Virtu Financial, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management’s discussion and analysis covers the three and six months ended June 30, 2022 and 2021 and should be read in conjunction with the condensed consolidated financial statements of Virtu Financial, Inc. (the Company") for the period ended June 30, 2022, which are in Part 1, Item 1 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, 2021, 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, 2021. 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 our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission ("SEC") on February 18, 2022 (the "2021 Form 10-K"), 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 2021 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 risk of employees and executives contracting COVID-19 and the deployment of our business continuity plan pursuant to which a significant number of our employees may 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; • volatility in 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; • enhanced regulatory, congressional, and media scrutiny, including attention to electronic trading, wholesale market making and off-exchange trading, payment for order flow, and other market structure topics and both the impact of potential changes in regulation or law which could have an adverse effect on our business as well as the potential impact upon public perception of us or of companies in our industry; • 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, including but limited to risks related to funding and liquidity; • obligations to comply with applicable regulatory capital requirements; • litigation or other legal and regulatory-based liabilities; 46 • changes in laws, rules or regulations, including proposed legislation that would impose taxes on certain financial transactions in the European Union, the U.S. (and certain states therein) and other jurisdictions and other potential changes which could increase our corporate or other tax obligations in one or more jurisdictions; • obligations to comply with laws and regulations applicable to our operations in the U.S. and abroad; • need to maintain and continue developing proprietary technologies; • the effect of the Acquisition of KCG and the ITG Acquisition (each as defined below) on ongoing business operations generally, including the assumption of potential liabilities and risks relating to these historical acquisitions; • 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, monetary payment demands 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, geopolitical conflicts, 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. Unless the context otherwise requires, the terms "we," "us," "our," "Virtu" and the "Company" refer to Virtu Financial, Inc., a Delaware corporation, and its consolidated subsidiaries and the term "Virtu Financial" refers to Virtu Financial LLC, a Delaware limited liability company and a consolidated subsidiary of ours. 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, cryptocurrencies 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. 47 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. 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 other financial instruments, 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. The segment also includes the results of our capital markets business, in which we act as an agent for issuers in connection with at-the-market offerings and buyback programs. 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. 48 Acquisition of ITG On March 1, 2019, the "ITG Closing Date", we announced the completion of Investment Technology Group, Inc. and its subsidiaries ("ITG") in an all-cash transaction (the "ITG Acquisition"). In connection with the ITG Acquisition, Virtu Financial, VFH Parent LLC, a Delaware limited liability company and a subsidiary of Virtu Financial ("VFH"), and Impala Borrower LLC (the "Acquisition Borrower"), a subsidiary of the Company, 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 "Acquisition Credit Agreement"). The Acquisition Credit Agreement provided (i) a senior secured first lien term loan (together with the Acquisition Incremental Term Loans, as defined below; the "Acquisition First Lien Term Loan Facility") in an aggregate principal amount of $1,500.0 million, drawn in its entirety on the ITG Closing Date, of which approximately $404.5 million was borrowed by VFH to repay all amounts outstanding under a previous term loan facility and the remaining approximately $1,095.0 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 "Acquisition 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, VFH entered into an amendment (“Amendment No. 1”), which amended the Acquisition Credit Agreement dated as of March 1, 2019, to, among other things, provide for $525.0 million in aggregate principal amount of incremental term loans (the “Acquisition Incremental Term Loans”), and amend the related collateral agreement. On March 2, 2020, VFH entered into a second amendment (“Amendment No. 2”), which further amended the Acquisition 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 step-down in the spread based on VFH's first lien leverage ratio. On January 13, 2022 (the "Credit Agreement Closing Date"), VFH and Virtu Financial entered into the Credit Agreement, with the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent and JPMorgan Chase bank, N.A., Goldman Sachs Bank USA, RBC Capital Markets, Barclays Bank plc, Jefferies Finance LLC, BMO Capital Markets Corp., and CIBC World Markets Corp., as joint lead arrangers and bookrunners (the “Credit Agreement”). The Credit Agreement provides (i) a senior secured first lien term loan in an aggregate principal amount of $1,800.0 million, drawn in its entirety on the Credit Agreement Closing Date, the proceeds of which were used by VFH to repay all amounts outstanding under the Acquisition Credit Agreement, to pay fees and expenses in connection therewith, to fund share repurchases under the Company’s repurchase program and for general corporate purposes, and (ii) a $250.0 million senior secured first lien revolving facility to VFH, with a $20.0 million letter of credit subfacility and a $20.0 million swingline subfacility. 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. On April 22, 2022, the Company’s Board of Directors adopted another 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 21,000,000 shares of Class A Common Stock to an aggregate of 26,000,000 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 2, 2022. In connection with the IPO, non-qualified stock options to purchase 9,228,000 shares were granted at the IPO per share price, each of which vests in equal annual installments over a period of four years from the grant date and expires not later than 10 years from the grant date. Subsequent to the IPO and through June 30, 2022, options to purchase 1,633,750 shares in the aggregate were forfeited and 6,072,474 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 49 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. 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 Statements of Financial Condition as of June 30, 2022 in the amount of $13.2 million; (ii) deferred tax assets reflected on our Condensed Consolidated Statements of Financial Condition as of June 30, 2022 in the amount of $133.4 million and tax receivable agreement obligation in the amount of $237.9 million, in each case as described in greater detail in Note 4 "Tax Receivable Agreements" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q; (iii) a portion of the member's equity of Virtu Financial is represented as noncontrolling interest on our Condensed Consolidated Statements of Financial Condition as of June 30, 2022; and (iv) provision for corporate income tax in the amount of $13.7 million and $40.8 million reflected on our Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022, respectively. 