itg_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the fiscal period ended June 30, 2018

 

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

 

for the transition period from          to            

 

Commission File Number 001-32722

 

INVESTMENT TECHNOLOGY GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

95 - 2848406

(State or Other Jurisdiction of Incorporation or
Organization)

(I.R.S. Employer Identification No.)

 

 

165 Broadway, New York, New York

10006

(Address of Principal Executive Offices)

(Zip Code)

 

(212) 588 - 4000

(Registrant’s Telephone Number, Including Area Code)

 

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 ☒  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 ☒  No ☐

 

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

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

 

At July 10, 2018, the Registrant had 32,989,116 shares of common stock, $0.01 par value, outstanding.

 

 

 

 


 

Table of Contents

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I. — Financial Information

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition June 30, 2018 (unaudited) and December 31, 2017

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Three and Six Months Ended June 30, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited) Three and Six Months Ended June 30, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Six Months Ended June 30, 2018

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2018 and 2017

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4. 

Controls and Procedures

44

 

 

 

 

PART II. — Other Information

 

 

 

 

Item 1. 

Legal Proceedings

45

 

 

 

Item 1A. 

Risk Factors

45

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3. 

Defaults Upon Senior Securities

46

 

 

 

Item 4. 

Mine Safety Disclosures

46

 

 

 

Item 5. 

Other Information

46

 

 

 

Item 6. 

Exhibits

47

 

 

 

 

Signature

48

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Table of Contents

 

Investment Technology Group, ITG, the ITG logo, AlterNet, ITG Net, POSIT, POSIT Alert, RFQ‑hub and Triton are registered trademarks or service marks of the Investment Technology Group, Inc. companies. Single Ticket Clearing and Algo Wheel are trademarks or service marks of the Investment Technology Group, Inc. companies.

 

PRELIMINARY NOTES

 

When we use the terms “ITG,” the “Company,” “we,” “us” and “our,” we mean Investment Technology Group, Inc. and its consolidated subsidiaries.

 

FORWARD-LOOKING STATEMENTS

In addition to the historical information contained throughout this Quarterly Report on Form 10‑Q, there are forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements regarding our expectations related to our future financial position, results of operations, revenues, cash flows, dividends, stock repurchases, financing plans, business and product strategies, competitive positions, as well as the plans and objectives of management for future operations, and all expectations concerning securities markets, client trading and economic trends are forward‑looking statements. In some cases, you can identify these statements by forward‑looking words such as “may,” “might,” “will,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “trend,” “potential” or “continue” and the negative of these terms and other comparable terminology.

Although we believe our expectations reflected in such forward‑looking statements are based on reasonable assumptions and beliefs, and on information currently available to our management, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward‑looking statements herein include, among others, general economic, business, credit, political and financial market conditions, both internationally and domestically, financial market volatility, fluctuations in market trading volumes, effects of inflation, adverse changes or volatility in interest rates, fluctuations in foreign exchange rates, evolving industry regulations and increased regulatory scrutiny, the outcome of contingencies such as legal proceedings or governmental or regulatory investigations and customer or shareholder reaction to, or further proceedings or sanctions based on, such matters, the volatility of our stock price, changes in tax policy or accounting rules, the ability of the Company to utilize its loss and tax credit carryforwards, the actions of both current and potential new competitors, changes in commission pricing, rapid changes in technology, errors or malfunctions in our systems or technology, operational risks related to misconduct or errors by our employees or entities with which we do business, cash flows into or redemptions from equity mutual funds, ability to meet the capital and liquidity requirements of our securities businesses and the related clearing of our customers’ trades, customer trading patterns, the success of our products and service offerings, our ability to continue to innovate and meet the demands of our customers for new or enhanced products, our ability to protect our intellectual property, our ability to execute on strategic initiatives or transactions, our ability to attract and retain talented employees, and our ability to pay dividends or repurchase our common stock in the future.

Certain of these factors, and other factors, are more fully discussed in Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A, Risk Factors in our Quarterly Reports on Form 10-Q, which you are encouraged to read.  Our 2017 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are available through our website at http://investor.itg.com under “SEC Filings.”

We disclaim any duty to update any of these forward‑looking statements after the filing of this report to conform our prior statements to actual results or revised expectations and we do not intend to do so. These forward‑looking statements should not be relied upon as representing our views as of any date subsequent to the filing of this report.

