Amended Annual Report (10-k/a)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-K/A

(AMENDMENT NO. 1)



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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013



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

000-54991

Commission File Number

KCG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

(State or other jurisdiction of incorporation or organization)

38-3898306

(I.R.S. Employer Identification Number)

545 Washington Boulevard, Jersey City, NJ 07310

(Address of principal executive offices and zip code)

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

_______________________________________________

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



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

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

_______________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ý No ¨

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



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The aggregate market value of the Class A Common Stock held by nonaffiliates of the Registrant's predecessor, Knight Capital Group, Inc. ("Knight"), was approximately $800.6 million at June 30, 2013 based upon the closing price for shares of Knight's Class A Common Stock as reported by the New York Stock Exchange.

At February 27, 2014 , the number of shares outstanding of the Registrant’s Class A Common Stock was 125,706,326 (including restricted stock units) and there were no shares outstanding of the Registrant’s Class B Common Stock or Preferred Stock.

_______________________________________________

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement relating to the Company’s 2014 Annual Meeting of Stockholders to be filed hereafter (incorporated, in part, into Part III hereof).

EXPLANATORY NOTE TO THIS AMENDMENT

We are filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to the KCG Holdings, Inc. (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 3, 2014 (the “Original Filing”), solely to correct typographical errors in the presentation of earnings and related earnings per share amounts attributable to preferred and common holders contained in Part II, Item 6. Selected Financial Data and Part II, Item 8. Financial Statements and Supplementary Data (Notes to Consolidated Financial Statements (Footnote 2 “Merger of GETCO and Knight”)). The errors related to the reporting of certain earnings per share information that was properly presented on the Consolidated Statements of Operations and in Footnote 19 "Earnings Per Share" but not conformed elsewhere in the Original Filing. This Amendment includes all corrected information, as well as conforming signature pages that were omitted from the Original Filing. The original signature pages were fully executed on March 3, 2014, and were in the Company’s possession at the time of the Original Filing. In addition, the Company is including in this Amendment currently dated certifications from its Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 and Exhibits 32.1 and 32.2, respectively, as well as a new consent of the Company's independent registered accounting firm as Exhibit 23.1. This Form 10-K/A corrects these inadvertent errors.

Except as described above, no other changes have been made to the Original Filing, and this Amendment does not otherwise amend, update or change the financial statements or disclosures in the Original Filing.

KCG HOLDINGS, INC.

FORM 10-K/A ANNUAL REPORT

For the Year Ended December 31, 2013

TABLE OF CONTENTS



		Page

Part II
Item 6.	Selected Financial Data	5
Item 8.	Financial Statements and Supplementary Data	8

PART IV
Item 15.	Exhibits and Financial Statement Schedules	62
Signatures		63
Certifications
Exhibit Index

EXPLANATORY NOTE

On July 1, 2013, Knight Capital Group, Inc. (“Knight”) merged with and into Knight Acquisition Corp., a wholly-owned subsidiary of KCG Holdings, Inc. (“KCG”), with Knight surviving the merger, GETCO Holding Company, LLC (“GETCO”) merged with and into GETCO Acquisition, LLC, a wholly-owned subsidiary of KCG, with GETCO surviving the merger and GA-GTCO, LLC, a unitholder of GETCO, merged with and into GA-GTCO Acquisition, LLC, a wholly-owned subsidiary of KCG, with GA-GTCO Acquisition, LLC surviving the merger (collectively, the “Mergers”), in each case, pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of December 19, 2012 and amended and restated as of April 15, 2013 (the "Merger Agreement"). Following the Mergers, each of Knight and GETCO became wholly-owned subsidiaries of KCG.

All references herein to the "Company", "we", "our" or "KCG" relate solely to KCG and not Knight or GETCO. All references to GETCO relate solely to GETCO Holding Company, LLC and not KCG.

The Mergers were treated as a purchase of Knight by GETCO for accounting and financial reporting purposes. As a result, the financial results for the year ended December 31, 2013 comprise the results of GETCO only for the six months ended June 30, 2013 and the results of KCG (the combined Knight and GETCO) for the six months ended December 31, 2013. All periods prior to 2013 reflect solely the results and financial condition of GETCO.

All GETCO earnings per share and unit share outstanding amounts in this Form 10-K/A have been calculated as if the conversion of GETCO units to KCG Class A Common Stock took place on January 1, 2011, at the exchange ratio, as defined in the Merger Agreement.

For additional information relating to the Mergers and KCG see the Registration Statement on Form S-4 (Registration No. 333-186624) filed by KCG with respect to the Mergers, the Current Report on Form 8-K filed by KCG on July 1, 2013 with the U.S. Securities and Exchange Commission ("SEC") and the Current Report on Form 8-K filed by KCG on August 9, 2013, the Current Report on Form 8-K filed by KCG on November 12, 2013 related to the restatement of GETCO historical results and in other reports or documents KCG files with, or furnishes to, the SEC from time to time.

PART II



Item 6.	Selected Financial Data

The following should be read in conjunction with the Consolidated Financial Statements included in this Amendment and the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Original Filing. The Consolidated Statements of Operations Data for 2013, 2012 and 2011 and the Consolidated Statements of Financial Condition Data at December 31, 2013 and 2012 have been derived from our audited Consolidated Financial Statements included elsewhere in this document. The Consolidated Statements of Operations Data for 2010 and 2009 and the Consolidated Statements of Financial Condition Data at December 31, 2011, 2010 and 2009 are derived from Consolidated Financial Statements updated to conform with current year presentation and not included in this document.



	For the year ended December 31,
	2013			2012			2011			2010		2009
Consolidated Statements of Operations Data:	(In thousands, except per share amounts)
Revenues
Trading revenue, net	$	628,304		$	421,063		$	611,845		$	335,418	$	138,384
Commissions and fees	275,474			105,518			284,620			529,673		816,778
Interest, net	(537		)	(2,357		)	(1,211		)	50		1,099
Investment income and other, net	116,930			27,010			20,194			1,804		537
Total revenues	1,020,171			551,234			915,448			866,945		956,798
Expenses
Employee compensation and benefits	349,192			157,855			241,753			220,318		247,255
Execution and clearance fees	246,414			185,790			289,025			303,574		307,036
Communications and data processing	123,552			90,623			87,116			61,844		43,402
Depreciation and amortization	55,570			34,938			45,675			46,612		29,483
Interest	44,785			2,665			1,299			740		961
Payments for order flow	35,711			2,964			3,299			4,086		4,710
Occupancy and equipment rentals	24,812			12,804			9,903			7,054		6,509
Professional fees	46,662			14,072			17,142			11,621		8,193
Business development	4,609			23			108			143		—
Writedown of capitalized debt costs	13,209			—			—			—		—
Writedown of assets and lease loss accrual	14,748			—			—			—		—
Other	43,094			23,073			26,587			21,263		17,177
Total expenses	1,002,358			524,807			721,907			677,255		664,726
Income from continuing operations before income taxes	17,813			26,427			193,541			189,690		292,072
Income tax (benefit) expense	(102,195		)	10,276			30,841			27,834		28,972
Income from continuing operations, net of taxes	120,008			16,151			162,700			161,856		263,100
Income from discontinued operations, net of taxes	80			—			—			—		—
Net income	$	120,088		$	16,151		$	162,700		$	161,856	$	263,100
Net (loss) income allocated to preferred and participating units	$	(21,565	)	$	1,092		$	12,510		$	21,954	$	19,490
Net income attributable to common shareholders	$	141,653		$	15,059		$	150,190		$	139,902	$	243,610
Basic earnings per common share from continuing operations	$	1.77		$	0.31		$	2.96		$	2.80	$	4.99
Diluted earnings per common share from continuing operations	$	1.75		$	0.31		$	2.96		$	2.80	$	4.99
Basic earnings per common share from discontinued operations	$	0.00		$	—		$	—		$	—	$	—
Diluted earnings per common share from discontinued operations	$	0.00		$	—		$	—		$	—	$	—
Basic earnings per common share	$	1.77		$	0.31		$	2.96		$	2.80	$	4.99
Diluted earnings per common share	$	1.75		$	0.31		$	2.96		$	2.80	$	4.99
Shares used in computation of basic earnings per common share	80,143			48,970			50,688			49,977		48,773
Shares used in computation of diluted earnings per common share	81,015			48,970			50,688			49,977		48,773



	December 31,
	2013		2012		2011		2010		2009
	(In thousands)
Consolidated Statements of Financial Condition Data:
Cash and cash equivalents	$	674,281	$	427,631	$	607,689	$	614,025	$	638,326
Financial instruments owned, at fair value	2,721,839		654,875		240,338		99,418		66,869
Total assets	6,991,215		1,687,536		1,302,023		1,184,382		967,426
Financial instruments sold, not yet purchased, at fair value	2,165,500		512,553		140,530		191,446		24,068
Debt	657,259		15,000		15,000		21,654		20,000
Redeemable preferred member's equity	—		311,139		314,440		338,158		350,000
Equity	1,507,252		654,672		622,996		532,411		439,858



Item 8.	Financial Statements and Supplementary Data

KCG HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
Management’s Report on Internal Control over Financial Reporting	9
Report of Independent Registered Public Accounting Firm	10
Consolidated Statements of Financial Condition as of December 31, 2013 and 2012	11
Consolidated Statements of Operations for the year ended December 31, 2013, 2012 and 2011	12
Consolidated Statements of Comprehensive Income for the year ended December 31, 2013, 2012 and 2011	13
Consolidated Statements of Changes in Equity for the year ended December 31, 2013, 2012 and 2011	14
Consolidated Statements of Cash Flows for the year ended December 31, 2013, 2012 and 2011	15
Notes to Consolidated Financial Statements	17

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

KCG Holdings, Inc.’s (“KCG”) management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:


•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of KCG;


•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of KCG; and


•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of KCG’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992) .

Based on our assessment, KCG’s management has concluded that, as of December 31, 2013, internal control over financial reporting is effective.

The scope of management’s assessment of the effectiveness of our internal control over financial reporting excludes the operations of GETCO Holding Company, LLC and GA-GTCO, LLC (collectively "GETCO") which were party to a business combination with Knight Capital Group, Inc. that was completed on July 1, 2013, resulting in the formation of KCG Holdings, Inc. GETCO's total assets and total revenues represent 17% and 52%, respectively,of the related consolidated financial statement amounts as of and for the year ended December 31, 2013.

The effectiveness of KCG’s internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of KCG Holdings, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of KCG Holdings, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in 2013). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting , management has excluded GETCO Holding Company, LLC and GA-GTCO, LLC (collectively “GETCO”) from its assessment of internal control over financial reporting as of December 31, 2013 because they were party to a business combination with Knight Capital Group, Inc. that was completed on July 1, 2013, resulting in the formation of KCG Holdings, Inc. We have also excluded GETCO from our audit of internal control over financial reporting. GETCO’s total assets and total revenues represent 17% and 52%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2013.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 28, 2014

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



	December 31,			December 31,
	2013			2012
Assets	(In thousands)
Cash and cash equivalents	$	674,281		$	427,631
Cash and cash equivalents segregated under federal and other regulations	183,082			—
Financial instruments owned, at fair value, including securities pledged to counterparties that had the right to deliver or repledge of $552,242 at December 31, 2013 and $52,261 at December 31, 2012:
Equities	2,298,785			378,933
Listed options	339,798			92,305
Debt securities	83,256			183,637
Total financial instruments owned, at fair value	2,721,839			654,875
Collateralized agreements:
Securities borrowed	1,357,387			52,261
Receivable from brokers, dealers and clearing organizations	1,257,251			142,969
Fixed assets and leasehold improvements, less accumulated depreciation and amortization	146,668			83,341
Investments	122,047			248,438
Goodwill and Intangible assets, less accumulated amortization	207,754			57,035
Deferred tax asset, net	173,584			4,180
Other assets	147,322			16,806
Total assets	$	6,991,215		$	1,687,536
Liabilities, redeemable preferred member's equity and equity
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities	$	1,851,006		$	423,740
Listed options	252,282			69,757
Debt securities	57,198			19,056
Other financial instruments	5,014			—
Total financial instruments sold, not yet purchased, at fair value	2,165,500			512,553
Collateralized financings:
Securities loaned	733,230			—
Financial instruments sold under agreements to repurchase	640,950			—
Total collateralized financings	1,374,180			—
Payable to brokers, dealers and clearing organizations	474,108			24,185
Payable to customers	481,041			—
Accrued compensation expense	149,430			27,728
Accrued expenses and other liabilities	172,406			118,068
Capital lease obligations	10,039			24,191
Debt	657,259			15,000
Total liabilities	5,483,963			721,725
Commitments and Contingent Liabilities (Note 21)
Redeemable preferred member's equity	—			311,139
Equity
Members' equity	—			654,672
Class A Common Stock
Shares authorized: 1,000,000 at December 31, 2013; Shares issued: 123,317 at December 31, 2013; Shares outstanding: 122,238 at December 31, 2013	1,233			—
Additional paid-in capital	1,306,549			—
Retained earnings	209,393			—
Treasury stock, at cost; 1,079 shares at December 31, 2013	(11,324		)	—
Accumulated other comprehensive income	1,401			—
Total equity	1,507,252			654,672
Total liabilities, redeemable preferred member's equity and equity	$	6,991,215		$	1,687,536

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

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



	For the year ended December 31,
	2013			2012			2011
	(In thousands, except per share amounts)
Revenues
Trading revenues, net	$	628,304		$	421,063		$	611,845
Commissions and fees	275,474			105,518			284,620
Interest, net	(537		)	(2,357		)	(1,211		)
Investment income and other, net	116,930			27,010			20,194
Total revenues	1,020,171			551,234			915,448
Expenses
Employee compensation and benefits	349,192			157,855			241,753
Execution and clearance fees	246,414			185,790			289,025
Communications and data processing	123,552			90,623			87,116
Interest	44,785			2,665			1,299
Depreciation and amortization	55,570			34,938			45,675
Payments for order flow	35,711			2,964			3,299
Professional fees	46,662			14,072			17,142
Occupancy and equipment rentals	24,812			12,804			9,903
Business development	4,609			23			108
Writedown of capitalized debt costs	13,209			—			—
Writedown of assets and lease loss accrual	14,748			—			—
Other	43,094			23,073			26,587
Total expenses	1,002,358			524,807			721,907
Income from continuing operations before income taxes	17,813			26,427			193,541
Income tax (benefit) expense	(102,195		)	10,276			30,841
Income from continuing operations, net of tax	120,008			16,151			162,700
Income from discontinued operations, net of tax	80			—			—
Net income	$	120,088		$	16,151		$	162,700
Net (loss) income allocated to preferred and participating units	$	(21,565	)	$	1,092		$	12,510
Net income attributable to common shareholders	$	141,653		$	15,059		$	150,190
Basic earnings per common share from continuing operations	$	1.77		$	0.31		$	2.96
Diluted earnings per common share from continuing operations	$	1.75		$	0.31		$	2.96
Basic earnings per common share from discontinued operations	$	0.00		$	—		$	—
Diluted earnings per common share from discontinued operations	$	0.00		$	—		$	—
Basic earnings per common share	$	1.77		$	0.31		$	2.96
Diluted earnings per common share	$	1.75		$	0.31		$	2.96
Shares used in computation of basic earnings per common share	80,143			48,970			50,688
Shares used in computation of diluted earnings per common share	81,015			48,970			50,688