50 Components of Our Results of Operations The following table shows our i) Total revenue, ii) Total operating expenses, and iii) Income before income taxes and noncontrolling interest by segment for the three and six months ended June 30, 2022, and 2021: (in thousands) Three Months Ended June 30, Six Months Ended June 30, Market Making 2022 2021 2022 2021 Total revenue $ 432,595 $ 402,541 $ 979,158 $ 1,226,265 Total operating expenses 307,149 277,970 629,490 648,417 Income before income taxes and noncontrolling interest 125,446 124,571 349,668 577,848 Execution Services Total revenue 130,997 138,130 282,742 327,369 Total operating expenses 123,110 134,072 259,729 282,960 Income before income taxes and noncontrolling interest 7,887 4,058 23,013 44,409 Corporate Total revenue 41,146 8,294 44,100 7,903 Total operating expenses 695 1,921 1,287 5,371 Income before income taxes and noncontrolling interest 40,451 6,373 42,813 2,532 Consolidated Total revenue 604,738 548,965 1,306,000 1,561,537 Total operating expenses 430,954 413,963 890,506 936,748 Income before income taxes and noncontrolling interest $ 173,784 $ 135,002 $ 415,494 $ 624,789 The following table shows our results of operations for the three and six months ended June 30, 2022, and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Revenues: Trading income, net $ 395,928 $ 384,832 $ 918,235 $ 1,197,576 Interest and dividends income 30,792 9,545 51,804 16,541 Commissions, net and technology services 136,340 143,115 290,995 334,764 Other, net 41,678 11,473 44,966 12,656 Total revenue 604,738 548,965 1,306,000 1,561,537 Operating Expenses: Brokerage, exchange, clearance fees and payments for order flow, net 156,986 170,691 307,366 430,023 Communication and data processing 55,699 52,507 111,534 104,197 Employee compensation and payroll taxes 98,604 83,849 202,084 188,620 Interest and dividends expense 48,716 24,971 91,254 48,999 Operations and administrative 13,577 21,753 38,792 47,408 Depreciation and amortization 16,334 16,349 33,812 33,127 Amortization of purchased intangibles and acquired capitalized software 16,277 18,077 32,757 36,154 Termination of office leases 677 3,667 1,384 4,888 Debt issue cost related to debt refinancing, prepayment and commitment fees 1,437 1,989 27,121 3,744 Transaction advisory fees and expenses 558 (3) 980 (17) Financing interest expense on long-term borrowings 22,089 20,113 43,422 39,605 Total operating expenses 430,954 413,963 890,506 936,748 Income before income taxes and noncontrolling interest 173,784 135,002 415,494 624,789 Provision for income taxes 24,888 26,095 66,674 106,650 Net income $ 148,896 $ 108,907 $ 348,820 $ 518,139 51 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 comprises of small amounts earned on millions of trades on various exchanges. 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 70% and 77% of our total revenues for the six months ended June 30, 2022 and 2021, 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 “JNX Investment”) in Japannext Co., Ltd. (“JNX”), a proprietary trading system based in Tokyo. In connection with the investment, we issued bonds to certain affiliates of JNX 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. Other, net can also include gains on sales of strategic investments and businesses, as well as revenues from service agreements related to the sale of businesses. 52 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. 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 cost 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 cost 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 one or more acquisitions or dispositions. 53 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, and foreign 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 13 "Income Taxes" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for additional information. 54 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. We also disclose Adjusted Net Trading Income by segment, including daily averages. Management believes that Adjusted Net Trading Income 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, reserves for legal matters, transaction advisory fees and expenses, termination of office leases, charges related to share-based compensation and other expenses, which includes 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 gains and losses from strategic investments and the sales of businesses, 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. 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; 55 • 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 consolidated 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 six months ended June 30, 2022, and 2021. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Reconciliation of Trading income, net to Adjusted Net Trading Income Trading income, net $ 395,928 $ 384,832 $ 918,235 $ 1,197,576 Interest and dividends income 30,792 9,545 51,804 16,541 Commissions, net and technology services 136,340 143,115 290,995 334,764 Brokerage, exchange, clearance fees and payments for order flow, net (156,986) (170,691) (307,366) (430,023) Interest and dividends expense (48,716) (24,971) (91,254) (48,999) Adjusted Net Trading Income $ 357,358 $ 341,830 $ 862,414 $ 1,069,859 Reconciliation of Net Income to EBITDA and Adjusted EBITDA Net income $ 148,896 $ 108,907 $ 348,820 $ 518,139 Financing interest expense on long-term borrowings 22,089 20,113 43,422 39,605 Debt issue cost related to debt refinancing, prepayment, and commitment fees 1,437 1,989 27,121 3,744 Depreciation and amortization 16,334 16,349 33,812 33,127 Amortization of purchased intangibles and acquired capitalized software 16,277 18,077 32,757 36,154 Provision for income taxes 24,888 26,095 66,674 106,650 EBITDA $ 229,921 $ 191,530 $ 552,606 $ 737,419 Severance 757 1,020 2,759 3,039 Transaction advisory fees and expenses 558 (3) 980 (17) Termination of office leases 677 3,667 1,384 4,888 Other (41,631) (11,434) (37,369) (8,603) Share based compensation 18,997 12,552 32,709 25,330 Adjusted EBITDA $ 209,279 $ 197,332 $ 553,069 $ 762,056 Selected Operating Margins Net Income Margin (1) 41.7 % 31.9 % 40.4 % 48.4 % EBITDA Margin (2) 64.3 % 56.0 % 64.1 % 68.9 % Adjusted EBITDA Margin (3) 58.6 % 57.7 % 64.1 % 71.2 % (1) Calculated by dividing net income by Adjusted Net Trading Income. (2) Calculated by dividing EBITDA by Adjusted Net Trading Income. 56 (3) Calculated by dividing Adjusted EBITDA by Adjusted Net Trading Income. The following table reconciles Net Income to arrive at Normalized Adjusted Net Income before income taxes, Normalized provision for income taxes, Normalized Adjusted Net Income and Normalized Adjusted EPS for the three and six months ended June 30, 2022, and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Reconciliation of Net Income to Normalized Adjusted Net Income Net income $ 148,896 $ 108,907 $ 348,820 $ 518,139 Provision for income taxes 24,888 26,095 66,674 106,650 Income before income taxes 173,784 135,002 415,494 624,789 Amortization of purchased intangibles and acquired capitalized software 16,277 18,077 32,757 36,154 Debt issue cost related to debt refinancing, prepayment, and commitment fees 1,437 1,989 27,121 3,744 Severance 757 1,020 2,759 3,039 Transaction advisory fees and expenses 558 (3) 980 (17) Termination of office leases 677 3,667 1,384 4,888 Other (41,631) (11,434) (37,369) (8,603) Share based compensation 18,997 12,552 32,709 25,330 Normalized Adjusted Net Income before income taxes 170,856 160,870 475,835 689,324 Normalized provision for income taxes (1) 41,006 38,609 114,201 165,438 Normalized Adjusted Net Income $ 129,850 $ 122,261 $ 361,634 $ 523,886 Weighted Average Adjusted shares outstanding (2) 178,886,524 194,770,445 181,017,758 195,861,065 Normalized Adjusted EPS $ 0.73 $ 0.63 $ 2.00 $ 2.67 (1) Reflects U.S. federal, state, and local income tax rate applicable to corporations of approximately 24% for all periods presented. (2) Assumes that (1) holders of all vested and unvested non-vesting Virtu Financial Units (together with corresponding shares of the Company's Class C common stock, par value $0.00001 per share (the “Class C Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of Class A Common Stock on a one-for-one basis, (2) holders of all Virtu Financial Units (together with corresponding shares of the Company's Class D common stock, par value $0.00001 per share (the “Class D Common Stock”)) have exercised their right to exchange such Virtu Financial Units for shares of the Company's Class B common stock, par value $0.00001 per share (the “Class B Common Stock”) on a one-for-one basis, and subsequently exercised their right to convert the shares of Class B Common Stock into shares of Class A Common Stock on a one-for-one basis. Includes additional shares from dilutive impact of options, restricted stock units and restricted stock awards outstanding under the Amended and Restated 2015 Management Incentive Plan and the Amended and Restated ITG 2007 Equity Plan during the three and six months ended June 30, 2022, and 2021. 