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Table of Contents

PART I. — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

    

 

Cash and cash equivalents

 

$

236,446

 

$

287,452

 

Cash restricted or segregated under regulations and other

 

 

18,263

 

 

18,599

 

Deposits with clearing organizations

 

 

80,373

 

 

57,388

 

Securities owned, at fair value

 

 

939

 

 

1,559

 

Receivables from brokers, dealers and clearing organizations

 

 

259,982

 

 

193,907

 

Receivables from customers

 

 

164,583

 

 

74,695

 

Premises and equipment, net

 

 

52,091

 

 

53,960

 

Capitalized software, net

 

 

41,462

 

 

41,259

 

Goodwill

 

 

10,788

 

 

11,054

 

Intangibles, net

 

 

13,481

 

 

14,040

 

Income taxes receivable

 

 

128

 

 

3,917

 

Deferred tax assets

 

 

4,389

 

 

4,902

 

Other assets

 

 

44,009

 

 

22,124

 

Total assets

 

$

926,934

 

$

784,856

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

198,193

 

$

166,495

 

Short-term bank loans

 

 

72,997

 

 

101,422

 

Payables to brokers, dealers and clearing organizations

 

 

178,886

 

 

119,278

 

Payables to customers

 

 

113,340

 

 

23,568

 

Securities sold, not yet purchased, at fair value

 

 

 —

 

 

 1

 

Income taxes payable

 

 

4,287

 

 

6,003

 

Deferred tax liabilities

 

 

1,768

 

 

1,750

 

Term debt

 

 

2,329

 

 

3,104

 

Total liabilities

 

 

571,800

 

 

421,621

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 52,748,475 and 52,639,823 shares issued at June 30, 2018 and December 31, 2017, respectively

 

 

527

 

 

526

 

Additional paid-in capital

 

 

247,897

 

 

250,216

 

Retained earnings

 

 

483,639

 

 

486,957

 

Common stock held in treasury, at cost; 19,757,705 and 20,038,809 shares at June 30, 2018 and December 31, 2017, respectively

 

 

(349,906)

 

 

(353,067)

 

Accumulated other comprehensive loss (net of tax)

 

 

(27,023)

 

 

(21,397)

 

Total stockholders’ equity

 

 

355,134

 

 

363,235

 

Total liabilities and stockholders’ equity

 

$

926,934

 

$

784,856

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Commissions and fees

 

$

106,451

 

$

100,564

 

$

216,020

 

$

200,444

 

Recurring

 

 

20,082

 

 

18,933

 

 

39,644

 

 

37,883

 

Other

 

 

1,944

 

 

2,084

 

 

4,297

 

 

4,089

 

Total revenues

 

 

128,477

 

 

121,581

 

 

259,961

 

 

242,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

45,099

 

 

45,994

 

 

90,886

 

 

92,678

 

Transaction processing

 

 

25,969

 

 

25,482

 

 

53,049

 

 

50,338

 

Occupancy and equipment

 

 

15,055

 

 

14,680

 

 

29,830

 

 

30,302

 

Telecommunications and data processing services

 

 

12,988

 

 

12,129

 

 

25,591

 

 

24,156

 

Restructuring charges

 

 

 —

 

 

 —

 

 

7,165

 

 

 —

 

Other general and administrative

 

 

29,132

 

 

17,699

 

 

46,823

 

 

35,014

 

Interest expense

 

 

488

 

 

510

 

 

974

 

 

1,030

 

Total expenses

 

 

128,731

 

 

116,494

 

 

254,318

 

 

233,518

 

(Loss) income before income tax expense

 

 

(254)

 

 

5,087

 

 

5,643

 

 

8,898

 

Income tax expense (benefit)

 

 

2,781

 

 

444

 

 

4,301

 

 

(1,047)

 

Net (loss) income

 

$

(3,035)

 

$

4,643

 

$

1,342

 

$

9,945

 

(Loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09)

 

$

0.14

 

$

0.04

 

$

0.30

 

Diluted

 

$

(0.09)

 

$

0.14

 

$

0.04

 

$

0.29

 

Basic weighted average number of common shares outstanding

 

 

33,035

 

 

33,125

 

 

32,963

 

 

33,037

 

Diluted weighted average number of common shares outstanding

 

 

33,035

 

 

34,222

 

 

33,986

 

 

34,180

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net (loss) income

 

$

(3,035)