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

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the year ended December 31,
	2013			2012		2011
	(In thousands)
Net income	$	120,088		$	16,151	$	162,700
Other comprehensive income:
Unrealized (loss) gain on available for sale securities, net of tax	(114,283		)	114,319		—
Cumulative translation adjustment, net of tax	1,365			—		—
Comprehensive income	$	7,170		$	130,470	$	162,700

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

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the Year Ended December 31, 2011, 2012, 2013



	(in thousands)
										Class A Common Stock							Treasury Stock
	Redeemable preferred member's equity			Members' Equity			Unrecognized Compensation			Shares	Amount		Additional Paid-In Capital		Retained Earnings		Shares		Amount			Accumulated other comprehensive income (loss)			Total Equity
Balance, January 1, 2011	$	338,158		570,434			$	(38,023	)	—	$	—	$	—	$	—	—		$	—		$	—		$	532,411
Contributions	—			48,789			(5,745		)	—	—		—		—		—		—			—			43,044
Repurchase of Membership interests	—			(15,410		)	—			—	—		—		—		—		—			—			(15,410		)
Distributions	(23,668		)	(99,749		)	—			—	—		—		—		—		—			—			(99,749		)
Net income	—			162,700			—			—	—		—		—		—		—			—			162,700
Balance, December 31, 2011	314,490			666,764			(43,768		)	—	—		—		—		—		—			—			622,996
Contributions	—			12,695			24,829			—	—		—		—		—		—			—			37,524
Repurchase of Membership interests	—			(111,525		)	—			—	—		—		—		—		—			—			(111,525		)
Distributions	(3,351		)	(24,793		)	—			—	—		—		—		—		—			—			(24,793		)
Net income	—			16,151			—			—	—		—		—		—		—			114,319			130,470
Balance, December 31, 2012	311,139			559,292			(18,939		)	—	—		—		—		—		—			114,319			654,672
Contributions	—			11,339			18,939			—	—		—		—		—		—			—			30,278
Repurchase of Membership interests	—			(5,833		)	—			—	—		—		—		—		—			—			(5,833		)
Distributions	—			(2,054		)	—			—	—		—		—		—		—			—			(2,054		)
Net (loss) income	—			(89,305		)	—			—	—		—		—		—		—			—			(89,305		)
Unrealized gain on available for sale securities	—			—			—			—	—		—		—		—		—			4,550			4,550
Cumulative translation adjustment	—			—			—			—	—		—		—		—		—			(403		)	(403		)
Modification of redemption value	(21,565		)	21,565			—			—	—		—		—		—		—			—			21,565
Balance, June 30, 2013	289,574			495,004			—			—	—		—		—		—		—			118,466			613,470
Gain on investment in Knight Capital Group, Inc.	—			—			—			—	—		—		—		—		—			9,103			9,103
Reclassification of investment in Knight out of other comprehensive income	—			—			—			—	—		—		—		—		—			(127,972		)	(127,972		)
Equity issued to General Atlantic	—			55,000			—			—	—		—		—		—		—			—			55,000
Exchange of membership interests for shares of KCG Class A Common Stock	(289,574		)	(550,004		)	—			75,868	759		754,417		—		—		—			—			205,172
Exchange of membership interests for warrants to purchase KCG Class A Common Stock	—			—			—			—	—		74,896		—		—		—			—			74,896
Issuance of KCG Class A Common Stock to Knight stockholders	—			—			—			41,889	419		453,419		—		—		—			—			453,838
Change in estimated distribution payable to members	—			—			—			—	—		1,757		—		—		—			—			1,757
KCG Class A Common Stock repurchased	—			—			—			—	—		—		—		(1,079	)	(11,324		)	—			(11,324		)
Stock-based compensation	—			—			—			5,560	55		22,060		—		—		—			—			22,115
Unrealized gain on available for sale securities	—			—			—			—	—		—		—		—		—			36			36
Cumulative translation adjustment	—			—			—			—	—		—		—		—		—			1,768			1,768
Net Income	—			—			—			—	—		—		209,393		—		—			—			209,393
Balance, December 31, 2013	$	—		$	—		$	—		123,317	$	1,233	$	1,306,549	$	209,393	(1,079	)	$	(11,324	)	$	1,401		$	1,507,252

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

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the year ended December 31,
	2013			2012			2011
Cash flows from operating activities	(In thousands)
Net income	$	120,088		$	16,151		$	162,700
Income from discontinued operations, net of tax	80			—			—
Income from continuing operations, net of tax	120,008			16,151			162,700
Adjustments to reconcile income from continuing operations, net of tax to net cash provided by (used in) operating activities
Non-cash gain on Knight Common Stock	(127,972		)	—			—
Deferred tax benefit	(103,499		)	—			—
Depreciation and amortization	55,570			34,938			45,675
Stock and unit-based compensation	64,286			12,320			43,044
Unrealized gain (loss) on investments	2,627			(25,754		)	(22,750		)
Writedown of assets and lease loss accrual	14,748			—			—
Writedown and amortization of debt offering costs	17,332			276			—
Deferred rent	58			—			—
Operating activities from discontinued operations	6,952			—			—
(Increase) decrease in operating assets
Cash and securities segregated under federal and other regulations	19,963			—			—
Financial instruments owned, at fair value	(129,035		)	(414,537		)	(140,414		)
Securities borrowed	(146,145		)	(30,679		)	18,932
Receivable from brokers, dealers and clearing organizations	252,266			36,439			93,940
Other assets	24,703			1,332			(2,922		)
(Decrease) increase in operating liabilities
Financial instruments sold, not yet purchased, at fair value	139,951			—			(50,917		)
Securities loaned	106,339			—			—
Financial instruments sold under agreements to repurchase	95,950			372,023			—
Payable to brokers, dealers and clearing organizations	(185,992		)	(34,752		)	50,313
Payable to customers	(46,877		)	—			—
Accrued compensation expense	24,441			(18,494		)	8,209
Accrued expenses and other liabilities	(64,470		)	(13,779		)	4,472
Net cash provided by (used in) operating activities	141,204			(64,516		)	210,282
Cash flows from investing activities
Cash acquired upon acquisition of Knight Capital Group, Inc.	509,133			—			—
Cash received from sale of Urban Financial of America, LLC	85,406			—			—
Acquisition of trading rights	—			—			(30,828		)
Purchase of acquisition	—			—			(10,945		)
Proceeds and distributions from investments	3,251			72,196			1,047
Purchases of fixed assets and leasehold improvements	(27,703		)	(31,389		)	(62,790		)
Purchases of investments	(158		)	(87,308		)	(6,118		)
Investing activities from discontinued operations	12,963			—			—
Net cash provided by (used in) investing activities	582,892			(46,501		)	(109,634		)
Cash flows from financing activities
Proceeds from issuance of Credit Agreement	535,000			—			—
Partial repayment of Credit Agreement	(300,000		)	—			—
Proceeds from issuance of Senior Secured Notes	305,000			—			—
Proceeds from issuance of notes payable	—			—			15,000
Repayment of notes payable	(15,000		)	—			—
Payment of debt issuance cost	(34,592		)	(1,375		)	—
Issuance of equity to General Atlantic	55,000			—			—
Payment to former Knight Capital Group, Inc. stockholders	(720,000		)	—			—
Repayment of Knight Convertible Notes	(257,741		)	—			—
Funding of collateral account for Knight Convertible Notes	(117,259		)	—			—
Payment out of collateral account for Knight Convertible Notes	117,259			—			—
Borrowings under secured credit facility	25,000			88,750			—
Repayment of secured credit facility	(25,000		)	(88,750		)	—
Borrowings under capital lease obligations	—			15,558			15,786
Principal payments on capital lease obligations	(14,152		)	(20,990		)	(12,979		)
Members' distributions	(21,002		)	(37,061		)	(122,227		)
Repurchase of members' interest	—			(25,173		)	(2,564		)
Cost of common stock repurchased	(11,324		)	—			—
Net cash used in financing activities	(478,811		)	(69,041		)	(106,984		)
Effect of exchange rate changes on cash and cash equivalents	1,365			—			—
Increase (decrease) in cash and cash equivalents	246,650			(180,058		)	(6,336		)
Cash and cash equivalents at beginning of period	427,631			607,689			614,025
Cash and cash equivalents at end of period	$	674,281		$	427,631		$	607,689

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



Supplemental disclosure of cash flow information:
Cash paid for interest	$	56,227	$	8,084	$	3,641
Cash paid for income taxes	$	10,198	$	21,789	$	31,114
See Footnote 2 "Merger of GETCO and Knight" for a description of non-cash investing activities relating to the acquisition of Knight

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

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of the Business

On December 19, 2012, Knight Capital Group, Inc.(“Knight”), GETCO Holding Company, LLC (“GETCO”) and an affiliate of GETCO entered into an agreement and plan of merger (as amended and restated on April 15, 2013 the “Merger Agreement”) for a series of strategic business combinations (the “Mergers”). The Mergers were approved by the respective stockholders and unitholders of both companies at special meetings held on June 25, 2013, and the Mergers were completed on July 1, 2013. As a result of the Mergers, Knight and GETCO each became a wholly-owned subsidiary of KCG Holdings, Inc. (collectively with its subsidiaries, “KCG” or the “Company”).

The Mergers took place in order to combine the businesses, intellectual capital and resources of the two companies to more successfully compete in the highly regulated and technologically advanced marketplace and to allow for further diversification of each company's revenues from principal and agency trading across asset classes and regions. The Mergers were treated as a purchase of Knight by GETCO for accounting and financial reporting purposes. As a result, the financial results for the year ended December 31, 2013 comprise the results of GETCO only for the six months ended June 30, 2013 and the results of KCG (the combined Knight and GETCO) for the six months ended December 31, 2013. All periods prior to 2013 reflect solely the results and financial condition of GETCO.

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

As of December 31, 2013, the Company's operating segments comprised the following: (i) Market Making; (ii) Global Execution Services; and (iii) Corporate and Other.

Market Making

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

Global Execution Services

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, options, foreign exchange, fixed income and futures to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals to transactions that are executed within this segment, however, the Company will commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment primarily consists of self-directed trading in global equities through a suite of algorithms or via the Company's execution management system; institutional high touch sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); an institutional spot foreign exchange electronic communication network ("ECN"); a fixed income ECN that also offers trading applications; an alternative trading system ("ATS") for global equities; and futures execution and clearing through a futures commission merchant ("FCM").

Corporate and Other

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

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Discontinued Operations

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

In July 2013, KCG entered into an agreement to sell to an investor group Urban Financial of America, LLC, formerly known as Urban Financial Group, Inc. (“Urban”), the reverse mortgage origination and securitization business that was previously owned by Knight. The transaction was completed in the fourth quarter of 2013, and the results of Urban's operations have been reported in Income from discontinued operations, net of tax on the Consolidated Statements of Operations for the year ended December 31, 2013. See Footnote 4 "Discontinued Operations" for further discussion.

2. Merger of GETCO and Knight

Background

Pursuant to the Merger Agreement, upon completion of the Mergers on July 1, 2013, subject to proration and certain specified exceptions, each outstanding share of Knight Class A common stock, par value $0.01 per share (“Knight Common Stock”) was converted into the right to elect to receive either $3.75 per share in cash or one third of a share of KCG Class A common stock, par value $0.01 per share (“KCG Class A Common Stock”). Pursuant to the proration procedures provided in the Merger Agreement and taking into account the waiver by Jefferies LLC (Knight's largest stockholder before the Mergers) of its right to receive cash consideration with respect to certain of its shares, former Knight stockholders eligible for election received cash payments aggregating $720.0 million and 41.9 million shares of KCG Class A Common Stock.

Upon completion of the Mergers, GETCO unitholders received, in aggregate, 75.9 million shares of KCG Class A Common Stock and 24.3 million warrants to acquire shares of KCG Class A Common Stock. The warrants comprise 8.1 million Class A warrants, having a $12.00 exercise price and exercisable for a four -year term; 8.1 million Class B warrants, having a $13.50 exercise price and exercisable for a five -year term; and 8.1 million Class C warrants, having a $15.00 exercise price and exercisable for a six -year term (collectively the “KCG Warrants”).

After taking into account the election results and the shares of KCG Class A Common Stock issued to former unitholders of GETCO and former stockholders of Knight, 116.8 million shares (including unvested restricted stock units ("RSUs")) of KCG Class A Common Stock were outstanding as of July 1, 2013.

Accounting treatment of the Mergers

The Mergers are accounted for as a purchase of Knight by GETCO under accounting principles generally accepted in the United States of America ("GAAP") based on, among other factors, the controlling ownership position of the former GETCO unitholders as of the closing of the Mergers. Under the purchase method of accounting, the assets and liabilities of Knight as of July 1, 2013 were recorded at their respective fair values and added to the carrying value of GETCO's existing assets and liabilities. The reported financial condition and results of operations of KCG for the periods following the Mergers reflect Knight's and GETCO's balances and reflect the impact of purchase accounting adjustments, including revised amortization and depreciation expense for acquired assets. As GETCO is the accounting acquirer, the financial results for KCG for the year ended December 31, 2013 comprise the results of KCG for the six months ended December 31, 2013 and the results of GETCO only for the six months ended June 30, 2013. All periods prior to 2013 comprise solely the results of GETCO.

Prior to the Mergers, GETCO treated its investment in Knight as an available-for-sale security, which it recorded at fair value, with any gains or losses recorded in other comprehensive income as a component of equity. Upon completion of the Mergers the Company reversed the cumulative gain that it had recorded in other comprehensive income within equity and recognized a gain of $128.0 million in Investment income and other, net on the Consolidated Statements of Operations for the year ended December 31, 2013.

All GETCO earnings per share and unit share outstanding amounts in these financial statements have been calculated as if the conversion of GETCO units to KCG Class A Common Stock took place on January 1, 2011, at the exchange ratio as defined in the Merger Agreement. See Footnote 19 "Earnings Per Share" for further discussion.

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Purchase price and goodwill

The Knight acquisition was accounted for using the acquisition method of accounting. The aggregate purchase price of $1.37 billion was determined as the sum of the fair value of KCG shares issued to former Knight stockholders at closing; the fair value of Knight employee stock based awards attributable to periods prior to closing; and the fair value of the Knight Common Stock owned by GETCO and its subsidiaries immediately prior to the Mergers (and subsequently canceled in conjunction with the Mergers).

The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair values at July 1, 2013, the closing date of the Mergers. The Company has not yet completed all of its analysis to finalize the allocation of the purchase price to the Knight acquired assets and liabilities. The allocation of the purchase price may be modified over the measurement period, as more information is obtained about the fair values of assets acquired and liabilities assumed.

Tax treatment of the Mergers

The Company believes that the Mergers will be treated as a transaction described in Section 351 of the Internal Revenue Code, and both Knight and GETCO have received tax opinions from external legal counsel to that effect. Knight’s tax basis in its assets and liabilities therefore generally carries over to the Company following the Mergers. Upon completion of the Mergers, the Company became a corporation subject to U.S. corporate income taxes and, following the Mergers, the Company recorded deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company measures deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse.