57 The following tables reconcile Trading income, net to Adjusted Net Trading Income by segment for the three and six months ended June 30, 2022, and 2021: Three Months Ended June 30, 2022 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 390,263 $ 5,665 $ — $ 395,928 Commissions, net and technology services 11,145 125,195 — 136,340 Interest and dividends income 30,792 — — 30,792 Brokerage, exchange, clearance fees and payments for order flow, net (131,121) (25,865) — (156,986) Interest and dividends expense (47,355) (1,361) — (48,716) Adjusted Net Trading Income $ 253,724 $ 103,634 $ — $ 357,358 Three Months Ended June 30, 2021 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 380,644 $ 4,188 $ — $ 384,832 Commissions, net and technology services 9,087 134,028 — 143,115 Interest and dividends income 9,569 (24) — 9,545 Brokerage, exchange, clearance fees and payments for order flow, net (144,784) (25,907) — (170,691) Interest and dividends expense (22,442) (2,529) — (24,971) Adjusted Net Trading Income $ 232,074 $ 109,756 $ — $ 341,830 Six Months Ended June 30, 2022 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 906,621 $ 11,614 $ — $ 918,235 Commissions, net and technology services 20,194 270,801 — 290,995 Interest and dividends income 51,775 29 — 51,804 Brokerage, exchange, clearance fees and payments for order flow, net (254,636) (52,730) — (307,366) Interest and dividends expense (88,382) (2,872) — (91,254) Adjusted Net Trading Income $ 635,572 $ 226,842 $ — $ 862,414 Six Months Ended June 30, 2021 (in thousands) Market Making Execution Services Corporate Total Trading income, net $ 1,181,926 $ 15,650 $ — $ 1,197,576 Commissions, net and technology services 23,217 311,547 — 334,764 Interest and dividends income 16,469 72 — 16,541 Brokerage, exchange, clearance fees and payments for order flow, net (367,978) (62,045) — (430,023) Interest and dividends expense (46,436) (2,563) — (48,999) Adjusted Net Trading Income $ 807,198 $ 262,661 $ — $ 1,069,859 The following table shows our Adjusted Net Trading Income and average daily Adjusted Net Trading Income by segment for the three and six months ended June 30, 2022, and 2021: 58 Three Months Ended June 30, Adjusted Net Trading Income by Segment (in thousands): 2022 2021 % Change Market Making $ 253,724 $ 232,074 9.3% Execution Services 103,634 109,756 (5.6)% Adjusted Net Trading Income $ 357,358 $ 341,830 4.5% Three Months Ended June 30, Average Daily Adjusted Net Trading Income by Segment (in thousands): 2022 2021 % Change Market Making $ 4,092 $ 3,684 11.1% Execution Services 1,672 1,742 (4.0)% Average Daily Adjusted Net Trading Income $ 5,764 $ 5,426 6.2% Six Months Ended June 30, Adjusted Net Trading Income by Segment (in thousands): 2022 2021 % Change Market Making $ 635,572 $ 807,198 (21.3)% Execution Services 226,842 262,661 (13.6)% Adjusted Net Trading Income $ 862,414 $ 1,069,859 (19.4)% Six Months Ended June 30, Average Daily Adjusted Net Trading Income by Segment (in thousands): 2022 2021 % Change Market Making $ 5,126 $ 6,510 (21.3)% Execution Services 1,829 2,118 (13.6)% Average Daily Adjusted Net Trading Income $ 6,955 $ 8,628 (19.4)% Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Total Revenues Our total revenues increased $55.8 million, or 10.2%, to $604.7 million for the three months ended June 30, 2022, compared to $549.0 million for the three months ended June 30, 2021. The increase was primarily due to by an increase of $30.2 million in Other, net, which was driven by gains recorded on sales of various strategic investments, as well as an increase of $21.2 million in Interest and dividends income which is largely driven by the level of trading assets held over periods when dividends are paid, and the levels of stock borrowing and trading asset financing during the three months ended June 30, 2022 compared to the same period in 2021. Trading income, net increased 2.9% to $395.9 million from $384.8 million for the three months ended June 30, 2022 and 2021, respectively. 59 The following table shows total revenues by segment for the three months ended June 30, 2022 and 2021. Three Months Ended June 30, (in thousands, except for percentage) 2022 2021 % Change Market Making Trading income, net $ 390,263 $ 380,644 2.5% Interest and dividends income 30,792 9,569 221.8% Commissions, net and technology services 11,145 9,087 22.6% Other, net 395 3,241 (87.8)% Total revenues from Market Making $ 432,595 $ 402,541 7.5% Execution Services Trading income, net $ 5,665 $ 4,188 35.3% Interest and dividends income — (24) (100.0)% Commissions, net and technology services 125,195 134,028 (6.6)% Other, net 137 (62) NM Total revenues from Execution Services $ 130,997 $ 138,130 (5.2)% Corporate Other, net $ 41,146 $ 8,294 396.1% Total revenues from Corporate $ 41,146 $ 8,294 396.1% Consolidated Trading income, net $ 395,928 $ 384,832 2.9% Interest and dividends income 30,792 9,545 222.6% Commissions, net and technology services 136,340 143,115 (4.7)% Other, net 41,678 11,473 263.3% Total revenues $ 604,738 $ 548,965 10.2% Trading income, net. Trading income, net was primarily earned by our Market Making segment. Trading income, net increased $11.1 million, or 3%, to $395.9 million for the three months ended June 30, 2022, compared to $384.8 million for the three months ended June 30, 2021. The increase was primarily driven by the higher market volumes and volatility across global markets and major asset categories during the three months ended June 30, 2022 compared to the same period in 2021. Average daily U.S. equity consolidated volumes increased 19%, average daily realized volatility of the S&P 500 Index increased 155%, and average daily CVIX volatility increased 120% in the period compared to the prior period, driven by macroeconomic conditions, including increased inflation, uncertainty around geopolitical developments in eastern Europe, and the governmental and other responses thereto. There was also one less trading day in the three months ended June 30, 2022 than the same period in 2021. Rather than analyzing trading income, net, in isolation, we evaluate it in the broader context of our Adjusted Net Trading Income, together with Interest and dividends income, Interest and dividends expense, Commissions, net and technology services and Brokerage, exchange, clearance fees and payments for order flow, net, each of which is described below. Interest and dividends income. Interest and dividends income was primarily earned by our Market Making segment. Interest and dividends income increased $21.2 million, or 222.6%, to $30.8 million for the three months ended June 30, 2022, compared to $9.5 million for the three months ended June 30, 2021. This increase was primarily attributable to the higher dividends earned on market making trading assets held over periods when dividends are paid along with an increase in interest income earned on cash collateral posted as part of securities borrowing transactions and interest earned on balances maintained at prime brokers, both of which benefited from higher interest rates for the period compared to the same period during the prior year. 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 $6.8 million, or 4.7%, to $136.3 million for the three months ended June 30, 2022, compared to $143.1 million for the three months ended June 30, 2021. There was one less trading day in the three months ended June 30, 2022 than the same period in 2021. 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. 60 Other, net. Other, net increased $30.2 million, or 263.3%, to $41.7 million for the three months ended June 30, 2022, compared to $11.5 million for the three months ended June 30, 2021. The increase was primarily due to gains recognized during the 2022 period on sales of investments in our strategic investments portfolio. Adjusted Net Trading Income Adjusted Net Trading Income, which is a non-GAAP measure, increased $15.5 million, or 4.5%, to $357.4 million for the three months ended June 30, 2022, compared to $341.8 million for the three months ended June 30, 2021. This increase was primarily attributable to higher Trading income, net in the Market Making segment driven by higher market volumes and volatility across major asset categories during the three months ended June 30, 2022 compared to the same period in 2021, as noted above, and lower Brokerage, exchange, clearing fees and payments for order flow, net as described below. Adjusted Net Trading Income per day increased $0.3 million, or 6.2%, to $5.8 million for the three months ended June 30, 2022, compared to $5.4 million for the three months ended June 30, 2021. Although average Adjusted Net Trading Income per day increased, there was one less trading day in the three months ended June 30, 2022 than the same period in 2021. 