 

$

4,643

 

$

1,342

 

$

9,945

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(6,695)

 

 

4,730

 

 

(5,626)

 

 

6,756

 

Other comprehensive (loss) income

 

 

(6,695)

 

 

4,730

 

 

(5,626)

 

 

6,756

 

Comprehensive (loss) income

 

$

(9,730)

 

$

9,373

 

$

(4,284)

 

$

16,701

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2018

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Common

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Stock

 

Other

 

Total

 

 

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Held in

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Treasury

 

Income/(Loss)

 

Equity

 

Balance at January 1, 2018

 

$

 —

 

$

526

 

$

250,216

 

$

486,957

 

$

(353,067)

 

$

(21,397)

 

$

363,235

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

1,342

 

 

 —

 

 

 —

 

 

1,342

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,626)

 

 

(5,626)

 

Issuance of common stock in connection with restricted stock unit awards (1,048,639 shares)

 

 

 —

 

 

 1

 

 

(17,005)

 

 

 —

 

 

17,214

 

 

 —

 

 

210

 

Issuance of common stock for the employee stock purchase plan (30,769 shares)

 

 

 —

 

 

 —

 

 

523

 

 

 —

 

 

 —

 

 

 —

 

 

523

 

Shares withheld for net settlements of share-based awards (409,431 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,366)

 

 

 —

 

 

(8,366)

 

Purchase of common stock for treasury (282,980 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,736)

 

 

 —

 

 

(5,736)

 

Dividends declared on common stock

 

 

 —

 

 

 —

 

 

 9

 

 

(4,614)

 

 

49

 

 

 —

 

 

(4,556)

 

Share-based compensation

 

 

 —

 

 

 —

 

 

14,154

 

 

 —

 

 

 —

 

 

 —

 

 

14,154

 

Cumulative effect of accounting change

 

 

 —

 

 

 —

 

 

 —

 

 

(46)

 

 

 

 

 

 —

 

 

(46)

 

Balance at June 30, 2018

 

$

 —

 

$

527

 

$

247,897

 

$

483,639

 

$

(349,906)

 

$

(27,023)

 

$

355,134

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2018

 

2017

 

Cash Flows from Operating Activities:

    

 

    

    

 

    

 

Net income

 

$

1,342

 

$

9,945

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,220

 

 

22,437

 

Deferred income tax expense (benefit)

 

 

729

 

 

(7,407)

 

Provision for doubtful accounts

 

 

192

 

 

155

 

Non-cash share-based compensation

 

 

14,154

 

 

10,818

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Deposits with clearing organizations

 

 

(24,118)

 

 

(9,673)

 

Securities owned, at fair value

 

 

620

 

 

634

 

Receivables from brokers, dealers and clearing organizations

 

 

(74,048)

 

 

(83,582)

 

Receivables from customers

 

 

(93,681)

 

 

(117,877)

 

Accounts payable and accrued expenses

 

 

33,964

 

 

(29,254)

 

Payables to brokers, dealers and clearing organizations

 

 

63,422

 

 

90,673

 

Payables to customers

 

 

92,600

 

 

91,320

 

Securities sold, not yet purchased, at fair value

 

 

(1)

 

 

(249)

 

Income taxes receivable/payable

 

 

2,074

 

 

1,314

 

Other, net

 

 

(20,011)

 

 

290

 

Net cash provided by (used in) operating activities

 

 

19,458

 

 

(20,456)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Investment in venture

 

 

(612)

 

 

 —

 

Capital purchases

 

 

(7,534)

 

 

(5,657)

 

Capitalization of software development costs

 

 

(13,380)

 

 

(14,357)

 

Net cash used in investing activities

 

 

(21,526)

 

 

(20,014)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Repayments of long term debt

 

 

(775)

 

 

(3,317)

 

Proceeds from (repayments of) borrowing under short-term bank loans

 

 

(26,623)

 

 

13,359

 

Debt issuance costs

 

 

(751)

 

 

(762)

 

Common stock issued

 

 

733

 

 

745

 

Common stock repurchased

 

 

(5,736)

 

 

(4,983)

 

Dividends paid

 

 

(4,581)

 

 

(4,595)

 

Shares withheld for net settlements of share-based awards

 

 

(8,366)

 

 

(9,882)

 

Net cash used in financing activities

 

 

(46,099)

 

 

(9,435)

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(3,175)

