings and revolver borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Company's election, either (i) the greatest of (a) the prime rate in effect, (b) the greater of (1) the federal funds effective rate and (2) the overnight bank funding rate, in each case plus 0.50%, (c) an adjusted LIBOR rate for a Eurodollar borrowing with an interest period of one month plus 1.00% and (d) 1.00%, plus, in each case, 2.00%, or (ii) the greater of (x) an adjusted LIBOR rate for the interest period in effect and (y) 0%, plus, in each case, 3.00%. In addition, a commitment fee accrues at a rate of 0.50% per annum on the average daily unused amount of the First Lien Revolving Facility, with stepdowns to 0.375% and 0.25% per annum based on VFH’s first lien leverage ratio, and is payable quarterly in arrears. 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 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. VFH is also subject to contingent principal prepayments based on excess cash flow and certain other triggering events. Borrowings under the Credit Agreement are guaranteed by Virtu Financial and VFH’s material non-regulated domestic restricted subsidiaries and secured by substantially all of the assets of VFH and the guarantors, in each case, subject to certain exceptions. 83 Table of Contents Under the Amended Credit Agreement, term loans will mature on March 1, 2026. The term loans amortize in annual installments equal to 1.0% of the original aggregate principal amount of the term loans. The revolving commitments will terminate on March 1, 2022. The Amended Credit Agreement contains certain customary covenants and events of default, including relating to a change of control. If an event of default occurs and is continuing, the lenders under the Amended Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding under the Amended Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Amended Credit Agreement. To finance the Acquisition of KCG, on June 30, 2017, Virtu Financial and VFH previously entered into the Fourth Amended and Restated Credit Agreement which, upon the closing of the Acquisition of KCG, provided for an aggregate $1.15 billion of first lien secured term loans (the “Existing Term Loan Facility”). As described above, the Existing Term Loan Facility was fully terminated following its repayment in full with the proceeds of the First Lien Term Loan Facility. We were in compliance with all applicable covenants under the Amended Credit Agreement as of September 30, 2020. Cash Flows 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 nine months ended September 30, 2020 and 2019. Nine Months Ended September 30, Net cash provided by (used in): 2020 2019 Operating activities $ 483,598 $ (346,222) Investing activities 3,444 (882,820) Financing activities (598,220) 897,810 Effect of exchange rate changes on cash and cash equivalents 3,860 (9,996) Net increase (decrease) in cash and cash equivalents $ (107,318) $ (341,228) Operating Activities 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 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 $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. 84 Table of Contents Secondary Offerings In May 2018, the Company and certain selling stockholders completed a public offering (the “May 2018 Secondary Offering”) of 17,250,000 shares of Class A Common Stock by the Company and certain selling stockholders at a purchase price per share of $27.16 (the offering price to the public of $28.00 per share minus the underwriters’ discount), which included the exercise in full by the underwriters of their option to purchase additional shares in the May 2018 Secondary Offering. The Company sold 10,518,750 shares of Class A Common Stock in the offering, 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 15, 2018 by and between the Company and TJMT Holdings LLC. The selling stockholders sold 6,731,250 shares of Class A Common Stock in the May 2018 Secondary Offering, including 2,081,250 shares of Class A Common Stock issued by the Company upon the exercise of vested stock options. In connection with the May 2018 Secondary Offering, the Company, TJMT Holdings LLC, North Island Stockholder, Havelock Fund Investments Pte. Ltd. (“Havelock”) and Aranda entered into that certain Amendment No. 1 to the Amended and Restated Registration Rights Agreement dated April 20, 2017, by and among the Company, TJMT Holdings LLC, the North Island Stockholder, Havelock, Aranda and certain direct or indirect equityholders of the Company (the “Amended and Restated Registration Rights Agreement”) to add Mr. 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. 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 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. Inflation 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 The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the applicable reporting period. Critical accounting policies are those that are the most important portrayal of our financial condition, results of operations and cash flows, and that require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements, our most critical accounting policies are discussed below. In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates. Estimates, by their nature, are based upon judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. 85 Table of Contents Valuation of Financial Instruments Due to the nature of our operations, substantially all of our financial instrument assets, comprised of financial instruments owned, securities purchased under agreements to resell, and receivables from brokers, dealers and clearing organizations are carried at fair value based on published market prices and are marked to market daily, or are assets which are short-term in nature and are reflected at amounts approximating fair value. Similarly, all of our financial instrument liabilities that arise from financial instruments sold but not yet purchased, securities sold under agreements to repurchase, securities loaned, and payables to brokers, dealers and clearing organizations are short-term in nature and are reported at quoted market prices or at amounts approximating fair value. Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories based on inputs: Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 — Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly; or Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable The fair values for substantially all of our financial instruments owned and financial instruments sold but not yet purchased are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Instruments categorized within level 3 of the fair value hierarchy are those which require one or more significant inputs that are not observable. Estimating the fair value of level 3 financial instruments requires judgments to be made. See Note 11 “Financial Assets and Liabilities” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for further information about fair value measurements. Revenue Recognition Trading Income, Net Trading income, net, consists of trading gains and losses that are recorded on a trade date basis and reported on a net basis. Trading income, net, is comprised of changes in fair value of financial instruments owned and financial instruments sold, not yet purchased assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses on equities, fixed income securities, currencies and commodities. Interest and Dividends Income/Interest and Dividends Expense Interest income and interest expense are accrued in accordance with contractual rates. Interest income consists of income earned on collateralized financing arrangements and on cash held by brokers. Interest expense includes interest expense from collateralized transactions, margin and related short-term lending facilities. Dividends are recorded on the ex-dividend date, and interest is recognized on an accrual basis. Commissions, net and Technology Services Commissions, net, which primarily comprise commissions and commission equivalents earned on institutional client orders, are recorded on a trade date basis, which is the point at which the performance obligation to the customer is satisfied. Under a commission management program, we allow institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As we act as an agent in these transactions, we record such expenses on a net basis within Commissions, net and technology services in the Condensed Consolidated Statements of Comprehensive Income. The Company recognizes the related revenue when the third-party research services are rendered and payments are made to the service provider. Technology services revenues consist of fees paid by third parties for licensing of our proprietary risk management and trading infrastructure technology and provision of associated management and hosting services. These fees include both upfront and annual recurring fees, as well as, in certain cases, contingent fees based on client revenues, which represents variable 86 Table of Contents consideration. The services offered under these contracts have the same pattern of transfer; accordingly, they are being measured and recognized as a single performance obligation. The performance obligation is satisfied over time, and accordingly, revenue is recognized as time passes. Variable consideration has not been included in the transaction price as the amount of consideration is contingent on factors outside the Company’s control and thus it is not probable that a significant reversal of cumulative revenue recognized will not occur. Recurring fees, which exclude variable consideration, are billed and collected on a monthly basis. Workflow technology revenues consist of order and trade execution management and order routing services we provide through our front-end workflow solutions and network capabilities. We provide trade order routing from our execution management system (“EMS”) to our execution services offerings, with each trade order routed through the EMS representing a separate performance obligation that is satisfied at a point in time. A portion of the commissions earned on the trade is then allocated to Workflow Technology based on the stand-alone selling price paid by third-party brokers for order routing. The remaining commission is allocated to commissions, net using a residual allocation approach. Commissions earned are fixed and revenue is recognized on the trade date. We participate in commission share arrangements, where trade orders are routed to third-party brokers from our EMS and our order management system (“OMS”). Commission share revenues from third-party brokers are generally fixed and revenue is recognized at a point in time on the trade date. We also provide OMS and related software products and connectivity services to customers and recognize license fee revenues and monthly connectivity fees. License fee revenues, generated for the use of our OMS and other software products, are fixed and recognized at the point in time at which the customer is able to use and benefit from the license. Connectivity revenue is variable in nature, based on the number of live connections, and is recognized over time on a monthly basis using a time-based measure of progress. Analytics revenues are earned from providing customers with analytics products and services, including trading and portfolio analytics tools. We provide analytics products and services to customers and recognize subscription fees, which are fixed for the contract term, based on when the products and services are delivered. Analytics services can be delivered either over time (when customers are provided with distinct ongoing access to analytics data) or at a point in time (when reports are only