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 $17.0 million, or 4.1%, to $431.0 million for the three months ended June 30, 2022, compared to $414.0 million for the three months ended June 30, 2021. The increase in operating expenses is primarily due to an increase in Employee compensation and payroll taxes, and Interest and dividends expense, partially offset by decreases in Brokerage, exchange, clearance fees and payments for order flow, net, and Operations and administrative, 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, decreased $13.7 million, or 8.0%, to $157.0 million for the three months ended June 30, 2022, compared to $170.7 million for the three months ended June 30, 2021. These costs vary period to period based upon the level and composition of our trading activities. We evaluate this category representing direct costs associated with transacting business, in the broader context of our Adjusted Net Trading Income. Communication and data processing. Communication and data processing expense increased $3.2 million, or 6.1%, to $55.7 million for the three months ended June 30, 2022, compared to $52.5 million for the three months ended June 30, 2021. This increase was primarily due to increased connectivity spending on colocation, subscriber connections and trading membership fees. Employee compensation and payroll taxes. Employee compensation and payroll taxes increased $14.8 million, or 17.6%, to $98.6 million for the three months ended June 30, 2022, compared to $83.8 million for the three months ended June 30, 2021. The increase in compensation levels was primarily attributable to an increase in salaries and an increase in share-based compensation related to prior year incentive awards and the portion of anticipated current year incentive awards that is accrued in the current period. We have capitalized and therefore excluded employee compensation and benefits related to software development of $8.3 million and $8.9 million for the three months ended June 30, 2022, and 2021, respectively. Interest and dividends expense. Interest and dividends expense increased $23.7 million or 95.1% to $48.7 million for the three months ended June 30, 2022, compared to $25.0 million for the three months ended June 30, 2021. This increase was primarily attributable to higher dividend expense with respect to securities sold, not yet purchased and higher interest expense incurred on cash collateral received as part of securities lending transactions and higher financing costs with respect to trading assets driven by higher interest rates. 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 $8.2 million or 37.6% to $13.6 million for the three months ended June 30, 2022, compared to $21.8 million for the three months ended June 30, 2021. This decrease was primarily driven by the beneficial effect of a strong U.S. dollar on foreign exchange translation gains during the three months ended June 30, 2022. Depreciation and amortization. Depreciation and amortization remained consistent at $16.3 million both for the three months ended June 30, 2022, and June 30, 2021. 61 Amortization of purchased intangibles and acquired capitalized software. Amortization of purchased intangibles and acquired capitalized software decreased $1.8 million, or 10.0%, to $16.3 million for the three months ended June 30, 2022, compared to $18.1 million for the three months ended June 30, 2021. This decrease was due to certain intangible assets being fully amortized. Termination of office leases. Termination of office leases decreased $3.0 million or 81.5% to $0.7 million for the three months ended June 30, 2022, compared to $3.7 million for the three months ended June 30, 2021. The expenses incurred during the period ended June 30, 2021 primarily related to the effort to integrate and consolidate office space in connection with the ITG Acquisition. Debt issue cost related to debt refinancing, prepayment and commitment fees. Expense from debt issue cost related to debt refinancing, prepayment and commitment fees decreased $0.6 million, or 27.8%, to $1.4 million for the three months ended June 30, 2022, compared to $2.0 million for the three months ended June 30, 2021. The decrease was primarily driven by the acceleration of deferred debt issuance costs as a result of refinancing our long-term debt transaction in January 2022, as described in further detail below. Transaction advisory fees and expenses. Transaction advisory fees and expenses remained consistent at $0.6 million for the three months ended June 30, 2022, compared to immaterial amounts incurred during the three months ended June 30, 2021. These expenses were primarily incurred in relation to our strategic investment portfolio. Financing interest expense on long-term borrowings. Financing interest expense on long-term borrowings increased $2.0 million or 9.8% to $22.1 million for the three months ended June 30, 2022, compared to $20.1 million for the three months ended June 30, 2021.The increase was primarily attributable to the increase in outstanding principal as a result of refinancing our long-term debt transaction in January 2022, as described in further detail below. Provision for 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 and effective tax rates were $24.9 million and 14.3% for the three months ended June 30, 2022, compared to $26.1 million and 19.3% for the three months ended June 30, 2021. Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Total Revenues Our total revenues decreased $255.5 million, or 16.4%, to $1,306.0 million for the six months ended June 30, 2022, compared to $1,561.5 million for the six months ended June 30, 2021. This decrease was primarily attributable to a decrease of $279.3 million in Trading income, net, which was primarily driven by lower market volatility during the six months ended June 30, 2022 compared to the prior period. This decrease was offset, in part, by an increase of $32.3 million in Other, net, which was driven by gains recorded on sales of various strategic investments, as well as an increase of $35.3 million in Interest and dividends income which is largely driven by the level of trading assets held over periods when dividends are paid, and the levels of stock borrowing and trading asset financing during the six months ended June 30, 2022 compared to the same period in 2021. 62 The following table shows the total revenues by segment for the six months ended June 30, 2022 and 2021. Six Months Ended June 30, (in thousands, except for percentage) 2022 2021 % Change Market Making Trading income, net $ 906,621 $ 1,181,926 (23.3)% Interest and dividends income 51,775 16,469 214.4% Commissions, net and technology services 20,194 23,217 (13.0)% Other, net 568 4,653 (87.8)% Total revenues from Market Making $ 979,158 $ 1,226,265 (20.2)% Execution Services Trading income, net $ 11,614 $ 15,650 (25.8) Interest and dividends income 29 72 (59.7)% Commissions, net and technology services 270,801 311,547 (13.1)% Other, net 298 100 198% Total revenues from Execution Services $ 282,742 $ 327,369 (13.6)% Corporate Other, net $ 44,100 $ 7,903 458.0% Total revenues from Corporate $ 44,100 $ 7,903 458.0% Consolidated Trading income, net $ 918,235 $ 1,197,576 (23.3)% Interest and dividends income 51,804 16,541 213.2% Commissions, net and technology services 290,995 334,764 (13.1)% Other, net 44,966 12,656 255.3% Total revenues $ 1,306,000 $ 1,561,537 (16.4)% Trading income, net. Trading income, net was primarily earned by our Market Making segment. Trading income, net, decreased $279.3 million, or 23.3%, to $918.2 million for the six months ended June 30, 2022, compared to $1,197.6 million for the six months ended June 30, 2021. The decrease was largely a result of lower trading income in the first quarter of 2022, driven by lower market volumes as compared to the same period in 2021. 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 increased $35.3 million, or 213.2%, to $51.8 million for the six months ended June 30, 2022, compared to $16.5 million for the six months ended June 30, 2021. This increase was primarily attributable to higher dividends earned on market making trading assets held over periods when dividends are paid, along with an increase in interest income earned on cash collateral posted as part of securities borrowed transactions, both of which benefited from higher interest rates for the period 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 decreased $43.8 million, or 13.1%, to $291.0 million for the six months ended June 30, 2022, compared to $334.8 million for the six months ended June 30, 2021.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. Other, net. Other, net increased $32.3 million, or 255.3%, to $45.0 million for the six months ended June 30, 2022, compared to $12.7 million for the six months ended June 30, 2021. The increase was primarily due to gains recognized during the 2022 period from sales of investments in our strategic investments portfolio. 63 Adjusted Net Trading Income Adjusted Net Trading Income, which is a non-GAAP measure, decreased $207.4 million, or 19.4%, to $862.4 million for the six months ended June 30, 2022, compared to $1,069.9 million for the six months ended June 30, 2021. This decrease was primarily attributable to lower Trading Income, net as noted above, partially offset by lower Brokerage, exchange, clearance fees and payments for order flow, net as described below, incurred by Market Making. Adjusted Net Trading Income per day decreased $1.6 million, or 19.4%, to $7.0 million for the six months ended June 30, 2022, compared to $8.6 million for the six months ended June 30, 2021. The number of trading days was 124 days for both the six months ended June 30, 2022 and June 30, 2021. 