UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________  

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

OR

¨

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)

300 Vesey Street, New York, NY 10282

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (646) 682-6000

_______________________________________________ 

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 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 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest predictable date:

At November 2, 2016, the number of shares outstanding of the Registrant’s Class A Common Stock was 86,157,599 (including restricted stock units) and there were no shares outstanding of the Registrant’s Class B Common Stock or Preferred Stock.

KCG HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended September 30, 2016

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Financial Condition	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	63
PART II	OTHER INFORMATION:
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	66
Signatures

2

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months   ended September 30,						For the nine months   ended September 30,
	2016			2015			2016		2015
	(In thousands, except per share amounts)
Revenues
Trading revenues, net	$	113,829		$	277,677		$	524,649	$	657,222
Commissions and fees	87,842			95,027			288,904		282,358
Interest, net	677			(1,080		)	1,061		(1,699		)
Investment income and other, net	6,184			5,412			59,256		397,193
Total revenues	208,532			377,036			873,870		1,335,074
Expenses
Employee compensation and benefits	49,006			121,597			222,684		337,786
Execution and clearance fees	71,995			67,502			219,371		198,573
Communications and data processing	36,733			35,256			108,766		103,260
Depreciation and amortization	21,876			23,813			66,015		65,154
Payments for order flow	13,845			17,121			39,590		47,277
Collateralized financing interest	10,693			8,617			29,465		25,932
Occupancy and equipment rentals	9,275			7,472			28,094		22,286
Debt interest expense	9,153			9,958			27,836		30,266
Professional fees	4,139			4,406			15,497		21,281
Business development	994			1,846			4,073		6,728
Debt extinguishment charges	—			—			—		25,006
Writedown of assets and other real estate related charges	—			34,029			—		40,488
Other	8,797			10,000			25,923		26,604
Total expenses	236,506			341,617			787,314		950,641
(Loss) income before income taxes	(27,974		)	35,419			86,556		384,433
Income tax (benefit) expense	(16,760		)	13,482			27,051		132,357
Net (loss) income	$	(11,214	)	$	21,937		$	59,505	$	252,076
Basic (loss) earnings per share	$	(0.13	)	$	0.24		$	0.69	$	2.42
Diluted (loss) earnings per share	$	(0.13	)	$	0.24		$	0.67	$	2.36
Shares used in computation of basic (loss) earnings per share	85,009			91,134			86,531		104,244
Shares used in computation of diluted (loss) earnings per share	85,009			92,079			88,481		106,816

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

3

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the three months   ended September 30,						For the nine months   ended September 30,
	2016			2015			2016			2015
	(In thousands)
Net (loss) income	$	(11,214	)	$	21,937		$	59,505		$	252,076
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of tax	88			(312		)	172			(175		)
Cumulative translation adjustment, net of tax	18			(595		)	(632		)	(1,651		)
Comprehensive (loss) income	$	(11,108	)	$	21,030		$	59,045		$	250,250

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

4

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	September 30,			December 31,
	2016			2015
Assets	(In thousands)
Cash and cash equivalents	$	505,462		$	581,313
Cash and cash equivalents segregated under federal and other regulations	3,000			3,000
Financial instruments owned, at fair value, including securities pledged to counterparties that had the right to deliver or repledge of $470,568 at September 30, 2016 and $324,146 at December 31, 2015:
Equities	2,641,499			2,129,208
Debt securities	251,264			136,387
Listed options	12,190			178,360
Other financial instruments	—			445
Total financial instruments owned, at fair value	2,904,953			2,444,400
Collateralized agreements:
Securities borrowed	1,958,095			1,636,284
Receivable from brokers, dealers and clearing organizations	696,495			681,211
Fixed assets and leasehold improvements, less accumulated depreciation and amortization	135,296			94,858
Investments	93,775			98,943
Goodwill and Intangible assets, less accumulated amortization	100,235			100,471
Deferred tax asset, net	151,024			151,225
Assets of businesses held for sale	8,194			25,999
Other assets	194,072			222,831
Total assets	$	6,750,601		$	6,040,535
Liabilities and equity
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities	$	1,927,864		$	1,856,171
Debt securities	278,303			105,340
Listed options	16,319			151,893
Other financial instruments	302			—
Total financial instruments sold, not yet purchased, at fair value	2,222,788			2,113,404
Collateralized financings:
Securities loaned	647,602			463,377
Financial instruments sold under agreements to repurchase	1,034,700			954,902
Other collateralized financings	50,000			—
Total collateralized financings	1,732,302			1,418,279
Payable to brokers, dealers and clearing organizations	647,089			273,805
Payable to customers	29,615			17,387
Accrued compensation expense	96,087			154,547
Accrued expenses and other liabilities	129,548			134,026
Debt	453,524			484,989
Total liabilities	5,310,953			4,596,437
Equity
Class A Common Stock
Shares authorized: 1,000,000 at September 30, 2016 and December 31, 2015; Shares issued: 109,012 at September 30, 2016 and 106,025 at December 31, 2015; Shares outstanding: 86,213 at September 30, 2016 and 90,156 at December 31, 2015	1,090			1,060
Additional paid-in capital	1,460,313			1,436,671
Retained earnings	251,625			192,120
Treasury stock, at cost; 22,799 shares at September 30, 2016 and 15,869 shares at December 31, 2015	(273,270		)	(186,103		)
Accumulated other comprehensive (loss) income	(110		)	350
Total equity	1,439,648			1,444,098
Total liabilities and equity	$	6,750,601		$	6,040,535

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

5

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the nine months ended September 30, 2016

(Unaudited)

	Class A Common Stock								Treasury Stock
(in thousands)	Shares	Amount		Additional Paid-In Capital			Retained Earnings		Shares		Amount			Accumulated other comprehensive income			Total Equity
Balance, December 31, 2015	106,025	$	1,060	$	1,436,671		$	192,120	(15,869	)	$	(186,103	)	$	350		$	1,444,098
KCG Class A Common Stock repurchased	—	—		—			—		(6,930	)	(87,167		)	—			(87,167		)
Warrants repurchased	—	—		(15,909		)	—		—		—			—			(15,909		)
Stock-based compensation and Options & Warrants exercised	2,987	30		39,551			—		—		—			—			39,581
Unrealized gain on available for sale securities, net of tax	—	—		—			—		—		—			172			172
Cumulative translation adjustment, net of tax	—	—		—			—		—		—			(632		)	(632		)
Net income	—	—		—			59,505		—		—			—			59,505
Balance, September 30, 2016	109,012	$	1,090	$	1,460,313		$	251,625	(22,799	)	$	(273,270	)	$	(110	)	$	1,439,648

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

6

KCG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the nine months ended September 30,
	2016			2015
Cash flows from operating activities	(In thousands)
Net income	$	59,505		$	252,076
Adjustments to reconcile Net income to net cash provided by operating activities
Realized gain on sale of KCG Hotspot	—			(385,026		)
Depreciation and amortization	66,015			65,154
Stock and unit-based compensation	25,161			74,949
Realized gain on sale of assets	(36,195		)	—
Realized gain on repurchase of debt and investments	(3,676		)	—
Unrealized gain on investments	(10,116		)	(9,366		)
Deferred taxes	—			(25,781		)
Other	7,512			51,964
(Increase) decrease in operating assets
Cash and cash equivalents segregated under federal and other regulations	—			(5,039		)
Financial instruments owned, at fair value	(460,553		)	(139,736		)
Securities borrowed	(320,316		)	12,550
Receivable from brokers, dealers and clearing organizations	(6,318		)	178,109
Other assets	26,653			2,187
Increase (decrease) in operating liabilities
Financial instruments sold, not yet purchased, at fair value	109,383			34,317
Securities loaned	184,225			61,396
Financial instruments sold under agreements to repurchase	79,798			180,176
Other collateralized financings	50,000			—
Payable to brokers, dealers and clearing organizations	367,480			(361,012		)
Payable to customers	11,851			(1,318		)
Accrued compensation expense	(44,291		)	5,585
Accrued expenses and other liabilities	(15,112		)	42,329
Net cash provided by operating activities	91,006			33,514
Cash flows from investing activities
Cash received from sale of KCG Hotspot, net of cash provided	6,552			360,928
Cash received from sale of assets	21,220			—
Cash received from sale of investments and redemptions from investments	52,967			2,523
Purchases of fixed assets and leasehold improvements	(81,916		)	(22,657		)
Capitalization of software development costs	(25,212		)	(15,786		)
Purchases of investments	(3,330		)	(2,418		)
Purchase of business, net of cash acquired	(2,251		)	—
Net cash (used in) provided by investing activities	(31,970		)	322,590
Cash flows from financing activities
Repurchase of 6.875% Senior Secured Notes	(30,288		)	—
Proceeds from issuance of 6.875% Senior Secured Notes, net	—			494,810
Repayment of 8.25% Senior Secured Notes	—			(305,000		)
Repayment of convertible notes	—			(117,259		)
Payment of debt issuance costs	—			(12,645		)
Principal payments on capital lease obligations	(1,535		)	(3,478		)
Cost of common stock repurchased - Tender Offer	—			(330,000		)
Cost of common stock repurchased	(87,167		)	(33,250		)
Stock options exercised	15			1,247
Warrants exercised	—			247
Cost of warrants repurchased	(15,909		)	—
Income tax provision on stock awards exercised	—			257
Net cash used in financing activities	(134,884		)	(305,071		)
Effect of exchange rate changes on cash and cash equivalents	(3		)	(1,651		)
(Decrease) Increase in cash and cash equivalents	(75,851		)	49,382
Cash and cash equivalents at beginning of period	581,313			578,768
Cash and cash equivalents at end of period	$	505,462		$	628,150
Supplemental disclosure of cash flow information:
Cash paid for interest	$	53,171		$	69,307
Cash paid for income taxes	$	15,960		$	78,164
Non-cash investing activities - Contribution of fixed assets to joint venture	$	353		$	4,364

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

7

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Description of the Business

KCG Holdings, Inc. (collectively with its subsidiaries, "KCG" or the "Company") 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 direct-to-client and non-client exchange-based electronic market making. KCG has multiple access points to trade global equities, options, futures, fixed income, currencies and commodities via voice or automated execution.

KCG was formed as a result of a strategic business combination (the “Mergers”) of Knight Capital Group, Inc.(“Knight”) and GETCO Holding Company, LLC (“GETCO”) in July 2013.

As of September 30, 2016, 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, 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, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making. KCG 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 of the London Stock Exchange ("AIM").

Global Execution Services

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, options, futures and fixed income to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals for transactions; however, the Company may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income electronic communication network ("ECN") that also offers trading applications; and (iv) an alternative trading system ("ATS") for U.S. equities.

In September 2016, the Company completed the acquisition of Neonet Securities AB ("Neonet"). Neonet is an independent agency broker and execution specialist based in Stockholm, Sweden. The results of Neonet, beginning on the date of acquisition, are included in this segment. The Company does not consider this acquisition to be significant.

Corporate and Other

The Corporate and Other segment contains investments principally in strategic financial services-oriented opportunities; manages the deployment of capital across the organization; houses executive management functions; 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.

Sales of Businesses

Management 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 that the disposal of a business may return a higher value to stockholders, or that the business is no longer core to its strategy, the Company may divest or exit such business.

In March 2015, the Company sold KCG Hotspot, the Company's former spot institutional foreign exchange ECN, to Bats Global Markets, Inc. ("Bats"). The results of KCG Hotspot, including the gain on sale, are included in the Global Execution Services segment, up through the date of its sale.

8

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

In March 2016, KCG completed the sale of assets related to its retail U.S. options market making business.

In May 2016, KCG completed the sale of its business as an equities designated market maker ("DMM") on the New York Stock Exchange ("NYSE") to Citadel Securities LLC (“Citadel”).

The results of both the retail U.S. options market making business and the DMM business are included in the Market Making segment, up through the date of the respective sales.

See Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses" for further details.

2. Significant Accounting Policies

Basis of consolidation and form of presentation

The accompanying unaudited Consolidated Financial Statements, prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. These unaudited Consolidated Financial Statements include the accounts of the Company and its subsidiaries and reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to U.S. Securities and Exchange Commission (“SEC”) rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. All significant intercompany transactions and balances have been eliminated. Interim period operating results may not be indicative of the operating results for a full year.

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. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.

Cash and cash equivalents segregated under federal and other regulations

The Company maintains custody of customer funds and is obligated by rules and regulations mandated bythe SEC 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 cash equivalents segregated under federal and other regulations approximate fair value. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.

Market making, sales, trading and execution activities

Financial instruments owned and Financial instruments sold, not yet purchased relate to market making and trading activities, and include listed and other equity securities, listed equity options and fixed income securities that are recorded on a trade date basis and are reported at fair value. Such financial instruments are netted by their respective long and short positions by CUSIP/ISIN number. Trading revenues, net, which comprises trading gains, net of trading losses on such financial instruments, are also recorded on a trade date basis.

Commissions, which primarily comprise commission equivalents earned on institutional client orders and volume based fees earned from providing liquidity to other trading venues, as well as related expenses, are also recorded on a trade date 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):

9

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

	For the three months   ended September 30,						For the nine months   ended September 30,
	2016			2015			2016			2015
Interest Income	$	3,011		$	2,768		$	9,015		$	9,841
Interest Expense	(2,334		)	(3,848		)	(7,954		)	(11,540		)
Interest, net	$	677		$	(1,080	)	$	1,061		$	(1,699	)

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

	For the three months   ended September 30,						For the nine months   ended September 30,
	2016			2015			2016			2015
Dividend Income	$	14,704		$	14,879		$	39,637		$	45,596
Dividend Expense	$	(14,521	)	$	(9,904	)	$	(35,235	)	$	(30,262	)

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, prior to the sale of the retail U.S. options market making business, 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 4 “Fair Value” 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. Collateralized financings primarily comprise securities loaned and financial instruments sold under agreements to repurchase.

• 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 posts 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 and other collateralized financings 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 and other collateralized financing 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

10

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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, financial instruments sold under agreements to repurchase and other collateralized financings 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 substantially collateralized pursuant to the terms of the underlying agreements. 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 noncontrolling equity ownership interests in financial services-related businesses and are held by the Company's non-broker dealer subsidiaries. These investments are accounted for under the equity method, at cost, or at fair value. The equity method of accounting is used when the Company has significant influence over the operating and financial policies of the investee. 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 over operating and financial policies of the investee. Investments that are publicly traded and where the Company does not exert significant influence on operating and financial policies are held at fair value and accounted for as available for sale securities and any unrealized gains or losses are recorded net of tax in Other comprehensive income.

Investments are reviewed on an ongoing basis to determine whether the carrying values of the investments have been impaired. If the Company determines that an impairment loss on an investment has occurred due to a decline in fair value or other conditions, the investment is written down to its estimated fair value.

Included in the Company's investments are assets supporting a non-qualified deferred compensation plan for certain employees. 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 that the carrying amounts may not be recoverable. The Company amortizes intangible assets with finite lives 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. 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.

Payable to customers

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

Repurchases of common stock

The Company may repurchase shares of KCG Class A Common Stock, par value $0.01 per share ("KCG Class A Common Stock") in the open market or through privately negotiated transactions. The Company may structure such repurchases as either a purchase of treasury stock or a retirement of shares. The Company records its purchases of treasury stock, which include shares repurchased in satisfaction of tax withholding obligations upon vesting of restricted awards, at cost as a separate component of stockholders’ equity. The Company may re-issue treasury stock, at average cost, for the acquisition of new businesses and in certain other circumstances. For shares that are retired, the Company records its repurchases at cost, as a reduction in KCG Class A Common Stock for the par value of such retired shares and a reduction in Retained earnings for the balance.

11

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

Repurchases of warrants

As discussed in Footnote 15 "Warrants and Stock Repurchase", in connection with the Mergers, the Company issued Class A, Class B and Class C warrants to acquire shares of KCG Class A Common Stock ("Warrants"). The Company may repurchase Warrants through privately negotiated transactions. The Company records its purchases of Warrants as a reduction in Additional paid-in capital for the total cost.

Repurchases of debt

The Company may repurchase its 6.875% Senior Secured Notes in the open market or through privately negotiated transactions. The Company records its purchases of debt as a reduction in Debt for the par value repurchased as well as a prorated reduction of original issue discount and capitalized issuance costs. Total cost also includes accrued interest on the repurchased debt, which is included in Accrued expenses and other liabilities. The Company will record a gain to the extent that it repurchases debt at a price that is less than par value less the applicable original issue discount and capitalized issuance costs.

Foreign currency translation and foreign currency forward contracts

The Company's foreign subsidiaries generally use the U.S. dollar as their functional currency. The Company also has subsidiaries that utilize a functional currency other than the U.S. dollar, including its Indian subsidiary, which utilizes the Indian Rupee and, beginning in the third quarter of 2016, Neonet, which utilizes the Swedish Krona. None of these non-U.S. dollar functional currency subsidiaries are significant to the Company’s Consolidated Financial Statements.

Assets and liabilities of these non-U.S. dollar functional currency subsidiaries 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, net of tax 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 three months ended September 30, 2016 and 2015, the Company recorded a gain of $0.1 million and a loss of $1.8 million, respectively, on foreign currency transactions. For the nine months ended September 30, 2016 and 2015, the Company recorded a gain of $1.0 million and a loss of $2.4 million, respectively, on foreign currency transactions.

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 on the Consolidated Statements of Financial Condition and Cumulative translation adjustment, net of tax, on 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 primarily measured based on the grant date fair value of the awards. These costs are amortized over the requisite service period, if any. Expected forfeitures are considered in determining stock-based employee compensation expense. See Footnote 12 "Stock-Based Compensation" for further discussion.

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.

12

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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, upon occupancy of the location, 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, as well as their remaining useful lives whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

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 projected sub-lease income upon the date the Company ceases to use the excess real estate. Such accrual is adjusted to the extent the actual terms of sub-leased property differ from the previous assumptions used in the calculation of the accrual.

Income taxes

The Company is a corporation subject to U.S. corporate income tax as well as non-U.S. income taxes in the jurisdictions in which it operates. 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.

Variable interest entities

A variable interest entity (“VIE”) is an entity that lacks one or more of the following characteristics (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity.

The Company will be considered to have a controlling financial interest and will consolidate a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Since January 2015, the Company has owned 50% of the voting shares and 50% of the equity of a joint venture, (“JV”) which maintains microwave communication networks in the U.S. and Europe, and which is considered to be a VIE. The Company and its JV partner each pay monthly fees for the use of the microwave communication networks in connection with their respective trading activities, and the JV may sell excess bandwidth that is not utilized by the JV members to third parties.

The Company does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; therefore it does not have a controlling financial interest in the JV and does not consolidate the JV. The Company records its interest in the JV under the equity method of accounting and records its investment in the JV within Investments and its amounts payable for communication services provided by the JV within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The Company records its pro-rata share of the JV’s earnings or losses within Investment income and other, net and fees related to the use of communication services provided by the JV within Communications and data processing on the Consolidated Statements of Operations.

The Company’s exposure to the obligations of this VIE is generally limited to its interests in the JV, which is the carrying value of the equity investment in the JV.