delivered to the customer on a periodic basis). Over time performance obligations are recognized using a time-based measure of progress on a monthly basis, since the analytics products and services are continually provided to the client. Point in time performance obligations are recognized when the analytics reports are delivered to the client. Analytics products and services can also be paid for through variable bundled arrangements with trade execution services. Customers agree to pay for analytics products and services with commissions generated from trade execution services, and commissions are allocated to the analytics performance obligation(s) using: (i) the commission value for each customer for the products and services it receives, which is priced using the value for similar stand-alone subscription arrangements; and (ii) a calculated ratio of the commission value for the products and services relative to the total amount of commissions generated from the customer. For these bundled commission arrangements, the allocated commissions to each analytics performance obligation are then recognized as revenue when the analytics product is delivered, either over time or at a point in time. These allocated commissions may be deferred if the allocated amount exceeds the amount recognizable based on delivery. Share-Based Compensation We account for share-based compensation transactions with employees under the provisions of the Financial Accounting Standards Board's Accounting Standards Codification (“ASC”) 718, Compensation: Stock Compensation. 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 ("RSUs"). 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 87 Table of Contents they occur. The fair value of RSAs is determined based on the closing price as of the date of grant. The fair value of share-based awards granted to employees is expensed based on the vesting conditions and is recognized on a straight-line basis over the vesting period, or, in the case of RSAs subject to performance conditions, from the date that achievement becomes probable through the remainder of the vesting period. We record as treasury stock shares repurchased from employees for the purpose of settling tax liabilities incurred upon the issuance of common stock, the vesting of restricted stock units or the exercise of stock options. Income Taxes We conduct our business globally through a number of separate legal entities. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations of each legal jurisdiction in which we operate. Certain of our wholly owned subsidiaries are subject to income taxes in foreign jurisdictions. The provision for income tax is comprised of current tax and deferred tax. Current tax represents the tax on current year tax returns, using tax rates enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the asset can be utilized. 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. 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. The tax benefits recognized in the condensed consolidated financial statements from such a position are measured based on the largest benefit for each such position that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Many factors are considered when evaluating and estimating the tax positions and tax benefits. Such estimates involve interpretations of regulations, rulings, case law, etc. and are inherently complex. Our estimates may require periodic adjustments and may not accurately anticipate actual outcomes as resolution of income tax treatments in individual jurisdictions typically would not be known for several years after completion of any fiscal year. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of our acquisitions. Goodwill is not amortized but is assessed for impairment on an annual basis and between annual assessments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is assessed at the reporting unit level, which is defined as an operating segment or one level below the operating segment. When assessing impairment, an entity may perform an initial qualitative assessment, under which it assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances, including the following: • general economic conditions; • limitations on accessing capital; • fluctuations in foreign exchange rates or other developments in equity and credit markets; • industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development; • cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; • overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; • other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation. If, after assessing the totality of such events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further goodwill impairment testing is necessary. 88 Table of Contents If further testing is necessary, the fair value of the reporting unit is compared to its carrying value; if the fair value of the reporting unit is less than its carrying value, a goodwill impairment loss is recorded, equal to the excess of the reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). We assess goodwill for impairment on an annual basis as of July 1st and on an interim basis when certain events or circumstances exist. In the impairment assessment as of July 1, 2020, we performed a qualitative assessment as described above for each reporting unit. No impairment of goodwill was identified. We amortize finite-lived intangible assets over their estimated useful lives. We test finite-lived intangible assets for impairment when impairment indicators are present, and if impaired, they are written down to fair value. Recent Accounting Pronouncements For a discussion of recently issued accounting developments and their impact or potential impact on our condensed consolidated financial statements, see Note 2 “Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. 89 Table of Contents