 

 

520

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(51,342)

 

 

(49,385)

 

Cash, cash equivalents and restricted cash—beginning of period

 

 

306,051

 

 

318,330

 

Cash, cash equivalents and restricted cash—end of period

 

$

254,709

 

$

268,945

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

2,775

 

$

2,326

 

Income taxes paid, net

 

$

1,496

 

$

4,859

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Investment in venture

 

$

1,393

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Basis of Presentation

 

Investment Technology Group, Inc. (the “Company” or “ITG”) was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc., AlterNet Securities, Inc. (“AlterNet”) and ITG Derivatives LLC (through February 16, 2018) (“ITG Derivatives”), institutional broker-dealers in the United States (“U.S.”), (2) ITG Canada Corp., an institutional broker-dealer in Canada, (3) Investment Technology Group Limited, an institutional broker-dealer in Europe, (4) ITG Australia Limited, an institutional broker-dealer in Australia, (5) ITG Hong Kong Limited, an institutional broker-dealer in Hong Kong, (6) ITG Software Solutions, Inc., the Company’s intangible property, software development and maintenance subsidiary in the U.S., and (7) ITG Solutions Network, Inc., a holding company for ITG Analytics, Inc., a provider of pre- and post-trade analysis, fair value and trade optimization services, and ITG Platforms Inc., a provider of workflow technology solutions and network connectivity services for the financial community.

 

ITG is a global financial technology company that helps leading brokers and asset managers improve returns for investors around the world. ITG empowers traders to reduce the end-to-end cost of implementing investments via liquidity, execution, analytics and workflow technology solutions. ITG has offices in Asia Pacific, Europe and North America and offers execution services in more than 50 countries.

 

The Company’s business is organized into four reportable operating segments: U.S. Operations, Canadian Operations, European Operations and Asia Pacific Operations (see Note 16, Segment Reporting).

 

The four operating segments offer a wide range of solutions for asset managers and broker‑dealers in the areas of execution services, workflow technology and analytics. These offerings include trade execution services and solutions for portfolio management, as well as pre‑trade analytics and post‑trade analytics and processing.

Regional segment results exclude the impact of Corporate activity, which is presented separately and includes investment income from treasury activity, certain non-operating revenues and other gains as well as costs not associated with operating the businesses within the Company’s regional segments.  These costs include, among others, (a) the costs of being a public company, such as certain staff costs, a portion of external audit fees, and reporting, filing and listing costs, (b) intangible asset amortization, (c) interest expense, (d) professional fees associated with the Company's global transfer pricing structure, (e) foreign exchange gains or losses and (f) certain non-operating expenses.

The condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for the fair presentation of the financial statements.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with Securities and Exchange Commission (“SEC”) rules and regulations; however, management believes that the disclosures herein are adequate to make the information presented not misleading. This report should be read in conjunction with the audited financial statements and the notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Recently Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014‑09, Revenue from Contracts with Customers. This standard created Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”), providing companies with a single five step revenue recognition model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry‑specific revenue guidance. On January 1, 2018, the Company adopted

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ASC 606, using the modified retrospective transition method applied to all contracts as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. See Note 3, Revenue from Contracts with Customers, for additional information.

 

In May 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.  The amendments in this ASU clarify which changes to the terms or conditions of a share-based payment award must be accounted for as modifications.  The new guidance allows entities to make non-substantive changes to awards without accounting for them as modifications, which results in fewer changes to the terms of an award being accounted for as modifications and reduces diversity in practice when applying modification accounting.  ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  This new guidance was adopted on January 1, 2018 and did not have a material effect on the Company’s financial statements.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016‑18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. This new guidance was adopted on January 1, 2018 and did not have a material effect on the Company’s financial statements.

 

(2) Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, various methods are used including market, income and cost approaches. Based on these approaches, certain assumptions that market participants would use in pricing the asset or liability are used, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market‑corroborated, or generally unobservable firm inputs. Valuation techniques that are used maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, fair value measured financial instruments are categorized according to the fair value hierarchy prescribed by ASC 820, Fair Value Measurements and Disclosures. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

*

Level 1: Fair value measurements using unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities.

*

Level 2: Fair value measurements using correlation with (directly or indirectly) observable market‑based inputs, unobservable inputs that are corroborated by market data, or quoted prices in markets that are not active.

*

Level 3: Fair value measurements using inputs that are significant and not readily observable in the market.