The following table presents the Company’s nonconsolidated VIE at September 30, 2016 (in thousands):

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

	Carrying Amount				Maximum Exposure to loss
	Asset		Liability				VIE's assets
Equity investment	$	13,153	$	1,206	$	13,153	$	27,931

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 June 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to resolve diverse accounting treatment for share based awards in which the terms of the award are related to a performance target that affects vesting. The ASU requires an entity to treat a performance target that could be achieved after the requisite service period as a performance condition. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The guidance became effective for reporting periods beginning after December 15, 2015 and has been applied prospectively. The adoption of this ASU did not have an impact on the Company’s Consolidated Financial Statements.

In February 2015, the FASB issued an ASU which requires entities to evaluate whether they should consolidate certain legal entities. The ASU simplifies consolidation accounting by reducing the number of consolidation models that an entity may apply. The guidance became effective for reporting periods beginning after December 15, 2015. The adoption of this ASU did not have an impact on the Company’s Consolidated Financial Statements.

In April 2015, the FASB issued an ASU regarding simplification of the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance became effective retrospectively for reporting periods beginning after December 15, 2015. The Company retrospectively adopted this ASU in the first quarter of 2016, and as a result, the Company reclassified deferred debt issuance costs from Other assets to a direct deduction from the carrying value of Debt on its Consolidated Statements of Financial Condition for all periods presented. The Company also reclassified its amortization of debt issuance costs from Other expense to Debt interest expense on its Consolidated Statements of Operations for all periods presented. The adoption of this ASU did not have any other impact on the Company's Consolidated Financial Statements. See Footnote 10 “Debt” for further details regarding these reclassifications.

Recent accounting guidance to be adopted in future periods

In May 2014, the FASB issued an ASU that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued an ASU to clarify guidance on principal versus agent evaluation considerations and whether an entity reports revenue on a gross or net basis. These ASUs will be effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. The Company is evaluating the impact of these ASUs on its Consolidated Financial Statements.

In August 2014, the FASB issued an ASU that requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosure in certain circumstances. The guidance is effective for reporting periods beginning after December 15, 2016. The Company does not expect the adoption of this ASU to have an impact on its Consolidated Financial Statements.

In January 2016, the FASB issued an ASU that provides entities guidance for the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted

14

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

under a modified retrospective approach for certain financial liabilities as specified in this ASU. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In February 2016, the FASB issued an ASU which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted under a modified retrospective approach. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In March 2016, the FASB issued an ASU which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In August 2016, the FASB issued an ASU which clarifies the presentation and classification of certain cash receipts and cash payments in the Consolidated Statement of Cash Flows. This ASU is effective for reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

3. Assets of Businesses Held for Sale & Sales of Businesses

In March 2015, the Company completed the sale of KCG Hotspot to Bats. The Company and Bats have agreed to share certain tax benefits, which could result in future payments to the Company of up to approximately $70.0 million in the three-year period following the close, consisting of a $50.0 million payment in 2018 and annual payments of up to $6.6 million per year (the "Annual Payments"), from 2016 up to and including 2018. The Annual Payments were contingent on KCG Hotspot achieving various levels of trading volumes through June 2015. That contingency has been removed because the trading levels were achieved. However, the remaining Annual Payments are contingent on Bats generating sufficient taxable net income to receive the tax benefits.

The Company has elected the fair value option related to the receivable from Bats and considers the receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable significant inputs such as contractual cash flows and market discount rates. KCG received the first annual payment of $6.6 million in March 2016. The remaining additional potential payments of $63.2 million are recorded at a fair value of $59.9 million in Other assets on the Consolidated Statement of Financial Condition as of September 30, 2016.

The Company recorded a gain upon completion of the sale of $385.0 million, which is recorded as Investment income and other, net on the Consolidated Statement of Operations for the nine months ended September 30, 2015. The net gain on the sale of KCG Hotspot was $373.8 million which is net of direct costs associated with the sale which comprised professional fees of $6.7 million and compensation of $4.5 million, which are recorded in Professional fees and Employee compensation and benefits, respectively, on the Consolidated Statement of Operations for the nine months ended September 30, 2015.

In accordance with the Company's strategic review of its businesses and evaluation of their potential value in the marketplace relative to their current and expected returns, KCG determined in 2015 that certain of its businesses including its DMM business, were no longer considered core to its strategy. KCG believes that the sale or divestiture of these businesses does not represent a strategic shift that will have a major effect on its operations and financial results, however, these businesses met the requirements to be considered as held for sale at December 31, 2015 and, for the assets of businesses not yet sold, continue to meet such requirements at September 30, 2016. Assets of businesses held for sale are recorded at the lower of their book value or their estimated fair value and are reported as Assets of businesses held for sale on the September 30, 2016 and December 31, 2015 Consolidated Statements of Financial Condition. See Footnote 9 "Goodwill and Intangible Assets" for further details.

Included in the $26.0 million of Assets of businesses held for sale at December 31, 2015 were assets related to the Company's retail options market making business. The assets were sold to a third party in March 2016, and as a result of the sale, the Company recorded a gain of $2.9 million, which is included in Investment income and other, net on the Consolidated Statement of Operations for the nine months ended September 30, 2016. Also included in the $26.0 million of Assets of businesses held for sale at December 31, 2015 were assets related to the Company's DMM business. The DMM business was sold to Citadel in May 2016. As charges were recorded in the fourth quarter of 2015

15

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

in order to reflect the estimated fair value of this held for sale business, no gain or loss on sale was recorded in the nine months ended September 30, 2016. The Company continues to have one business that is considered to be held for sale at September 30, 2016.

The assets of businesses held for sale as of September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):

	September 30, 2016		December 31, 2015
Assets:
Intangible assets, net of accumulated amortization	$	8,194	$	25,999
Total assets of businesses held for sale	$	8,194	$	25,999

4. Fair Value

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 2 “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
September 30, 2016	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities	$	2,641,499	$	—	$	—	$	2,641,499
Corporate debt	179,152		—		—		179,152
U.S. government obligations	72,112		—		—		72,112
Listed options	12,190		—		—		12,190
Total Financial instruments owned, at fair value	2,904,953		—		—		2,904,953
Investment in CME Group (1)	2,093		—		—		2,093
Other (2)	—		62,151		6,650		68,801
Total assets held at fair value	$	2,907,046	$	62,151	$	6,650	$	2,975,847
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities	$	1,927,864	$	—	$	—	$	1,927,864
Corporate debt	173,678		—		—		173,678
U.S. government obligations	104,625		—		—		104,625
Listed options	16,319		—		—		16,319
Foreign currency forward contracts	—		302		—		302
Total liabilities held at fair value	$	2,222,486	$	302	$	—	$	2,222,788

⁽¹⁾  Investment in CME Group is included within Investments on the Consolidated Statements of Financial Condition. See Footnote 8 "Investments" for additional information.

⁽²⁾  Other primarily consists of a $59.9 million receivable from Bats related to the sale of KCG Hotspot and a $6.7 million receivable from the sale of an investment, both of which are included within Other Assets, and $2.3 million of deferred compensation investments which is included within Investments on the Consolidated Statements of Financial Condition.

16

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2015	Level 1		Level 2		Level 3		Total
Assets
Financial instruments owned, at fair value:
Equities	$	2,129,208	$	—	$	—	$	2,129,208
Listed options	178,360		—		—		178,360
U.S. government and Non-U.S. government obligations	41,706		—		—		41,706
Corporate debt	94,681		—		—		94,681
Foreign currency forward contracts	—		445		—		445
Total Financial instruments owned, at fair value	2,443,955		445		—		2,444,400
Investment in CME Group (1)	1,814		—		—		1,814
Other (2)	—		65,732		5,789		71,521
Total assets held at fair value	$	2,445,769	$	66,177	$	5,789	$	2,517,735
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities	$	1,856,171	$	—	$	—	$	1,856,171
Listed options	151,893		—		—		151,893
U.S. government obligations	21,056		—		—		21,056
Corporate debt	84,284		—		—		84,284
Total liabilities held at fair value	$	2,113,404	$	—	$	—	$	2,113,404

⁽¹⁾  Investment in CME Group is included within Investments on the Consolidated Statements of Financial Condition. See Footnote 8 "Investments" for additional information.

⁽²⁾  Other primarily consists of a $64.2 million receivable from Bats related to the sale of KCG Hotspot and a $5.8 million receivable from the sale of an investment, both of which are included in Other assets, and $1.5 million of deferred compensation investments which is included within Investments on the Consolidated Statements of Financial Condition.

The Company's derivative financial instruments are also held at fair value. See Footnote 5 "Derivative Financial Instruments" for further information.

The Company’s equities, listed options, U.S. government and non-U.S. government obligations, corporate debt and strategic investments that are publicly traded and for which the Company does not exert significant influence on operating and financial policies 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.

As of both September 30, 2016 and December 31, 2015, a receivable related to the sale of an investment was classified within Level 3 of the fair value hierarchy.

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

The following is a summary of changes in fair value of the Company's financial assets that have been categorized within Level 3 of the fair value hierarchy at September 30, 2016 (in thousands):

	Level 3 Financial Assets for the three months ended September 30, 2016
	Balance at July 1, 2016		Realized gains(losses) during period		Unrealized gains (losses) during the period		Purchases		Sales		Settlements		Issuances		Transfers in or (out) of Level 3		Balance at September 30, 2016
Receivable from sold investment	$	6,347	$	—	$	303	$	—	$	—	$	—	$	—	$	—	$	6,650

17

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

	Level 3 Financial Assets for the nine months ended September 30, 2016
	Balance at January 1, 2016		Realized gains(losses) during period		Unrealized gains (losses) during the period		Purchases		Sales		Settlements		Issuances		Transfers in or (out) of Level 3		Balance at September 30, 2016
Receivable from sold investment	$	5,789	$	—	$	861	$	—	$	—	$	—	$	—	$	—	$	6,650

The unrealized gains of $0.3 million and $0.9 million are included within Investment income and other, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2016, respectively.

The following is a description of the valuation basis, techniques and significant inputs used by the Company in valuing its Level 2 and Level 3 assets and liabilities.

Foreign currency forward contracts

At September 30, 2016 and December 31, 2015, the Company had foreign currency forward contracts with a notional value of 735.0 million Indian Rupees ($10.7 million U.S. dollars) and 850.0 million Indian Rupees ($13.0 million U.S. dollars), respectively. These forward contracts are used to hedge the Company’s investment in its Indian subsidiary.

The fair value of these forward contracts were determined based upon spot foreign exchange rates and dealer quotations.

Other

Other primarily consists of the fair value of the Company's receivable from Bats from the sale of KCG Hotspot as more fully described in Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses". Also included in this category are deferred compensation investments which comprise investments in liquid mutual funds that the Company acquires to hedge its obligations to employees 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.

The Company has elected the fair value option related to its receivable from Bats. It considers the receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable significant inputs such as contractual cash flows and market discount rates.

The Company has elected the fair value option related to a receivable originating from the sale of an investment which is classified within Level 3 of the fair value hierarchy. The range of undiscounted amounts the Company may receive for this receivable is between $0 and $8.5 million. The valuation of this financial instrument was based upon the use of a model developed by Company management. Inputs into this model were based upon risk profiles of similar financial instruments in the market and reflects management’s judgment relating to the appropriate discount on the receivable as well as a financial assessment of the debtor. To the extent that valuations based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Movements in these unobservable inputs would not materially impact the Company's results of operations.

5. Derivative Financial Instruments

The Company enters into derivative transactions as part of its trading activities and 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.

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.

The Company has entered into and may continue to enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements with counterparties. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

18

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

Under the ISDA master netting agreements, the Company typically also executes credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted or paid by a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of counterparty’s default, provisions of the ISDA master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.

The Company is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.

The following tables summarize the fair value and number of derivative instruments held at September 30, 2016 and December 31, 2015. These instruments include those classified as Financial instruments, owned at fair value, Financial instruments sold, not yet purchased at fair value, as well as futures contracts and bi-lateral over the counter swaps which are reported within Receivable from brokers, dealers and clearing organizations in the Consolidated Statements of Financial Condition. The fair value of assets/liabilities are shown gross of counterparty netting and cash collateral received and pledged. The following tables also provide information regarding 1) the extent to which, under enforceable master netting agreements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and 2) the extent to which other rights of setoff associated with these agreements exist and could have an effect on our financial position (in thousands, except contract amounts):

		September 30, 2016
	Financial Statements	Assets				Liabilities
	Location	Fair Value			Contracts	Fair Value			Contracts
Foreign currency
Futures contracts	Receivable from brokers, dealers and clearing organizations	$	292		1,932	$	1,651		3,440
Forward contracts (1)	Financial instruments owned, at fair value	—			—	302			1
Equity
Futures contracts	Receivable from brokers, dealers and clearing organizations	1,560			2,321	2,000			2,723
Swap contracts	Receivable from brokers, dealers and clearing organizations	8			1	146			1
Listed options	Financial instruments owned/sold, not yet purchased, at fair value	12,190			78,269	16,319			81,367
Fixed income
Futures contracts	Receivable from brokers, dealers and clearing organizations	5,075			4,162	6,059			3,924
Commodity
Futures contracts	Receivable from brokers, dealers and clearing organizations	66,562			37,977	65,970			38,373
Gross derivative assets/liabilities, before netting		$	85,687			$	92,447
Less: Legally enforceable master netting agreements
Exchange traded (2)		(72,993		)		(75,680		)
Bi-lateral over-the-counter (3)		—				(448		)
Net amounts per Consolidated Statement of Financial Condition (4)		$	12,694			$	16,319

19

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

		December 31, 2015
	Financial Statements	Assets				Liabilities
	Location	Fair Value			Contracts	Fair Value			Contracts
Foreign currency
Futures contracts	Receivable from brokers, dealers and clearing organizations	$	578		3,675	$	955		6,586
Forward contracts (1)	Financial instruments owned, at fair value	445			1	—			—
Equity
Futures contracts	Receivable from brokers, dealers and clearing organizations	1,558			4,038	1,743			3,432
Swap contracts	Receivable from brokers, dealers and clearing organizations	—			—	281			2
Listed options	Financial instruments owned/sold, not yet purchased, at fair value	178,360			360,469	151,893			390,949
Fixed income
Futures contracts	Receivable from brokers, dealers and clearing organizations	4,265			6,195	4,037			4,891
Commodity
Futures contracts	Receivable from brokers, dealers and clearing organizations	35,441			22,424	35,814			24,261
Gross derivative assets/liabilities, before netting		$	220,647			$	194,723
Less: Legally enforceable master netting agreements
Exchange traded (2)		(41,146		)		(42,549		)
Bi-lateral over-the-counter (3)		—				(281		)
Net amounts per Consolidated Statement of Financial Condition (4)		$	179,501			$	151,893

⁽¹⁾  The foreign currency forward contract represents a net investment hedge and is designated as a hedging instrument.

⁽²⁾  Exchange traded instruments comprise futures contracts.

⁽³⁾  Bi-lateral over-the-counter instruments comprise swaps and forward contracts.

⁽⁴⁾  The Company has not received or pledged additional collateral under master netting agreements and or other credit support agreements that is eligible to be offset beyond what is offset in the Consolidated Statements of Financial Condition.

The fair value of listed options and forward contracts in the tables above are classified as Level 1 and Level 2 in the fair value hierarchy, respectively. The fair value of futures contracts and swaps in the tables above would be classified as Level 1 and Level 2 in the fair value hierarchy, respectively, if such classification were required.

20

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following table summarizes the gains and losses included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015.

		Gain (Loss) Recognized
	Financial Statements	For the three months   ended September 30,						For the nine months   ended September 30,
	Location	2016			2015			2016			2015
Derivative instruments not designated as hedging instruments:
Foreign currency
Futures contracts	Trading revenues, net	$	1,964		$	1,868		$	3,529		$	2,674
Forward contracts	Investment income and other, net	—			—			—			(10		)
Equity
Futures contracts	Trading revenues, net	(5,008		)	13,849			6,395			27,587
Swap contracts	Trading revenues, net	(232		)	1,792			2,480			2,860
Listed options	Trading revenues, net	(557		)	1,149			(222		)	(15,032		)
Fixed income
Futures contracts	Trading revenues, net	2,670			10,918			16,627			35,839
Commodity
Futures contracts	Trading revenues, net	9,949			14,852			31,506			39,855
		$	8,786		$	44,428		$	60,315		$	93,773
Derivative instruments designated as hedging instruments:
Foreign exchange - forward contract	Accumulated other comprehensive income	$	(197	)	$	(44	)	$	(571	)	$	(50	)

The Company has identified an error in the presentation of its previously reported derivative gains and losses for the three and nine months ended September 30, 2015 and the above disclosures have been revised to correct for the error. The error impacted the gains and losses from futures contracts in the above table but did not have any impact to the Company’s Consolidated Financial Statements. The Company evaluated the materiality of these errors in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and concluded that this error was immaterial to the Consolidated Financial Statements for all prior periods. While the adjustments were immaterial, the Company revised its previously disclosed gains and losses from futures contracts in the above table as follows:

		Gain (Loss) Recognized
	Financial Statements	For the three months   ended September 30, 2015			For the nine months   ended September 30, 2015
	Location	As Previously Reported		Revised	As Previously Reported	Revised
Derivative instruments not designated as hedging instruments:
Equity
Futures contracts	Trading revenues, net	(2,122	)	13,849	11,616	27,587
Fixed income
Futures contracts	Trading revenues, net	5,256		10,918	30,177	35,839
Commodity
Futures contracts	Trading revenues, net	12,339		14,852	37,342	39,855

6. Collateralized Transactions

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

21

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The table below presents financial instruments at fair value received as collateral related to Securities borrowed or Receivable from brokers, dealers and clearing organizations 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 party (in thousands):

	September 30, 2016		December 31, 2015
Collateral permitted to be delivered or repledged	$	1,969,324	$	1,640,145
Collateral that was delivered or repledged	1,842,751		1,570,921
Collateral permitted to be further repledged by the receiving counterparty	152,717		188,345

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 have the right to sell or repledge such financial instruments primarily consist of equities. Financial instruments owned and pledged to counterparties that do not have the right to sell or repledge such financial instruments consist of equities, corporate obligations and obligations of the U.S. government, but may also include obligations of federal agencies, foreign governments and convertible securities.

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

	September 30, 2016		December 31, 2015
Financial instruments owned, at fair value, pledged to counterparties that have the right to deliver or repledge	$	470,568	$	324,146
Financial instruments owned, at fair value, pledged to counterparties that do not have the right to deliver or repledge	1,189,985		1,027,847

The table below presents the gross carrying value of Securities loaned and Financial instruments sold under agreements to repurchase by class of collateral pledged (in thousands):

September 30, 2016			Financial instruments sold under agreements to repurchase		Other collateralized financings
Asset Class	Securities Loaned
Equities	$	639,452	$	912,099	$	49,256
U.S. government obligations	—		69,700		—
Corporate debt	8,150		52,901		744
Total	$	647,602	$	1,034,700	$	50,000

December 31, 2015			Financial instruments sold under agreements to repurchase		Other collateralized financings
Asset Class	Securities Loaned
Equities	$	451,085	$	855,632	$	—
U.S. government obligations	—		54,902		—
Corporate debt	12,292		44,368		—
Total	$	463,377	$	954,902	$	—

The Company may enter into master netting agreements and collateral arrangements with counterparties in order to manage its exposure to credit risk associated with securities financing transactions. Such transactions are generally executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions). Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

In the event of counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting

22

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated as an unsecured claim in bankruptcy court.