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 decreased $46.2 million, or 4.9%, to $890.5 million for the six months ended June 30, 2022, compared to $936.7 million for the six months ended June 30, 2021. The decrease in operating expenses was primarily due to lower Brokerage, exchange, clearance fees and payments for order flow, net, partially offset by increases in Debt issue cost related to debt refinancing, prepayment, and commitment fees, and Interest and dividends expense. Brokerage, exchange, clearance fees and payments for order flow, net. Brokerage, exchange, clearance fees and payments for order flow, net, decreased $122.7 million, or 28.5%, to $307.4 million for the six months ended June 30, 2022, compared to $430.0 million for the six months ended June 30, 2021. These costs vary period to period based upon the level and composition of our trading activities. 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 $7.3 million, or 7.0%, to $111.5 million for the six months ended June 30, 2022, compared to $104.2 million for the six months ended June 30, 2021. This increase was primarily attributable to increased connectivity spending on colocation, subscriber connections and trading membership fees. Employee compensation and payroll taxes. Employee compensation and payroll taxes increased $13.5 million, or 7.1%, to $202.1 million for the six months ended June 30, 2022, compared to $188.6 million for the six months ended June 30, 2021. The increase in compensation levels was primarily attributable to an increase in salaries and an increase in share-based compensation related to prior year incentive awards and the portion of anticipated current year incentive awards that is accrued in the current period. We have capitalized and therefore excluded employee compensation and benefits related to software development of $16.7 million and $18.0 million for the six months ended June 30, 2022 and 2021, respectively. Interest and dividends expense. Interest and dividends expense increased $42.3 million, or 86.2%, to $91.3 million for the six months ended June 30, 2022, compared to $49.0 million for the six months ended June 30, 2021. This increase was primarily attributable to higher dividend expense with respect to securities sold, not yet purchased and higher interest expense incurred on cash collateral received driven by higher interest rates, as well as an increase 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 generally evaluate it in the broader context of our Adjusted Net Trading Income. Operations and administrative. Operations and administrative expense decreased $8.6 million, or 18.2%, to $38.8 million for the six months ended June 30, 2022, compared to $47.4 million for the six months ended June 30, 2021. The decrease was primarily driven by the beneficial effect of a strong U.S. dollar on foreign exchange translation gains during the six months ended June 30, 2022. Depreciation and amortization. Depreciation and amortization increased $0.7 million, or 2.1%, to $33.8 million for the six months ended June 30, 2022, compared to $33.1 million for the six months ended June 30, 2021. This increase was primarily attributable to an increase in capital expenditures on telecommunication, networking, and other assets. Amortization of purchased intangibles and acquired capitalized software. Amortization of purchased intangibles and acquired capitalized software decreased $3.4 million, or 9.4%, to $32.8 million for the six months ended June 30, 2022, compared to $36.2 million for the six months ended June 30, 2021. This decrease was primarily attributable to certain intangible assets being fully amortized in 2021. 64 Termination of office leases. Termination of office leases was $1.4 million for the six months ended June 30, 2022, compared to $4.9 million for the six months ended June 30, 2021. These expenses are related to the impairment of leasehold improvements and fixed assets for certain abandoned office space. Debt issue cost related to debt refinancing, prepayment and commitment fees. Expense from debt issue cost related to debt refinancing, prepayment and commitment fees increased $23.4 million, or 624.4%, to $27.1 million for the six months ended June 30, 2022, compared to $3.7 million for the six months ended June 30, 2021. The increase was primarily driven by the acceleration of deferred debt issuance costs as a result of refinancing our long-term debt transaction in January 2022. See Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for additional details. Transaction advisory fees and expenses. Transaction advisory fees and expenses were $1.0 million for the six months ended June 30, 2022, compared to immaterial amounts for the six months ended June 30, 2021. These expenses were primarily incurred in relation to our strategic investment portfolio. Financing interest expense on long term borrowings. Financing interest expense on long-term borrowings increased $3.8 million, or 9.6%, to $43.4 million for the six months ended June 30, 2022, compared to $39.6 million for the six months ended June 30, 2021. This increase was primarily attributable to the increase in outstanding principal as a result of refinancing our long-term debt in January 2022, as described in further detail below. Provision for 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 and effective tax rates were $66.7 million, and 16.0% for the six months ended June 30, 2022, compared to a provision for income taxes of $106.7 million, and 17.1% for the six months ended June 30, 2021. Liquidity and Capital Resources General As of June 30, 2022, we had $810.6 million in Cash and cash equivalents. This balance is maintained primarily to support operating activities, for capital expenditures and for short-term access to liquidity, and for other general corporate purposes. As of June 30, 2022, we had borrowings under our prime brokerage credit facilities of approximately $218.4 million, borrowings under our broker dealer facilities of $158.0 million, and long-term debt outstanding in an aggregate principal amount of approximately $1,825.8 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 U.S. broker-dealer subsidiary, as discussed in Note 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. Short-term Liquidity and Capital Resources Based on our current level of operations, 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 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. 65 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. Long-term Liquidity and Capital Resources Our principal demand for funds beyond the next twelve months will be payments on our long-term debt, operating lease payments, common stock repurchases under our share repurchase program, and dividend payments. Based on our current level of operations, we believe our cash flow from operations, and ability to raise funding, notably the refinancing of our term loan in January 2022, will be sufficient to fund capital demands. 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 4 "Tax Receivable Agreements" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q are expected to range from approximately $0.4 million to $22.0 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, and subsequent payments of $12.4 million in September 2018, $13.3 million in March 2020, $16.5 million in April 2021, and $21.3 million in March 2022. 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 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, Virtu Americas LLC ("VAL") is subject to separate regulation and capital requirements in the U.S. and other jurisdictions. VAL is a registered U.S. broker-dealer, and its primary regulators include the SEC and the Financial Industry Regulatory Authority ("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. VAL is also subject to rules set forth by NYSE and is required to maintain a certain level of capital in connection with the operation of its designated market maker business. Our Canadian subsidiaries, Virtu ITG Canada Corp. and Virtu Financial Canada ULC, are subject to regulatory capital requirements and periodic requirements to report their regulatory capital and submit other regulatory reports set forth by the Investment Industry Regulatory Organization of Canada. Our Irish subsidiaries, Virtu Financial Ireland Limited ("VFIL") and Virtu ITG Europe Limited ("VIEL") 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 66 conditions, and other factors. In addition to periodic requirements to report their regulatory capital and submit other regulatory reports, VFIL and VIEL 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 and Investments Commission, the Securities and Futures Commission of Hong Kong, and the Monetary Authority of Singapore, respectively. See Note 19 "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 8 "Borrowings" of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q for details on our various credit facilities. As of June 30, 2022, the outstanding principal balance on our broker-dealer facilities was $158.0 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 $218.4 million, which was netted within Receivables from broker-dealers and clearing organizations on the Condensed Consolidated Statements of Financial Condition of Part I Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. 