Level 1 consists of financial instruments whose value is based on quoted market prices such as exchange‑traded mutual funds and listed equities.

Level 2 includes financial instruments that are valued based upon observable market‑based inputs.

Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable.

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Fair value measurements for those items measured on a recurring basis are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

 1

 

$

 1

 

$

 —

 

$

 —

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

 1

 

 

 1

 

 

 —

 

 

 —

 

Mutual funds

 

 

938

 

 

938

 

 

 —

 

 

 —

 

Total

 

$

940

 

$

940

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

$

78

 

$

78

 

$

 —

 

$

 —

 

Mutual funds

 

 

1,481

 

 

1,481

 

 

 —

 

 

 —

 

Total

 

$

1,559

 

$

1,559

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

 1

 

 

 1

 

 

 —

 

 

 —

 

Total

 

$

 1

 

$

 1

 

$

 —

 

$

 —

 

 

Cash and cash equivalents other than bank deposits are measured at fair value and primarily include money market mutual funds.

Securities owned, at fair value and securities sold, not yet purchased, at fair value include corporate stocks, equity index mutual funds and bond mutual funds, all of which are exchange traded.

Certain of the Company’s assets and liabilities are carried at contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers, clearing organizations and customers. These receivables and payables to brokers, dealers, clearing organizations and customers are short-term in nature and, following June 30, 2018, substantially all have settled at the contracted amounts.

 

The Company believes the carrying amounts of its term-debt obligations at June 30, 2018 and December 31, 2017 approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates.

 

 

(3) Revenue from Contracts with Customers

 

Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. The following is a description of the Company’s revenue recognition policies and balances as it relates to revenue from contracts with customers.

 

Revenue from contracts with customers was $127.0 million and $256.9 million for the three and six months ended June 30, 2018, respectively. The majority of the Company’s revenues fall under the scope of ASC 606, with the exception of investment and dividend income, gains and losses on temporary securities positions assumed and other miscellaneous income, all of which are presented within the other revenue line item on the condensed consolidated statements of operations. The tables within Note 16, Segment Reporting, provide revenue disaggregated by reportable geographic operating segment and by product group.

 

Upon adoption, the Company recorded a net cumulative-effect decrease to opening retained earnings of approximately $50 thousand as of January 1, 2018, which is primarily related to:

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(i)

the deferral of commissions allocated to analytics products in bundled commission arrangements where the analytics services have not yet been transferred to the customer as of December 31, 2017, but whose commissions were appropriately recognized in the previous year under the superseded revenue recognition guidance; and

(ii)

the acceleration of revenue for certain product license fees associated with the licenses of software recognized at the point in time the customer is able to use and benefit from the license, instead of being appropriately recognized over the license period under the superseded revenue recognition guidance.

The net impacts to the condensed consolidated statements of operations of adopting ASC 606 for the three and six months ended June 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

Ended

June 30, 

 

Six Months

Ended

June 30, 

 

    

2018

 

2018

Net decrease in commissions and fees

 

$

(1,068)

 

$

(4,915)

Net increase in recurring revenues

 

 

442

 

 

868

Net decrease in total revenues

 

$

(626)

 

$

(4,047)

 

At June 30, 2018, the condensed consolidated statements of financial condition include an increase to receivables from customers of $1.4 million related to the acceleration of license fees and an increase to accounts payable and accrued expenses of $5.8 million related to the deferral of commissions in bundled commission arrangements.

The following provides detailed information on the Company’s material performance obligations and how revenue is recognized.

 

Execution Services

The Company earns commissions for providing equity trade execution services to customers, with each trade executed on the client’s behalf representing a separate performance obligation that is satisfied at a point in time. Commission rates are fixed and revenue is recognized on the trade date. These revenues are presented within the commissions and fees line item on the Company’s condensed consolidated statements of operations.

 

The Company also permits institutional customers to allocate a portion of their gross commissions to pay for research, commonly known as soft dollars. The customer controls the use of the soft dollars and directs payments to third party service providers on its behalf. All amounts allocated to soft dollar arrangements are netted against commission revenues.

 

Workflow Technology

 

Through its front-end workflow solutions and network capabilities, the Company provides order and trade execution management and order routing services.