The Company is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open repurchase and/or securities lending transactions.

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):

September 30, 2016	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral(1)		Counterparty Netting(2)
Assets
Securities borrowed	$	1,958,095	$	—	$	1,958,095	$	1,909,346	$	7,002	$	41,747
Receivable from brokers, dealers and clearing organizations (3)	59,980		—		59,980		59,881		22		77
Total assets	$	2,018,075	$	—	$	2,018,075	$	1,969,227	$	7,024	$	41,824
Liabilities
Securities loaned	$	647,602	$	—	$	647,602	$	627,544	$	7,002	$	13,056
Financial instruments sold under agreements to repurchase	1,034,700		—		1,034,700		1,034,678		22		—
Other collateralized financings	50,000		—		50,000		50,000		—		—
Total liabilities	$	1,732,302	$	—	$	1,732,302	$	1,712,222	$	7,024	$	13,056

⁽¹⁾  Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

⁽²⁾  Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement.  These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Consolidated Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.

⁽³⁾  Represents financial instruments purchased under agreement to resell.

December 31, 2015	Gross Amounts Recognized		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statement of Financial Condition				Net Amount
							Available Collateral(1)		Counterparty Netting(2)
Assets
Securities borrowed	$	1,636,284	$	—	$	1,636,284	$	1,575,568	$	8,277	$	52,439
Receivable from brokers, dealers and clearing organizations (3)	65,433		—		65,433		62,580		—		2,853
Total assets	$	1,701,717	$	—	$	1,701,717	$	1,638,148	$	8,277	$	55,292
Liabilities
Securities loaned	$	463,377	$	—	$	463,377	$	440,486	$	8,277	$	14,614
Financial instruments sold under agreements to repurchase	954,902		—		954,902		954,902		—		—
Total liabilities	$	1,418,279	$	—	$	1,418,279	$	1,395,388	$	8,277	$	14,614

⁽¹⁾  Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

23

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

⁽²⁾  Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by a counterparty in the event of a counterparty's default, but which are not netted in the Consolidated Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.

⁽³⁾  Represents financial instruments purchased under agreement to resell.

See Footnote 5 "Derivative Financial Instruments" for information related to the offsetting of derivatives in the Company's Consolidated Financial Statements.

Maturities of Securities loaned and Financial instruments sold under agreements to repurchase are provided in the table below (in thousands):

As of September 30, 2016	Overnight		0 - 30 days		31 - 60 days		61 - 90 days		Total
Securities loaned	$	647,602	$	—	$	—	$	—	$	647,602
Other collateralized financings	—		50,000		—		—		50,000
Financial instruments sold under agreements to repurchase	69,700		310,000		415,000		240,000		1,034,700
Total	$	717,302	$	360,000	$	415,000	$	240,000	$	1,732,302

As of December 31, 2015	Overnight		0 - 30 days		31 - 60 days		61 - 90 days		Total
Securities loaned	$	463,377	$	—	$	—	$	—	$	463,377
Financial instruments sold under agreements to repurchase	54,902		635,000		150,000		115,000		954,902
Total	$	518,279	$	635,000	$	150,000	$	115,000	$	1,418,279

7. 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):

	September 30, 2016		December 31, 2015
Receivable:
Clearing organizations and other	$	458,972	$	505,789
Financial instruments purchased under agreement to resell	59,980		65,433
Securities failed to deliver	177,543		109,989
Total receivable	$	696,495	$	681,211
Payable:
Clearing organizations and other	$	559,621	$	240,985
Securities failed to receive	87,468		32,820
Total payable	$	647,089	$	273,805

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.

8. Investments

Investments primarily comprise strategic investments and deferred compensation investments. Investments consist of the following (in thousands):

	September 30, 2016		December 31, 2015
Strategic investments:
Investments accounted for under the equity method	$	87,099	$	86,853
Investments held at fair value	2,093		1,814
Investments held at adjusted cost	2,293		8,746
Total strategic investments	91,485		97,413
Other investments	2,290		1,530
Total investments	$	93,775	$	98,943

24

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

As of September 30, 2016, the aggregate market value of the Company's investment in Bats was approximately $398.7 million based on the closing stock price on the Bats BZX Exchange, Inc. on that date.

In the second quarter of 2016, as part of the initial public offering of Bats, the Company sold 2.6 million shares of its investment in Bats for approximately $46.4 million after commissions. The Company recorded a pre-tax gain of $33.4 million from the sale, which is included in Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2016. Following the sale, and based on total shares outstanding of Bats (including non-voting shares) as of July 31, 2016 as reported by Bats in its most recent Quarterly Report on Form 10-Q, KCG retained an approximate 13.7% ownership stake in Bats. The Company continues to account for its investment in Bats under the equity method of accounting.

In the first quarter of 2016, one of the Company's investments held at adjusted cost made a distribution to its owners, including the Company. As a result of this distribution, the investment's carrying value was adjusted and the Company recognized a pre-tax gain of $2.3 million, which is included in Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2016.

For the three months ended September 30, 2016 and 2015, the Company recorded income of $3.1 million and $4.9 million, respectively, related to Investments accounted for under the equity method of accounting, which is recorded within Investment income and other, net in the Consolidated Statements of Operations. For the nine months ended September 30, 2016 and 2015, the Company recorded income of $9.9 million and $9.3 million, respectively, related to investments accounted for under the equity method. The Company's investments accounted for under the equity method are considered to be related parties. See Footnote 11 "Related Parties".

9. Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives are 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 equity 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.

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 one 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 two of the impairment assessment is performed using a discounted cash flow methodology with a risk-adjusted weighted average cost of equity 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.

During the third quarter of 2016, the Company wrote off certain trading rights that ceased being utilized in the period. The writeoff resulted in a charge of $0.7 million which was recorded within Other expense in the Consolidated Statements of Operations for the three and nine months ended September 30, 2016. No other events occurred in the nine months ended September 2016 that would indicate that the carrying amounts of the Company’s goodwill or intangible assets may not be recoverable.

No events occurred in the nine months ended September 2015 that would indicate that the carrying amounts of the Company’s goodwill or intangible assets may not be recoverable.

As detailed in Footnote 3 “Assets of Businesses Held for Sale & Sales of Businesses” the Company conducted a strategic review of its businesses and determined that certain of its businesses are no longer considered core to its strategy and the Company is currently seeking the opportunity to exit or divest or has already exited or divested of

25

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

these businesses. The $8.2 million and $26.0 million estimated fair value of such intangibles as of September 30, 2016 and December 31, 2015, respectively are reported within Assets of businesses held for sale on the Consolidated Statements of Financial Condition.

As of both September 30, 2016 and December 31, 2015, all goodwill was recorded within the Market Making segment.

Intangible assets with definite useful lives are amortized over their remaining estimated useful lives, the majority of which have been determined to range from one to eight years. The weighted average remaining life of the Company’s intangible assets with definite useful lives at September 30, 2016 and December 31, 2015 was approximately two and three years, respectively.

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

	September 30, 2016 (1)		December 31, 2015 (1)
Market Making
Technology	$	39,501	$	38,151
Trading rights	7,035		8,530
Total	46,536		46,681
Global Execution Services
Technology	20,646		21,446
Customer relationships	8,306		9,389
Trade names	675		750
Total	29,627		31,585
Corporate and Other
Technology	7,668		5,801
Total	$	83,831	$	84,067

⁽¹⁾  Excluded from the September 30, 2016 and December 31, 2015 balance is $8.2 million and $26.0 million, respectively, of intangibles related to businesses which meet the requirements to be considered held for sale. As noted in Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses", such amounts are included in Assets of businesses held for sale.

		September 30, 2016			December 31, 2015
Technology (1)	Gross carrying amount	$	147,538		$	120,256
	Accumulated amortization	(79,723		)	(54,858		)
	Net carrying amount	67,815			65,398
Trading rights (2)	Gross carrying amount	7,509			9,209
	Accumulated amortization	(474		)	(679		)
	Net carrying amount	7,035			8,530
Customer relationships (3)	Gross carrying amount	13,000			13,000
	Accumulated amortization	(4,694		)	(3,611		)
	Net carrying amount	8,306			9,389
Trade names (4)	Gross carrying amount	1,000			1,000
	Accumulated amortization	(325		)	(250		)
	Net carrying amount	675			750
Total	Gross carrying amount	169,047			143,465
	Accumulated amortization	(85,216		)	(59,398		)
	Net carrying amount	$	83,831		$	84,067

⁽¹⁾  The weighted average remaining life for technology, including capitalized internal use software, was approximately two years as of both September 30, 2016 and December 31, 2015. Excluded from the September 30, 2016 and December 31, 2015 balances are $8.2 million and $8.8 million, respectively, of technology assets related to Assets of businesses held for sale. As noted in Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses", these assets are included in Assets of businesses held for sale.

⁽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 was approximately 4 and 5 years as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, $6.9 million of trading rights had indefinite useful lives. Excluded from the December 31, 2015 balance is $17.2 million of trading rights related to Assets of businesses held for sale.

26

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

⁽³⁾  Customer relationships relate to KCG BondPoint. The weighted average remaining life was approximately 6 and 7 years as of September 30, 2016 and December 31, 2015, respectively. Lives may be reduced depending upon actual retention rates.

⁽⁴⁾  Trade names relate to KCG BondPoint. The weighted average remaining life was approximately 7 years as of both September 30, 2016 and December 31, 2015.

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

	For the three months   ended September 30,				For the nine months   ended September 30,
	2016		2015		2016		2015
Amortization expense	$	8,943	$	8,533	$	24,810	$	26,400

As of September 30, 2016, the following table summarizes the Company’s estimated amortization expense for future periods (in thousands):

	Amortization     expense
For the three months ended December 31, 2016	$	9,199
For the year ended December 31, 2017	35,366
For the year ended December 31, 2018	23,201
For the year ended December 31, 2019	5,179
For the year ended December 31, 2020	1,561

10. Debt

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

	September 30, 2016					December 31, 2015
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
6.875% Senior Secured Notes	$	461,657		$	458,723	$	495,632		$	450,000
Deferred debt issuance costs (1)	(8,133		)	—		(10,643		)	—
Total	$	453,524		$	458,723	$	484,989		$	450,000

⁽¹⁾  As discussed in Footnote 2 "Significant Accounting Policies", in 2016 the Company retrospectively adopted a new ASU which requires debt issuance costs be presented as a direct deduction from the carrying amount of the debt liability.

The fair value of the Company's 6.875% Senior Secured Notes is based upon the value of such debt in the secondary market.

The Company's 6.875% Senior Secured Notes would be categorized as Level 2 in the fair value hierarchy if they were required to be recorded at fair value.

6.875% Senior Secured Notes

On March 10, 2015, the Company entered into a purchase agreement with Jefferies LLC, as initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to sell, and the Initial Purchaser agreed to purchase, $500.0 million aggregate principal amount of 6.875% Senior Secured Notes (the “6.875% Senior Secured Notes”), pursuant to an indenture dated March 13, 2015 (the “6.875% Indenture”), in a private offering exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The 6.875% Senior Secured Notes were resold by the Initial Purchaser to qualified institutional buyers in reliance on Rule 144A and Regulation S under the Securities Act.

The 6.875% Senior Secured Notes mature on March 15, 2020 and bear interest at a rate of 6.875% per year, payable on March 15 and September 15 of each year, beginning on September 15, 2015. The 6.875% Senior Secured Notes were issued at 98.962% with net proceeds (before fees and expenses) of $494.8 million and a yield to maturity of 7.083%.

On March 13, 2015, KCG and certain subsidiary guarantors (the "6.875% Guarantors") under the 6.875% Indenture, fully and unconditionally guaranteed on a joint and several basis the 6.875% Senior Secured Notes. The 6.875% Senior Secured Notes and the obligations under the 6.875% Indenture are currently secured by pledges of all of the equity interests in each of KCG’s and the 6.875% Guarantors’ existing and future domestic subsidiaries (but limited to 66% of the voting equity interests of controlled foreign company subsidiaries and excluding equity interests in regulated subsidiaries to the extent that such pledge would have a material adverse regulatory effect or is not permitted by applicable law) and security interests in substantially all other tangible and intangible assets of KCG and

27

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

the 6.875% Guarantors, in each case subject to customary exclusions; provided, however, that if in the future KCG or any of the 6.875% Guarantors enter into certain first lien obligations (as described in the 6.875% Indenture) the collateral agent is authorized by the holders of the 6.875% Senior Secured Notes to enter into an Intercreditor Agreement pursuant to which the lien securing the 6.875% Senior Secured Notes would be contractually subordinated to the lien securing such first lien obligations, to the extent of the value of the collateral securing such obligations. The 6.875% Senior Secured Notes are effectively subordinated to any existing and future indebtedness that is secured by assets that do not constitute collateral under the 6.875% Senior Secured Notes to the extent of the value of such assets. All of the 6.875% Guarantors are wholly-owned subsidiaries of KCG.

On or after March 15, 2017, KCG may redeem all or a part of the 6.875% Senior Secured Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest on the 6.875% Senior Secured Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on March 15 of the years indicated below:

Year	Percentage
2017	103.438	%
2018	101.719	%
2019 and thereafter	100.000	%

KCG may also redeem the 6.875% Senior Secured Notes, in whole or in part, at any time prior to March 15, 2017 at a price equal to 100% of the aggregate principal amount of the 6.875% Senior Secured Notes to be redeemed, plus a contractual make-whole premium and accrued and unpaid interest. In addition, at any time on or prior to March 15, 2017, KCG may redeem up to 40% of the aggregate principal amount of the 6.875% Senior Secured Notes with the net cash proceeds of certain equity offerings, at a price equal to 106.875% of the aggregate principal amount of the 6.875% Senior Secured Notes, plus accrued and unpaid interest, if any.

The 6.875% 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 and repurchases of capital stock. As of September 30, 2016, the Company was in compliance with these covenants.

If at any time the 6.875% Senior Secured Notes are rated investment grade by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Group and no default or event of default has occurred and is continuing under the 6.875% Indenture, certain of the restrictive covenants will be suspended and will not apply to KCG or its restricted subsidiaries; provided, however, that such covenants will be reinstated if the 6.875% Senior Secured Notes subsequently cease to be rated or are no longer assigned an investment grade rating by both rating agencies.

The 6.875% Senior Secured Notes and the guarantee of the 6.875% Senior Secured Notes have not been registered under the Securities Act or the securities laws of any other jurisdiction and have no registration rights and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Company has determined that the terms of the 6.875% Senior Secured Notes do not give rise to a bifurcatable derivative instrument under GAAP.

The Company incurred issuance costs of approximately $12.6 million in connection with the issuance of the 6.875% Senior Secured Notes. The issuance costs are recorded, net, within Debt on the Consolidated Statements of Financial Condition and are being amortized as interest expense over the remaining term of the 6.875% Senior Secured Notes. Including issuance costs and original issue discount, the 6.875% Senior Secured Notes had an effective yield of 7.590%. Of the above mentioned costs, $11.3 million was paid to a related party. See Footnote 11 "Related Parties" for additional information relating to financing and advising activities.

In the first quarter of 2016, the Company repurchased $35.0 million par value of 6.875% Senior Secured Notes in the open market for $31.2 million (including interest owed). The Company recorded a $3.7 million pre-tax gain within Investment income and other, net on the Consolidated Statements of Operations as a result of these repurchases. The gain on repurchase was net of accelerated original issue discount of $0.3 million and accelerated deferred debt issuance costs of $0.7 million.

28

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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. In connection with the closing of the Mergers, on July 1, 2013, KCG became a party to the indenture under which the Convertible Notes were issued.

On March 16, 2015, the Convertible Notes became due and were paid off in full with a payment of $119.3 million comprising $117.3 million in principal and $2.1 million in interest.

The Convertible Notes bore 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.

8.25% Senior Secured Notes

On June 5, 2013 GETCO Financing Escrow LLC (“Finance LLC”), a wholly-owned subsidiary of GETCO, issued 8.25% senior secured notes due 2018 in the aggregate principal amount of $305.0 million (the “8.25% Senior Secured Notes”) pursuant to an indenture, dated June 5, 2013 (as amended and supplemented, the "8.25% 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 8.25% Senior Secured Notes plus certain escrow agent fees and expenses of $3.0 million.

The 8.25% Senior Secured Notes were scheduled to mature on June 15, 2018 and bore interest at a rate of 8.25% per year, payable on June 15 and December 15 of each year, beginning on December 15, 2013.

The 8.25% Senior Secured Notes Indenture provided that KCG could redeem the 8.25% Senior Secured Notes, in whole or in part, at any time prior to June 15, 2015 at a price equal to 100% of the aggregate principal amount of the 8.25% Senior Secured Notes to be redeemed, plus a make-whole premium and accrued and unpaid interest, if any.

On March 13, 2015, KCG provided 30 days’ notice that it would be calling its existing 8.25% Senior Secured Notes, effective April 13, 2015. On March 13, 2015, the Company used a portion of the gross proceeds from the 6.875% Senior Secured Notes, to deposit in an escrow account maintained by The Bank of New York Mellon, the trustee of the 8.25% Senior Secured Notes (“Bank of New York”) an amount sufficient to redeem the 8.25% Senior Secured Notes in full and accordingly satisfied and discharged the 8.25% Senior Secured Notes Indenture. The Company funded $330.2 million into an escrow account maintained by Bank of New York comprising the following: principal of $305.0 million, accrued interest for the period from December 16, 2014 to April 13, 2015 of $8.2 million, make whole premium which included 4.125% early redemption cost plus additional interest due from April 13, 2015 through June 15, 2015 totaling $16.5 million, and additional funds to cover other miscellaneous charges of $0.4 million.

In the second quarter of 2015, the escrow amount of $330.2 million was released and the required amount was paid out to the 8.25% Senior Secured Notes holders to redeem the 8.25% Senior Secured Notes. Upon the release of the $330.2 million escrow account, the Company recognized charges for a make-whole premium of $16.5 million and the write off of capitalized debt issuance costs of $8.5 million which are recorded as Debt extinguishment charges in the Consolidated Statement of Operations for the nine months ended September 30, 2015.

Revolving Credit Agreement

On June 5, 2015, KCG Americas LLC ("KCGA"), a wholly-owned broker dealer subsidiary of KCG, as borrower, and KCG, as guarantor, entered into a credit agreement (the "KCGA Facility Agreement”) with a consortium of banks. The KCGA Facility Agreement replaced the prior KCGA credit agreement, dated July 1, 2013, which was terminated as of June 5, 2015.

The KCGA Facility Agreement comprises two classes of revolving loans in a total aggregate committed amount of $355.0 million, including a swingline facility with a $50.0 million sub-limit, subject to two borrowing bases (collectively, the “KCGA Revolving Facility”): Borrowing Base A and Borrowing Base B (limited to a maximum loan amount of $115.0 million). The KCGA Revolving Facility also provides for future increases of the revolving credit facility of up to $145.0 million to a total of $500.0 million on certain terms and conditions.

Borrowings under the KCGA Revolving Facility bear interest, at the 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

29

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

one-month LIBOR rate plus (a) for each Borrowing Base A loan, a margin of 1.50% per annum and (b) for each Borrowing Base B loan, a margin of 2.50% per annum. For each Eurodollar Loan, the interest rate per annum is equal to an adjusted LIBOR rate corresponding to an interest period of one, two or three months plus (a) for each Borrowing Base A loan, a margin of 1.50% per annum and (b) for each Borrowing Base B loan, a margin of 2.50% per annum. As of both September 30, 2016 and December 31, 2015, there were no outstanding borrowings under the KCGA Facility Agreement.