The Company recorded net deferred tax assets of $62.3 million with respect to recording Knight’s assets and liabilities under the purchase method of accounting as described above as well as recording the value of a tax net operating loss ("NOL”) carryforwards and other tax attributes acquired as a result of the Mergers, as described in Footnote 16 “Income Taxes”.

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The following table reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the acquisition date (in thousands):



Identifiable Net Assets
Cash and cash equivalents	$	509,133
Cash and securities segregated under federal and other regulations	203,045
Financial instruments owned	1,937,929
Securities borrowed	1,158,981
Receivable from brokers, dealers and clearing organizations	1,369,474
Fixed assets and leasehold improvements	80,280
Investments	106,353
Intangible assets	155,425
Assets within discontinued operations	5,607,063
Deferred tax asset, net	62,329
Other assets	141,617
Total Assets	$	11,331,629

Financial instruments sold, not yet purchased	$	1,512,983
Collateralized financings	1,166,211
Payable to brokers, dealers and clearing organizations	635,914
Payable to customers	527,918
Accrued compensation expense	107,409
Accrued expenses and other liabilities	126,507
Liabilities within discontinued operations	5,518,168
Long-term debt	375,000
Total Liabilities	$	9,970,110

Total identified assets acquired, net of assumed liabilities	1,361,519

Goodwill	11,615

Total Purchase Price	$	1,373,134

Goodwill has been primarily assigned to the Market Making segment of the Company. None of the goodwill is expected to be deductible for tax purposes; however, as described in Tax treatment of the Mergers above, Knight’s tax basis in its assets, including certain goodwill, has carried over to the Company as a result of the Mergers.

Amounts preliminarily allocated to intangible assets and goodwill, and the amortization period for intangible assets with finite useful lives, were as follows (dollars in thousands):



			Amortization
	Amount		Years
Technology	$	110,504	5 years
Customer relationships	35,000		9 - 11 years
Trade names	4,000		10 years
Trading rights ⁽¹⁾	5,921		7 years
Intangible assets	155,425
Goodwill	11,615
Total	$	167,040

⁽¹⁾ Trading rights include both assets with a finite useful life and assets with an indefinite useful life. The 7 years amortization period only applies to assets with a finite useful life.

The Company recorded $38.9 million of costs related to the Mergers for the year ended December 31, 2013 .

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Pro forma results

Included in KCG results for the year ended December 31, 2013 are results from the businesses acquired as a result of the Mergers as follows (in thousands):



	Year ended December 31,
	2013
Revenues	$	486,119
Income from continuing operations, before income taxes	54,070

The following pro forma results are based on adding the pre-tax historical results of GETCO and Knight, and adjusting primarily for amortization of intangibles acquired in the Mergers, debt raised in conjunction with the Mergers and income taxes as if the Company was subject to U.S. corporate income taxes for all periods presented. The pro forma data assumes that no payments were made on the First Lien Credit Facility (as later defined) except those prescribed in the Credit Agreements (as later defined), that all GETCO units have been converted to KCG Class A Common Stock on January 1, 2012, and excludes any gain recognized on Knight Common Stock. The pro forma disclosures do not include adjustments to reflect the Company's operating costs or expected differences in the way funds generated by the Company are invested. The pro forma data is intended for informational purposes and is not indicative of the future results of operations.



	Year ended December 31, 2013					Year ended December 31, 2012
	Reported		Pro Forma (unaudited)			Reported		Pro Forma (unaudited)
	(in thousands, except per share amounts)
Revenue	$	1,020,171	$	1,421,566		$	551,234	$	1,020,334
Net income from continuing operations	120,008		(69,414		)	16,151		(286,656		)
Net income	120,088		(98,394		)	16,151		(355,130		)

Diluted earnings (loss) per common share from continuing operations	$	1.75	$	(0.86	)	$	0.31	$	(5.85	)
Diluted earnings (loss) per common share	$	1.75	$	(1.21	)	$	0.31	$	(7.25	)

3. Significant Accounting Policies

Basis of consolidation and form of presentation

The Consolidated Financial Statements, prepared in conformity with GAAP, include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

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

Cash and cash equivalents

Cash and cash equivalents include money market accounts, which are payable on demand, and short-term investments with an original maturity of less than 90 days . The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments.

Cash and securities segregated under federal and other regulations

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

Table of Contents

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Market making, sales, trading and execution activities

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

Commissions, which includes commission equivalents earned on institutional client orders and commissions on futures transactions, and related expenses are also recorded on a trade date basis. Commissions earned by the Company’s FCM are recorded net of any commissions paid to independent brokers and are recognized on a half-turn basis.

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



	For the year ended December 31,
	2013			2012			2011
Interest Income	$	10,187		$	3,070		$	1,131
Interest Expense	(10,724		)	(5,427		)	(2,342		)
Interest, net	$	(537	)	$	(2,357	)	$	(1,211	)

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



	For the year ended December 31,
	2013			2012			2011
Dividend Income	$	26,237		$	2,253		$	4,700
Dividend Expense	$	(21,630	)	$	(1,599	)	$	(1,512	)

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

Fair value of financial instruments

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

The fair value hierarchy can be summarized as follows:


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


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


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

Changes in fair value are recognized in earnings each period for financial instruments that are carried at fair value. See Footnote 6 “Fair Value of Financial Instruments” for a description of valuation methodologies applied to the classes of financial instruments at fair value.

Collateralized agreements and financings

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

•

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

•

Financial instruments sold under agreements to repurchase are used to finance inventories of securities and other financial instruments and are recorded at their contractual amount. The Company has entered into bilateral and tri-party term and overnight repurchase agreements which bear interest at negotiated rates. The Company receives cash and makes delivery of financial instruments to a custodian who monitors the market value of these instruments on a daily basis. The market value of the instruments delivered must be equal to or in excess of the principal amount loaned under the repurchase agreements plus the agreed upon margin requirement. The custodian may request additional collateral, if appropriate.

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

Investments

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

Prior to the Mergers, GETCO had a strategic investment in Knight which was classified as available for sale and held at fair value with any unrealized gains or losses recorded in Other comprehensive income or loss. As a result of the Mergers, the Company recognized a non-cash gain of $128.0 million on its investment in Knight Common Stock, which it recorded within Investment income and other, net on the Consolidated Statements of Operations for the year ended December 31, 2013 and reversed any previous unrealized gains out of Other comprehensive income.

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

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

Goodwill and intangible assets

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Payable to customers

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

Treasury stock

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

Foreign currency translation and foreign currency forward contracts

The Company has foreign subsidiaries that do not utilize the U.S. dollar as their functional currency.

Assets and liabilities of the foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. Gains and losses resulting from translating foreign currency financial statements into U.S. dollars are included in Accumulated other comprehensive income on the Consolidated Statements of Financial Condition and Cumulative translation adjustment on the Consolidated Statements of Comprehensive Income. Gains or losses resulting from foreign currency transactions are included in Investment income and other, net on the Company’s Consolidated Statements of Operations. For the years ended December 31, 2013 , 2012 , and 2011 the Company recorded a loss of $4.1 million, a gain of $0.2 million and a loss of $2.4 million , respectively.

The Company seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For foreign currency forward contracts designated as hedges, the Company assesses its risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts. For qualifying net investment hedges, any gains or losses, to the extent effective, are included in Accumulated other comprehensive income or loss on the Consolidated Statements of Financial Condition and the Consolidated Statements of Comprehensive Income. The ineffective portion, if any, is recorded in Investment income and other, net on the Consolidated Statements of Operations.

Stock and unit based compensation

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

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

Soft dollar expense

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

Depreciation, amortization and occupancy

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

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

Lease loss accrual

The Company’s policy is to identify excess real estate capacity and where applicable, accrue for related future costs, net of estimated sub-lease income upon the date the Company ceases to use the excess real estate. In the event the Company is able to sublease the excess real estate after recording a lease loss, such accrual is adjusted to the extent the actual terms of sub-leased property differ from the assumptions used in the calculation of the accrual. In the event that the Company concludes that previously determined excess real estate is needed for the Company’s use, such lease loss accrual is adjusted accordingly.

Income taxes

Prior to the Mergers, GETCO and the majority of its subsidiaries were treated as partnerships or disregarded entities for U.S. income tax purposes and, accordingly, were not subject to federal income taxes. Instead, the former GETCO members were liable for federal income taxes on their proportionate share of taxable income. Upon completion of the Mergers, the Company became a corporation subject to U.S. corporate income taxes and, following the Mergers, the Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measures them using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences and forecasted operating earnings.

Use of estimates

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

Recently adopted accounting guidance

In December 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) that requires additional disclosures about financial assets and liabilities that are subject to netting arrangements. Under the ASU, financial assets and liabilities must be disclosed at their respective gross asset and liability amounts, the amounts offset on the balance sheet and a description of the respective netting agreements. The new disclosures were required for reporting periods beginning on or after January 1, 2013, and are to be applied retrospectively. Other than requiring additional disclosures, the adoption of this ASU did not have an impact on the Company's Consolidated Financial Statements.

In February 2013, the FASB issued an ASU that requires additional disclosure requirements for items reclassified out of accumulated other comprehensive income. This new guidance requires entities to present either on the face of the income statement or in the notes to the financial statements the effects on the specific line items of the income statement for amounts reclassified out of accumulated other comprehensive income. This ASU was effective for reporting periods beginning after December 15, 2012. Other than additional disclosure requirements, the adoption of this ASU did not have an impact on the Company's Consolidated Financial Statements.

Recent accounting guidance to be adopted in future periods

In March 2013, the FASB issued an ASU concerning the parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This ASU provides for the release of the cumulative translation adjustment into net income when a parent sells a part or all of its investment within a foreign entity, no longer holds a controlling interest in an investment in a foreign entity or obtains control of an investment in a foreign entity that was previously recognized as an equity method investment. This ASU is effective for reporting periods beginning after December 15, 2013, however early adoption is permitted. The adoption of this ASU will not have an impact on the Company's Consolidated Financial Statements.

In July 2013, the FASB issued an ASU to clarify the financial statement presentation of an unrecognized tax benefit when a NOL carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU requires entities to

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. The ASU is required for reporting periods beginning after December 15, 2013. Upon adoption, entities are required to apply the provisions of the ASU prospectively for all unrecognized tax benefits that exist at the adoption date, however, the ASU also indicates that retrospective application is permitted. The adoption of this ASU will not have an impact on the Company's Consolidated Financial Statements.

4. Discontinued Operations

As part of the Mergers, KCG acquired certain assets and liabilities from Knight related to discontinued operations. The assets and liabilities were not considered part of the Company's continuing operations, and, therefore, the results have been included in Income from discontinued operations, net of tax within the Consolidated Statements of Operations for the year ended December 31, 2013. In addition, in July 2013, the Company entered into an agreement to sell to an investor group Urban, the reverse mortgage origination and securitization business that was previously owned by Knight. The transaction was completed in the fourth quarter of 2013, and, as a result, the results of Urban's operations have also been included in Income from discontinued operations, net of tax within the Consolidated Statements of Operations for the year ended December 31, 2013.

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



	For the six months ended December 31,
	2013
Revenues	$	39,868

Expenses:
Compensation	$	14,068
Execution and clearance fees	5,038
Payments for order flow	9,885
Other expenses	10,748
Total Expenses	39,739

Pre-tax income from discontinued operations	129
Income tax expense	(49		)
Income from discontinued operations, net of tax	$	80

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

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



	December 31, 2013
Cash and cash equivalents segregated under federal or other regulations	$	183,083
Receivables from brokers, dealers and clearing organizations ⁽¹⁾	304,294
Total assets segregated or held in separate accounts under federal or other regulations	$	487,377

⁽¹⁾ Segregated assets included within Receivables from brokers, dealers and clearing organizations comprise cash and cash equivalents and U.S. government obligations primarily held as deposits with exchange clearing organizations.

The Company did not have any cash or securities segregated under U.S. Federal and other regulations as of December 31, 2012.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

6. Fair Value of Financial Instruments

The Company’s financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance, as described in Footnote 3 “Significant Accounting Policies.” The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value (in thousands):



	Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2013	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	2,298,785	$	—	$	—	$	2,298,785
Listed options	339,798		—		—		339,798
U.S. government and Non-U.S. government obligations	40,053		—		—		40,053
Corporate debt	43,203		—		—		43,203
Total Financial instruments owned, at fair value	2,721,839		—		—		2,721,839

Securities on deposit with clearing organizations ⁽²⁾	170,235		—		—		170,235
Investment in CME Group ⁽³⁾	3,925		—		—		3,925
Deferred compensation investments ⁽³⁾	—		117		—		117
Investment in Deephaven Funds ⁽³⁾	—		1,958		—		1,958
Total assets held at fair value	$	2,895,999	$	2,075	$	—	$	2,898,074
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	1,851,006	$	—	$	—	$	1,851,006
Listed options	252,282		—		—		252,282
U.S. government obligations	15,076		—		—		15,076
Corporate debt	42,122		—		—		42,122
Foreign currency forward contracts	—		5,014		—		5,014
Total liabilities held at fair value	$	2,160,486	$	5,014	$	—	$	2,165,500

________________________________________


⁽¹⁾	Equities of $697.9 million have been netted by their respective long and short positions by CUSIP number.


⁽²⁾	Securities on deposit with clearing organizations consist of U.S. government obligations and are recorded within Receivable from brokers, dealers and clearing organizations on the Consolidated Statements of Financial Condition.


⁽³⁾	Investment in CME Group, Deferred compensation investments and Investment in Deephaven Funds are included within Investments on the Consolidated Statements of Financial Condition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued



	Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2012	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities ⁽¹⁾	$	378,933	$	—	$	—	$	378,933
Listed options	92,305		—		—		92,305
U.S. government obligations and corporate bonds	68,765		—		—		68,765
Mutual funds - Bond Funds	114,872		—		—		114,872
Total Financial instruments owned, at fair value	654,875		—		—		654,875
Securities on deposit with clearing organizations	7,147		—		—		7,147
Investment in CME Group	3,040		—		—		3,040
Investment in Knight preferred shares	199,632		—		—		199,632
Total assets held at fair value	$	864,694	$	—	$	—	$	864,694
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities ⁽¹⁾	$	423,740	$	—	$	—	$	423,740
Listed options	69,757		—		—		69,757
U.S. government obligations	19,056		—		—		19,056
Total Financial instruments sold, not yet purchased, at fair value	512,553		—		—		512,553
Total liabilities held at fair value	$	512,553	$	—	$	—	$	512,553

___________________________________

⁽¹⁾ Equities of $5.9 million have been netted by their respective long and short positions by CUSIP number.

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

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

The Company has no financial instruments classified within Level 3 of the fair value hierarchy.

The Company’s assets measured at fair value on a nonrecurring basis solely relates to goodwill and intangible assets arising from various acquisitions which would be classified as Level 3 within the fair value hierarchy. See Footnote 11 “Goodwill and Intangible Assets” for additional information.

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

The Company’s foreign currency forward contracts, deferred compensation investments and its remaining investment in the Deephaven Funds are classified within Level 2 of the fair value hierarchy.

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

Foreign currency forward contracts

At December 31, 2013 , the Company had foreign currency forward contracts with a notional value of 80.0 million British pounds that are used to hedge the Company’s investment in its European subsidiaries. The fair value of these contracts was determined based upon spot foreign exchange rates, LIBOR interest rates and dealer quotations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Deferred compensation investments

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

Investment in Deephaven Funds

Investment in Deephaven Funds represents the Company's residual investment in certain funds that were formerly managed by Deephaven Capital Management, a former Knight subsidiary. These investments are in the process of liquidation and are valued based upon the fair value of the underlying investments within such funds.