 

The Company provides trade order routing from its execution management system (“EMS”) to its execution services offerings, with each trade order routed through the EMS representing a separate performance obligation that is satisfied at a point in time. A portion of the commissions earned on the trade is then allocated to Workflow Technology based on the stand-alone selling price paid by third-party brokers for order routing. The remaining commission is allocated to Execution Services using a residual allocation approach. Commissions earned are fixed and revenue is recognized on the trade date. Commissions are presented within the commissions and fees line item on the Company’s condensed consolidated statements of operations.

 

The Company participates in commission share arrangements, where trade orders are routed to third-party brokers from its EMS and its order management system (“OMS”). Commission share revenues from third-party brokers are generally fixed and revenue is recognized at a point in time on the trade date. Commission share revenues are presented within the commissions and fees line item on the Company’s condensed consolidated statements of operations.

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The Company provides OMS and related software products and connectivity services to customers and recognizes license fee revenues and monthly connectivity fees. License fee revenues, generated for the use of the Company’s OMS and other software products, is fixed and recognized at the point in time at which the customer is able to use and benefit from the license. Connectivity revenue is variable in nature, based on the number of live connections, and is recognized over time on a monthly basis using a time-based measure of progress. These revenues are presented within the recurring line item on the Company’s condensed consolidated statements of operations.

 

Analytics

 

The Company provides customers with analytics products and services, including trading and portfolio analytics tools.

 

The Company provides analytics products and services to customers and recognizes subscription fees, which are fixed for the contract term, based on when the products and services are delivered.  Analytics services can be delivered either over time (when customers are provided with distinct ongoing access to analytics data) or at a point in time (when reports are only delivered to the customer on a periodic basis). Over time performance obligations are recognized using a time-based measure of progress on a monthly basis, since the analytics products and services are continually provided to the client. Point in time performance obligations are recognized when the analytics reports are delivered to the client. These revenues are presented within the recurring line item on the Company’s condensed consolidated statements of operations.

 

Analytics products and services can also be paid for through variable bundled arrangements with trade execution services. Customers agree to pay for analytics products and services with commissions generated from trade execution services, and commissions are allocated to the analytics performance obligation(s) using:

(i)

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

(ii)

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

For these bundled commission arrangements, the allocated commissions to each analytics performance obligation are then recognized as revenue when the analytics product is delivered, either over time or at a point in time. These allocated commissions may be deferred if the allocated amount exceeds the amount recognizable based on delivery. Commissions are presented within the commissions and fees line item on the Company’s condensed consolidated statements of operations.

 

Remaining Performance Obligations and Revenue Recognized from Past Performance Obligations

 

The Company elected not to disclose information about remaining performance obligations pertaining to (i) contracts with an original expected length of one year or less or (ii) contracts with variable consideration that cannot be estimated, as permitted under the guidance.

 

The Company’s remaining unsatisfied performance obligations that do not meet the criteria above primarily relate to analytics products and services that have fixed subscription fees. As of June 30, 2018, the future revenue the Company expects to recognize for these performance obligations is not material.

 

For the three months ended June 30, 2018, the Company recognized revenue of $0.8 million related to performance obligations satisfied in previous periods.

 

 

Contract Balances

 

The timing of the Company’s revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.

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Receivables related to contracts with customers were $41.4 million and $38.2 million as of June 30, 2018 and December 31, 2017, respectively. The Company did not identify any contract assets.  There were no impairment losses on receivables as of June 30, 2018.

 

Deferred revenue primarily relates to deferred commissions allocated to analytics products and subscription fees billed in advance of satisfying the performance obligations. Deferred revenue related to contracts with customers was $12.6 million and $6.9 million as of June 30, 2018 and December 31, 2017, respectively. During the three and six months ended June 30, 2018, the Company recognized revenue of $7.4 million and $14.5 million, respectively, that was initially recorded as deferred revenue.

 

The Company has not identified any costs to obtain or fulfill associated with its contracts under ASC 606.

 

(4) Equity Investment

 

In February 2018, the Company established a venture with Option Technology Solutions LLC (“Optech”) to form Matrix Holding Group (“Matrix”), a derivatives execution and technology business.  Matrix offers derivatives trading technology and execution services to broker dealers, professional traders and select hedge funds.  Matrix has dedicated sales, client services, operations, and technology staff located in Chicago and New York.