The proceeds of the Borrowing Base A loans may be used solely to finance the purchase and settlement of securities. The proceeds of Borrowing Base B loans may be used solely to fund clearing deposits with the National Securities Clearing Corporation ("NSCC").

KCGA is charged a commitment fee at a rate of 0.40% per annum on the average daily amount of the unused portion of the KCGA Facility Agreement.

The loans under the KCGA Facility Agreement will mature on June 5, 2017. The KCGA Revolving Facility is fully and unconditionally guaranteed on an unsecured basis by KCG and, to the extent elected by KCGA, any of its or KCG’s other 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 KCGA Facility Agreement 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 KCGA, a maximum total asset to total regulatory capital ratio for KCGA, a minimum excess net capital limit for KCGA, a minimum liquidity ratio for KCGA, and a minimum tangible net worth threshold for KCGA. As of September 30, 2016, the Company and KCGA were in compliance with these covenants.

The KCGA Facility Agreement also contains events of default customary for facilities of its type, including: nonpayment of principal, interest, fees and other amounts when due, inaccuracy of representations and warranties in any material respect; violation of covenants; cross-default and cross-acceleration to material indebtedness; bankruptcy and insolvency events; material judgments; ERISA events; collateral matters; certain regulatory matters; and a “change of control”; subject, where appropriate, to threshold, notice and grace period provisions.

In connection with the KCGA Revolving Facility, the Company incurred issuance costs of $1.7 million which are recorded within Other assets on the Consolidated Statements of Financial Condition and are being amortized over the term of the facility.

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

	For the three months   ended September 30,				For the nine months   ended September 30,
	2016		2015		2016		2015
Interest expense	$	8,234	$	8,853	$	24,885	$	26,738
Debt extinguishment charges	—		—		—		25,006
Amortization of debt issuance costs (1)	795		841		2,411		2,697
Commitment fee (2)	371		343		1,089		1,140
Accelerated amortization of debt issuance costs (3)	—		—		738		—
Accelerated interest expense on repurchase of debt (3)	—		—		298		—
Total	$	9,400	$	10,037	$	29,421	$	55,581

⁽¹⁾  Included within Interest expense on the Consolidated Statements of Operations.

⁽²⁾  Included within Other expense on the Consolidated Statements of Operations.

⁽³⁾  In conjunction with the repurchase of debt in the open market, the Company recorded the prorated accelerated portion of its original issue discount and capitalized debt issuance costs. these costs have been netted against the gain on repurchase within Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2016.

11. Related Parties

The Company interacts with one party which is the beneficial owner of more than 10 percent of KCG’s Class A Common Stock. It also has trading and other activities with certain investees for which KCG accounts for under the equity method of accounting. Each is considered a related party for all applicable periods. See Footnote 8 "Investments" for the carrying value of these investees at September 30, 2016 and December 31, 2015 and for the Company's income

30

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

with respect to its equity earnings from these investees for the three and nine months ended September 30, 2016 and 2015.

The Company earns revenues, incurs expenses and maintains balances with these related parties or their affiliates in the ordinary course of business. As of the date and period indicated below, the Company had the following balances and transactions with its related parties or their affiliates (in thousands):

	For the three months   ended September 30,					For the nine months   ended September 30,
Statements of Operations	2016		2015			2016		2015
Revenues
Commissions and fees	$	8,171	$	4,496		$	23,246	$	10,624
Trading revenues, net	86		1,343			1,190		5,248
Interest, net	119		399			394		756
Total revenues from related parties	$	8,376	$	6,238		$	24,830	$	16,628
Expenses
Execution and clearance fees(1)	$	4,132	$	(4,525	)	$	8,577	$	(13,333	)
Communications and data processing	4,710		1,577			12,327		3,986
Payment for order flow	—		274			5		2,527
Collateralized financing interest	73		99			199		346
Professional fees	—		—			—		5,507
Other expense	71		479			125		1,756
Total expenses incurred with respect to related parties	$	8,986	$	(2,096	)	$	21,233	$	789

⁽¹⁾  Represents net volume based fees paid or received by KCG for taking or providing liquidity to related trading venues.

Statements of Financial Condition	September 30, 2016		December 31, 2015
Assets
Securities borrowed	$	35,421	$	10,573
Receivable from brokers, dealers and clearing organizations	4,601		1,987
Other assets	62,789		67,652
Liabilities
Securities loaned	$	3,127	$	3,844
Payable to brokers, dealers and clearing organizations	61		61
Accrued expenses and other liabilities	4,016		4,159

As noted in Footnote 8 "Investments", in the second quarter of 2016, the Company sold a portion of its investment in Bats, which it accounts for under the equity method. The Company recorded a pre-tax gain of $33.4 million from the sale, which is included in Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2016 and is not included in the table above.

In March 2015, the Company completed the sale of KCG Hotspot to Bats, a related party. The Company recorded a gain on sale of $385.0 million which is included as Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2015. The Company and Bats have agreed to share certain tax benefits, which could result in future payments to the Company of up to approximately $70.0 million in the three-year period following the close. KCG received the first annual payment of $6.6 million in March 2016. The remaining additional potential payments are recorded at their estimated fair value of $59.9 million in Other assets on the September 30, 2016 Consolidated Statement of Financial Condition and in the table above. See Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses" for additional information.

Additionally, for the nine months ended September 30, 2015, the Company paid one of its related parties $16.8 million in fees related to financing and advisory activities associated with the issuance of the 6.875% Senior Secured Notes and the sale of KCG Hotspot to Bats. The $16.8 million comprised $11.3 million that was capitalized as debt issuance costs and its remaining balance is included, net, within Debt on the Consolidated Statements of Financial Condition and $5.5 million that was recorded as Professional fees in the Consolidated Statement of Operations for the nine months ended September 30, 2015. These Professional fees are included in the table above, however, the $11.3

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KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

million capitalized debt issuance costs are not included in the table above as such costs are being amortized over the life of the debt.

In the nine months ended September 30, 2016, the Company paid $66,000 in fees to one of its related parties for acting as broker in connection with the Company's stock buyback program. In the nine months ended September 30, 2015, the Company paid $23,000 in fees to this same related party for acting as broker in connection with the Company's stock buyback program. Such fees are recorded within Treasury stock, at cost in the Consolidated Statements of Financial Condition at both September 30, 2016 and December 31, 2015 and are not included in the above table.

In the third quarter of 2015, the Company contributed microwave communication network assets to the JV, which is considered a related party. These assets were contributed at fair value and resulted in the Company recording a $4.3 million writedown of such assets. This charge is included in Writedown of assets and other real estate related charges on the Consolidated Statements of Operations for the three and nine months ended September 30, 2015.

During the second quarter of 2016, the Company repurchased 1.9 million shares of KCG Class A Common Stock for $26.1 million, for an average price per share of $13.48, and 6.6 million Warrants for $14.2 million from entities affiliated with two former directors of KCG.

12. Stock-Based Compensation

KCG Equity Incentive Plan

KCG Holdings, Inc. Amended and Restated Equity Incentive Plan (the "KCG Plan") was initially assumed from Knight in connection with the Mergers, and since the Mergers, has been maintained by the Company for the purpose of granting incentive awards to officers, employees and directors of the Company.

In April 2015, the Company’s Board of Directors approved and adopted an amended and restated version of the KCG Plan, the KCG Holdings, Inc. 2015 Amended and Restated Equity Incentive Plan (“the Amended 2015 Plan”), subject to approval by the KCG stockholders which was obtained on May 12, 2015 at the Company’s annual meeting of stockholders.

The Amended 2015 Plan removed a legacy provision that required, subject to limited exceptions, that awards of restricted stock units ("RSUs") and restricted shares be subject to minimum three year vesting for time-based awards and minimum one year vesting for performance-based awards. Additionally, in the second quarter of 2015, the Compensation Committee of the Company’s Board of Directors (the "Compensation Committee") amended the terms of existing RSUs previously granted by the Company as a component of annual incentive compensation in respect of the 2012, 2013 and 2014 performance years (the “Outstanding Annual RSUs”) to provide for the continued vesting of such RSUs following a voluntary resignation of employment, subject to the grantee’s ongoing compliance with non-competition and non-solicitation requirements through the duration of the vesting period (the “Continued Vesting Amendment”). The RSUs granted by the Company as a component of 2015 annual incentive compensation provide for the continued vesting treatment described above, and the Company expects that future equity awards granted as a component of annual incentive compensation (“Annual Equity Awards”) will have similar terms. As of September 30, 2016, there were approximately 25.1 million shares authorized for issuance under the Amended 2015 Plan, of which approximately 13.1 million shares are available for grant (subject to adjustment as provided under the Amended 2015 Plan).

The Amended 2015 Plan is administered by the Compensation Committee, and allows for the grant of stock options, stock appreciation rights ("SARs"), restricted stock, RSUs and cash-based awards (collectively, the “awards”), as defined by the Amended 2015 Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the Amended 2015 Plan also limits the number of awards that may be granted to a single individual.

Restricted Shares and Restricted Stock Units

The Company has historically awarded RSUs to eligible officers, employees and directors as a component of annual incentive compensation, and has also made off-cycle grants of RSUs for purposes of one-time, special or retention awards ("Off-Cycle Grants"). The majority of RSUs that have been granted by the Company vest ratably over three years and are subject to accelerated vesting, or continued vesting, following the grantee’s termination of employment, in accordance with the applicable award documents and employment agreements between the Company and the grantee.

32

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

As a result of implementing the Continued Vesting Amendment described above, the Outstanding Annual RSUs are no longer considered to have a service condition from an expense perspective. This amendment resulted in the acceleration of the unrecognized expense associated with such awards and the Company recorded a charge of $28.8 million in Employee compensation and benefits in the Consolidated Statements of Operations for the nine months ended September 30, 2015. Beginning in the second quarter of 2015, the Company also began to recognize in the current year the expense associated with the RSUs expected to be granted by the Company early in the following year for the current year's annual incentive compensation.

The Company measures compensation expense related to Off-Cycle Grants (and previously for Outstanding Annual RSUs) based on the fair value of KCG Class A Common Stock at the date of grant. When accruing compensation expense over the duration of a performance year prior to the grant of Annual Equity Awards for that year, the Company accrues compensation expense based on the estimated value of such future awards. For example, prior to granting the RSUs that are expected to be awarded by the Company in early 2017 as a component of annual incentive compensation for the 2016 performance year, the Company will accrue compensation expense for such awards over the year ended December 31, 2016, based on the estimated value of such awards. The amount accrued during the year for Annual Equity Awards is included in Accrued compensation expense on the Consolidated Statements of Financial Condition.

Compensation expense relating to RSUs, 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):

	For the three months   ended September 30,					For the nine months   ended September 30,
	2016			2015		2016		2015
Stock award compensation expense (1)	$	(232	)	$	17,906	$	24,124	$	72,202
Income tax benefit	(88		)	6,804		9,167		27,437

⁽¹⁾   Included in the nine months ended September 30, 2015 is $28.8 million of accelerated stock compensation expense related to the Outstanding Annual RSUs as a result of implementing the Continued Vesting Amendment.

The following table summarizes restricted awards activity for the nine months ended September 30, 2016 (awards in thousands):

	Restricted Stock Units
	Number of Units		Weighted- Average Grant date Fair Value
Outstanding at December 31, 2015	6,737		$	11.29
Granted	3,179		10.71
Vested	(4,027	)	10.98
Forfeited	(206	)	11.47
Outstanding at September 30, 2016	5,683		$	11.18

There was $5.2 million of unamortized compensation related to unvested RSUs at September 30, 2016 that are not Annual Equity Awards. The cost of these unvested RSUs, unless a modification occurs, is expected to be recognized over a weighted average life of 1.8 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. The stock options and SARs outstanding as of the date hereof have each been granted with an exercise price not less than the market value of KCG Class A Common Stock on the grant date and 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. Like RSUs, stock options and SARs are subject to accelerated vesting, or continued vesting following certain termination circumstances, in accordance with the applicable award agreements and employment agreements between the Company and the grantee. The Company issues new shares upon stock option exercises by its employees and directors, and may either issue new shares or provide a cash payment upon SARs exercises by its employees.

33

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The Company estimates the fair value of each stock option and SAR granted as of its respective grant date using the Black-Scholes option-pricing model. The principal assumptions utilized in valuing stock options and SARs and the methodology for estimating the inputs to such model include: 1) risk-free interest rate, the estimate of which is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the stock option or SAR; 2) expected volatility, the estimate of which is based on several factors including implied volatility of market-traded stock 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, the estimate of which is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific stock option and SAR characteristics, including the effect of employee terminations. There were no stock options or SARs granted during the three months ended September 30, 2016. There were 2.0 million stock options granted and no SARs granted during the nine months ended September 30, 2016. There were no stock options or SARs granted during the three and nine months ended September 30, 2015.

Compensation expense 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) expense on the Consolidated Statements of Operations are as follows (in thousands):

	For the three months   ended September 30,				For the nine months   ended September 30,
	2016		2015		2016		2015
Stock option and SAR compensation expense	$	190	$	915	$	538	$	2,856
Income tax benefit	72		348		204		1,085

The following table summarizes stock option and SAR activity and stock options exercisable for the nine months ended September 30, 2016 (awards in thousands):

	Number of Stock Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Life (years)
Outstanding at December 31, 2015 (1)	4,371		$	17.36
Granted	2,059		23.35
Exercised	(2	)	8.24
Forfeited or expired	(61	)	48.38
Outstanding at September 30, 2016 (1)	6,367		$	18.96	$	11,818	2.58
Exercisable at September 30, 2016	4,308		$	16.92	$	11,818	1.66
Available for future grants at September 30, 2016 (2)	13,073

⁽¹⁾ Includes 1.7 million SARs.

⁽²⁾ Represents shares available for grant of options, SARs, RSUs and other awards under the Amended 2015 Plan.

The aggregate intrinsic value is the amount by which the closing price of KCG Class A Common Stock exceeds the exercise price of the stock options or SARs, as applicable, multiplied by the number of shares underlying such award. There were 1,800 stock options exercised for the three and nine months ended September 30, 2016. There were no stock options or SARs exercised during the three and nine months ended September 30, 2015.

There is $0.7 million of unamortized compensation related to unvested stock options at September 30, 2016. The cost of these unvested awards is expected to be recognized over a weighted average life of 1.75 years.

Incentive units

Prior to the Mergers, GETCO awarded deferred compensation to its employees in the form of incentive units that generally vested over time. The value of these incentive units was determined at the date of grant based on the estimated enterprise value of GETCO 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 on the Consolidated Statements of Operations. Given that the units vested in connection with the Mergers, the Company fully amortized the costs associated with these units as of June 30, 2013. Deferred compensation payable at September 30,

34

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

2016 and December 31, 2015 related to incentive units were $2.6 million and $2.4 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 nine months ended September 30, 2016 (units in thousands):

	Vested
Incentive units at December 31, 2015	30
Issued	—
Vested	(10	)
Exercised	(3	)
Canceled	—
Incentive units at September 30, 2016	17

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

	For the three months   ended September 30,					For the nine months   ended September 30,
	2016		2015			2016		2015
Incentive units	$	253	$	(295	)	$	499	$	(109	)

13. Income Taxes

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.

The Company’s effective tax rate was a benefit of 59.9% on a pre-tax loss for the three months ended September 30, 2016, and an expense of 31.3% on pre-tax income for the nine months ended September 30, 2016. These rates differed from the federal statutory rate of 35% primarily due to benefits associated with research and development tax credits, tax deductions for domestic production activities, state and local taxes, and the effect of nondeductible expenses including certain compensation and meals and entertainment.

The Company’s effective tax rate of 38.1% for the three months ended September 30, 2015 differed from the federal statutory rate of 35% primarily due to state and local taxes and the effect of nondeductible expenses including certain compensation and meals and entertainment. The Company’s effective tax rate of 34.4% for the nine months ended September 30, 2015 differed from the federal statutory rate of 35% primarily due to the reversal of a valuation allowance on certain state tax net operating losses and other deferred tax assets as a result of a change in tax status of one of the Company's subsidiaries in the second quarter of 2015, other state and local taxes and the effect of nondeductible expenses including certain 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.

As of September 30, 2016, the Company is subject to U.S. Federal income tax examinations for the tax years 2013 through 2015, and to non-U.S. income tax examinations for the tax years 2007 through 2015. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2007 through 2015. 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.

At September 30, 2016, the Company had $4.5 million of unrecognized tax benefits, all of which would affect the Company's effective tax rate if recognized. At December 31, 2015, the Company had $3.6 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized.

35

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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

14. Accumulated Other Comprehensive Income

The following table presents changes in Accumulated other comprehensive income (loss), net of tax by component for the three and nine months ended September 30, 2016 and 2015 (in thousands):

	Unrealized Gains on Available-for-Sale Securities		Foreign Currency Translation Adjustments			Total
Balance, June 30, 2016	$	234	$	(450	)	$	(216	)
Other comprehensive income (loss)	88		18			106
Balance September 30, 2016	$	322	$	(432	)	$	(110	)

	Unrealized Gains on Available-for-Sale Securities		Foreign Currency Translation Adjustments			Total
Balance, December 31, 2015	$	150	$	200		$	350
Other comprehensive income (loss)	172		(632		)	(460		)
Balance September 30, 2016	$	322	$	(432	)	$	(110	)

	Unrealized Gains (Losses) on Available-for-Sale Securities			Foreign Currency Translation Adjustments			Total
Balance June 30, 2015	$	489		$	725		$	1,214
Other comprehensive loss	(4		)	(595		)	(599		)
Amount reclassified from Available-for-sale securities	(308		)	—			(308		)
Net current period other comprehensive loss	$	(312	)	$	(595	)	$	(907	)
Balance September 30, 2015	$	177		$	130		$	307

	Unrealized Gains (Losses) on Available-for-Sale Securities			Foreign Currency Translation Adjustments			Total
Balance December 31, 2014	$	352		$	1,781		$	2,133
Other comprehensive income (loss)	133			(1,651		)	(1,518		)
Amount reclassified from Available-for-sale securities	(308		)	—			(308		)
Net current period other comprehensive loss	$	(175	)	$	(1,651	)	$	(1,826	)
Balance September 30, 2015	$	177		$	130		$	307

The following table presents the effects of reclassifications out of Accumulated Other Comprehensive Income and into the Consolidated Statements of Operations for the three and nine months ended September 30, 2015 (in thousands):

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Other Comprehensive Income			Affected Line Item in the Consolidated Statement of Operations where Net Income is Presented
Available-for-sale securities:
Reclassification of unrealized net gains	497			Investment income and other, net
Related income tax expense	(189		)	Income tax (benefit) expense
	$	308		Net of tax

36

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

15. Warrants and Stock Repurchase

Warrants

As a portion of the consideration in the Mergers, former GETCO unitholders received, in addition to KCG Class A Common Stock, 24.3 million Class A, Class B and Class C Warrants, which were issued in accordance with the Warrant Agreement, dated July 1, 2013, between KCG and Computershare Shareowner Services LLC (the “Warrant Agreement”) and which are subject to the terms and conditions of the Warrant Agreement.