Derivative Instruments

Fair value of derivative instruments

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

Futures

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

Futures contracts would be classified as Level 1 if they were required to be reported in the fair value hierarchy; swaps and forward contracts would be classified as Level 2 if they were required to be reported in the fair value hierarchy.

The following tables summarize the fair value of derivative instruments and futures contract trading activities in the Consolidated Statements of Financial Condition and the gains and losses included in the Consolidated Statements of Operations (fair value in thousands):



		December 31, 2013
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	$	89	892	$	142	533
Forward contracts ⁽¹⁾	Financial instruments owned, at fair value	6,913		1	11,515		2
Equity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	223		1,069	1,089		1,046
Swap contracts	Receivables from/Payables to brokers, dealers and clearing organizations	—		—	18		1
Listed options	Financial instruments owned, at fair value	339,798		730,020	252,282		755,947
Fixed income
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	4,815		18,280	2,259		15,202
Commodity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	3,392		10,629	1,773		3,806
Total		$	355,230	760,891	$	269,078	776,537

⁽¹⁾ Designated as hedging instrument

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued



		December 31, 2012
	Financial Statements	Assets			Liabilities
	Location	Fair Value		Contracts	Fair Value		Contracts
Foreign currency
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	$	8	500	$	5	110
Forward contracts	Accrued expenses and other liabilities	—		—	110		1
Equity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	270		766	477		1,070
Swap contracts	Receivables from/Payables to brokers, dealers and clearing organizations	570		1	—		—
Listed options	Financial instruments owned, at fair value	92,305		199,324	69,757		196,804
Fixed income
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	449		49,498	2,014		53,882
Commodity
Futures contracts	Receivables from/Payables to brokers, dealers and clearing organizations	13		1,060	—		—
Total		$	93,615	251,149	$	72,363	251,867



		Gain (Loss) Recognized
	Financial Statements	For the year ended December 31,
	Location	2013			2012		2011
Derivative instruments not designated as hedging instruments:
Foreign currency
Futures contracts	Trading revenues, net	$	12,191		$	19,699	$	25,808
Equity
Futures contracts	Trading revenues, net	50,073			76,089		156,537
Swap contracts	Trading revenues, net	11,736			8,116		18,624
Listed options ⁽¹⁾	Trading revenues, net	37,035			50,446		90,389
Fixed income
Futures contracts	Trading revenues, net	80,511			81,933		170,414
Commodity
Futures contracts	Trading revenues, net	62,215			35,952		24,154
		$	253,761		$	272,235	$	485,926
Derivative instruments designated as hedging instruments:
Foreign exchange - forward contract	Accumulated other comprehensive income	$	(3,298	)	$	—	$	—

⁽¹⁾

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Assets and Liabilities Subject to Netting

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



December 31, 2013	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Financial Instruments		Cash Collateral Received
							Financial Instruments		Cash Collateral Received
Assets
Listed options	$	339,798	$	—	$	339,798	$	—	$	—	$	339,798
Securities borrowed	1,357,387		—		1,357,387		1,326,220		—		31,167
Receivable from brokers, dealers and clearing organizations ⁽¹⁾	24,366		—		24,366		24,249		—		117
Foreign currency forward contracts	6,913		6,501		412		—		—		412
Futures	8,519		4,369		4,150		—		—		4,150
Total Assets	$	1,736,983	$	10,870	$	1,726,113	$	1,350,469	$	—	$	375,644
Liabilities
Listed options	$	252,282	$	—	$	252,282	$	—	$	10,924	$	241,358
Securities loaned	733,230		—		733,230		726,948		—		6,282
Financial instruments sold under agreements to repurchase	640,950		—		640,950		640,948		—		2
Foreign currency forward contracts	11,515		6,501		5,014		—		—		5,014
Futures	5,263		5,263		—		—		—		—
Swaps	18		—		18		—		—		18
Total Liabilities	$	1,643,258	$	11,764	$	1,631,494	$	1,367,896	$	10,924	$	252,674

⁽¹⁾ Represent reverse repurchase agreements at broker dealer



December 31, 2012	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Financial Instruments		Cash Collateral Received
							Financial Instruments		Cash Collateral Received
Assets
Listed options	$	92,305	$	—	$	92,305	$	—	$	—	$	92,305
Securities borrowed	52,261		—		52,261		50,717		—		1,544
Futures	740		462		278		—		$	—	278
Total Assets	$	145,306	$	462	$	144,844	$	50,717	$	—	$	94,127
Liabilities
Listed options	$	69,757	$	—	$	69,757	$	—	$	1,393	$	68,364
Futures	2,497		2,497		—		—		—		—
Total Liabilities	$	72,254	$	2,497	$	69,757	$	—	$	1,393	$	68,364

7. Collateralized Transactions

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

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



	December 31, 2013		December 31, 2012
Collateral permitted to be delivered or repledged	$	1,315,803	$	50,717
Collateral that was delivered or repledged	1,231,468		50,717
Collateral permitted to be further repledged by the receiving counterparty	142,938		—

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

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



	December 31, 2013		December 31, 2012
Financial instruments owned, at fair value, pledged to counterparties that had the right to deliver or repledge	$	552,242	$	52,261
Financial instruments owned, at fair value, pledged to counterparties that do not have the right to deliver or repledge	676,956		—

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

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



	December 31, 2013		December 31, 2012
Receivable:
Clearing organizations and other	$	750,440	$	140,089
Assets segregated or held in separate accounts under federal or other regulations	304,294		—
Securities failed to deliver	202,517		2,880
Total Receivable	$	1,257,251	$	142,969
Payable:
Clearing organizations and other	$	425,196	$	15,879
Securities failed to receive	48,912		8,306
Total Payable	$	474,108	$	24,185

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

9. Fixed Assets and Leasehold Improvements

Fixed assets and leasehold improvements comprise the following (in thousands):



	Depreciation	December 31,
	Period	2013			2012
Computer hardware and software	3 years	$	223,141		$	178,187
Leasehold improvements	*	115,046			60,750
Telephone systems	5 years	3,848			—
Furniture and fixtures	7 years	12,227			9,093
		354,262			248,030
Less - Accumulated depreciation and amortization		(207,594		)	(164,689		)
		$	146,668		$	83,341

______________________________

*-Shorter of life of lease or useful life of assets

10. Investments

Investments comprise strategic investments, including an investment in Knight prior to the Mergers and investment in the Deephaven Funds. Investments consist of the following (in thousands):



	December 31, 2013		December 31, 2012
Strategic investments:
Investments accounted for under the equity method	$	82,234	$	—
Investments held at fair value	3,925		202,672
Common stock or equivalent of companies representing less than 20% equity ownership held at adjusted cost	33,813		45,766
Total Strategic investments	119,972		248,438
Deferred compensation investments	117		—
Investment in Deephaven Funds	1,958		—
Total Investments	$	122,047	$	248,438

Investments held at fair value, including GETCO's investment in Knight prior to the Mergers, are accounted for as available for sale securities and any unrealized gains or losses are recorded in Other comprehensive income. As a result of the Mergers, the Company recognized a non-cash gain of $128.0 million on its investment in Knight Common Stock, which it recorded within Investment income and other, net on the Consolidated Statements of Operations for the year ended December 31, 2013 and reversed any previous unrealized gains out of Other comprehensive income.

11. Goodwill and Intangible Assets

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

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

As discussed in Footnote 2 "Merger of GETCO and Knight", as a result of the Mergers, $155.4 million and $11.6 million in identifiable intangible assets and goodwill, respectively, were recorded by the Company on the date of the Mergers.

No events occurred in 2013 or 2012 that would indicate that the carrying amounts of the Company’s goodwill or intangible assets may not be recoverable. In December 2013, the Company assessed the impairment of goodwill and intangible assets as part of its annual assessment and concluded that there was no impairment.

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



	December 31, 2013		December 31, 2012
Market Making	$	15,427	$	4,645
Global Execution Services	832		—
Total	$	16,259	$	4,645

Intangible assets with definite useful lives are amortized over their estimated remaining useful lives, the majority of which have been determined to range from three to 12 years. The weighted average remaining life of the Company’s intangible assets with definite useful lives at December 31, 2013 and December 31, 2012 is approximately six years and nine years, respectively.

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



	December 31, 2013		December 31, 2012
Market Making
Trading rights	$	48,920	$	48,903
Technology	53,315		3,487
Total	102,235		52,390
Global Execution Services
Customer relationships	33,278		—
Trade names	3,800		—
Technology	38,682		—
Total	75,760		—
Corporate and Other
Technology	13,500		—
Consolidated Total	$	191,495	$	52,390

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued



		December 31, 2013			December 31, 2012
Customer relationships ⁽¹⁾	Gross carrying amount	$	35,000		$	—
	Accumulated amortization	(1,722		)	—
	Net carrying amount	33,278			—
Trading rights ⁽²⁾	Gross carrying amount	62,450			58,095
	Accumulated amortization	(13,530		)	(9,192		)
	Net carrying amount	48,920			48,903
Trade names ⁽³⁾	Gross carrying amount	4,000			—
	Accumulated amortization	(200		)	—
	Net carrying amount	3,800			—
Technology ⁽⁴⁾	Gross carrying amount	120,346			5,580
	Accumulated amortization	(14,849		)	(2,093		)
	Net carrying amount	105,497			3,487
Total	Gross carrying amount	221,796			63,675
	Accumulated amortization	(30,301		)	(11,285		)
	Net carrying amount	$	191,495		$	52,390

________________________________________


⁽¹⁾	Customer relationships relate to KCG Hotspot and KCG BondPoint. The weighted average remaining life is approximately 10 years as of December 31, 2013 . Lives may be reduced depending upon actual retention rates.


⁽²⁾	Trading rights provide the Company with the rights to trade on certain exchanges. The weighted average remaining life of trading rights with definite useful lives is approximately eight and nine years as of December 31, 2013 and December 31, 2012 , respectively. As of December 31, 2013 and 2012, $7.6 million and $6.3 million , respectively, of trading rights have indefinite useful lives.


⁽³⁾	Trade names relate to KCG Hotspot and KCG BondPoint. The weighted average remaining life is approximately ten years as of December 31, 2013 .


⁽⁴⁾	The weighted average remaining life for technology, including capitalized software, is approximately four and three years as of December 31, 2013 and December 31, 2012 , respectively.

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



	For the year ended December 31,
	2013		2012		2011
Amortization expense	$	19,211	$	5,518	$	3,595

As of December 31, 2013 , the following table summarizes the Company’s estimated amortization expense for future periods (in thousands):



	Amortization expense
For the year ended December 31, 2014	$	33,542
For the year ended December 31, 2015	32,617
For the year ended December 31, 2016	31,527
For the year ended December 31, 2017	30,396
For the year ended December 31, 2018	19,396

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

12. Debt

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



	December 31, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Notes	$	—	$	—	$	15,000	$	15,000
Cash Convertible Senior Subordinated Notes	117,259		118,432		—		—
Senior Secured Notes	305,000		320,823		—		—
First Lien Credit Facility	235,000		235,000		—		—
Total Debt	$	657,259	$	674,255	$	15,000	$	15,000

The fair value of the Cash Convertible Senior Subordinated Notes and Senior Secured Notes is based upon the value of such debt in the secondary market. The carrying value of the First Lien Credit facility approximated fair value as it was not materially sensitive to shifts in interest rates due to its floating interest rate, which also considers changes in the Company's credit risks and financial condition. These liabilities would all be categorized as Level 2 in the fair value hierarchy if they were required to be recorded at fair value.

Notes

In October 2011, the Company issued $15.0 million in notes to a single lender. The notes bore interest at 5.95% per annum, required no principal amortization over the term and were scheduled to mature in October 2018. The note agreement included certain covenants which required the Company, among other things, to maintain compliance with debt to net worth ratios, maintain minimum levels of liquid net assets and maintain minimum net capital levels in regulated subsidiaries. At December 31, 2012, the Company was in compliance with these covenants. In anticipation of the Mergers, on May 31, 2013, the Company provided irrevocable notice to the lender to prepay the notes. The $15.0 million in notes were subsequently repaid on July 1, 2013 along with accrued interest and a $3.0 million early termination payment.

Cash Convertible Senior Subordinated Notes

In March 2010, Knight issued $375.0 million aggregate principal amount of Cash Convertible Senior Subordinated Notes (the “Convertible Notes”) due on March 15, 2015 in a private offering exempt from registration under the Securities Act of 1933, as amended.

The Convertible Notes bear interest at a rate of 3.50% per year, payable semi-annually in arrears, on March 15 and September 15 of each year, commencing on September 15, 2010 and will mature on March 15, 2015 , subject to earlier repurchase or conversion. The Convertible Notes are reported as Debt in the Company’s Consolidated Statements of Financial Condition.

As a result of the Mergers, on July 1, 2013, KCG became a party to Knight's $375.0 million Convertible Notes. On July 1, 2013, the Company delivered a notice (the “Convertible Notes Notice”) to the holders of the Notes. The Convertible Notes Notice advised holders of the Convertible Notes of the following (among others):


•	The completion of the Mergers on July 1, 2013 and the results of the election of the holders of KCG Class A Common Stock to receive cash consideration for such KCG Class A Common Stock constitutes a “Fundamental Change";


•	Each holder of the Convertible Notes has the right to deliver a “Fundamental Change Repurchase Notice ” requiring the Company to repurchase all or any portion of the principal amount of the Convertible Notes at a Fundamental Change Repurchase Price of 100% of the principal amount plus accrued and unpaid interest on August 5, 2013, the Fundamental Change Repurchase Date; and


•	The Company deposited with the paying agent an amount of money sufficient to repurchase all of the Convertible Notes to be repurchased; and upon payment by the paying agent such Convertible Notes will cease to be outstanding.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

On July 1, 2013, $375.0 million , which was the amount needed to repurchase the aggregate amount of Knight's Convertible Notes in full at maturity, was deposited in a cash collateral account under the sole dominion and control of the collateral agent under the First Lien Credit Facility (the "Collateral Account").

After the Mergers, a total of $257.7 million in principal amount of the Convertible Notes were repurchased using funds deposited in the Collateral Account. The repurchase included accrued and unpaid interest of $3.6 million . In October 2013, the funds remaining in the Collateral Account were used to repay a portion of the First Lien Credit Facility. As of December 31, 2013, there were no funds in the Collateral Account.

Debt incurred in connection with Mergers

In connection with the Mergers, KCG entered into a series of debt agreement transactions. Described below are the details of these transactions.

Senior Secured Notes

On June 5, 2013 GETCO Financing Escrow LLC (“Finance LLC”), a wholly-owned subsidiary of GETCO, issued 8.250% senior secured notes due 2018 in the aggregate principal amount of $305.0 million (the “Senior Secured Notes”) pursuant to an indenture, dated June 5, 2013 (as amended, the "Senior Secured Notes Indenture"). On July 1, 2013, KCG entered into a first supplemental indenture (the “First Supplemental Indenture”) pursuant to which KCG assumed all of the obligations of Finance LLC which comprised the Senior Secured Notes plus certain escrow agent fees and expenses of $3.0 million .