 

The Company contributed the ITG Derivatives entity, including its broker-dealer license and professional trader client base with revenues of $5.3 million during the year ended December 31, 2017, along with certain derivatives-focused software and technology for an initial minority stake of approximately 20%. Optech contributed the management team, a retail-focused trading and analytics platform and capital. The board of directors of Matrix consists of two members appointed by Optech and one member appointed by the Company. Unanimous approval of the full board is required for all significant operating activities, including but not limited to: approval and amendment of annual business plans or operating budgets, establishing an incentive compensation plan, approving significant loans and expenditures, appointment of officers and entering into material agreements.    

 

The Company’s initial investment in Matrix was recorded at $2.0 million, representing the fair value of the net assets contributed. This investment included cash and restricted cash of $0.6 million and net non-cash assets of $1.4 million. No gain or loss was recognized upon the closing of this transaction as the book value of the contributed net assets approximated fair value. The Company’s interest in Matrix is accounted for in the condensed consolidated financial statements using the equity method.      

 

(5) Restructuring Charges

 

2018 Restructuring

 

In the first quarter of 2018, the Company implemented a restructuring plan to improve margins and enhance stockholder returns through the elimination of certain positions in the U.S.

 

Activity and liability balances recorded as part of the restructuring plan through June 30, 2018 are as follows (dollars in thousands):

 

 

 

 

 

 

    

Amount

Restructuring charges recognized

 

$

7,165

Cash payments (primarily severance related)

 

 

(3,328)

Acceleration of share-based compensation

 

 

(2,561)

Balance at June 30, 2018

 

$

1,276

 

The payment of the accrued costs for the 2018 restructuring is expected to continue through the first quarter of 2019.

 

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2016 Restructuring

 

As part of an end-to-end review of its business in 2016, the Company determined that its strategy is to increasingly focus its resources on its core capabilities in liquidity, execution, analytics and workflow technology solutions. To that end, in 2016, the Company implemented restructuring plans to (i) reduce headcount in its single stock sales trading and sales organizations, (ii) close its U.S. matched-book securities lending operations and its Canadian arbitrage trading desk and (iii) identify additional annual cost savings from management delayering and the elimination of certain positions.

 

Activity and liability balances recorded as part of the restructuring plan through June 30, 2018 are as follows (dollars in thousands):

 

 

 

 

 

 

    

Amount

Balance at December 31, 2017

 

$

 6

Asset write-off

 

 

(6)

Balance at June 30, 2018

 

$

 —

 

 

(6) Cash

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

Cash Restricted or Segregated Under Regulations and Other

 

Cash restricted or segregated under regulations and other represents (i) a special reserve bank account for the exclusive benefit of customers (“Special Reserve Bank Account”) maintained by ITG Inc. in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”), or agreements for proprietary accounts of broker dealers (“PABs”), (ii) funds on deposit for Canadian and European trade clearing and settlement activity, (iii) segregated balances under a collateral account control agreement for the benefit of certain customers, and (iv) funds relating to the securitization of bank guarantees supporting the Company’s Australian and French leases.

 

The following table provides a reconciliation of cash and cash equivalents together with restricted cash as reported within the condensed consolidated statements of financial condition to the sum of the same such amounts shown in the condensed consolidated statements of cash flows.

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

 

2017

Cash and cash equivalents

 

$

236,446

 

$

287,452

Cash restricted or segregated under regulations and other

 

 

18,263

 

 

18,599

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

254,709

 

$

306,051

 

 

 

 

 

(7) Securities Owned and Sold, Not Yet Purchased

 

The following is a summary of securities owned and securities sold, not yet purchased (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Sold, Not Yet

 

 

 

Securities Owned

 

Purchased

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

 

2018

 

2017

 

2018

 

2017

 

Corporate stocks - trading securities

    

$

 1

    

$

78

    

$

 —

    

$

 1

 

Mutual funds

 

 

938

 

 

1,481

 

 

 —

 

 

 —

 

Total

 

$

939

 

$

1,559

 

$

 —

 

$

 1

 

 

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Trading securities owned and sold, not yet purchased primarily consists of temporary positions obtained in the normal course of agency trading activities, including positions held in connection with the creation and redemption of exchange-traded funds on behalf of clients.