The Warrant Agreement includes various anti-dilution and similar provisions that require adjustments to the exercise prices of the Class A, Class B and Class C Warrants and/or the number of shares of KCG Class A Common Stock issuable upon exercise of the Warrants upon certain events and actions taken by the Company, including the Company’s repurchase of KCG Class A Common Stock through a public tender offer.

As a result of the Company’s "modified Dutch auction" tender offer ("Tender Offer") in the second quarter of 2015, the exercise price of each of the Class A, Class B and Class C Warrants was adjusted in accordance with the terms of the Warrant Agreement. All other terms of the Warrants remained the same.

The adjusted exercise price for each class of Warrants and the activity for the nine months ended September 30, 2016 were as follows (Warrants in thousands):

	Class A			Class B			Class C
Original Exercise Price	$	12.00		$	13.50		$	15.00
Adjusted Exercise Price	$	11.70		$	13.16		$	14.63
Initial term (years)	4			5			6
Expiration	7/1/2017			7/1/2018			7/1/2019
										Total
Warrants - Outstanding at December 31, 2015	7,097			7,254			7,254			21,605
Exercised	(53		)	(18		)	—			(71	)
Repurchased	(2,677		)	(2,828		)	(2,828		)	(8,333	)
Warrants - Outstanding at September 30, 2016	4,367			4,408			4,426			13,201

During the third quarter of 2016, the Company repurchased 0.3 million Warrants for $0.7 million. During the nine months ended September 30, 2016, the Company repurchased 8.3 million Warrants for $15.9 million.

Stock Repurchase

As of September 30, 2016, approximately $138.5 million in authority remained under the current share repurchase program, which is subject to the restrictive covenants in the 6.875% Senior Secured Notes Indenture.

See Footnote 11 "Related Parties" for additional information regarding stock and warrant repurchases.

16. Earnings Per Share

Basic earnings or loss per common share (“EPS”) has been calculated by dividing net income or loss by the weighted average shares of the Company's 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 RSUs, options, Warrants and SARs excluded from the EPS calculation was approximately 17.2 million and 27.9 million for the three months ended September 30, 2016 and 2015, respectively. The number of such RSUs, options, Warrants and SARs excluded from the EPS calculation was approximately 14.3 million and 18.3 million for the nine months ended September 30, 2016 and 2015, respectively. Such RSUs, options, Warrants and SARs were excluded from the EPS calculation as their inclusion would have an anti-dilutive impact on the EPS calculation. The computation of diluted shares can vary among periods due in part to the change in the average price of the Company's Class A Common Stock.

37

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share amounts):

	For the three months ended September 30,
	2016						2015
	Numerator  / net (loss)			Denominator /     shares			Numerator  / net income		Denominator /  shares
(Loss) income and shares used in basic calculations	$	(11,214	)	85,009			$	21,937	91,134
Effect of dilutive stock based awards
Restricted awards				—					809
Stock options and SARs				—					136
Warrants				—					—
(Loss) income and shares used in diluted calculations	$	(11,214	)	85,009			$	21,937	92,079
Basic (loss) earnings per common share				$	(0.13	)			$	0.24
Diluted (loss) earnings per common share				$	(0.13	)			$	0.24

	For the nine months ended September 30,
	2016				2015
	Numerator  / net income		Denominator /     shares		Numerator  / net income		Denominator /  shares
Income and shares used in basic calculations	$	59,505	86,531		$	252,076	104,244
Effect of dilutive stock based awards
Restricted awards			1,066				1,994
Stock options and SARs			546				390
Warrants			338				188
Income and shares used in diluted calculations	$	59,505	88,481		$	252,076	106,816
Basic earnings per common share			$	0.69			$	2.42
Diluted earnings per common share			$	0.67			$	2.36

17. Significant Clients

The Company considers significant clients to be those clients who account for 10% or more of the total U.S. equity market making dollar value traded by the Company. No clients accounted for more than 10% of the Company’s U.S. equity dollar value traded during the three and nine months ended September 30, 2016 or 2015.

18. 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 or investigations 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 litigation and regulatory matters, particularly in regulatory examinations or investigations or other proceedings in which substantial or indeterminate damages or fines are sought, or where such matters are in the early stages, the Company cannot estimate losses or ranges of losses for such matters 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, fine or sanction 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. The Company carries directors’ and officers’ liability insurance coverage for potential claims, including securities actions, against the Company, Knight and GETCO and their respective directors and officers.

38

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

Other Legal and Regulatory Matters

The Company owns subsidiaries including regulated entities that are subject to extensive oversight under federal, state and applicable international laws as well as self-regulatory organization ("SRO") rules. Changes in market structure and the need to remain competitive require constant changes to the Company's systems and order handling procedures. The Company makes 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 the Company's regulators in the U.S. and abroad. As a major order flow execution destination, the Company is named from time to time in, or is asked to respond to a number of regulatory matters brought by U.S. regulators, foreign regulators, SROs, as well as actions brought by private plaintiffs, which arise from its business activities. There has recently been an increased focus by regulators on Anti-Money Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on suspicious activity reporting and transactions involving microcap securities. In addition, there has been an increased focus by Congress, federal and state regulators, the SROs and the media on market structure issues, and in particular, high frequency trading, best execution, internalization, ATS manner of operations, market fragmentation and complexity, colocation, access to market data feeds and remuneration arrangements, such as payment for order flow and exchange fee structures. The Company has received information requests from various authorities, including the SEC, requesting, among other items, information regarding these market structure matters, which the Company is in the process of responding.

The Company is currently the subject of various regulatory reviews and investigations by federal, state and foreign regulators and SROs, including the SEC, the U.S. Department of Justice, the Financial Industry Regulatory Authority, Inc. and the Financial Conduct Authority ("FCA"). In some instances, these matters may rise to a disciplinary action and/or a civil or administrative action. For example, the Autorité des Marchés Financiers ("AMF") recently completed an investigation of GETCO’s trading activities on Euronext for the period 2010 to 2012. In a decision, dated July 8, 2016, the AMF's enforcement committee imposed a €400,000 monetary penalty on GETCO which the Company has decided not to appeal. The Company fully reserved for the monetary penalty in the second quarter of 2016 and anticipates paying the monetary penalty in the fourth quarter of 2016.

Capital Leases

The Company enters into capitalized lease obligations related to certain computer equipment. These obligations represent drawdowns under a revolving secured lending facility with a single lender. At September 30, 2016, the obligations have a weighted-average interest rate of 4.40% per annum and are on varying 3-year terms. The carrying amounts of the capital lease obligations approximate fair value and is recorded in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The future minimum payments including interest under the capitalized leases at September 30, 2016 consist of (in thousands):

	Minimum Payments
Three months ended December 31, 2016	$	532
2017	620
Total	$	1,152

The total interest expense related to capital leases for the three and nine months ended September 30, 2016 and 2015 included in Debt interest expense on the Consolidated Statements Operations is as follows (in thousands):

	For the three months   ended September 30,				For the nine months   ended September 30,
	2016		2015		2016		2015
Interest expense - Capital leases	$	15	$	38	$	56	$	160

Operating Leases

The Company leases office space under noncancelable operating leases. Certain office leases contain fixed dollar-based escalation clauses. Rental expense under the office leases was $6.4 million and $4.0 million for the three months ended September 30, 2016 and 2015, respectively, and $18.9 million and $12.9 million for the nine months ended September 30, 2016 and 2015, respectively, and is included in Occupancy and equipment rentals on the Consolidated Statements of Operations. The Company also subleases certain of its excess capacity to third parties

39

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

and collects sublease income on such premises. Such income is part of lease loss accruals included within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

The Company leases certain computer and other equipment under noncancelable operating leases. As of September 30, 2016, 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
Three months ending December 31, 2016	$	5,717	$	1,452	$	4,265
Year ending December 31, 2017	28,549		5,144		23,405
Year ending December 31, 2018	26,872		4,791		22,081
Year ending December 31, 2019	24,318		4,131		20,187
Year ending December 31, 2020	22,918		2,957		19,961
Thereafter through December 31, 2031	175,323		10,348		164,975
Total	$	283,697	$	28,823	$	254,874

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 September 30, 2016, the Company had provided letters of credit for $11.1 million, collateralized by cash, as a guarantee for several of its lease obligations and for a trading JV. 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.

Guarantees

The Company is a member of exchanges that trade and clear futures contracts. Associated with its memberships, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange. Although the rules governing different exchange memberships vary, in general the Company’s guarantee obligations would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other nondefaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the financial statements for these agreements and management believes that any potential requirement to make payments under these agreements is remote.

There was one compensation guarantee at September 30, 2016 that extended beyond December 31, 2016. There were no compensation guarantees at September 30, 2015 that extended beyond December 31, 2015.

Representations and Warranties

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.

Urban Financial of America, LLC, ("Urban"), the reverse mortgage origination and securitization business that was sold by KCG in November 2013, has advised KCG that it will seek indemnification from KCG for losses on certain loans that were underwritten prior to KCG’s disposition of Urban. This potential obligation relates to approximately 40 loans which have been identified as either loans pursuant to which Urban was required to provide an indemnification to the U.S. Department of Housing and Urban Development (“HUD”) in the event the loans sustained losses or as not qualifying for HUD insurance. Based on information currently available, KCG estimates that its maximum exposure to losses with respect to reimbursing Urban for any potential losses on these loans will not exceed $8.5 million. The Company has not recorded any liabilities related to these potential losses as of September 30, 2016.

40

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The activity in the liability accounts related to the Company’s lease losses and lease terminations for its U.S. leases are recorded in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition as follows (in thousands):

	For the nine months ended September 30, 2016			For the year ended December 31, 2015
Balance as of beginning of period	$	18,892		$	5,897
Real estate charges incurred	—			23,186
Payments made, net	(459		)	(8,921		)
Interest accretion	(3,949		)	(1,270		)
Balance as of end of period	$	14,484		$	18,892

19. 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 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.

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.

20. Business Segments

As of September 30, 2016, 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, 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, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making. KCG 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.

The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, options, futures and fixed income to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals for transactions; however, the Company may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and ETFs; (iii) a fixed income ECN that also offers trading applications; and (iv) an ATS for U.S. equities.

In September 2016, the Company completed the acquisition of Neonet. Neonet is an independent agency broker and execution specialist based in Stockholm, Sweden. The results of Neonet, beginning on the date of acquisition, are included in this segment.

The Corporate and Other segment contains investments principally in strategic financial services-oriented opportunities; manages the deployment of capital across the organization; houses executive management functions; 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.

41

KCG HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

The Company’s revenues, (loss) income 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 three months ended September 30, 2016:
Revenues	$	136,107		$	63,713		$	8,712		$	208,532
Pre-tax earnings	(13,776		)	(439		)	(13,759		)	(27,974		)
Total assets	5,280,491			1,060,460			409,650			6,750,601
For the three months ended September 30, 2015:
Revenues	$	299,755		$	69,713		$	7,568		$	377,036
Pre-tax earnings	85,419			(1,050		)	(48,951		)	35,419
Total assets	5,125,761			798,956			925,452			6,850,169
For the nine months ended September 30, 2016:
Revenues	$	606,849		$	208,245		$	58,776		$	873,870
Pre-tax earnings	102,223			7,506			(23,173		)	86,556
Total assets	5,280,491			1,060,460			409,650			6,750,601
For the nine months ended September 30, 2015:
Revenues	$	716,631		$	597,502		$	20,941		$	1,335,074
Pre-tax earnings	129,160			370,072			(114,799		)	384,433
Total assets	5,125,761			798,956			925,452			6,850,169

Included in Revenues and Pre-tax earnings within Corporate and Other for the nine months ended September 30, 2016 is a $33.4 million gain from the sale of a portion of the Company's investment in Bats. Included in Revenues and Pre-tax earnings within Global Execution Services for the nine months ended September 30, 2015 are results of KCG Hotspot through March 13, 2015, the date of the sale. Also included in Revenues and Pre-tax earnings within the Global Execution Services segment for the nine months ended September 30, 2015 is a gain related to the sale of KCG Hotspot of $385.0 million and $373.8 million, respectively.

Included in total assets within Corporate and Other at September 30, 2016 is $8.2 million related to Assets of businesses held for sale. See Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses" for further information.

42

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein (“MD&A”), “Quantitative and Qualitative Disclosures About Market Risk” in Part I, Item 3, “Legal Proceedings” and "Risk Factors" in Part II and the documents incorporated by reference herein may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could” or “may,” or by variations of such words or by similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about KCG Holdings, Inc.’s (the “Company” or “KCG”) industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with: (i) the inability to manage trading strategy performance and grow revenue and earnings (ii) the receipt of additional payments from the sale of KCG Hotspot that are subject to certain contingencies; (iii) changes in market structure, legislative, regulatory or financial reporting rules, including the increased focus by Congress, federal and state regulators, the SROs and the media on market structure issues, and in particular, the scrutiny of high frequency trading, best execution, internalization, alternative trading systems, market fragmentation, colocation, access to market data feeds, and remuneration arrangements such as payment for order flow and exchange fee structures; (iv) past or future changes to KCG's organizational structure and management; (v) KCG's ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by KCG's customers and potential customers; (vi) KCG's ability to keep up with technological changes; (vii) KCG's ability to effectively identify and manage market risk, operational and technology risk, cybersecurity risk, legal risk, liquidity risk, reputational risk, counterparty and credit risk, international risk, regulatory risk, and compliance risk; (viii) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; (ix) the effects of increased competition and KCG's ability to maintain and expand market share; (x) the announced plan to relocate KCG’s global headquarters from Jersey City, NJ to New York, NY; and (xi) KCG's ability to complete the sale or disposition of any or all of the assets or businesses that are classified as held for sale. The list above is not exhaustive. Because forward-looking statements involve risks and uncertainties, the actual results and performance of the Company may materially differ from the results expressed or implied by such statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made herein. Readers should carefully review the risks and uncertainties disclosed in the Company’s reports with the U.S. Securities and Exchange Commission (“SEC”), including those detailed under “Certain Factors Affecting Results of Operations” in this MD&A and in “Risk Factors” in Part II, Item 1A of KCG's Annual Report on Form 10-K for the year ended December 31, 2015 and in other reports or documents the Company files with, or furnishes to, the SEC from time to time. This information should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto contained in this Quarterly Report on Form 10-Q, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time.

Executive Overview

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

43

Results of Operations

As of September 30, 2016, our operating segments comprised the following:

• Market Making— Our Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, we commit capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making. We are an active participant on all major global equity and futures exchanges and also trade on substantially all domestic electronic options exchanges. As a complement to electronic market making, our 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 of the London Stock Exchange ("AIM").

• Global Execution Services— Our Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, options, futures and fixed income to institutions, banks and broker dealers. We generally earn commissions as an agent between principals for transactions; however, we may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income electronic communication network ("ECN") that also offers trading applications; and (iv) an alternative trading system ("ATS") for U.S. equities.

In September 2016, we completed the acquisition of Neonet Securities AB ("Neonet"). Neonet is an independent agency broker and execution specialist based in Stockholm, Sweden. The results of Neonet, beginning on the date of acquisition, are included in this segment.

• Corporate and Other— Our Corporate and Other segment contains investments principally in strategic financial services-oriented opportunities; manages the deployment of capital across the organization; houses executive management functions; and maintains corporate overhead expenses and all other income and expenses that are not attributable to our other segments. Our Corporate and Other segment also contains functions that support the Company’s other segments such as self-clearing services, including stock lending activities.

Management from time to time conducts a strategic review of our businesses and evaluates their potential value in the marketplace relative to their current and expected returns. To the extent management and our Board of Directors determine that the disposal of a business may return a higher value to stockholders, or that the business is no longer core to our strategy, the Company may divest or exit such business.

During the fourth quarter of 2015, management conducted a strategic review of our businesses and evaluated their potential value in the marketplace relative to their current and expected returns. As a result of this review, we determined that certain of our businesses, including our business as an equities designated market maker ("DMM") on the New York Stock Exchange ("NYSE"), were no longer considered core to our strategy, and we began seeking opportunities to exit or divest of these businesses. We believe that this course of action did not represent a strategic shift that will have a major effect on our operations and financial results, but did meet the requirements to be considered held for sale at December 31, 2015 and for assets of businesses not yet sold, continue to meet such requirements as of September 30, 2016. The fair value of such assets, of $8.2 million and $26.0 million, on September 30, 2016 and December 31, 2015, respectively, are included within Assets of businesses held for sale on the Consolidated Statements of Financial Condition.

In May 2016, we completed the sale of our DMM business to Citadel Securities LLC (“Citadel”) and in the first quarter of 2016, we completed the sale of assets related to our retail U.S. options market making business, both of which were included in Assets of businesses held for sale at December 31, 2015. As a result of the sale of our retail U.S. options market making business, we recorded a $2.9 million gain within our Market Making segment. The results of the DMM and retail U.S. options market making business are included in the Market Making segment, up through the dates of their respective sales.

In March 2015, we completed the sale of KCG Hotspot to Bats Global Markets, Inc. ("Bats") and recorded a gain on sale of $385.0 million or $373.8 million net of direct costs associated with the sale which comprised professional

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fees of $6.7 million and compensation of $4.5 million. The results of the business and gain on sale of KCG Hotspot are included in the Global Execution Services segment, up through the date of its sale.

For additional information, see Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses" to the Company's Consolidated Financial Statements included in Part I, Item 1 "Financial Statements (Unaudited)" herein.

The following table sets forth: (i) Revenues, (ii) Expenses and (iii) Pre-tax earnings (loss) of our segments and on a consolidated basis (in thousands):

	For the three months   ended September 30,						For the nine months   ended September 30,
	2016			2015			2016			2015
Market Making
Revenues	$	136,107		$	299,755		$	606,849		$	716,631
Expenses	149,883			214,336			504,626			587,471
Pre-tax (loss) earnings	(13,776		)	85,419			102,223			129,160
Global Execution Services
Revenues	63,713			69,713			208,245			597,502
Expenses	64,152			70,763			200,739			227,430
Pre-tax (loss) earnings	(439		)	(1,050		)	7,506			370,072
Corporate and Other
Revenues	8,712			7,568			58,776			20,941
Expenses	22,471			56,519			81,949			135,740
Pre-tax loss	(13,759		)	(48,951		)	(23,173		)	(114,799		)
Consolidated
Revenues	208,532			377,036			873,870			1,335,074
Expenses	236,506			341,617			787,314			950,641
Pre-tax (loss) earnings	$	(27,974	)	$	35,419		$	86,556		$	384,433

For additional details regarding our segments, see Footnote 20 “Business Segments” included in Part I, Item 1 "Financial Statements (Unaudited)" herein.

Consolidated revenues for the three months ended September 30, 2016 were $208.5 million, compared to $377.0 million for the comparable period in 2015. Consolidated pre-tax earnings for the three months ended September 30, 2016 was a loss of $28.0 million as compared to pre-tax earnings of $35.4 million for the comparable period in 2015.

Consolidated revenues for the nine months ended September 30, 2016 were $873.9 million, which included a $33.4 million gain from the sale of a portion of the Company's investment in Bats, compared to $1,335.1 million for the comparable period in 2015 which included a $385.0 million gain from the sale of KCG Hotspot to Bats. Consolidated pre-tax earnings for the nine months ended September 30, 2016 were $86.6 million as compared to $384.4 million for the comparable period in 2015.