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 Founder Member Loan Facility, 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 was entitled to purchase up to 3,000,000 shares of Class A Common Stock on or after May 22, 2020 up to and including January 15, 2022. If at any time during the term of the Founder Member Loan Facility, the Founder Member Loans equal to or greater than $100 million had remained outstanding for a certain period of time specified in the Warrant, the number of shares would have increased to 10,000,000. The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant was $22.98. The Warrant was exercised on December 17, 2021 for the full 3,000,000 shares of the Company's Class A Common Stock. The Warrant and Class A Common Stock issued pursuant to the Warrant were offered, 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. Credit Agreement On January 13, 2022 (the “Credit Agreement Closing Date”), Virtu Financial, VFH Parent LLC, a Delaware limited liability company and a subsidiary of Virtu Financial (“VFH”), entered into the Credit Agreement, with the lenders party thereto, JPMorgan Chase Bank, N.A. as administrative agent and JPMorgan Chase bank, N.A., Goldman Sachs Bank USA, RBC Capital Markets, Barclays Bank plc, Jefferies Finance LLC, BMO Capital Markets Corp., and CIBC World Markets Corp., as joint lead arrangers and bookrunners (the “Credit Agreement”). On the Credit Agreement Closing Date, VFH and Virtu Financial entered into the Credit Agreement. The Credit Agreement provides (i) a senior secured first lien term loan in an aggregate principal amount of $1,800.0 million, drawn in its entirety on the Credit Agreement Closing Date, the proceeds of which were used by VFH to repay all amounts outstanding under the Acquisition Credit Agreement, to pay fees and expenses in connection therewith, to fund share repurchases under the Company’s repurchase program and for general corporate purposes, and (ii) a $250.0 million senior secured first lien revolving facility to VFH, with a $20.0 million letter of credit subfacility and a $20.0 million swingline subfacility. 67 In connection with the ITG Acquisition, Virtu Financial, VFH and the Acquisition Borrower entered into the Acquisition 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 Acquisition Credit Agreement provided (i) the Acquisition First Lien Term Loan Facility in an aggregate principal amount of $1,500.0 million, drawn in its entirety on the ITG Closing Date, of which approximately $404.5 million was borrowed by VFH to repay all amounts outstanding under a previous term loan facility and the remaining approximately $1,095 million was borrowed by the Acquisition Borrower to finance the consideration and fees and expenses paid in connection with the ITG Acquisition, and (ii) the $50 million Acquisition First Lien Revolving Facility, with a $5.0 million letter of credit subfacility and a $5.0 million swing-line 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, VFH entered into Amendment No. 1, which amended the Acquisition Credit Agreement dated as of March 1, 2019, to, among other things, provide for $525.0 million in aggregate principal amount of the Acquisition Incremental Term Loans, and amend the related collateral agreement. On March 2, 2020, VFH entered into Amendment No. 2, which further amended the Acquisition 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 step-down in the spread based on VFH's first lien leverage ratio. There were no outstanding borrowings under the Acquisition Credit Agreement as of June 30, 2022 The term loan borrowings and revolver borrowings under the 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 term SOFR rate with an interest period of one month plus 1.00% and (d)(1) in the case of term loan borrowings, 1.50% and (2) in the case of revolver borrowings, 1.00%, plus, (x) in the case of term loan borrowings, 2.00% and (y) in the case of revolver borrowings, 1.50% or (ii) the greater of (a) an adjusted term SOFR rate for the interest period in effect and (b) (1) in the case of term loan borrowings, 0.50% and (2) in the case of revolver borrowings, 0.00%, plus, (x) in the case of term loan borrowings, 3.00% and (y) in the case of revolver borrowings, 2.50%. In addition, a commitment fee accrues at a rate of 0.50% per annum on the average daily unused amount of the revolving facility, with step-downs to 0.375% and 0.25% per annum based on VFH’s first lien leverage ratio, and is payable quarterly in arrears. The revolving facility under the 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. The 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 Credit Agreement will be entitled to take various actions, including the acceleration of amounts outstanding under the Credit Agreement and all actions permitted to be taken by a secured creditor in respect of the collateral securing the obligations under the Credit Agreement. Under the Credit Agreement, the term loans will mature on January 13, 2029. 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 January 13, 2025. As of June 30, 2022, $1,800.0 million was outstanding under the term loans. We were in compliance with all applicable covenants under the Credit Agreement as of June 30, 2022. In October 2019, the Company entered into a five-year $525.0 million floating-to-fixed interest rate swap agreement. In January 2020, the Company entered into a five-year $1,000.0 million floating-to-fixed interest rate swap agreement. These two interest rate swaps met 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 fixed interest payment obligations on $525.0 million and $1,000.0 million of principal under the Acquisition First Lien Term Loan Facility at rates of 4.3% and 4.4% through September 2024 and January 2025, respectively, based on the interest rates set forth in the Acquisition Credit Agreement. In April 2021, each of the swap agreements described above was novated to another counterparty and amended in connection with such novation. The amendments included certain changes to collateral posting obligations and also had the effect of increasing the effective fixed interest payment obligations to rates of 4.5%, with respect to the earlier maturing swap arrangement, and 4.6% with respect to the later maturing swap arrangement. In January 2022, in order to align the swap agreements with the Credit Agreement, the Company amended each of the swap agreements to align the floating rate term of such swap agreements to SOFR. The effective fixed interest payment obligations remained at 4.5%, with respect to the earlier maturing swap arrangement, and 4.6% with respect to the later maturing swap arrangement. 68 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 six months ended June 30, 2022, and 2021 and 2020. Six Months Ended June 30, Net cash provided by (used in): 2022 2021 Operating activities $ 57,622 $ 355,441 Investing activities 4,003 (42,738) Financing activities (307,830) (400,843) Effect of exchange rate changes on cash and cash equivalents (24,978) (3,610) Net decrease in cash and cash equivalents $ (271,183) $ (91,750) Operating Activities Net cash provided by operating activities was $57.6 million for the six months ended June 30, 2022, compared to net cash provided by operating activities of $355.4 million for the six months ended June 30, 2021. The decrease in net cash provided by operating activities was primarily attributable to lower net income, as well as increased in operating assets, net of operating liabilities, related to our trading activities for the six months ended June 30, 2022 compared to the prior period. Investing Activities Net cash provided by investing activities was $4.0 million for the six months ended June 30, 2022, compared to net cash used in investing activities of $42.7 million for the six months ended June 30, 2021. The increase in cash provided by investing activities for the six months ended June 30, 2022 was primarily attributable to sales of strategic investments during the six months ended June 30, 2022 as compared to the prior period, offset by cash used for the acquisition of property and equipment, and capitalized software for both periods. Financing Activities Net cash used in financing activities was $307.8 million for the six