 

(8) Income Taxes

 

The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) was enacted on December 22, 2017, and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Cuts and Jobs Act reduced the U.S. statutory corporate tax rate from 35% to 21% and created new taxes in the U.S. on income in certain foreign controlled corporations, which are referred to as the global intangible low-taxed income tax (“GILTI”), and imposed a new tax on certain related party payments under the base erosion anti-abuse tax (“BEAT”).  The inclusion of income earned in controlled foreign corporations under the GILTI regime did not result in any incremental U.S. tax expense during the three and six months ended June 30, 2018 due to the impact of a U.S. tax loss in the current period. The Company does not expect to be subject to the BEAT tax in 2018.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Cuts and Jobs Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its 2017 results. As the Company collects and prepares necessary data and interprets the Tax Cuts and Jobs Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, additional adjustments to the provisional amounts may be made. Information needed to adjust provisional amounts include the completion of all international 2017 income tax returns. These additional adjustments may materially impact the provision for income taxes and effective tax rate in the period in which the adjustments are made. We expect the final accounting for the tax effects of the Tax Cuts and Jobs Act to be completed in 2018.

 

A tax benefit from an uncertain tax position may be recognized only if it is more-likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

 

During the six months ended June 30, 2018, the Company realized a $1.9 million tax benefit related to the resolution of a multi-year contingency in the U.S.

 

The Company maintained reserves for unrecognized tax benefits of $5.6 million at June 30, 2018 and $7.7 million at December 31, 2017. At June 30, 2018, $4.2 million of the unrecognized tax benefits was netted against fully reserved U.S. deferred tax assets. The Company had accrued interest expense related to tax reserves of $1.2 million and $1.6 million, net of related tax effects, at June 30, 2018 and December 31, 2017, respectively.

 

(9) Goodwill and Other Intangibles

 

Goodwill

The following table presents the changes in the carrying amount of goodwill by the Company’s European Operations segment for the six months ended June 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

Total

Balance at December 31, 2017

 

$

11,054

Currency translation adjustment

 

 

(266)

Balance at June 30, 2018

 

$

10,788

 

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Other Intangible Assets

Acquired other intangible assets consisted of the following at June 30, 2018 and December 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

Useful Lives

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

(Years)

 

Trade name

    

$

8,525

    

$

 —

    

$

8,529

    

$

 —

    

 —

 

Customer-related intangibles

 

 

9,691

 

 

6,018

 

 

10,217

 

 

6,219

 

17

 

Proprietary software

 

 

23,278

 

 

22,384

 

 

23,321

 

 

22,197

 

8.4

 

Trading rights

 

 

339

 

 

 —

 

 

339

 

 

 —

 

 —

 

Other

 

 

50

 

 

 —

 

 

50

 

 

 —

 

 —

 

Total

 

$

41,883

 

$

28,402

 

$

42,456

 

$

28,416

 

 

 

 

At June 30, 2018, indefinite-lived intangibles not subject to amortization amounted to $8.9 million, of which $8.4 million related to the POSIT trade name.

 

Amortization expense for definite-lived intangibles was $0.3 million and $0.5 million for the three and six months ended June 30, 2018, respectively, compared with $0.4 million and $0.7 million in the respective prior year periods. These amounts are included in other general and administrative expense in the condensed consolidated statements of operations.

 

The following table represents the changes in the carrying amount of net intangible assets for the six months ended June 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2017

    

$

14,040

 

Amortization

 

 

(513)

 

Currency translation adjustment

 

 

(46)

 

Balance at June 30, 2018

 

$

13,481

 

 

 

(10) Receivables and Payables

 

Receivables from, and Payables to, Brokers, Dealers and Clearing Organizations

 

The following is a summary of receivables from, and payables to, brokers, dealers and clearing organizations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables from

 

Payables to

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

   

2018

   

2017

   

2018

   

2017

 

Broker-dealers

 

$

178,520

 

$

189,817

 

$

143,919

 

$

105,022

 

Clearing organizations

 

 

40,124

 

 

708

 

 

12,357

 

 

10,011

 

Securities borrowed

 

 

42,089

 

 

4,246

 

 

 —

 

 

 —

 

Securities loaned

 

 

 —

 

 

 —

 

 

22,610

 

 

4,245

 

Allowance for doubtful accounts

 

 

(751)

 

 

(864)

 

 

 —

 

 

 —

 

Total

 

$

259,982

 

$

193,907

 

$

178,886

 

$

119,278

 


*

See Securities Borrowed and Loaned below.

 

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Receivables from, and Payables to, Customers

 

The following is a summary of receivables from, and payables to, customers (dollars in thousands):