The Company’s net revenues, which we define as total revenues, less execution and clearance fees, payments for order flow and collateralized financing interest, and which excludes certain revenue items such as the aforementioned $33.4 million gain from the sale of a portion of the Company's investment in Bats for the nine months ended September 30, 2016 and the $385.0 million gain on the sale of KCG Hotspot for the nine months ended September 30, 2015 ("Net revenues”) were $112.0 million for the three months ended September 30, 2016, compared to $283.8 million for the comparable period in 2015, and $552.0 million for the nine months ended September 30, 2016, compared to $678.3 million for the comparable period in 2015. Net revenues is a non-GAAP measure that we use to measure our performance as well as to make certain strategic decisions.

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The following tables provide a full reconciliation of total revenues to Net revenues for the three and nine months ended September 30, 2016 and 2015 (in thousands):

	For the three months   ended September 30,				For the nine months   ended September 30,
	2016		2015		2016		2015
Reconciliation of Total revenues to Net revenues:
Total revenues per Consolidated Statements of Operations	$	208,532	$	377,036	$	873,870	$	1,335,074
Less:
Execution and clearance fees	71,995		67,502		219,371		198,573
Payments for order flow	13,845		17,121		39,590		47,277
Collateralized financing interest	10,693		8,617		29,465		25,932
Gain from the sale of a portion of the Company's investment in Bats	—		—		33,397		—
Gain from the sale of KCG Hotspot	—		—		—		385,026
Net revenues	$	111,999	$	283,796	$	552,047	$	678,266

Consolidated revenues for the three months ended September 30, 2016 of $208.5 million decreased from consolidated revenues of $377.0 million for the comparable period in 2015. The $168.5 million decrease is primarily due to the decrease in the performances of our Market Making trading strategies and agency execution services, all of which were impacted by lower volumes and market volatility compared to the third quarter of 2015.

Consolidated revenues for the nine months ended September 30, 2016 of $873.9 million decreased from consolidated revenues of $1,335.1 million for the comparable period in 2015. The $461.2 million decrease is primarily due to the $385.0 million gain from the sale of KCG Hotspot in 2015 as well as lower trading revenues from Market Making in 2016 offset, in part, by the $33.4 million gain from the sale of a portion of the Company's investment in Bats.

The changes in our results by segment from the comparable period in 2015 are summarized as follows:

• Market Making— Our pre-tax earnings from Market Making for the three months ended September 30, 2016 was a loss of $13.8 million, and pre-tax earnings of $85.4 million for the comparable period in 2015. Results for 2015 included a $4.4 million charge related to a writedown of assets. Our pre-tax earnings from Market Making for the nine months ended September 30, 2016 were $102.2 million, and pre-tax earnings of $129.2 million for the comparable period in 2015. Results for the three and nine months ended September 30, 2016 were affected by a decrease in the performance of our U.S. equities market making strategies which is the largest driver of our revenues. Their performance was impacted by lower market volatility and volumes as well as more narrow spreads of equities traded offset, in part, by lower expenses. Results for 2015 included the aforementioned $4.4 million charge related to a writedown of assets as well as a $19.8 million charge in the second quarter of 2015 related to stock-based compensation resulting from stockholder-approved changes made to outstanding equity awards.

• Global Execution Services— Our pre-tax loss from Global Execution Services for the three months ended September 30, 2016 was $0.4 million, and a pre-tax loss of $1.1 million for the comparable period in 2015. Results for 2016 were aided by improved results from our ETF and KCG BondPoint businesses. Our pre-tax earnings from Global Execution Services for the nine months ended September 30, 2016 were $7.5 million, and pre-tax earnings of $370.1 million for the comparable period in 2015.This decrease resulted primarily from the following: (i) a $385.0 million gain from the sale of KCG Hotspot recognized in the 2015 period, (ii) related professional fees of $6.7 million, (iii) sale-related compensation expense of $4.5 million, (iv) earnings from the operation of KCG Hotspot up until its sale, which were included for most of the first quarter of 2015, and (v) an $8.2 million charge in 2015 related to the aforementioned changes to our stock-based compensation. The decrease in pre-tax results was partially offset by improved results in 2016 in our ETF and KCG BondPoint businesses.

• Corporate and Other— Our pre-tax loss from Corporate and Other was $13.8 million for the three months ended September 30, 2016 and a pre-tax loss of $49.0 million for the comparable period in 2015. Our pre-tax loss from Corporate and Other was $23.2 million for the nine months ended September 30, 2016 and a loss of $114.8 million for the comparable period in 2015.The results for the three and nine months ended September 30, 2016 were aided by a $33.4 million gain from the sale of a portion of our investment in Bats. The results for the three and nine months ended September 30, 2015 were primarily affected by the following:

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(i) a $25.0 million charge related to the early retirement of debt including a contractual make-whole premium, (ii) $35.3 million in various real estate charges comprising the accelerated amortization of leasehold improvements for excess real estate in the Jersey City and Chicago offices (iii) a $0.8 million charge in 2015 related to the aforementioned changes to our stock-based compensation and (iv) $0.8 million in writedown of assets.

Headquarters relocation

In the second quarter of 2015, we adopted a plan to consolidate our metro New York City area real estate, which currently comprises our Jersey City, NJ and New York, NY locations, through a relocation of our corporate headquarters to lower Manhattan in late 2016. As a result of this plan, we expect to abandon the majority of our Jersey City, NJ location on a staggered basis through the end of 2016 and expect to abandon our current New York, NY location by the end of 2016. Upon adopting the relocation plan, we prospectively shortened the remaining useful lives of the leasehold improvements and other fixed assets associated with these locations to reflect the projected abandonment dates. We are recording approximately $5.0 million per quarter of incremental depreciation and amortization which began in the third quarter of 2015 and will run through the end of 2016 as a result of shortening the remaining useful lives.

As a result of the planned relocation of our new corporate headquarters, we continue to incur additional occupancy expenses of approximately $1.6 million per quarter in 2016, which will also continue to run through the end of 2016.

Our address has changed to 300 Vesey Street, New York, New York 10282 and our move into our new corporate headquarters has begun and is expected to be completed by the end of 2016.

We have also adopted a plan to relocate our main data center from Jersey City, NJ. We anticipate that this data center relocation will result in additional capital expenditures during 2017, which will lead to increases in depreciation, and we also expect this data center relocation to result in increases in our communications and data processing costs. We expect to complete our data center relocation in 2018.

Certain Factors Affecting Results of Operations

We may experience significant variation in our future results of operations. Fluctuations in our future performance may result from numerous factors, including, among other things, global financial market conditions and the resulting competitive, credit and counterparty risks; cyclicality, seasonality and other economic conditions; the value of our securities positions and other financial instruments and our ability to manage the risks attendant thereto; the volume, notional dollar value traded and volatility levels within the core markets where our market making and trade execution businesses operate; the composition, profile and scope of our relationships with institutional and broker dealer clients; the performance, size and volatility of our direct-to-client market making portfolios; the performance, size and volatility of our non-client exchange-based trading activities; the overall size of our balance sheet and capital usage; impairment of goodwill and/or tangible or intangible assets; the performance of our global operations, trading technology and technology infrastructure; the effectiveness of our self-clearing and futures platforms and our ability to manage risks related thereto; the availability and cost of credit and liquidity in the marketplace; our ability to prevent erroneous trade orders from being submitted due to technology or other issues (such as the events that affected Knight on August 1, 2012) and avoiding the consequences thereof; the performance, operation and connectivity to various market centers; our ability to manage personnel, compensation, overhead and other expenses, including our occupancy expenses under our office leases (and related expenses in connection with the planned relocation of our headquarters) and expenses and charges relating to legal and regulatory proceedings; the strength of our client relationships; changes in payments for order flow; changes to execution quality and changes in clearing, execution and regulatory transaction costs; interest rate movements; the addition or loss of executive management, sales, trading and technology professionals; geopolitical, legislative, legal, regulatory and financial reporting changes specific to financial services and global trading; legal or regulatory matters and proceedings; the amount, timing and cost of business divestitures/acquisitions or capital expenditures; the integration, performance and operation of acquired businesses; the incurrence of costs associated with acquisitions and dispositions; actions taken relating to our strategic investments; investor sentiment; the effectiveness of the measures we take to mitigate the risks of cyber threats; and technological changes and events.

Such factors may also have an impact on our ability to achieve our strategic objectives, including, without limitation, increases in market share, growth and profitability in the businesses in which we operate. If demand for our services declines or our performance deteriorates significantly due to any of the above factors, and we are unable to adjust our

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cost structure on a timely basis, our operating results could be materially and adversely affected. As a result of the foregoing factors, period-to-period comparisons of our revenues and operating results are not necessarily meaningful and such comparisons cannot be relied upon as indicators of future performance. There also can be no assurance that we will be able to continue to achieve the level of revenues that we have experienced in the past or that we will be able to improve our operating results.

Trends Affecting Our Company

We believe that our businesses are affected by various global economic trends as well as more specific trends. Some of the specific trends that impact our operations, financial condition and results of operations are:

• Clients continue to focus on statistics measuring the quality of their executions (including speed of execution and amount of price improvement). In an effort to improve the quality of their executions as well as increase efficiencies, market makers continue to increase the level of sophistication and automation within their operations and the extent of price improvement they provide to their clients. The continued focus on execution quality has resulted in greater price competition in the marketplace, which, along with market structure changes and market conditions, has negatively impacted the performance of our trading models and margin metrics and those of other market making firms.

• Market Making and Global Execution Services transaction volumes executed by clients have fluctuated over the past few years due to market conditions, retail and institutional investor sentiment and a variety of other factors. Market Making and Global Execution Services transaction volumes are not predictable and may not be sustainable.

• There continues to be growth in electronic trading, including direct market access platforms, algorithmic and program trading, high frequency trading, ECNs, ATSs and dark liquidity pools. In addition, electronic trading continues to expand to other asset classes, including options, currencies and fixed income. The expansion of electronic trading may result in the growth of innovative electronic products and competition for order flow and may further reduce demand for traditional institutional voice services.

• Over the past several years, exchanges have become far more competitive, and market participants have created ATSs, ECNs and other execution venues which compete with the OTC and listed trading venues. Initiatives by these and other market participants could draw market share away from the Company, and thus negatively impact our business. In addition, while there is the possibility for consolidation among trading venues, there are many new entrants into the market, including ATSs, Multilateral Trading Facilities, systematic internalizers, dark liquidity pools, high frequency trading firms and market making firms competing for retail and institutional order flow. Some of these new entrants are proposing features that may affect internalization practices and trading strategies of current market participants. Further, many broker dealers offer their own internal crossing networks. These factors continue to create further fragmentation and competition in the marketplace.

• Market structure changes, competition, market conditions and a steady increase in electronic trading have resulted in a reduction in institutional commission rates and volumes which may continue in the future. Additionally, many institutional clients allocate commissions to broker dealers based not only on the quality of executions, but also in exchange for research or participation in soft dollar and commission recapture programs.

• Market structure changes, competition and technology advancements have led to an industry focus on increasing execution speeds and a dramatic increase in electronic message traffic. Increases in execution speeds and message traffic require additional expenditures for technology infrastructure and place heavy strains on the technology resources, bandwidth and capacities of market participants. Additionally, the expansion by market participants into trading of non-equities products offers similar challenges.

• There has been increased scrutiny of the capital markets industry by the regulatory and legislative authorities, both in the U.S. and abroad, which could result in increased regulatory costs in the future particularly as it relates to the trading of equities, fixed income, commodities, and currencies. As has been widely reported, there has been an increased focus by securities regulators, federal and state law enforcement agencies, Congress and the media on market structure issues, and, in particular, high frequency trading, best execution, ATS manner of operations, market fragmentation, public disclosures around order types and execution protocols, market structure complexity, colocation, access to market data feeds and remuneration

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arrangements such as payment for order flow and exchange fee structures. New legislation or new or modified regulations and rules could occur in the future. Members of the U.S. Congress continue to ask the SEC and other regulators to closely review the financial markets regulatory structure and make the changes necessary to insure the rule framework governing the U.S. financial markets is comprehensive and complete. The SEC and other regulators, both in the U.S. and abroad, have adopted and will continue to propose and adopt rules and take other policy actions where necessary, on a variety of marketplace issues – including, but not limited to: high frequency trading, market fragmentation and complexity, transaction taxes, off-exchange trading, dark liquidity pools, internalization, post-trade attribution, colocation, market access, short sales, consolidated audit trails, policies and procedures relating to technology controls and systems, optimal tick sizes, and market volatility rules. The SEC has recently approved a pilot program for certain securities to increase the minimum trading increment and to include a “trade at” component, requiring that certain of these transactions occur only on an exchange, which could lead to increased costs for certain transactions.

• Unique instances of trading volatility impact our businesses. For example, on October 15, 2014, the market for U.S. Treasury securities, futures and other closely related financial markets experienced an unusually high level of volatility. Additionally, on August 24, 2015, the securities markets experienced an unusually high level of volatility that contributed to the delayed opening of securities on primary exchanges, sharp price moves in the major indices and in ETFs, and frequent triggering of trading halts. Market structure changes that may ensue as a result of these events and their effect on the Company are difficult to forecast.

• There could be continued fluctuations, including possible substantial increases, in Section 31 fees and fees imposed by other regulators. In addition, clearing corporations are considering various proposals which could require substantial increases in clearing margin, liquidity and collateral requirements, and financial transaction taxes have been introduced in certain jurisdictions and may be introduced in others.

• The Dodd-Frank Act affects nearly all financial institutions that operate in the U.S. While the weight of the Dodd-Frank Act falls more heavily on large, complex financial institutions, smaller institutions will continue to face a more complicated and expensive regulatory framework.

• There has recently been an increased focus and increased sanction levels by regulators on broker-dealers’ controls and surveillance for Anti-Money Laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on suspicious activity reporting and transactions involving microcap securities.

Income Statement Items

The following section briefly describes the key components of, and drivers to, our significant revenues and expenses.

Revenues

Our revenues consist principally of Trading revenues, net and Commissions and fees from all of our business segments.

Trading profits and losses on principal transactions primarily relate to our global market making activities and are included within Trading revenues, net. These revenues are primarily affected by trading volumes, including the number and dollar value of equities, fixed income, options, futures and FX trades; volatility in the marketplace; the performance of our direct-to-client and non-client trading models; our ability to derive trading gains by taking proprietary positions; changes in our execution standards and execution quality that we provide to customers; our market share; the mix of order flow from broker dealer and institutional clients; client service and relationships; and regulatory changes and evolving industry customs and practices.

Revenues on transactions for which we charge explicit commissions or commission equivalents, which include the majority of our institutional client orders, are included within Commissions and fees. Also included in Commissions and fees are volume based fees earned from providing liquidity to other trading venues. Commissions and fees are primarily affected by changes in our equity, fixed income, futures and, prior to the sale of KCG Hotspot, foreign exchange transaction volumes with institutional clients; client relationships; changes in commission rates; client experience on the various platforms; level of volume based fees from providing liquidity to other trading venues; and the level of our soft dollar and commission recapture activity.

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Interest, net is earned from our cash held at banks, cash held in trading accounts at third party clearing brokers and from collateralized financing arrangements, such as securities borrowing. The Company’s third party clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions. Net interest is primarily affected by interest rates; the level of cash balances held at banks and third party clearing brokers; the level of our securities borrowing activity; our level of securities positions in which we are long compared to our securities positions in which we are short; and the extent of our collateralized financing arrangements.

Investment income and other, net primarily represents returns on our investments as well as gains on the sales of our businesses and repurchases of our debt. Such income or loss is primarily affected by the performance and activity of our strategic investments and the effect of gains on the sale of businesses.

Expenses

Employee compensation and benefits expense primarily consists of salaries and wages paid to all employees; performance-based compensation, which includes compensation paid to certain sales personnel and certain incentive compensation paid to employees based on individual performance and the performance of our business; employee benefits; and stock and unit-based compensation. Employee compensation and benefits expense fluctuates, for the most part, based on Net revenues, profitability, changes in our business mix and the number and mix of employees.

Execution and clearance fees primarily represent fees paid to third party clearing brokers for clearing equities, options and fixed income transactions; transaction fees paid to Nasdaq and other exchanges, clearing organizations and regulatory bodies; and fees paid to third parties, primarily for executing, processing and settling trades on the NYSE, other exchanges, ECNs and other third party execution destinations. Execution and clearance fees primarily fluctuate based on changes in trade and share volume, execution strategies, rate of clearance fees charged by clearing brokers and rate of fees paid to ECNs, exchanges, other third party execution destinations and certain regulatory bodies.

Communications and data processing expense primarily consists of costs for obtaining market data, connectivity, telecommunications services, colocation facilities and systems maintenance.

Depreciation and amortization expense results from the depreciation of fixed assets, which consist of computer hardware, equipment and furniture and fixtures, and the amortization of purchased software, capitalized software development costs, acquired intangible assets and leasehold improvements. We depreciate our fixed assets and amortize our intangible assets on a straight-line basis over their expected useful lives. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease.

Payments for order flow primarily represent payments to broker dealer clients, in the normal course of business, for directing to us their order flow primarily in U.S. equities. Payments for order flow will fluctuate as we modify our rates and as our percentage of clients whose policy is not to accept payments for order flow varies. Payments for order flow also fluctuate based on U.S. equity share and option volumes, our profitability and the mix of market orders, limit orders, and customer mix.

Collateralized financing interest consists primarily of costs associated with financing arrangements such as securities lending and sale of financial instruments under our agreements to repurchase.

Occupancy and equipment rentals consist primarily of rent and utilities related to leased premises and office equipment.

Debt interest expense consists primarily of costs associated with our debt including amortization of debt issuance costs and capital lease obligations.

Professional fees consist primarily of legal, accounting, consulting, and other professional fees.

Business development consists primarily of costs related to sales and marketing, conferences and client relationship management.

Debt extinguishment charges represent make-whole premiums paid to note holders and the writedown of capitalized debt costs as a result of the early retirement of our debt.

Writedown of assets and other real estate related charges consist primarily of charges related to our operating leases and the acceleration of amortization and depreciation of leaseholds and fixed assets for office space that has been abandoned.

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Other expenses include regulatory fees, corporate insurance, employment fees and general office expense.

Three months ended September 30, 2016 and 2015

Revenues

Market Making

	For the three months ended September 30,
	2016			2015			Change			% of Change
Trading revenues, net (thousands)	$	105,975		$	269,858		$	(163,883	)	(60.7	)%
Commissions and fees (thousands)	30,959			30,792			167			0.5	%
Interest, net and other (thousands)	(827		)	(895		)	68			7.6	%
Total revenues from Market Making (thousands)	$	136,107		$	299,755		(163,648		)	(54.6	)%
U.S. equity Market Making statistics:
Average daily dollar volume traded ($ millions)	26,352			31,517			(5,165		)	(16.4	)%
Average daily trades (thousands)	3,288			4,025			(737		)	(18.3	)%
Average daily NYSE and Nasdaq shares traded (millions)	949			985			(36		)	(3.7	)%
Average daily OTC Bulletin Board and OTC Market shares traded (millions)	2,820			3,838			(1,018		)	(26.5	)%
Average revenue capture per U.S. equity dollar value traded (bps)	0.67			1.27			(0.60		)	(47.2	)%

Totals may not add due to rounding.