On July 1, 2013, KCG and certain subsidiary guarantors (the "Guarantors") under the First Lien Credit Facility, as defined below, entered into a Second Supplemental Indenture, whereby the Senior Secured Notes and the obligations under the Senior Secured Notes Indenture will be fully and unconditionally guaranteed on a joint and several basis by the Guarantors and are secured by second-priority pledges and second-priority security interests in, and mortgages on, the collateral securing the First Lien Credit Facility, subject to certain exceptions.

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

The Senior Secured Notes Indenture contains customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, prepayments of other indebtedness, restrictions on subsidiaries and issuance of capital stock. As of December 31, 2013, the Company was in compliance with the covenants.

On July 1, 2013, KCG and the Guarantors entered into a joinder to the registration rights agreement dated June 5, 2013, (the "Senior Secured Notes Registration Rights Agreement") between Finance LLC and Jefferies LLC as representative of the initial purchasers of the Senior Secured Notes. Pursuant to the registration rights agreement, KCG shall use commercially reasonable efforts to (i) file an exchange offer registration statement with the SEC with respect to a registered offer to exchange the Senior Secured Notes, (ii) issue exchange securities within 365 days after June 5, 2013, and, (iii) in certain circumstances, file a shelf registration statement with respect to resales of the Senior Secured Notes. If KCG and the Guarantors fail to comply with certain obligations under the Senior Secured Notes Registration Rights Agreement, additional interest of up to 1.00% per annum will accrue on the Senior Secured Notes.

In October 2013, the Company received consents from 99.7% of its registered holders ("Holders") of the Senior Secured Notes to amend, among other things, the terms of the Senior Secured Notes among the Company, The Bank of New York Mellon, as trustee and collateral agent (the “Trustee”), and the guarantors.

As a result, the Company entered into the Third Supplemental Indenture with the Trustee to amend the Senior Secured Notes Indenture to permit the purchase, redemption or repayment of the Credit Agreement at any price, including at a premium or at a discount from the face value thereof, with any available cash.

First Lien Credit Facility

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

For the six months ended December 31, 2013, there were no borrowings made against the $50.0 million first lien senior secured revolving credit facility.

The First Lien Credit Facility bears interest, at KCG's option, at a rate based on the prime rate (“First Lien Prime Rate Loans”) or based on LIBOR (“First Lien Eurodollar Loans”). First Lien Prime Rate Loans bear interest at a rate per annum equal to the greatest of prime rate , 2.25% , the federal funds rate plus 0.50% , and an adjusted one-month LIBOR rate plus 1.00% , in each case plus an applicable margin of 3.50% . First Lien Eurodollar Loans bear interest at a rate per annum equal to the adjusted LIBOR rate (subject to a 1.25% LIBOR floor) corresponding to the interest period plus an applicable margin of 4.50% per annum. As of December 31, 2013, the interest rate was 5.75% per annum.

The First Lien Credit Facility matures on December 5, 2017. The First Lien Credit Facility requires an amortization payment of $235.0 million on July 1, 2014 followed by quarterly amortization payments of $7.5 million on each September 30 , December 31 , March 31 and June 30 , with the balance due on maturity.

Optional prepayments of borrowings under the First Lien Credit Facility are permitted at any time, without premium or penalty, subject, however, to a 1% prepayment premium for optional prepayments of the First Lien Credit Facility made prior to July 1, 2014 with a new or replacement term loan facility with an “effective” interest rate less than that applicable to the First Lien Credit Facility.

The First Lien Credit Facility is fully and unconditionally guaranteed on a joint and several basis by all of KCG's existing and future direct and indirect 100% owned domestic subsidiaries, other than certain subsidiaries including regulated broker dealers and other regulated subsidiaries that, in each case, are not permitted to provide such guarantees under applicable law.

The First Lien Credit Facility contains customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, prepayments of other indebtedness, restrictions on subsidiaries, capital expenditures and issuance of capital stock. It also contains financial maintenance covenants establishing a maximum consolidated first lien leverage ratio, a minimum consolidated interest coverage ratio and a minimum consolidated tangible net worth.

In connection with the consent solicitation and the Third Supplemental Indenture, the Company entered into an Amendment to its Credit Agreement with the consent of the requisite percentage of lenders under its First Lien Credit Facility. The Credit Agreement Amendment permits the Company to prepay a portion of the principal amount of borrowings under the First Lien Credit Facility from time to time for a period of 60 days following the effective date of the Credit Agreement Amendment out of the cash set aside in the Collateral Account under the sole dominion and control of the collateral agent under the First Lien Credit Facility for repayments of the Convertible Notes, after which period the remaining cash in the Collateral Account will be required to be used to prepay a portion of the principal amount of borrowings under the First Lien Credit Facility. On October 23, 2013, as permitted by the Credit Agreement Amendment, the Company applied 100% of the $117.3 million cash set aside in the Collateral Account to prepay a portion of the principal amount of borrowings under the First Lien Credit Facility. The Credit Agreement Amendment also permits the purchase, redemption or repayment of the Convertible Notes at any price, including at a premium or at a discount from the face value thereof, with any available cash.

The Company incurred issuance costs of $37.4 million in connection with the issuance of Senior Secured Notes, Credit Agreement and consent solicitation. The remaining issuance costs are recorded within Other assets on the Consolidated Statements of Financial Condition and are amortized over the respective terms of the Senior Secured Notes and the Credit Agreement. Including issuance costs, the Senior Secured Notes and Credit Agreements have effective yields of 9.0% and 8.3% , respectively.

During the fourth quarter of 2013, the Company repaid $300.0 million of principal of the First Lien Credit Facility. A portion of the $300.0 million was drawn from $117.3 million in cash held in the Collateral Account and the remainder of the $300.0 million was paid out of available cash including proceeds from the sale of Urban. In conjunction with these payments, the Company wrote down $13.2 million of its capitalized debt costs associated with the Credit Agreement.

Subsequent to December 31, 2013, the Company made a further $100.0 million principal prepayment under the Credit Agreement. See Footnote 26 "Subsequent Events" for further discussion.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Revolving Credit Agreement

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

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

Borrowings under the OCTEG-KCA Facility shall bear interest, at the applicable borrower's option, at a rate based on the federal funds rate (“Base Rate Loans”) or based on LIBOR (“Eurodollar Loans”), in each case plus an applicable margin. For each Base Rate Loan, the interest rate per annum is equal to the greater of the federal funds rate or an adjusted one-month LIBOR rate plus (a) for each Borrowing Base A loan, a margin of 1.75% per annum and (b) for each Borrowing Base B loan, a margin of 2.25% per annum. For each Eurodollar Loan, the interest rate per annum is equal to an adjusted LIBOR rate corresponding to the interest period plus (a) for each Borrowing Base A loan, a margin of 1.75% per annum and (b) for each Borrowing Base B loan, a margin of 2.25% per annum. As of December 31, 2013, there were no outstanding borrowings under the OCTEG-KCA Facility Agreement.

The proceeds of the Borrowing Base A loans are available to both OCTEG and KCA and may be used solely to finance the purchase and settlement of securities. The proceeds of Borrowing Base B loans are available solely to KCA and may be used solely to fund clearing deposits with the National Securities Clearing Corporation.

The borrowers are being charged a commitment fee at a rate of 0.35% per annum on the average daily amount of the unused portion of the OCTEG-KCA Facility Agreement.

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

The OCTEG-KCA Revolving Facility includes customary affirmative and negative covenants, including limitations on indebtedness, liens, hedging agreements, investments, loans and advances, asset sales, mergers and acquisitions, dividends, transactions with affiliates, restrictions on subsidiaries, issuance of capital stock, negative pledges and business activities. It contains financial maintenance covenants establishing a minimum total regulatory capital for each of OCTEG and KCA, a maximum total asset to total regulatory capital ratio for each of OCTEG and KCA, a minimum excess net capital limit for each of OCTEG and KCA, a minimum liquidity ratio for KCA, and a minimum tangible net worth threshold for KCG. As of December 31, 2013, the Company was in compliance with the covenants.

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

OCTEG and KCA shall each be obligated only with respect to the principal and interest of their own borrowings, and not the interest and principal of the other borrower's borrowings.

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

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



	For the year ended December 31,
	2013		2012		2011
Interest expense	$	34,138	$	1,194	$	164
Amortization of debt issuance cost ⁽¹⁾	16,832		276		—
Commitment fee ⁽¹⁾	792		1,034		—
Total	$	51,762	$	2,504	$	164


⁽¹⁾	$3.6 million is included in Other expense while $13.2 million is included in Writedown of debt issuance costs. The writedown amount was incurred as a result of the $300.0 million repayment of the First Lien Credit Facility.

13. Related Parties

The Company interacts with two related parties as part of its normal day-to-day operations. It earns revenues, incurs expenses and maintains balances with these related parties or their affiliates. As of the date and period indicated below, the Company had the following balances and transactions with the related parties or their affiliates as follows (in thousands):



Statement of Operations	For the year ended December 31, 2013
Revenues
Commissions and fees	$	2,583
Trading revenues, net	437
Interest, net	71
Total revenues from related parties	$	3,091
Expenses
Execution and clearance fees	$	(5,706	)
Interest expense	102
Other expense	146
Total expenses incurred with respect to related parties	$	(5,458	)



Statement of Financial Condition	December 31, 2013
Assets
Securities borrowed	$	57,732
Receivable from brokers, dealers and clearing organizations	20,826
Other assets	277
Liabilities
Securities loaned	$	116,062
Payable to brokers, dealers and clearing organizations	17,820
Accrued expenses and other liabilities	179

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

During 2013, the Company paid one of the related parties $49.8 million in fees related to financing and advisory activities.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

14. Stock-Based Compensation

KCG Equity Incentive Plan

The Knight Capital Group, Inc. Amended and Restated 2010 Equity Incentive Plan was established to provide long-term incentive compensation to employees and directors of the Company. As a result of the Mergers, on July 1, 2013, this plan was assumed by KCG and was renamed the KCG Holdings, Inc. Amended and Restated Equity Incentive Plan ("the KCG Plan"). At such time, the Knight Capital Group, Inc. 2009 Executive Incentive Plan was also assumed by KCG in connection with the Mergers and was renamed the KCG Holdings, Inc. Amended and Restated Executive Incentive Plan. As of the closing of the Mergers, the number of shares reserved for issuance under the KCG Plan was 20.7 million (based on a conversion ratio of one third of a share of KCG Class A Common Stock for each share of Knight Class A Common Stock). At a special meeting of the Company's stockholders on December 19, 2013, the Company's stockholders approved an increase to the number of shares authorized for grant under the KCG Plan from 20.7 million shares to 32.7 million shares (subject to adjustment as provided for under the KCG Plan).

The KCG Plan is administered by the Compensation Committee of the Company’s Board of Directors, and allows for the grant of options, SARs, restricted stock and RSUs (collectively, the “awards”), as defined by the KCG Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the KCG Plan also limits the number of awards that may be granted to a single individual. The KCG Plan replaced prior Knight stockholder-approved equity plans for future equity grants and no additional grants will be made under those historical Knight stock plans. However, the terms and conditions of any outstanding equity grants under the historical Knight stock plans are not affected.

As a result of the Mergers on July 1, 2013, each outstanding Knight stock option, whether vested or unvested, was automatically replaced with an option to purchase KCG Class A Common Stock equal to one third of the number of shares of Knight Common Stock subject to such original stock option immediately prior to the completion of the Mergers (rounded down to the nearest whole share of KCG Class A Common Stock). The exercise price per share of KCG Class A Common Stock is equal to the exercise price per share of Knight Common Stock subject to such Company stock option multiplied by three (rounded up to the nearest whole cent). Pursuant to the terms of the applicable Knight stock plans and award agreements, each option granted on or prior to December 19, 2012 immediately vested. There were no Knight stock options granted subsequent to December 19, 2012 through June 30, 2013.

As a result of the Mergers, each Knight restricted share granted after December 19, 2012 and each outstanding Knight RSU was replaced with a KCG restricted share or RSU, as applicable, in respect of one third of a share of common stock of KCG (rounded to the nearest whole share). Knight restricted share and RSU awards granted on or prior to December 19, 2012 (except for RSUs subject to performance-based vesting conditions) automatically vested upon the completion of the Mergers. Knight awards granted after December 19, 2012 (and RSUs granted on or prior to December 19, 2012 that were subject to performance-based vesting conditions) will continue to vest in accordance with their existing vesting schedule, subject to acceleration under certain circumstances.

Restricted Shares and Restricted Stock Units

Eligible employees and directors may receive restricted shares and/or RSUs (collectively “restricted awards”) as a portion of their total compensation. The majority of restricted awards vest ratably over three years and are subject to accelerated vesting, or continued vesting, following certain termination circumstances, in accordance with the applicable award documents. For certain restricted awards, the Company has the right to fully vest employees and directors upon retirement and in certain other circumstances.

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued



	For the year ended December 31,
	2013
Stock award compensation expense	$	33,067
Income tax benefit	11,573

The following table summarizes restricted awards activity for the six months ended December 31, 2013 (awards in thousands):



	Restricted Stock Units
	Number of Units		Weighted- Average Grant date Fair Value
July 1, 2013
Conversion of outstanding Knight RSUs	3,251		$	11.22
Granted	6,050		10.57
Vested	(391	)	11.89
Forfeited	(490	)	11.40
Outstanding at December 31, 2013	8,420		$	10.71

There is $67.3 million of unamortized compensation related to the unvested restricted awards outstanding at December 31, 2013 . The cost of these unvested restricted shares is expected to be recognized over a weighted average life of 2.2 years.

Stock Options and Stock Appreciation Rights

The Company’s policy is to grant options for the purchase of shares of KCG Class A Common Stock and SARs to purchase or receive the cash value of shares of KCG Class A Common Stock, in each case with an exercise price not less than the market value of KCG Class A Common Stock on the grant date. Options and SARs generally vest ratably over a three year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the applicable award agreement. Options and SARs continue to vest following certain termination circumstances, in accordance with the applicable award agreements. Options and SARs are otherwise canceled if employment is terminated before the end of the relevant vesting period. The Company’s policy is to issue new shares upon option exercises by its employees and directors. The Company may issue new shares or provide a cash payment upon SARs exercises by its employees.

The fair value of each option and SAR granted is estimated as of its respective grant date using the Black-Scholes option-pricing model. Stock options and SARs are granted with exercise prices equal to or greater than the market value of the Company’s common stock at the date of grant as defined by the stock plans. The principal assumptions utilized in valuing options and SARs and the methodology for estimating such model inputs include: 1) risk-free interest rate—estimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option or SAR; 2) expected volatility—estimate is based on several factors including implied volatility of market-traded options on the Company’s common stock on the grant date and the volatility of the Company’s common stock; and 3) expected option or SAR life—estimate is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific option and SAR characteristics, including the effect of employee terminations. Based on the results of the model, the weighted-average fair value of the stock options granted in 2013 was $3.15 per option. There were no stock options granted in 2012 or 2011.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The weighted average assumptions used for stock options granted were as follows:



	2013
Dividend yield	—	%
Expected volatility	35.0	%
Risk-free interest rate	1.0	%
Expected life (in years)	3.5

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



	For the year ended December 31,
	2013
Stock option and SAR compensation expense	$	1,813
Income tax benefit	635

The following table summarizes stock option and SAR activity and stock options exercisable for the six months ended December 31, 2013 (awards in thousands):



	Number of Stock Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Life (years)
July 1, 2013	—		$	—
Conversion of outstanding Knight options	782		41.25
Granted at market value ⁽¹⁾	4,323		15.19
Exercised	—		—
Forfeited or expired	(138	)	45.32
Outstanding at December 31, 2013 ⁽¹⁾	4,967		$	18.45	$	3,621	4.23
Exercisable at December 31, 2013	644		$	40.37	$	—	2.23
Available for future grants at December 31, 2013 *	19,160

* Represents both options and awards available for grant.