months ended June 30, 2022, while net cash used in financing activities was $400.8 million for the six months ended June 30, 2021. The cash used in financing activities for the six months ended June 30, 2022 was primarily attributable to $228.8 million in dividends to stockholders and distributions made to noncontrolling interests and $353.1 million in purchases of treasury stock, partially offset by the net proceeds of $200.2 million from the issuance of the new term loan and repayment of the existing term loan in January 2022. The cash used in financing activities of $400.8 million during the same period of 2021 primarily reflects $321.9 million net dividends to stockholders and distributions to noncontrolling interests, and $180.8 million purchase of treasury stock, partially offset by an increase of $151.4 million in short-term borrowings. Share Repurchase Program On February 8, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $50.0 million in Class A Common Stock and Virtu Financial Units, which was expanded to $100.0 million on July 27, 2018. The Company repurchased approximately 2.6 million shares of Class A Common Stock and Virtu Financial Units for approximately $65.9 million under this program, which expired on September 30, 2019. On November 6, 2020, the Company's Board of Directors authorized a new share repurchase program of up to $100.0 million in Class A common stock and Virtu Financial Units by December 31, 2021. On February 11, 2021, the Company's Board of Directors authorized the expansion of the Company's share repurchase program, increasing the total authorized amount by $70.0 million to $170.0 million in Class A Common Stock and Virtu Financial Units up to December 31, 2021. 69 On May 4, 2021, the Company's Board of Directors authorized the expansion of the Company's share repurchase program, increasing the total authorized amount by $300 million to $470 million in Class A Common Stock and Virtu Financial Units and extending the duration of the program through May 4, 2022. On November 3, 2021, the Company's Board of Directors authorized the expansion of the Company's current share repurchase program, increasing the total authorized amount by $750 million to $1,220 million and extended the duration through November 3, 2023. The share repurchase program authorizes the Company to repurchase shares from time to time in open market transactions, privately negotiated transactions or by other means. Repurchases are also permitted to be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, cash sources, legal requirements and other factors. From the inception of the program through June 30, 2022, the Company repurchased approximately 26.8 million shares of Class A Common Stock and Virtu Financial Units for approximately $773.8 million. As of June 30, 2022, the Company has approximately of $446.2 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program. 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 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. 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 70 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. Due to the relative immateriality of our financial instruments classified as level 3, we do not believe that a significant change to the inputs underlying the fair value of our level 3 financial instruments would have a material impact on our consolidated financial statements See Note 9 "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. 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. 71 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 RSUs is determined based on the volume weighted average price for the three days preceding the grant. With respect to the RSUs, we account for forfeitures as they occur. The fair value of RSAs is determined based on the closing price as of the date of grant. The fair value of share-based awards granted to employees is expensed based on the vesting conditions and is recognized on a straight-line basis over the vesting period, or, in the case of RSAs subject to performance conditions, from the date that achievement becomes probable through the remainder of the vesting period. The assessment of the performance condition becomes certain within the year of grant. 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 RSUs 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. We believe the judgments and estimates discussed above are reasonable. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. 72 Tax Receivable Agreements 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. An exchange of membership interests by the Virtu Members for Class A Common Stock or Class B Common Stock (an “Exchange”) during the year will give rise to favorable tax attributes that may generate cash tax savings specific to the Exchange, to be realized over a specific period of time (generally 15 years). At each Exchange, we estimate the cumulative tax receivable agreement obligations to be reported on the consolidated financial statements. The tax attributes are computed as the difference between our basis in the partnership interest (“outside basis”) as compared to our share of the adjusted tax basis of partnership property (“inside basis”), at the time of each Exchange. The computation of inside basis requires judgments in estimating the components included in the inside basis as of the date of the Exchange (such as, cash received on hypothetical sale of assets, allocation of gain/loss at the time of the Exchange taking into account complex partnership tax rules). In addition, we estimate the period of time that may generate cash tax savings of such tax attributes and the realizability of the tax attributes. 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. 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). Our estimate of goodwill impairment, if indicated based on results of the qualitative assessment, is highly dependent on our estimate of a reporting unit’s fair value. 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, 2021, we performed a qualitative assessment as described above for each reporting unit. No impairment of goodwill was identified. Valuation of intangible assets involves the use of significant estimates and assumptions with respect to the timing and amounts of revenue growth rates, customer attrition rates, future tax rates, royalty rates, contributory asset charges, discount rate and the resulting cash flows. We amortize finite-lived intangible assets over their estimated useful lives. Our largest finite-lived intangible asset is customer relationships, which is being amortized over an estimated useful life of ten years. Had we 73 used a shorter estimated useful life of seven years, the Company would have recorded an additional $4.1 million and $8.2 million of amortization expense for the three and six months ended June 30, 2022 and 2021, respectively. 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. 74 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We are exposed to various market risks in the ordinary course of business. The risks primarily relate to changes in the value of financial instruments due to factors such as market prices, interest rates, and currency rates. Our on-exchange market making activities are not dependent on the direction of any particular market and are designed to minimize capital at risk at any given time by limiting the notional size of our positions. Our on-exchange market making strategies involve continuously quoting two-sided markets in various financial instruments with the intention of profiting by capturing the spread between the bid and offer price. If another market participant executes against the strategy’s bid or offer by crossing the spread, the strategy will attempt to lock in a return by either exiting the position or hedging in one or more different correlated instruments that represent economically equivalent value to the primary instrument. Such primary or hedging instruments include but are not limited to securities and derivatives such as: common shares, exchange traded products, American Depositary Receipts (“ADRs”), options, bonds, futures, spot currencies and commodities. Substantially all of the financial instruments we trade are liquid and can be liquidated within a short time frame at low cost. Our customer market making activities involve the taking of position risks. The risks at any point in time are limited by the notional size of positions as well as other factors. The overall portfolio risks are quantified using internal risk models and monitored by the Company's Chief Risk Officer, the independent risk group and senior management. We use various proprietary risk management tools in managing our market risk on a continuous basis (including intraday). In order to minimize the likelihood of unintended activities by our market making strategies, if our risk management system detects a trading strategy generating revenues outside of our preset limits, it will freeze, or “lockdown”, that strategy and alert risk management personnel and management. For working capital purposes, we invest in money market funds and maintain interest and non-interest bearing balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents and Receivables from broker-dealers and clearing organizations, respectively, on the Condensed Consolidated Statements of Financial Condition. These financial instruments do not have maturity dates; the balances are short-term, which helps to mitigate our market risks. We also invest our working capital in short-term U.S. government securities, which are included in Financial instruments owned on the Condensed Consolidated Statements of Financial Condition. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position. In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to a lesser extent, fixed income securities and listed equity options. The fair value of these financial instruments at June 30, 2022 and December 31, 2021 was $5.2 billion and $4.3 billion, respectively, in long positions and $4.5 billion and $3.5 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our Condensed Consolidated Statements of Financial Condition within Receivable from brokers, dealers and clearing organizations or Payable to brokers, dealers and clearing organizations as applicable. We calculate daily the potential losses that might arise from a series of different stress events. These include both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior management and the independent risk group carefully monitor the highest stress scenarios to help mitigate the risk of exposure to extreme events. The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Company’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total cash and other equity deposited. 75 Interest Rate Risk, Derivative Instruments In the normal course of business, we utilize derivative financial instruments in connection with our proprietary trading activities. We carry our trading derivative instruments at fair value with gains and losses included in Trading income, net, in the accompanying Condensed Consolidated Statements of Comprehensive Income. Fair value of derivatives that are freely tradable and listed on a national exchange is determined at their last sale price as of the last business day of the period. Since gains and losses are included in earnings, we have elected not to separately disclose gains and losses on derivative instruments, but instead to disclose gains and losses within trading revenue for both derivative and non-derivative instruments. We also use derivative instruments for risk management purposes, including cash flow hedges used to manage interest rate risk on long-term borrowings and net investment hedges used to manage foreign exchange risk. We have entered into floating-to-fixed interest rate swap agreements in order to manage interest rate risk associated with our long-term debt obligations. Additionally, we may seek to reduce the impact of fluctuations in foreign exchange rates on our net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For interest rate swap agreements and foreign currency forward contracts designated as hedges, we assess our risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the interest rate swaps or forward contracts. For instruments that meet the criteria to be considered hedging instruments under ASC 815, any gains or losses, to the extent effective, are included in Accumulated other comprehensive income on the Condensed Consolidated Statements of Financial Condition and Other comprehensive income on the Condensed Consolidated Statements of Comprehensive Income. The ineffective portion, if any, is recorded in Other, net on the Condensed Consolidated Statements of Comprehensive Income. Futures Contracts . As part of our proprietary market making trading strategies, we use futures contracts to gain exposure to changes in values of various indices, commodities, interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering into a futures contract, we are required to pledge to the broker an amount of cash, U.S. government securities or other assets equal to a certain percentage of the contract amount. Subsequent payments, known as variation margin, are made or received by us each day, depending on the daily fluctuations in the fair values of the underlying securities. We recognize a gain or loss equal to the daily variation margin. Due from Broker-Dealers and Clearing Organizations . Management periodically evaluates our counterparty credit exposures to various brokers and clearing organizations with a view to limiting potential losses resulting from counterparty insolvency. Foreign Currency Risk As a result of our international market making and execution services activities and accumulated earnings in our foreign subsidiaries, our income and net worth are subject to fluctuation in foreign exchange rates. While we generate revenues in several currencies, the majority of our operating expenses are denominated in U.S. dollars. Therefore, depreciation in these other currencies against the U.S. dollar would negatively impact revenue upon translation to the U.S. dollar. The impact of any translation of our foreign denominated earnings to the U.S. dollar is mitigated, however, through the impact of daily hedging practices that are employed by the company. Approximately 20.7% and 20.2% of our total revenues for the six months ended June 30, 2022 and 2021, respectively, were denominated in non-U.S. dollar currencies. We estimate that a hypothetical 10% adverse change in the value of the U.S. dollar relative to our foreign denominated earnings would have resulted in decreases in total revenues of $27.1 million and $31.6 million for the six months ended June 30, 2022 and 2021, respectively. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at period-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the period. The resulting currency translation adjustments are recorded as foreign exchange translation adjustment in our Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Changes in Equity. Our primary currency translation exposures historically relate to net investments in subsidiaries having functional currencies denominated in the Euro, Pound Sterling, and Canadian dollar. 76 Financial Instruments with Off Balance Sheet Risk We enter into various transactions involving derivatives and other off-balance sheet financial instruments. These financial instruments include futures, forward contracts, swaps, and exchange-traded options. These derivative financial instruments are used to conduct trading activities and manage market risks and are, therefore, subject to varying degrees of market and credit risk. Derivative transactions are entered into for trading purposes or to economically hedge other positions or transactions. Futures and forward contracts provide for delayed delivery of the underlying instrument. In situations where we write listed options, we receive a premium in exchange for giving the buyer the right to buy or sell the security at a future date at a contracted price. The contractual or notional amounts related to these financial instruments reflect the volume and activity and do not necessarily reflect the amounts at risk. Futures contracts are executed on an exchange, and cash settlement is made on a daily basis for market movements, typically with a central clearing house as the counterparty. Accordingly, futures contracts generally do not have credit risk. The credit risk for forward contracts, options, and swaps is limited to the unrealized market valuation gains recorded in the Condensed Consolidated Statements of Financial Condition. Market risk is substantially dependent upon the value of the underlying financial instruments and is affected by market forces, such as volatility and changes in interest and foreign exchange rates. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective to ensure information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Changes to Internal Control over Financial Reporting No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended June 30, 2022 that has or is reasonably likely to materially affect, our internal control over financial reporting. 77 PART II ITEM 1. LEGAL PROCEEDINGS The information required by this item is set forth in the “Legal Proceedings” section in Note 14 "Commitments, Contingencies and Guarantees" to the Company’s condensed consolidated financial statements included in Part I Item 1 “Financial Statements”, which is incorporated by reference herein. ITEM 1A. RISK FACTORS There have been no material changes to the Risk Factors described in Part I Item 1A. “Risk Factors” in our 2021 Form 10-K.