Global Execution Services

	For the three months ended September 30,
	2016			2015			Change			% of Change
Commissions and fees (thousands)	$	56,883		$	64,235		$	(7,353	)	(11.4	)%
Trading revenues, net (thousands)	7,539			7,226			313			4.3	%
Interest, net and other (thousands)	(709		)	(1,748		)	1,040			59.5	%
Total revenues from Global Execution Services (thousands)	$	63,713		$	69,713		(6,000		)	(8.6	)%
Average daily KCG Institutional Equities U.S. equities shares traded (millions) (1)	206.4			236.3			(29.9		)	(12.7	)%
Average daily KCG BondPoint fixed income par value traded ($ millions)	201.5			130.5			71.0			54.4	%

⁽¹⁾  KCG Institutional Equities average daily U.S. National Market System (NMS) equity share volume represents trading on behalf of clients covering algorithmic trading and high touch sales trading in single stocks, ETFs and programs. In 2016, KCG modified the reporting of trading volumes within the Global Execution Services segment to remove internal volume generated by KCG trading desks and add volume from sales trading. Prior periods have been recast for this new presentation.

Totals may not add due to rounding.

Corporate and Other

	For the three months ended September 30,
	2016		2015		Change		% of Change
Total revenues from Corporate and Other (thousands)	$	8,712	$	7,568	$	1,144	15.1	%

Trading revenues, net were $113.8 million in the three months ended September 30, 2016, down 59.0% from $277.7 million in the comparable period in 2015. Trading revenues, net are primarily driven by the performance of our direct-to-client and non-client based strategies within our Market Making segment. The majority of these revenues as well as the majority of the quarter over quarter decline in revenues are derived from our market making strategies in U.S. equities whose performances declined during the current period. The decrease in performance is primarily due to less favorable market conditions during the third quarter of 2016 including substantially decreased market volumes, a tightening of spreads for equities traded and volatility. The decrease in Trading revenues, net was partially offset by the growth of our client ETF business within our Global Execution Services segment.

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We calculate average revenue capture per U.S. equity market making dollar value traded (“revenue capture”) to measure the revenue that we earn per dollar traded within U.S. equity market making. Revenue capture is a calculated metric that helps summarize the performance of our U.S. equity market making strategies and is impacted in a similar manner to the components that make it up, including market volumes and volatility and the performance of our U.S. equity trading strategies. The revenue capture metric is calculated as the total of net domestic market making trading revenues plus volume based fees from providing liquidity to other trading venues (which are included in Commissions and fees), (collectively “U.S. Equity Market Making Revenues”), divided by the total dollar value of the related equity transactions for the relevant period.

Average revenue capture per U.S. equity dollar traded was 0.67 basis points ("bps") in the three months ended September 30, 2016, down 47.2% from 1.27 bps for the comparable period in 2015. U.S. Equity Market Making Revenues were $112.4 million and $256.9 million for the three months ended September 30, 2016 and 2015, respectively.

Commissions and fees decreased 7.6% to $87.8 million in the three months ended September 30, 2016, compared to $95.0 million for the comparable period in 2015. The decrease was primarily driven by lower revenues from the Global Execution Services segment's agency-based high touch and electronic trading businesses, which includes the use of our client algorithms and order routing, offset, partially by higher revenues from KCG BondPoint.

Interest income, net increased to $0.7 million in the three months ended September 30, 2016, compared to a net loss of $1.1 million for the comparable period in 2015. Our interest income varies based on the amount of cash held at banks and level of our balances held at our third party clearing brokers, and interest rates.

Investment income and other, net was $6.2 million in the three months ended September 30, 2016, compared to $5.4 million for the comparable period in 2015.The increase is attributable to returns on our investments accounted for under the equity method.

Expenses

Employee compensation and benefits expense fluctuates, for the most part, based on Net revenues, profitability, changes in our business mix and the number and mix of employees. Employee compensation and benefits expense was $49.0 million for the three months ended September 30, 2016 and $121.6 million for the comparable period in 2015. In the third quarter of 2016, employee compensation and benefits was 43.8% of Net revenues and 42.8% in the comparable period in 2015. The decrease on a dollar basis was due to lower discretionary compensation accruals as a result of lower Net revenues and decreased profitability as well as fewer employees.

The number of full time employees decreased to 981 at September 30, 2016 from 1,033 at September 30, 2015. The decrease was due to natural attrition and the sale of our DMM business in the second quarter of 2016 offset, in part, by the acquisition of Neonet in September of 2016.

Execution and clearance fees were $72.0 million for the three months ended September 30, 2016 and $67.5 million for the comparable period in 2015. Execution and clearance fees were 34.5% of revenues in the third quarter of 2016 and 17.9% of revenues in the third quarter of 2015. The increase in Execution and clearance fees on a dollar basis was primarily due to a change in certain trading models and increased transaction costs. The increase as a percentage of revenues was due to decrease in performance of our trading models. Execution and clearance fees fluctuate based on changes in transaction volumes, shift in business mix, regulatory fees and operational efficiencies and scale.

Communications and data processing expenses were $36.7 million for the three months ended September 30, 2016 and $35.3 million for the comparable period in 2015. The increase in communications and data processing expense primarily relates to higher connectivity and colocation expenses offset, in part, by lower market data costs.

Depreciation and amortization expense results from the depreciation of fixed assets and the amortization of purchased software, capitalized internal use software development costs, acquired intangible assets and leasehold improvements. Depreciation and amortization expense was $21.9 million for the three months ended September 30, 2016 and $23.8 million for the comparable period in 2015. The decrease is due to the full depreciation of certain data center assets as well as microwave-related assets offset, in part, by additional depreciation as a result of purchases of fixed assets and increased capitalized internal-use software. These decreases were also aided by the sale of certain microwave communication network assets to the JV in 2015 as well as intangible assets included in Assets of businesses held for sale, which are no longer being amortized. See "Headquarters relocation" earlier in this section for further information regarding depreciation.

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Payments for order flow fluctuate in total and as a percentage of revenue due to changes in volume, client and product mix, client preference, profitability, and competition. Payments for order flow were $13.8 million for the three months ended September 30, 2016 and $17.1 million for the comparable period in 2015. As a percentage of revenues, Payments for order flow increased to 6.6% for 2016 from 4.5% of revenues in 2015. The decrease on a dollar basis is due to the decrease in activity related to our retail options market making business which we exited in the first quarter of 2016 offset, in part, by greater payments for order flow related to our U.S. equity market making business.

Collateralized financing interest expense was $10.7 million for the three months ended September 30, 2016 and $8.6 million for the comparable period in 2015. Collateralized financing interest expense relates to the funding of our securities positions primarily through stock loan and repurchase agreements. The increase is a result of additional funding during the current period as well as an increase to funding rates.

Occupancy and equipment rentals expense was $9.3 million for the three months ended September 30, 2016 and $7.5 million for the comparable period in 2015. The increase is primarily due to rent expense related to the lease of our new headquarters which commenced in the fourth quarter of 2015. See "Headquarters relocation" earlier in this section for further information.

Debt interest expense was $9.2 million for the three months ended September 30, 2016 and $10.0 million for the comparable period in 2015. The decrease is due to reduced debt outstanding as a result of the repurchase of $35.0 million par value of our 6.875% Senior Secured Notes in the open market during the first quarter of 2016.

Professional fees were $4.1 million for the three months ended September 30, 2016 and $4.4 million for the comparable period in 2015. The decrease in Professional fees was primarily due to lower consulting and legal fees.

Writedown of assets and other real estate related charges of $34.0 million for the three months ended September 30, 2015 primarily represent lease termination charges as well as accelerated amortization and depreciation of certain leasehold improvements and fixed assets in our Jersey City and Chicago offices. See "Headquarters relocation" earlier in this section for further information. There were no Writedown of assets and other real estate related charges for the three months ended September 30, 2016.

All other expenses were $9.8 million for the three months ended September 30, 2016 and $11.8 million for the comparable period for 2015. The decrease primarily relates to a decrease in recruiting and other employee costs as well as a decrease in marketing and client related activity included in Business development costs.

Our effective tax rate for the three months ending September 30, 2016 is a benefit of 59.9%, which differs from the federal statutory rate of 35% primarily due to benefits associated with research and development tax credits, tax deductions for domestic production activities, state and local taxes and the effect of nondeductible expenses including certain compensation and meals and entertainment. Our effective tax rate of 38.1% for the three months ending September 30, 2015 differs from the federal statutory rate of 35% primarily due to state and local taxes and the effect of nondeductible expenses including certain compensation and meals and entertainment.

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Nine months ended September 30, 2016 and 2015

Revenues

Market Making

	For the nine months ended September 30,
	2016		2015			Change			% of Change
Trading revenues, net (thousands)	$	500,937	$	631,327		$	(130,391	)	(20.7	)%
Commissions and fees (thousands)	105,155		90,685			14,470			16.0	%
Interest, net and other (thousands)	758		(5,381		)	6,139			N/M
Total revenues from Market Making (thousands)	$	606,849	$	716,631		(109,782		)	(15.3	)%
U.S. equity Market Making statistics:
Average daily dollar volume traded ($ millions)	27,712		30,140			(2,428		)	(8.1	)%
Average daily trades (thousands)	3,692		3,840			(148		)	(3.9	)%
Average daily NYSE and Nasdaq shares traded (millions)	1,008		934			74			7.9	%
Average daily OTC Bulletin Board and OTC Market shares traded (millions)	3,407		4,284			(877		)	(20.5	)%
Average revenue capture per U.S. equity dollar value traded (bps)	0.96		1.01			(0.05		)	(5.0	)%

Totals may not add due to rounding.

N/M - Not meaningful

Global Execution Services

	For the nine months ended September 30,
	2016			2015		Change			% of Change
Commissions and fees (thousands) (1)	$	183,747		$	191,673	$	(7,927	)	(4.1	)%
Trading revenues, net (thousands)	27,320			25,886		1,434			5.5	%
Interest, net and other (thousands) (1)	(2,821		)	379,943		(382,764		)	N/M
Total revenues from Global Execution Services (thousands)	$	208,245		$	597,502	(389,257		)	(65.1	)%
Average daily KCG Institutional Equities U.S. equities shares traded (millions) (2)	231.3			227.7		3.6			1.6	%
Average daily KCG BondPoint fixed income par value traded ($ millions)	199.2			138.1		61.1			44.2	%

⁽¹⁾  For the nine months ended September 30, 2015, Commissions and fees includes activity related to KCG Hotspot through March 13, 2015, while Interest, net and other includes the $385.0 million gain on the sale of KCG Hotspot.

⁽²⁾  KCG Institutional Equities average daily U.S. National Market System (NMS) equity share volume represents trading on behalf of clients covering algorithmic trading and high touch sales trading in single stocks, ETFs and programs. In 2016, KCG modified the reporting of trading volumes within the Global Execution Services segment to remove internal volume generated by KCG trading desks and add volume from sales trading. Prior periods have been recast for this new presentation.

Totals may not add due to rounding.

Corporate and Other

	For the nine months ended September 30,
	2016		2015		Change		% of Change
Total revenues from Corporate and Other (thousands)	$	58,776	$	20,941	$	37,835	180.7	%

Trading revenues, net were $524.6 million in the nine months ended September 30, 2016, down 20.2% from $657.2 million in the comparable period in 2015. Trading revenues, net are primarily driven by the performance of our direct-to-client and non-client based strategies within our Market Making segment. The majority of these revenues as well as the majority of the year over year decline in revenues are derived from our market making in U.S. equities whose performances declined during the current period. The decrease in performance is due to unfavorable market conditions in 2016 including lower market volumes and muted volatility. The decrease in trading revenues, net was partially offset by the growth of our client ETF business within our Global Execution Services segment.

Average revenue capture per U.S. equity dollar traded was 0.96 bps in the nine months ended September 30, 2016, down 5.0% from 1.01 bps for the comparable period in 2015. U.S. Equity Market Making Revenues were $504.1

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million and $571.9 million for the nine months ended September 30, 2016 and 2015, respectively.

Commissions and fees increased 2.3% to $288.9 million in the nine months ended September 30, 2016, compared to $282.4 million for the comparable period in 2015. The increase was primarily driven by higher revenues from the Market Making segment's volume based fees that are earned for providing liquidity to other trading venues as well as the growth of our agency-based electronic trading businesses, which includes the use of our client algorithms and order routing, and record highs from KCG BondPoint, partially offset by the decrease in commissions from our high touch sales business and the sale of our KCG Hotspot business, in March 2015.

Interest income, net increased to $1.1 million in the nine months ended September 30, 2016, compared to a net loss of $1.7 million for the comparable period in 2015. Our interest income varies based on the amount of cash held and level of our balances held at our third party clearing brokers, and interest rates.

Investment income and other, net was $59.3 million in the nine months ended September 30, 2016, compared to $397.2 million for the comparable period in 2015. Income for the nine months ended September 30, 2016 includes a $33.4 million gain from the sale of a portion of the Company's investment in Bats, a $2.9 million gain from the sale of assets related to our retail U.S. options market making operations, a $3.7 million gain from the repurchase of a portion of our 6.875% Senior Secured Notes and a $2.8 million net gain primarily resulting from a distribution from an investment. Income for the nine months ended September 30, 2015 includes the $385.0 million gain on the sale of KCG Hotspot within our Global Execution Services segment. In addition to these items, the current period had higher revenues from our investments which we account for under the equity method.

Expenses

Employee compensation and benefits expense fluctuates, for the most part, based on Net revenues, profitability, changes in our business mix and the number and mix of employees. Employee compensation and benefits expense was $222.7 million for the nine months ended September 30, 2016 and $337.8 million for the comparable period in 2015. In 2016, employee compensation and benefits was 40.3% of Net revenues. The comparable period in 2015 includes a $28.8 million charge related to stock-based compensation resulting from stockholder-approved changes made during the second quarter of 2015 related to outstanding equity awards and $4.5 million in compensation expense related to the sale of KCG Hotspot. Aside from these factors, employee compensation and benefits was lower in the current year period as a result of fewer employees and lower discretionary compensation accruals as a result of lower Net revenues and decreased profitability.

Execution and clearance fees were $219.4 million for the nine months ended September 30, 2016 and $198.6 million for the comparable period in 2015. Execution and clearance fees were 25.1% of revenues for 2016. The increase in Execution and clearance fees on a dollar basis was primarily due to a change in certain trading models and increased transaction costs. Execution and clearance fees fluctuate based on changes in transaction volumes, shift in business mix, regulatory fees and operational efficiencies and scale.

Communications and data processing expenses were $108.8 million for the nine months ended September 30, 2016 and $103.3 million for the comparable period in 2015. The increase in communications and data processing expense primarily relates to higher connectivity expenses.

Depreciation and amortization expense results from the depreciation of fixed assets and the amortization of purchased software, capitalized internal use software development costs, acquired intangible assets and leasehold improvements. Depreciation and amortization expense was $66.0 million for the nine months ended September 30, 2016 and $65.2 million for the comparable period in 2015. The increase relates to additional depreciation as a result of purchases of fixed assets and increased capitalized internal-use software as well as accelerated amortization and depreciation of certain leasehold improvements at our existing Jersey City and New York City offices as a result of reducing the remaining estimated useful lives of such assets upon adopting a plan in the second quarter of 2015 to relocate our headquarters in late 2016. See "Headquarters relocation" earlier in this section for further information.

Payments for order flow were $39.6 million for the nine months ended September 30, 2016 and $47.3 million for the comparable period in 2015. As a percentage of revenues, Payments for order flow were 4.5% for 2016. The decrease on a dollar basis is due to the decrease in activity related to our retail U.S. options market making business which we exited in the first quarter of 2016.

Collateralized financing interest expense was $29.5 million for the nine months ended September 30, 2016 and $25.9 million for the comparable period in 2015. Collateralized financing interest expense relates to the funding of our

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securities positions primarily through stock loan and repurchase agreements. The increase is a result of additional funding and higher funding rates during the period.

Occupancy and equipment rentals expense was $28.1 million for the nine months ended September 30, 2016 and $22.3 million for the comparable period in 2015. The increase is primarily due to rent expense related to the lease of our new headquarters which commenced in late 2015. See "Headquarters relocation" earlier in this section for further information.

Debt interest expense was $27.8 million for the nine months ended September 30, 2016 and $30.3 million for the comparable period in 2015. The decrease is due to reduced debt outstanding as a result of the repurchase of $35.0 million par value of our 6.875% Senior Secured Notes in the open market during the first quarter of 2016.

Professional fees were $15.5 million for the nine months ended September 30, 2016 and $21.3 million for the comparable period in 2015. The decrease in Professional fees was primarily due to the $6.7 million in legal, consulting and investment banking fees related to the sale of KCG Hotspot in the first quarter of 2015 offset, in part, by higher legal and consulting costs.

Debt extinguishment charges for the nine months ended September 30, 2015 of $25.0 million comprised a $16.5 million contractual debt make-whole premium paid to note holders and an $8.5 million writedown of capitalized debt costs as a result of the redemption of our $305.0 million 8.25% Senior Secured Notes in April 2015. There were no Debt extinguishment charges for the nine months ended September 30, 2016.

Writedown of assets and other real estate related charges of $40.5 million for the nine months ended September 30, 2015 primarily represent lease termination charges as well as accelerated amortization and depreciation of certain leasehold improvements and fixed assets related to abandoned spaces in our Chicago and Jersey City offices as well as adjustments to the previous calculations of lease losses due to actual and updated assumptions. See "Headquarters relocation" earlier in this section for further information. There were no Writedown of assets and other real estate related charges for the nine months ended September 30, 2016.

All other expenses were $30.0 million for the nine months ended September 30, 2016 and $33.3 million for the comparable period for 2015. The decrease primarily relates to a decrease in recruiting and other employee costs as well as a decrease in marketing and client related activity included in Business development costs.

Our effective tax rate of 31.3% for the nine months ended September 30, 2016 differed from the federal statutory rate of 35% primarily due to benefits associated with research and development tax credits, tax deductions for domestic production activities, state and local taxes and the effect of nondeductible expenses including certain compensation and meals and entertainment. Our effective tax rate for the nine months ending September 30, 2015 of 34.4% differed from the federal statutory rate of 35% primarily due to the reversal of a valuation allowance on certain state tax net operating losses and other deferred tax assets as a result of a change in tax status of one of our subsidiaries, offset in part by other state and local tax accruals and the effect of nondeductible expenses.

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Financial Condition, Liquidity and Capital Resources

Financial Condition

We have maintained a highly liquid balance sheet, with a substantial portion of our total assets consisting of cash, highly liquid marketable securities and short term receivables. As of September 30, 2016 and December 31, 2015, we had total assets of $6.75 billion and $6.04 billion, respectively, a significant portion of which consisted of cash or assets readily convertible into cash as follows (in thousands):

	September 30, 2016		December 31, 2015
Cash and cash equivalents	$	505,462	$	581,313
Financial instruments owned, at fair value:
Equities	2,641,499		2,129,208
Debt Securities	251,264		136,387
Listed Options	12,190		178,360
Collateralized agreements:
Securities borrowed	1,958,095		1,636,284
Receivable from brokers, dealers and clearing organizations (1)	518,952		571,222
Total cash and assets readily convertible to cash	$	5,887,462	$	5,232,774

⁽¹⁾ Excludes $177.5 million and $110.0 million of securities failed to deliver as of September 30, 2016 and December 31, 2015, respectively.