⁽¹⁾ Includes 1.7 million of SARs.



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Outstanding at 12/31/13	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at 12/31/13	Weighted- Average Exercise Price
$8.24 - $8.24	833	4.61	$	8.24	—	$	—
$8.25- $8.25	91	4.64	8.25		—	—
$11.65 - $11.65	1,700	4.51	11.65		—	—
$22.50 - $22.50	1,700	4.51	22.50		—	—
$23.70 - $53.91	640	2.23	40.28		640	40.28
$58.08 - $58.08	3	3.01	58.08		3	58.08
	4,967	4.23	$	18.45	643	$	40.37

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The aggregate intrinsic value is the amount by which the closing price of the Company’s common stock exceeds the exercise price of the stock options multiplied by the number of shares. There were no stock options exercised during the year ended December 31, 2013.

There is $7.0 million unamortized compensation related to unvested stock options and SARs outstanding at December 31, 2013 . The cost of these unvested awards is expected to be recognized over a weighted average life of 1.9 years.

Incentive units

Prior to the Mergers, GETCO awarded deferred compensation to its employees in the form of incentive units that generally vest over time. The value of these incentive units was determined based on the same methodology used to value the GETCO Class B unit awards and the amount expensed was determined based on this valuation multiplied by the percent vested. In connection with the Mergers, all outstanding unvested incentive units vested and were converted into units based on the applicable exchange ratio of GETCO units to KCG Class A Common Stock. The units are marked to the current stock price of KCG Class A Common Stock at the end of each period with the resulting change in the liability reflected as either an expense or gain included in Employee compensation and benefits. Given that the units vested in connection with the Mergers, the Company fully amortized the units as of June 30, 2013 . The accelerated amortization of incentive units recorded during the year ended December 31, 2013 was $1.3 million . Deferred compensation payable at December 31, 2013 and December 31, 2012 related to incentive units was $3.8 million and $3.5 million , respectively, and is included in Accrued compensation expense on the Consolidated Statements of Financial Condition.

The following is a summary of the changes in the incentive units for the year ended December 31, 2013 (units in thousands):



	Vested		Unvested
Incentive units at January 1, 2013	24		45
Issued	1		12
Vested	53		(53	)
Exercised	(28	)	—
Canceled	(1	)	(4	)
Incentive units at December 31, 2013	49		—

Class B units

Prior to the Mergers, GETCO granted membership unit awards to employees in the form of Class B units. The Class B units were valued at the date of grant based on the estimated enterprise value of GETCO. Prior to 2012, these non-voting units vested in full three years from the grant date, provided certain conditions of employment and performance were met by the employee. In 2012, GETCO changed the vesting of units granted in 2012 to annual vesting of one-third of the units over a three year period. Upon termination of employment, GETCO had the option to repurchase all or a portion of the units granted within six months. The purchase price for the unvested units was determined as a percentage of grant date fair value. GETCO classified these unit awards as equity as the employees received full membership rights with respect to allocation of income and participation in member distributions. In connection with the Mergers, all outstanding unvested Class B units vested on June 25, 2013. The accelerated amortization of Class B units recorded during the year ended December 31, 2013 was $9.4 million .

The following is a schedule of the changes in GETCO's unvested Class B units (units in thousands):



	Units		Weighted Average Grant Price
Unvested as of January 1, 2013	417		$	89.99
Issued	58		73.54
Vested	(438	)	87.86
Forfeited	(37	)	89.28
Unvested as of December 31, 2013	—

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Class E units

In 2012, GETCO also granted employees profit interests in the form of Class E units. Prior to 2012, Class E units primarily vested in full three years from the grant date. For units granted in 2012, GETCO changed the vesting of Class E units to an annual vesting of one-third of the units over the three year period and provided GETCO an option to repurchase the units at the end of 5 years. Class E units allowed for future appreciation in excess of the GETCO's value over a certain strike price per unit and allocation of income once the units are vested. Upon the departure of an employee, the Class E units were forfeited whether vested or not, and if vested, the cash value of the Class E units above their strike price was paid to the employee. GETCO classified these unit awards as equity. In connection with the Mergers all outstanding unvested Class E units vested on June 25, 2013 and were canceled for no consideration. The accelerated amortization of the Class E units recorded during the year ended December 31, 2013 was $3.5 million , respectively.

The following is a schedule of the changes in GETCO's unvested Class E units (units in thousands):



	Units		Weighted Average Grant Price
Unvested as of December 31, 2012	476		$	36.78
Issued	—		—
Vested	(442	)	37.24
Forfeited	(34	)	30.89
Unvested as of December 31, 2013	—

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



	For the year ended December 31,
	2013		2012		2011
Class B and E units	$	19,860	$	12,320	$	40,466
Incentive units	2,446		1,264		858
Total	$	22,306	$	13,584	$	41,324

15. Employee Benefit Plan

The Company sponsors a 401(k) profit sharing plan (the “401(k) Plan”) in which most of its employees are eligible to participate. Under the terms of the 401(k) Plan, the Company is required to make annual contributions to the 401(k) Plan equal to 100% of the contributions made by its employees, up to annual limits, however for 2013, such provisions only applied to Knight employees. The total expense recognized with respect to the 401(k) Plan is included in Employee compensation and benefits on the Consolidated Statements of Operations, as follows (in thousands):



For the year ended December 31, 2013	$	2,959

16. Income Taxes

Upon completion of the Mergers, the Company became subject to U.S. corporate income taxes and the Company and its subsidiaries will file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In other jurisdictions, the Company and its subsidiaries will file separate company state and local income tax returns.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

As described in Footnote 2 “Merger of GETCO and Knight”, following the Mergers the Company recorded $62.3 million of deferred tax assets as a result of recording Knight’s assets and liabilities under the purchase method of accounting as well as recording the value of Knight’s NOLs and tax credit carryforwards as described below.

As a result of the Company becoming subject to U.S. corporate income taxes, the Company also recorded a nonrecurring $103.5 million deferred tax benefit and corresponding deferred tax asset relating to GETCO's existing tax attributes. This deferred tax asset primarily relates to differences between GETCO’s book and tax bases in its intangible assets and its strategic investments.

The (benefit) provision for income taxes from continuing operations consists of (in thousands):



	For the years ended December 31,
	2013			2012			2011
Current:
U.S. federal	$	(194	)	$	(627	)	$	2,047
U.S. state and local	2,902			618			1,218
Non U.S.	3,773			8,708			29,910
	$	6,481		$	8,699		$	33,175
Deferred:
U.S. federal	$	(108,077	)	1,771			(949		)
U.S. state and local	—			1,046			(263		)
Non U.S.	(599		)	(1,240		)	(1,122		)
	$	(108,676	)	$	1,577		$	(2,334	)

Provision (benefit) for income taxes	$	(102,195	)	$	10,276		$	30,841

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



	For the years ended December 31,
	2013			2012			2011

U.S. federal statutory income tax (benefit) expense	$	6,235		$	9,249		$	67,739
Income not subject to U.S. corporate income tax	(14,071		)	(7,095		)	(65,718		)
U.S. state and local income taxes, net of U.S. federal income tax effect	1,886			772			478
Deferred tax benefit resulting from the Company becoming subject to U.S. corporate income taxes	(103,499		)	—			—
Nondeductible expenses ⁽¹⁾	3,627			200			133
Foreign taxes	3,603			7,468			29,118
Other, net	24			(318		)	(909		)
Income tax (benefit) expense	$	(102,195	)	$	10,276		$	30,841

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

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued



	For the years ended December 31,
	2013			2012
Deferred tax assets:
Employee compensation and benefit plans	$	16,629		$	527
Fixed assets and other amortizable assets	90,130			3,742
Reserves	4,362			—
Valuation of investments	31,154			—
Net operating loss carryforwards, net	125,728			1,041
Less: Valuation allowance on net operating loss carryforwards	(36,043		)	—
Total deferred tax assets	$	231,960		$	5,310

Deferred tax liabilities
Employee compensation and benefit plans	$	—		$	502
Fixed assets and other amortizable assets	29,077			2,558
Valuation of investments	10,414			1,831
Reduction in foreign tax credit for Non-U.S. NOL carryforwards	18,885			—
Total deferred tax liabilities	58,376			4,891
Net deferred tax assets	$	173,584		$	419

At December 31, 2013, the Company’s net deferred tax asset of $173.6 million was included in Deferred tax asset, net on the Consolidated Statements of Financial Condition. At December 31, 2012, the Company’s net deferred tax asset of $0.4 million was reported on the Consolidated Statements of Financial Condition as a deferred tax asset of $4.2 million and a liability within Accrued expenses and other liabilities of $3.8 million .

Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize its federal deferred tax assets in the future, and therefore no valuation allowance has been recorded at December 31, 2013. Management believes that positive evidence including the Company's history of sustainable profitability and its forecasts of future profitability outweighs the negative evidence. The Company has recorded a full valuation allowance against state and local deferred tax assets as it is more likely than not that the benefit of such items will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates.

Included in the Company’s deferred tax assets are benefits associated with NOL carryforwards generated by Knight in periods prior to the Mergers. At December 31, 2013, the Company had projected overall U.S. federal NOL carryforwards of $194.5 million of which $89.0 million resulted from the acquisition of Knight. The Company recorded a related deferred income tax asset for $68.1 million and an offsetting valuation allowance of $6.8 million at December 31, 2013, which represents the portion of these net operating loss carryforwards that are considered more likely than not to expire unutilized. The Company did not have any NOLs or related deferred tax assets at December 31, 2012.

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

At December 31, 2013 the Company recorded a valuation allowance for substantially all of its state and local NOL carryforwards as it is more likely than not that the benefit of such items will not be realized due to limitations on utilization in the particular jurisdictions in which the Company operates. Certain of these carryforwards are subject to annual limitations on utilization and they will begin to expire in 2019 .

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

At December 31, 2013, the Company had non-U.S. NOL carryforwards of $86.4 million of which $65.7 million were generated by Knight in periods prior to the Mergers. The Company recorded a foreign deferred income tax asset of $19.1 million for these NOL carryforwards as of December 31, 2013, along with an offsetting U.S. federal deferred tax liability of $18.9 million for the expected future reduction in U.S. foreign tax credits associated with the use of the non U.S. loss carryforwards. These non-U.S. net operating losses may be carried forward indefinitely. At December 31, 2013 the Company had tax credit carryforwards which were generated by Knight in periods prior to the Mergers, general business credit carryforwards of $2.5 million and alternative minimum tax credit carryforwards $6.8 million .

At December 31, 2013, the Company had $1.5 million of unrecognized tax benefits, all of which would affect the Company's effective tax rate if recognized. The Company had no such unrecognized tax benefits at December 31, 2012 or December 31, 2011.

The following table reconciles the beginning and ending amount of unrecognized tax benefits (in thousands):



	For the year ended December 31,
	2013
Balance at beginning of period	$	—
Increases based on tax positions related to prior periods ⁽¹⁾	1,464
Decreases based on tax positions related to prior periods	—
Decreases related to settlements with taxing authorities	—
Balance at the end of the period	$	1,464

⁽¹⁾ Increases relate to unrecognized tax benefits that inure to the Company as a result of the Mergers.

As of December 31, 2013, the Company is subject to U.S. Federal income tax examinations for the tax years 2009 through 2012 , and to non U.S. income tax examinations for the tax years 2007 through 2012. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2012 . The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the results of operations or financial condition.

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

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

17. Accumulated Other Comprehensive Income

The following table presents changes in Accumulated other comprehensive income, net of tax by component for the years ended December 31, 2012 and 2013 (in thousands):



	Unrealized Gains (Losses) on Available-for-Sale Securities			Foreign Currency Translation Adjustments		Total
Balance January 1, 2012	$	—		$	—	$	—
Other comprehensive income (loss)	114,319			—		114,319
Balance December 31, 2012	114,319			—		114,319
Other comprehensive income (loss)	13,689			1,365		15,054
Reclassification of gain on investment in Knight Common Stock ⁽¹⁾	(127,972		)	—		(127,972		)
Net current-period other comprehensive loss	(114,283		)	1,365		(112,918		)
Balance December 31, 2013	$	36		$	1,365	$	1,401

⁽¹⁾ As a result of the Mergers, the Company recorded a non-cash gain of $128.0 million on its investment in Knight Common Stock, which it recognized within Investment income and other, net on the Consolidated Statements of Operations for the year ended December 31, 2013 and reversed any previous unrealized gains out of Other comprehensive income.

18. Writedowns and Other Charges

Writedown of capitalized deal costs

During the fourth quarter of 2013, the Company made a $300.0 million principal repayments related under the Credit Agreement. As a result, $13.2 million of capitalized deal costs were accelerated.

Writedown of assets

For the year ended 2013, the Company recorded $7.7 million in writedown of assets primarily related to leasehold improvements and office furniture in the London and Chicago office locations.

Lease loss accrual

For the year ended 2013, the Company recorded a $7.1 million lease loss accrual primarily related to the consolidation of office space in the London and Chicago.

19. Earnings Per Share

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

The number of such options, warrants and SARs excluded was approximately 29.1 million for the year ended December 31, 2013. The computation of diluted shares can vary among periods due in part to the change in the average price of KCG Class A Common Stock.

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations from continuing operations for the years ended December 31, 2012 and 2011 (in thousands):



	For the year ended December 31,
	2013					2012				2011
	Numerator / net income			Denominator / shares		Numerator / net income		Denominator / shares		Numerator / net income		Denominator / shares
Income from continuing operations and shares used in basic calculations	$	120,008		80,143		$	16,151	48,970		162,700		50,688
Effect of dilutive stock based awards				872				—				—
Income from continuing operations and shares used in diluted calculations	$	120,008		81,015		$	16,151	48,970		162,700		50,688
(Loss) income from continuing operations allocated to preferred and participating units	$	(21,565	)			$	1,092			$	12,510
Income from continuing operations attributable to common shareholders	$	141,573				$	15,059			$	150,190
Basic earnings per common share from continuing operations				$	1.77			$	0.31			$	2.96
Diluted earnings per common share from continuing operations				$	1.75			$	0.31			$	2.96

Prior to the Mergers, GETCO units comprised preferred and common units, and net income was allocated among the various classes of units based upon participation rights in undistributed earnings. The number of shares used to calculate EPS for 2012 and 2011 are GETCO units converted into KCG shares using an exchange ratio as detailed in the Merger Agreement.

20. Significant Clients

The Company considers significant clients to be those clients who account for 10% or more of the total U.S. equity dollar value traded by the Company. No clients accounted for more than 10% of the Company’s U.S. equity dollar value traded for the years ended December 31, 2013 , 2012 or 2011 .

21. Commitments and Contingent Liabilities

Legal Proceedings

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

As previously disclosed in Knight's public filings, Knight experienced a technology issue at the open of trading at the NYSE on August 1, 2012. This issue was related to the installation of trading software and resulted in KCA sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market. Knight has since been named as a defendant in two putative class action complaints (one of which was voluntarily dismissed) and one derivative lawsuit, all of which relate to the technology issue. Knight has also received several derivative demand letters and/or

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

requests for the inspection or production of certain books and records pursuant to Delaware law related to the technology issue and the raising of $400.0 million in equity financing through a convertible preferred stock offering to certain investors (the "August 6, 2012 recapitalization").

After the announcement on December 19, 2012 of the signing of the Merger Agreement, Knight, GETCO, GA-GTCO, as well as the individual members of the Knight's Board of Directors prior to the Mergers (the “Individual Defendants”), were named as defendants in several lawsuits brought by certain purported Knight stockholders challenging the proposed Mergers. The lawsuits generally allege, among other things, that the Mergers failed to properly value Knight, that the Individual Defendants breached their fiduciary duties in approving the Merger Agreement and that those breaches were aided and abetted by GETCO and GA-GTCO. The lawsuits, among other things, seek to enjoin the defendants from completing the Mergers on the agreed-upon terms, rescission of the Mergers (to the extent the Mergers have already been consummated), monetary relief and attorneys' fees and costs.

While the Company is currently unable to predict the outcome of any existing or future litigation related to the August 1 technology issue, the August 6, 2012 recapitalization, or the Mergers, an unfavorable outcome in one or more of these matters could have a material adverse effect on its financial condition or ongoing results of operations. In addition, the Company expects to incur additional expenses in defending against such litigation.

Legal

Litigation Related to the August 1, 2012 Technology Issue

On October 26, 2012, Knight, its Chairman and Chief Executive Officer, Thomas M. Joyce, and its Executive Vice President, Chief Operating Officer and Chief Financial Officer, Steven Bisgay, were named as defendants in an action entitled Fernandez v. Knight Capital Group, Inc. in the U.S. District Court for the District of New Jersey. Generally, this putative class action complaint alleged that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that he and a purported class of Knight's stockholders who purchased Knight's Class A Common Stock between January 19, 2012 and August 1, 2012 paid an inflated price. Following the appointment of a lead plaintiff and counsel, the plaintiff filed an amended complaint on March 14, 2013, alleging generally that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that it and a purported class of Knight's stockholders who purchased Knight's securities between November 30, 2011 and August 1, 2012 paid an inflated price. On May 13, 2013, Knight filed a motion to dismiss the amended complaint, which was fully briefed as of August 2013. Before the court rendered a decision on the motion to dismiss, the plaintiff filed a second amended complaint on December 20, 2013, alleging generally that the defendants made material misstatements and/or failed to disclose matters related to the events of August 1, 2012. More specifically, the plaintiff referred to the settlement with the SEC (discussed further below) and alleged that the defendants made false and misleading statements concerning Knight's risk management procedures and protocols, available cash and liquidity, Value at Risk and internal controls over financial reporting. The plaintiff asserted claims under Sections 10(b) and 20 and Rule 10b-5 of the federal securities laws, claiming that it and a purported class of Knight's stockholders who purchased Knight's securities between May 10, 2011 and August 1, 2012 paid an inflated price. The defendants filed a motion to dismiss the second amended complaint on February 18, 2014, and the motion is scheduled to be fully briefed by June 5, 2014.

As noted above, Knight received several demand letters requesting that it commence a lawsuit against certain directors and officers for alleged breaches of fiduciary duties, waste, wrongdoing, mismanagement and/or demanding that it produce certain books and records pursuant to Delaware law concerning the technology issue and the August 6, 2012 recapitalization. The Company responded to each of these demand letters and, except as noted below in the New York litigation, none of these letters has resulted in litigation.

Mergers Litigation

Delaware Litigation. On December 28, 2012, a purported stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Ann Jimenez McMillan v. Thomas M. Joyce, et al., Case No. 8163-VCP. The complaint names as defendants Knight, the Individual Defendants, GETCO, and GA-GTCO, LLC. The complaint generally alleges, among other things, that the Individual Defendants violated their fiduciary duties by accepting an inadequate merger price, approving the transaction despite material conflicts of interest, and agreeing to a number of improper deal protection devices and voting agreements, which allegedly make it less likely that other

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

bidders would make successful competing offers for Knight. The complaint also alleges that Knight, GETCO, and GA-GTCO, LLC aided and abetted these purported breaches of fiduciary duties. The relief sought includes, among other things, an injunction prohibiting consummation of the Mergers, rescission of the Mergers (to the extent the Mergers have already been consummated), and attorneys' fees and costs. On December 28, 2012, a purported stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Chrislaine Dominique v. Thomas M. Joyce, et al., Case No. 8159-VCP. The complaint names as defendants Knight, the Individual Defendants, GETCO, and GA-GTCO, LLC. The complaint generally alleges, among other things, that the Individual Defendants violated their fiduciary duties by accepting an inadequate merger price, approving the transaction despite material conflicts of interest, including that they were appointed by an investor group that included GETCO, and agreeing to a number of improper deal protection devices, which allegedly make it less likely that other bidders would make successful competing offers for Knight. The complaint also alleges that Knight and GETCO aided and abetted these purported breaches of fiduciary duties. The relief sought includes, among other things, an injunction prohibiting consummation of the Mergers, rescission of the Mergers (to the extent the Mergers have already been consummated), and attorneys' fees and costs. On January 31, 2013, the Court of Chancery consolidated for all purposes the McMillan and Dominique actions into a single action captioned In re Knight Capital Group, Inc. Shareholder Litigation, C.A. No. 8159-VCP. On March 5, 2013, the co-lead plaintiffs in the Delaware Consolidated Action filed an amended complaint and motions for expedited discovery and a preliminary injunction. In addition to the allegations in the initial complaints, the Delaware amended complaint contains allegations that the Knight Board of Directors breached its fiduciary duties by providing stockholders with allegedly deficient disclosures about the proposed transaction in the Company's Preliminary Form S-4, filed with the SEC on February 13, 2013 (the “Preliminary Proxy”).

New Jersey Litigation . On December 31, 2012, a purported stockholder class action complaint was filed in the Superior Court of New Jersey, Chancery Division of Hudson County, NJ, captioned Charles Bryan v. Knight Capital, et al., Case No. HUD-C-001-13. The complaint names as defendants Knight, the Individual Defendants, Jefferies & Company, Inc., Jefferies High Yield Trading, LLC, TD Ameritrade Holding Corp., Blackstone Capital Partners VI L.P., Blackstone Family Investment Partnership VI-ESC L.P., Blackstone Family Investment Partnership VI L.P., Stephens Investments Holdings LLC, Stifel Financial Corp., GETCO Strategic Investments, LLC, GETCO Holding Company LLC, and GA-GTCO, LLC. The complaint generally alleges that the Individual Defendants breached their fiduciary duties by accepting an inadequate merger price, agreeing to a number of improper deal protection devices and voting agreements, which allegedly make it less likely that other bidders would make successful competing offers for Knight and approving the transaction despite material conflicts of interest, including that they were appointed by an investor group that included GETCO. The complaint further alleges that the entity defendants (except for Knight and GA-GTCO, LLC) breached alleged fiduciary duties in connection with the Individual Defendants' approval of the Mergers. The complaint also alleges that GETCO and GA-GTCO, LLC aided and abetted the Individual Defendants' purported breaches of fiduciary duty. The relief sought includes, among other things, an injunction prohibiting the consummation of the Mergers, rescission of the Mergers (to the extent the Mergers have already been consummated), and attorneys' fees and costs.

On December 31, 2012, a purported stockholder class action complaint was filed in the Superior Court of New Jersey, Chancery Division of Hudson County, NJ, captioned James Ward v. Knight Capital, et al., Case No. HUD-C-0003-13. The complaint names as defendants Knight, the Individual Defendants, Jefferies & Company, Inc., Jefferies High Yield Trading, LLC, TD Ameritrade Holding Corp., Blackstone Capital Partners VI L.P., Blackstone Family Investment Partnership VI-ESC L.P., Blackstone Family Investment Partnership VI L.P., Stephens Investments Holdings LLC, Stifel Financial Corp., GETCO Strategic Investments, LLC, GETCO Holding Company LLC, and GA-GTCO, LLC. The complaint generally alleges that the Individual Defendants breached their fiduciary duties by accepting an inadequate merger price, agreeing to a number of improper deal protection devices and voting agreements, which allegedly make it less likely that other bidders would make successful competing offers for Knight and approving the transaction despite material conflicts of interest, including that they were appointed by an investor group that included GETCO. The complaint further alleges that the entity defendants (except for Knight and GA-GTCO, LLC) breached alleged fiduciary duties in connection with the Individual Defendants' approval of the Mergers. The complaint also alleges that GETCO and GA-GTCO, LLC aided and abetted the Individual Defendants' purported breaches of fiduciary duty. The relief sought includes, among other things, an injunction prohibiting the consummation of the Mergers, rescission of the Mergers (to the extent the Mergers have already been consummated), and attorneys' fees and costs. On February 20, 2013, Knight moved to dismiss or, in the alternative, stay the New Jersey actions in deference to the first-filed Delaware actions. The New Jersey court granted the motion on March 28, 2013, and ordered that the New Jersey actions be stayed for all purposes in deference to the first-filed Delaware actions.

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New York Litigation . On January 15, 2013, Knight, the Individual Defendants, GETCO, GA-GTCO, LLC and General Atlantic were named as defendants in an action entitled Joel Rosenfeld v. Thomas M. Joyce, et al., Case No. 6540147/2013, in the Supreme Court of the State of New York (New York County). The plaintiff, Joel Rosenfeld, is one of the stockholders mentioned above who previously sent Knight a derivative demand letter. Generally, this complaint asserts both derivative and class action claims. First, it purports to assert derivative claims, which allege, among other things, that the seven Knight directors who were serving as of August 1, 2012 breached their fiduciary duties and wasted corporate assets by failing to erect and oversee effective safeguards to prevent against technology issues, such as the one that occurred on August 1, 2012, for which Knight incurred a realized pre-tax loss of approximately $457.6 million . Second, it asserts putative class action claims resulting from the proposed Mergers for (1) breach of fiduciary duty against the Individual Defendants; and (2) aiding and abetting the purported breach of fiduciary duty against GETCO, GA-GTCO, LLC, and General Atlantic. The complaint generally alleges that the Individual Defendants breached their fiduciary duties by approving the Mergers at an inadequate price, agreeing to a number of improper deal protection devices and voting agreements, which allegedly make it less likely that other bidders would make successful competing offers for Knight, and that certain of Knight's directors have conflicts of interest in connection with the transaction, including that certain directors sought to enter into the transaction to avoid potential liability relating to the derivative claims asserted in the complaint. With respect to the merger claims, the plaintiff seeks, among other things, to enjoin the proposed Mergers, rescission of the proposed Mergers (to the extent they have already been consummated) and attorneys' fees. With respect to the derivative claims, the plaintiff seeks, among other things, an order requiring the Knight directors who were serving as of August 1, 2012 to pay restitution and/or compensatory damages in favor of Knight and/or the proposed class of Knight stockholders. On March 14, 2013, the plaintiff filed an amended complaint, which, in addition to the allegations in the initial complaint, contains allegations that the Knight Board of Directors breached its fiduciary duties by providing stockholders with allegedly deficient disclosures about the proposed transaction in the Preliminary Proxy. On March 21, 2013, the plaintiff moved by order to show cause for expedited discovery in support of his claims. The New York court issued an order on March 25, 2013, setting a hearing on the plaintiff's motion for April 4, 2013. On March 28, 2013, the parties in the New York action reached an agreement with respect to the matters raised in the plaintiff's motion and other aspects of the action, and as a result, on March 29, 2013, the plaintiff withdrew his motion for expedited discovery. On April 9, 2013, the New York court granted permission for the plaintiff to withdraw his motion.

On June 10, 2013, the defendants entered into a memorandum of understanding with the plaintiffs in the Delaware shareholder actions and New York shareholder action regarding the settlement of those actions. In connection with the settlement, Knight and GETCO agreed to make supplemental disclosures to the joint proxy statement/prospectus filed with the SEC on May 28, 2013 (the “Proxy Statement”). In addition, Knight and GETCO agreed to make certain revisions to Knight's risk committee charter, as well as to KCG's risk committee charter.

The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including court approval following notice to Knight's former stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Delaware Court of Chancery will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims that were brought or could have been brought in the Delaware, New York, and New Jersey shareholder actions, including claims challenging any aspect of the Mergers, the Merger Agreement, or any disclosure made in connection therewith, pursuant to terms that will be disclosed to Knight's former stockholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs' counsel will file a petition in the Delaware Court of Chancery for an award of attorneys' fees and expenses to be paid by KCG. There can be no assurance that the parties will enter into a stipulation of settlement, or that the court will approve any proposed settlement. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

The settlement is not, and should not be construed as, an admission of wrongdoing or liability by any of the defendants. The defendants continue to believe that the shareholder actions challenging the Mergers are without merit and vigorously deny the allegations that Knight's directors breached their fiduciary duties. Likewise, defendants do not believe that any disclosures regarding the Mergers are required under applicable laws other than that which have already been provided in the Proxy Statement. Nonetheless, the defendants entered into the memorandum of understanding to avoid the risk of the putative stockholder class action delaying or adversely affecting the Mergers, to minimize the substantial expense, burden, distraction and inconvenience of continued litigation and to fully and finally resolve the claims in the shareholder actions.

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Regulatory

On or about August 9, 2012, the SEC began an examination of KCA's compliance with SEC Rule 15c3-5 (the “Market Access Rule”) and other rules and regulations as they relate to the August 1, 2012 technology issue. The SEC issued a formal order of investigation concerning Knight and KCA on August 29, 2012.

On October 16, 2013 , KCA reached a settlement with the SEC. KCA, without admitting or denying the findings, consented to the issuance of an administrative order relating to controls and procedures required by Section 15(c)(3) of the Securities Exchange Act of 1934 and SEC Rule 15c3-5 (the “Market Access Rule”), and Rules 200(g) and 203(b) of Regulation SHO (the “Short Sale Rules”). Under the terms of the settlement, KCA was censured, paid a civil penalty in the sum of $12.0 million and is required to cease and desist from committing future violations of the Market Access Rule and the Short Sale Rules. KCA was also required to retain an independent consultant to conduct a comprehensive review of KCA’s compliance with the Market Access Rule. The settlement resolved the SEC’s investigation relating to the August 1, 2012 technology issue. The full amount of this settlement had been accrued on Knight's July 1, 2013 balance sheet acquired by the Company.

Other Legal and Regulatory Matters

We own subsidiaries including regulated entities that are subject to extensive oversight under federal, state and applicable international laws as well as SRO rules. Changes in market structure and the need to remain competitive require constant changes to our systems and order handling procedures. We make these changes while continuously endeavoring to comply with many complex laws and rules. Compliance, surveillance and trading issues common in the securities industry are monitored by, reported to, and/or reviewed in the ordinary course of business by our regulators in the U.S. and abroad. As a major order flow execution destination, we are named from time to time in, or are asked to respond to a number of regulatory matters brought by U.S. regulators, foreign regulators and SROs that arise from our business activities. We are currently the subject of various regulatory reviews and investigations. In some instances, these matters may rise to a disciplinary action and/or civil or administrative action.

In the second quarter of 2012, Knight recorded pre-tax trading losses of $35.4 million related to the Facebook IPO. On August 1, 2012 Nasdaq’s proposed voluntary accommodation program (the “Accommodation Program”) was published in the Federal Register by the SEC. The Accommodation Program creates a fund for voluntary accommodations for qualifying Nasdaq members disadvantaged by problems that arose during the Facebook IPO. Under the Accommodation Program as proposed by Nasdaq, Knight would recover a portion of its pre-tax trading losses. The Accommodation Program was approved by the SEC on March 22, 2013 which would allow Nasdaq to compensate market participants for certain claims related to system difficulties in connection with the Facebook IPO in an amount not to exceed $62.0 million . On April 2, 2013, Knight submitted an accommodation claim to Nasdaq. On October 25, 2013, Nasdaq provided the Company with notice that it had completed its review of the Company’s accommodation claim. On December 31, 2013, the Company received payment from Nasdaq totaling approximately $12.0 million comprising approximately $10.5 million to the Company and approximately $1.5 million which was rebated to customers in February 2014.

Lease and Contract Obligations

Capital Leases

During 2012, the Company entered into capitalized lease obligations related to certain computer equipment. These obligations represent drawdowns under a revolving secured lending facility with a single lender. At December 31, 2013 , the obligations have a weighted-average interest rate of 3.85% per annum and are on varying 3 -year terms. The carrying amounts of the capital leases approximate fair value. The future minimum payments including interest under the capitalized leases at December 31, 2013 consist of (in thousands):



	Minimum Payments
2014	8,222
2015	2,072
Total	$	10,294

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The total interest expense related to capital leases for the years ended December 31, 2013, 2012 and 2011 included in the Consolidated Statements Operations is as follows (in thousands):



	For the year ended December 31,
	2013		2012		2011
Interest expense - Capital leases	$	700	$	1,376	$	982

Operating Leases

The Company leases office space under noncancelable operating leases. Certain office leases contain fixed dollar-based escalation clauses. Rental expense from continuing operations under the office leases was $16.0 million and $9.0 million for the year ended December 31, 2013 and 2012 , respectively, and is included in Occupancy and equipment rentals on the Consolidated Statements of Operations.

The Company leases certain computer and other equipment under noncancelable operating leases. As of December 31, 2013 , future minimum rental commitments under all noncancelable office, computer and equipment leases (“Gross Lease Obligations”), and Sublease Income were as follows (in thousands):



	Gross Lease Obligations		Sublease Income		Net Lease Obligations
Year ending December 31, 2014	$	29,689	$	4,315	$	25,374
Year ending December 31, 2015	27,915		4,914		23,001
Year ending December 31, 2016	27,571		4,850		22,721
Year ending December 31, 2017	27,036		4,426		22,610
Year ending December 31, 2018	26,492		2,720		23,772
Thereafter through December 31, 2027	75,552		12,521		63,031
Total	$	214,255	$	33,746	$	180,509

Contract Obligations

During the normal course of business, the Company collateralizes certain leases or other contractual obligations through letters of credit or segregated funds held in escrow accounts. At December 31, 2013 , the Company had provided a letter of credit for $1.0 million , collateralized by U.S. Treasury Bills, as a guarantee for one of the Company’s lease obligations. In the ordinary course of business, KCG also has provided, and may provide in the future, unsecured guarantees with respect to the payment obligations of certain of its subsidiaries under trading, repurchase, financing and stock loan arrangements, as well as under certain leases.

22. Net capital requirements

The Company's U.S. registered broker dealers are subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital. In 2013, the Company's U.S. registered broker dealers were in compliance with its capital adequacy requirements.

The following table sets forth the net capital levels and requirements for the Company’s U.S. registered broker dealer subsidiaries at December 31, 2013 as filed in their respective regulatory filings (in thousands):



Entity	Net Capital		Net Capital Requirement		Excess Net Capital
Knight Capital Americas LLC	$	396,655	$	22,300	$	374,355
OCTEG, LLC	98,737		1,000		97,737
GETCO Execution Services, LLC	11,433		250		11,183

As of January 1, 2014, OCTEG was merged with and into KCA and KCA was renamed KCG Americas LLC. At the end of 2013, GETCO Execution Services, LLC submitted its application to withdraw its membership as a U.S. registered broker dealer.

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The Company’s foreign registered broker dealers are subject to certain financial resource requirements of either the FCA or the SFC. The following table sets forth the financial resource requirement for the following significant foreign regulated broker dealers at December 31, 2013 (in thousands):



Entity	Financial Resources		Resource Requirement		Excess Financial Resources
GETCO Europe Limited	$	157,254	$	80,900	$	76,354
KCG Europe Limited	97,892		65,967		31,927

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

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

The Company, through its FCM, also provides execution and clearing services in futures and options on futures contracts to facilitate customer transactions on major U.S. and European futures and options exchanges. Customer activities may expose the Company to off-balance sheet risk in the event the FCM customer is unable to fulfill its contracted obligation as the Company guarantees the performance of its clients to the respective clearing houses or other brokers. In accordance with regulatory requirements and market practice, the Company requires its customers to meet, at a minimum, the margin requirements established by each of the exchanges at which contracts are traded. Margin is a good faith deposit from the customer that reduces risk to the Company of failure by the customer to fulfill obligations under these contracts. The Company establishes customer credit limits and monitors required margin levels on a daily basis and, pursuant to such guidelines, require customers to deposit additional collateral, or to reduce positions, when necessary. Further, the Company seeks to reduce credit risk by entering into netting agreements with customers, which permit receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits and collateral held at December 31, 2013 were adequate to minimize the risk of material loss that could be created by positions held at that time.

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

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

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

24. Business Segments

As of December 31, 2013, the Company's operating segments comprised the following: (i) Market Making; (ii) Global Execution Services; and (iii) Corporate and Other.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, options, foreign exchange, fixed income and futures to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals to transactions that are executed within this segment, however, the Company will commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment primarily consists of self-directed trading in global equities through a suite of algorithms or via an execution management system; institutional high touch sales traders executing program, block and riskless principal trades in global equities and ETFs; an institutional spot foreign exchange ECN; a fixed income ECN that also offers trading applications; an ATS for global equities; and futures execution and clearing through a FCM.

The Corporate and Other segment prinicipally invests in strategic financial services-oriented opportunities, allocates, deploys and monitors all capital, and maintains corporate overhead expenses and all other income and expenses that are not attributable to the other segments, including the gain recognized on Knight Common Stock. The Corporate and Other segment also contains functions that support the Company’s other segments such as self-clearing services, including stock lending activities.

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



	Market Making		Global Execution Services			Corporate and Other			Consolidated Total
For the year ended December 31, 2013:
Revenues	$	688,197	$	197,766		$	134,208		$	1,020,171
Pre-tax earnings	103,559		(25,739		)	(60,007		)	17,813
Total assets	3,939,965		1,106,448			1,944,802			6,991,215
For the year ended December 31, 2012:
Revenues	$	495,427	$	36,211		$	19,596		$	551,234
Pre-tax earnings	34,887		(7,330		)	(1,130		)	26,427
Total assets	1,408,516		33,623			245,397			1,687,536
For the year ended December 31, 2011:
Revenues	$	862,760	$	27,599		$	25,089		$	915,448
Pre-tax earnings	203,886		(15,406		)	5,061			193,541
Total assets	1,191,724		19,928			90,703			1,302,355

The Company operates in the U.S. and internationally, primarily in Europe and Asia. The following table presents Revenues by geographic area.



	U.S.		International		Consolidated Total
For the year ended December 31, 2013:
Revenues	$	827,245	$	192,926	$	1,020,171
For the year ended December 31, 2012:
Revenues	$	340,117	$	211,117	$	551,234
For the year ended December 31, 2011:
Revenues	$	489,514	$	425,934	$	915,448

25. Subsequent Events

Principal repayment under Credit Agreement

On January 22, 2014, the Company made a $100.0 million principal repayment under the Credit Agreement and will record an additional $4.2 million in writedown of capitalized debt issuance cost in the first quarter of 2014. Including this payment, the Company has completed $400.0 million in principal repayments since entering into the Credit Agreement on July 1, 2013, fully satisfying the amortization payment of $235.0 million due on July 1, 2014 leaving a remaining outstanding balance of $135.0 million .

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Merger of BATS and Direct Edge

In January 2014, BATS Global Markets Inc. and Direct Edge Holdings LLC announced plans to pay certain dividends to shareholders contingent on the completion of their pending merger. As a shareholder in both BATS and Direct Edge, KCG received approximately $41.7 million from the aggregate distributions paid at the close of the merger, which was closed as of January 31, 2014. The Company is currently assessing the treatment of these distributions for financial reporting purposes.

26. Condensed Financial Statements of KCG Holdings, Inc. (parent only)

Presented below are the Condensed Statements of Financial Condition, Operations and Cash Flows for the Company on an unconsolidated basis.

Statements of Financial Condition

KCG Holdings, Inc. (parent only)



	December 31,
	2013		2012
	(in thousands)
Assets
Cash and cash equivalents	$	253,017	$	114,511
Financial instruments owned, at fair value	—		2
Receivable from subsidiaries	60,460		216,266
Investments in subsidiaries	1,356,412		773,818
Goodwill and intangible assets, less accumulated amortization	—		8,132
Income taxes receivable	90		—
Deferred tax asset	144,109		—
Subordinated loans to subsidiaries	250,000		—
Other assets	21,182		1,039
Total assets	$	2,085,270	$	1,113,768
Liabilities & equity
Liabilities
Payable to subsidiaries	25,705		47,998
Accrued expenses and other liabilities	12,313		84,959
Debt	540,000		15,000
Total liabilities	578,018		147,957
Redeemable preferred member's equity	—		311,139
Total equity	1,507,252		654,672
Total liabilities & equity	$	2,085,270	$	1,113,768

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Statements of Operations

KCG Holdings, Inc. (parent only)



	For the year ended December 31,
	2013			2012			2011
	(in thousands)
Revenues
Investment income and other, net	$	3,717		$	5,981		$	2,001
Total revenues	3,717			5,981			2,001
Expenses
Employee compensation and benefits	31,970			(12,251		)	7,023
Interest	28,476			1,195			256
Depreciation and amortization	698			1,395			698
Professional fees	30,488			4,997			1,484
Bank fees	9,268			336			286
Other	20,561			1,157			852
Total expenses	121,461			(3,171		)	10,599
(Loss) income before income taxes and equity in earnings of subsidiaries	(117,744		)	9,152			(8,598		)
Income tax benefit	(120,761		)	—			—
Income (loss) before equity in earnings of subsidiaries	3,017			9,152			(8,598		)
Equity in earnings of subsidiaries	117,071			6,999			171,298
Net income	$	120,088		$	16,151		$	162,700

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Statements of Cash Flows

KCG Holdings, Inc. (parent only)



	For the year ended December 31,
	2013			2012			2011
	(In thousands)
Cash flows from operating activities
Net income	$	120,088		$	16,151		$	162,700
Adjustments to reconcile net income to net cash used in operating activities
Equity in earnings of subsidiaries	(117,071		)	(6,999		)	(171,298		)
Writedown and amortization of debt issuance costs	16,931			52			—
Amortization of intangibles	698			1,395			698
Decrease (increase) in operating assets
Subordinated loan receivable	(250,000		)	—			—
Receivable from subsidiaries	(67,523		)	(97,375		)	(89,814		)
Deferred tax asset	(144,109		)	—			—
Income taxes receivable	(90		)	—			—
Other assets	(15,351		)	31,031			48,653
(Decrease) increase in operating liabilities
Payable to subsidiaries	(2,024		)	11,756			33,932
Accrued expenses and other liabilities	59,921			5,106			718
Net cash used in operating activities	(398,530		)	(38,883		)	(14,411		)
Cash flows from investing activities
Cash acquired upon acquisition of Knight Capital Group, Inc.	509,133			—			—
Cash received from sale of Urban Financial of America, LLC	85,406			—			—
Acquisition of Automat Limited	—			—			(10,975		)
Dividends received from subsidiaries	646,425			161,606			127,530
Capital contributions to subsidiaries	(238,909		)	(70,794		)	(84,928		)
Net cash provided by investing activities	1,002,055			90,812			31,627
Cash flows from financing activities
Proceeds from issuance of Credit Agreement	535,000			—			—
Partial repayment of Credit Agreement	(300,000		)	—			—
Proceeds from issuance of Senior Secured Notes	305,000			—			—
Proceeds from issuance of notes payable	—			—			15,000
Repayment of notes payable	(15,000		)	—			—
Payment of debt issuance costs	(34,952		)	—			—
Issuance of equity to General Atlantic	55,000			—			—
Payment to former Knight Capital Group, Inc. stockholders	(720,000		)	—			—
Repayment of Knight Convertible Notes	(257,741		)	—			—
Funding of collateral account for Knight Convertible Notes	(117,259		)	—			—
Payment out of collateral account for Knight Convertible Notes	117,259			—			—
Proceeds from stock issuance	—			12,320			41,365
Member distributions	(21,002		)	(62,234		)	(124,791		)
Cost of common stock repurchased	(11,324		)	—			—
Net cash (used in) provided by financing activities	(465,019		)	(49,914		)	(68,426		)
Increase in cash and cash equivalents	138,506			2,015			(51,210		)
Cash and cash equivalents at beginning of period	114,511			112,496			163,706
Cash and cash equivalents at end of period	$	253,017		$	114,511		$	112,496
Supplemental disclosure of cash flow information:							—
Cash paid for interest	$	26,239		$	1,116		$	92
Cash paid for income taxes	$	365		$	—		$	—

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The condensed financial statements of KCG Holdings, Inc. (parent only; the “Parent Company”) should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. As noted in Footnote 1 "Organization and Description of Business", the Mergers were treated as a purchase of Knight by GETCO for accounting and financial reporting purposes.

The Statements of Operations and Cash Flows included in this footnote for the year ended December 31, 2013 include the combined financial results and cash flows for GETCO Holding Company, LLC for the six month period January 1, 2013 to June 30, 2013 and for KCG Holdings, Inc. for the six month period July 1, 2013 to December 31, 2013. These combined Statements of Operations and Cash Flows were presented for comparability to the prior years, 2012 and 2011. The Statement of Financial Condition at December 31, 2013 represents the financial condition of the Parent Company. The Statement of Financial Condition at December 31, 2012 represents the financial condition of GETCO Holding Company, LLC.

PART IV



Item 15.	Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

Consolidated Financial Statements and Financial Statement Schedules. See “Part II Item 8, Financial Statements and Supplementary Data”



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

23.1*		Consent of Independent Registered Public Accounting Firm.

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

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

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

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

99.1*		Conformed signature page to the Annual Report on Form 10-K filed by KCG Holdings, Inc. on March 3, 2014

101**		The following financial statements from KCG Holdings, Inc's Annual Report on Form 10-K/A for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012, (iii) Consolidated Statements of Financial Condition at December 31, 2013 and December 31, 2012, (iv) Consolidated Statements of Changes in Equity for the year ended December 31, 2013, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 and (vi) the Notes to Consolidated Financial Statements.

________________________________________



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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 4th day of March 2014.