Totals may not add due to rounding.

Substantially all of the non-cash amounts disclosed in the table above can be liquidated into cash within five business days under normal market conditions, however, the liquidated values may be subjected to haircuts during distressed market conditions.

Cash and cash equivalents decreased from December 31, 2015 due to repurchases of a portion of our 6.875% Senior Secured Notes and Class A Common Stock and Warrants, payments of 2015 year-end bonuses in 2016, capital expenditures and estimated income tax payments offset, in part, by cash generated by our operating activities. See Footnote 15 "Warrants and Stock Repurchase" and Footnote 10 “Debt” included in Part I, Item 1. "Financial Statements (Unaudited)" of this Form 10-Q for further information.

Financial instruments owned principally consist of equities that trade on the NYSE, NYSE Amex and NYSE Arca markets, Nasdaq and unlisted securities that trade over-the-counter and through marketplaces operated by the OTC Markets Group Inc. as well as U.S. government and non-U.S. government obligations and corporate debt securities, which include short-term bond funds. These financial instruments are used to generate revenues in our Market Making and Global Execution Services segments.

Securities borrowed represent the value of cash or other collateral deposited with securities lenders to facilitate our trade settlement process.

Receivable from brokers, dealers and clearing organizations include interest bearing cash balances held with third party clearing brokers, including, or net of, amounts related to securities transactions that have not yet reached their contracted settlement date, which is generally within three business days of the trade date.

As of September 30, 2016, $1.66 billion of securities, primarily equities, have been pledged as collateral to third-parties under financing arrangements. As of December 31, 2015, $1.35 billion of securities, primarily equities, were pledged as collateral to third-parties under financing arrangements.

Goodwill and intangible assets, net of accumulated amortization were slightly lower at September 30, 2016 compared to December 31, 2015 primarily due to amortization of intangible assets offset, in part, by additional capitalized internal-use software.

Other assets primarily comprise deposits, prepaids and other miscellaneous receivables. Other assets decreased primarily as a result of a decrease in customer receivable balances as well as the partial collection of our receivable from Bats related to our sale of KCG Hotspot. See Footnote 3 "Assets of Businesses Held for Sale & Sales of Businesses" to the Company's Consolidated Financial Statements included in Part I, Item 1 "Financial Statements (Unaudited)" of this Form 10-Q for further information on the Bats receivable.

The change in the balances of Financial instruments owned, Receivable from brokers, dealers and clearing organizations and Securities borrowed are all consistent with activity of our trading strategies. Our securities inventory

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fluctuates based on trading volumes, market conditions, trading strategies utilized and our pre-determined risk limits. The increase in these balances from December 31, 2015 to September 30, 2016 was due to higher trading activity and other quarter end activity.

Total liabilities were $5.31 billion at September 30, 2016 and $4.60 billion at December 31, 2015. Similar to the asset side, the change in Financial instruments sold, not yet purchased, Collateralized financings and Payable to brokers, dealers and clearing organizations is related to the activity of our trading strategies. The decrease in Debt was primarily due to the repurchase of $35.0 million par value of our 6.875% Senior Secured Notes in the first quarter of 2016. The decrease in our Accrued compensation expense is due to the payment of our 2015 bonus offset by accruals for current year bonus.

Equity decreased by $4.5 million to $1.44 billion at September 30, 2016. The decrease in equity from December 31, 2015 was primarily a result of our stock and warrant repurchase activities in 2016 offset by Net income and employee stock grants.

Liquidity and Capital Resources

We have financed our business primarily through cash generated by operations, sales of businesses, a series of debt transactions and the issuance of equity.

At September 30, 2016, we had net current assets, which consist of net assets readily convertible into cash including assets segregated or held in separate accounts under federal and other regulations, less current liabilities, of approximately $1.03 billion.

Our cash flow activities were as follows (in thousands):

	For the nine months ended September 30,
	2016			2015
Net cash provided by (used in):
Operating activities	$	91,006		$	33,514
Investing activities	(31,970		)	322,590
Financing activities	(134,884		)	(305,071		)

Operating activities

For the nine months ended September 30, 2016, cash of $91.0 million was provided by operating activities as compared to cash of $33.5 million for the nine months ended September 30, 2015. The increase was primarily related to increased cash funding of our inventories offset by decreased profitability related to our operating activities. The increases we have in our long and short inventory and related financing activities, led to increases in operating assets and operating liabilities as compared to the 2015 period. Increases in operating assets generally result in a use of cash while increases in operating liabilities generally result in an increase in cash. The largest increases in operating assets were Financial instruments owned, at fair value, and Securities borrowed, while the largest increases in operating liabilities were Payable to brokers, dealers and clearing organizations, Collateralized financings, and Financial instruments sold, not yet purchased, at fair value.

Investing activities

For the nine months ended September 30, 2016, cash of $32.0 million was used in investing activities as compared to cash of $322.6 million provided by investing activities in the comparable period in 2015. The decrease was primarily related to the $360.9 million in cash received from the sale of KCG Hotspot in the 2015 period.

For the nine months ended September 30, 2016, we received cash of $80.7 million from the sale of assets, including our former DMM; investments, including our sale of a portion of our Bats investment; and redemptions from investments, offset by purchases of investments.

Capital expenditures, including capitalized software development costs, were $107.1 million and $38.4 million for the nine months ended September 30, 2016 and 2015, respectively. The increased expenditure is primarily due to the build out of our new corporate headquarters. See “Headquarters relocation” earlier in this section for further information.

For the nine months ended September 30, 2016, cash of $2.3 million was used in purchase of Neonet, net of cash acquired. There were no purchases of businesses in the 2015 period.

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Financing activities

For the nine months ended September 30, 2016, cash of $134.9 million was used in financing activities as compared to $305.1 million cash used in the comparable period in 2015. The primary uses of cash for financing activities in the nine months ended September 30, 2016 related to the repurchase of KCG Class A Common Stock and Warrants and a portion of our 6.875% Senior Secured Notes. The primary uses of cash for financing activities in the 2015 period related to the use of $330.0 million for stock repurchases through our tender offer, other repurchases of KCG Class A Common Stock and the repayments of our 8.25% Senior Secured Notes and Cash Convertible Senior Subordinated Notes. These cash outflows in 2015 were offset by cash provided by the issuance of our 6.875% Senior Secured Notes.

See Footnote 10 “Debt” included in Part I, Item 1 “Financial Statements (Unaudited)” of this Form 10-Q for a description of our debt as of September 30, 2016.

Stock and Warrant Repurchases

During the second quarter of 2016, our Board of Directors authorized an expanded share repurchase program of up to $200.0 million of our KCG Class A Common Stock and Warrants (including the $2.4 million of remaining capacity under the previously authorized repurchase program). All stock and warrant repurchases are subject to the restrictive covenants in the 6.875% Senior Secured Notes Indenture.

During the third quarter of 2016, under our Board approved repurchase plan, we repurchased 500 shares of our KCG Class A Common Stock for $7,000 and repurchased 0.3 million Warrants for $0.7 million.

We may repurchase shares from time to time in open market transactions, accelerated stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. We caution that there are no assurances that any further repurchases will actually occur.

See Footnote 15 "Warrants and Stock Repurchase" and Footnote 11 "Related Parties" included in Part I, Item 1 “Financial Statements (Unaudited)” of this Form 10-Q for further information.

As of September 30, 2016 we had 86.2 million shares of KCG Class A Common Stock outstanding including RSUs as compared to 90.2 million shares at December 31, 2015.

Regulatory requirements

KCG Americas LLC ("KCGA"), our U.S. registered broker dealer, is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker dealers and require the maintenance of minimum levels of net capital, as defined in SEC Rule 15c3-1 as well as other capital requirements from several commodity organizations including the Commodity Futures Trading Commission ("CFTC") and the National Futures Association. These regulations also prohibit a broker dealer from repaying subordinated borrowings, paying cash dividends, making loans to its parent, affiliates or employees, or otherwise entering into transactions which would result in a reduction of its total net capital to less than 120% of its required minimum capital. Moreover, broker dealers are required to notify the SEC, CFTC and other regulators prior to repaying subordinated borrowings, paying dividends and making loans to its parent, affiliates or employees, or otherwise entering into transactions, which, if executed, would result in a reduction of 30% or more of its excess net capital (net capital less minimum requirement). The SEC and the CFTC have the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the broker dealer. As of September 30, 2016, KCGA was in compliance with the applicable regulatory net capital rules.

The following table sets forth the net capital level and requirements for KCGA at September 30, 2016, as reported in its regulatory filing (in thousands):

	Net Capital		Net Capital Requirement		Excess Net Capital
KCG Americas LLC	$	267,916	$	1,390	$	266,526

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Our U.K. registered broker dealer is subject to certain financial resource requirements of the Financial Conduct Authority ("FCA"). The following table sets forth the financial resource requirement for KCG Europe Limited, our U.K. registered broker dealer, at September 30, 2016 (in thousands):

	Financial Resources		Resource Requirement		Excess Financial Resources
KCG Europe Limited	$	150,816	$	112,900	$	37,916

Our other U.K. registered broker dealer, GETCO Europe Limited withdrew from its membership with the FCA during the first quarter of 2015. All business of GETCO Europe Limited had previously been transferred to KCG Europe Limited.

Our Australian, Indian and Swedish trading entities are subject to certain financial resource requirements of the Australian Securities and Investment Commission, the Foreign Investment Promotion Board and the Swedish Financial Supervisory Authority, respectively. As of September 30, 2016, we were in compliance with all such requirements.

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Effects of Inflation

The majority of our assets are liquid in nature and therefore are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of the services offered by us. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial position and results of operations.

Critical Accounting Policies

The preparation of our Consolidated Financial Statements and the accompanying notes requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

There have been no updates to our critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition” in our Annual Report on Form 10-K for the year ended December 31, 2015.

See Footnote 2 "Significant Accounting Policies" included in Part I, Item 1 "Financial Statements (Unaudited)" of this Form 10-Q for a further discussion of our accounting policies.

Accounting Standards Updates

See Footnote 2 “Significant Accounting Policies” included in Part I, Item 1 “Financial Statements (Unaudited)” of this Form 10-Q for further discussion of accounting guidance recently adopted and accounting guidance to be adopted in future periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to numerous risks in the ordinary course of our business and activities; therefore, effective risk management is critical to our financial soundness and profitability. We have a comprehensive global risk management structure and processes to monitor and evaluate the principal risks we assume in conducting our business. Our risk management policies, procedures and methodologies are subject to ongoing review and modification. The principal risks we face are as follows:

Market Risk

Our market making and trading activities expose our capital to significant risks. These risks include, but are not limited to, absolute and relative price movements, price volatility, interest rates, foreign exchange rates, credit spreads and changes in liquidity. Price risks result from exposure to changes in prices of individual financial instruments, baskets and indices. Further risks may result from changes in the factors determining options prices. Interest rate risks result primarily from exposure and changes in the yield curve, the volatility of interest rates and credit spreads. As market makers we are also exposed to “open order” risk where during unusual market conditions we could have an abnormally high percentage of our open orders filled simultaneously and therefore acquire a larger than average position in securities or derivative instruments.

For working capital purposes, we invest in money market funds and maintain interest bearing balances at banks and in our trading accounts with clearing brokers, which are classified as Cash and cash equivalents and Receivable from brokers, dealers and clearing organizations, respectively, on the Consolidated Statements of Financial Condition. These financial instruments do not have maturity dates; the balances are short term, which helps to mitigate our market risks. We also invest our working capital in short-term U.S. government securities, which are included in Financial instruments owned on the Consolidated Statements of Financial Condition. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily and are hedged or reduced when appropriate and therefore not material to our overall cash position.

We employ proprietary position management and trading systems that provide real-time, on-line risk exposure calculations, position management and inventory control. We monitor our risks by reviewing trading positions and their appropriate risk measures. We have established a system whereby transactions are monitored by senior management and an independent risk control function on a real-time basis as are aggregate risk exposures, sub unit risk exposures and aggregate dollar and inventory position totals, capital allocations, and real-time profits and losses. Our management of trading positions is enhanced by our review of mark-to-market valuations and position summaries on a daily basis.

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In the normal course of business, we maintain inventories of exchange-listed and other equity securities, and to a lesser extent, listed equity options and fixed income securities. The fair value of these financial instruments at September 30, 2016 and December 31, 2015 was $2.90 billionand $2.44 billion, respectively, in long positions and $2.22 billion and $2.11 billion, respectively, in short positions. We also enter into futures contracts, which are recorded on our Consolidated Statements of Financial Condition within Receivable from brokers, dealers and clearing organizations or Payable to brokers, dealers and clearing organizations as applicable.

We calculate daily the potential losses that might arise from a series of different stress events. These include both single factor and multi factor shocks to asset prices based off both historical events and hypothetical scenarios. The stress calculations include a full recalculation of any option positions, non-linear positions and leverage. Senior management and the independent risk function carefully monitor the highest stress scenarios to ensure that the Company is not unduly exposed to any extreme events.

The potential change in fair value is estimated to be a gain of $16.9 million using a hypothetical 10% increase in equity prices as of September 30, 2016, and an estimated loss of $8.5 million using a hypothetical 10% decrease in equity prices at September 30, 2016. These estimates take into account the offsetting effect of such hypothetical price movements on the fair value of short positions against long positions, the effect on the fair value of options, futures, nonlinear positions and leverage as well as assumed correlations with non-equity asset classes, such as fixed income, commodities and foreign exchange. The Company relies on internally developed systems in order to model and calculate stress risks to a variety of different scenarios.

Operational Risk

Operational risk can arise from many factors ranging from routine processing errors to potentially costly incidents arising, for example, from major systems failures or human errors. We maintain a robust framework to manage operational risk events. The framework includes a sound risk management governance structure, including a Chief Risk Officer, a risk function, Management Risk Committee, and a Board Risk Committee. Within the risk function, we have created a formal Operational Risk Management team lead by the Global Head of Operational Risk, responsible for managing the Company’s operational risk exposure. The Emergency Response Center has been established and is tasked with monitoring and responding to operational incidents and natural disasters in real time. The Emergency Management Plan ("EMP") sets forth procedures for firm-wide crisis response, should incidents go beyond the emergency solving capabilities of individual businesses. The EMP is tested several times a year with simulated emergencies of various kinds. Furthermore, the framework incorporates market access controls designed to closely monitor inbound and outbound orders and enable the rapid automatic shut-down for specific applications.

Our businesses are highly dependent on our ability and our market centers' ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in several currencies and products. We incur operational risk across all of our business activities, including revenue generating activities as well as support functions. Legal and compliance risk is included in the scope of operational risk and is discussed below under “Legal Risk.”

We rely heavily on technology and automation to perform many functions within KCG, which exposes us to various forms of cyber-attacks, including data loss or destruction, unauthorized access, unavailability of service or the introduction of malicious code. We have taken significant steps to mitigate the various cyber threats, and we devote significant resources to maintain and regularly upgrade our systems and networks and review the ever changing threat landscape. We have created a dedicated Information Security Group, created and filled the role of Information Security Officer and formed an Information Security Steering Committee. In addition, we have enhanced the communication channels with government and law enforcement agencies for better information sharing and awareness. We will continue to periodically review policies and procedures to ensure they are effective in mitigating current cyber and other information security threats. In addition to the policy reviews, we continue to look to implement technology solutions that enhance preventive and detection capabilities. We also maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks. However, such insurance may be insufficient to cover all losses.

Primary responsibility for the management of operational risk lies with our operating segments and supporting functions, and secondary responsibility lies with the Operational Risk Management function. Our operating segments maintain controls designed to manage and mitigate operational risk for existing activities. As new products and business activities are developed or new third parties are being on boarded, we endeavor to identify operational risks and design controls to seek to mitigate the identified risks.

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Disaster recovery plans are in place for critical facilities related to our primary operations and resources, and redundancies are built into the systems as deemed reasonably appropriate. We have also established policies, procedures and technologies designed to seek to protect our systems and other assets from unauthorized access. There is no assurance that such plans, policies, procedures and technologies will prevent a significant disruption to our business.

Liquidity Risk

Liquidity risk is the risk that we would be unable to meet our financial obligations as they arise in both normal and strained funding environments. To that end, we have established a comprehensive and conservative set of policies and procedures that govern the management of liquidity risk for the Company at the corporate level and at the subsidiary entity level.

We maintain a liquidity pool consisting of primarily cash and other highly liquid instruments at the holding company level to satisfy intraday and day-to-day funding needs, as well as potential cash needs in a strained funding environment.

Secured funding for the majority of our inventory is done through our regulated U.S. broker dealer subsidiary, KCGA. As such, a significant portion of our liquidity risk lies within KCGA. We consider cash and other highly liquid instruments held within KCGA, up to $150.0 million, a part of our liquidity pool to support financial obligations in normal and strained funding environments. We target having $350.0 million in our liquidity pool of cash and highly liquid instruments held at the holding company level and KCGA.

Cash and other highly liquid investments held by all other subsidiary entities are available to support financial obligations within those entities.

Our liquidity pool comprises the following (in thousands):

	September 30, 2016		December 31, 2015
Liquidity Pool Composition
Holding company
Cash held at banks	$	5,217	$	3,283
Money market and other highly liquid investments	271,523		330,698
KCGA
Cash held at banks	29,096		28,485
Money market and other highly liquid investments	110,162		121,515
Total Liquidity Pool	$	415,998	$	483,981
Cash and other highly liquid investments held by other subsidiary entities	$	89,464	$	73,779

In addition, we maintain committed and uncommitted credit facilities with a number of unaffiliated financial institutions. In connection with the uncommitted credit facilities, the lenders are at no time under any obligation to make any advances under the credit facilities, and any outstanding loans must be repaid on demand. See Footnote 10 "Debt" included in Part I, Item 1 “Financial Statements (Unaudited)” of this Form 10-Q for additional information regarding our credit facilities.

We regularly perform liquidity risk stress testing based on a scenario that considers both market-wide stresses and a company-specific stress over a one-month period. Given the nature of the Company’s business activity and balance sheet composition, survival over the first one to three days of a severe stress environment is most critical, after which management actions could be effectively implemented to navigate through prolonged periods of financial stress. The modeled cash inflows and outflows from the stress test serve as a quantitative input to assist us in establishing the Company’s liquidity risk appetite and amount of liquid assets to be held at the corporate level. The liquidity stress test considers cash flow risks arising from, but not limited to, a dislocation of the secured funding market, additional unexpected margin requirements, and operational events.

We maintain a contingency funding plan (“CFP”) which clearly delineates the roles, responsibilities and actions that will be utilized as the Company encounters various levels of liquidity stress with the goal of fulfilling all financial obligations as they arise while maintaining business activity. We periodically update and test the operational functionality of various aspects of the CFP to ensure it remains current with changing business activity.

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Capital Risk

Government regulators, both in the U.S. and globally, as well as self-regulated organizations, have supervisory responsibility over our regulated activities and require us to maintain specified minimum levels of regulatory capital in our broker dealer subsidiaries. If not properly monitored, our regulatory capital levels could fall below the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to imposing partial or complete restrictions on our ability to conduct business.

To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our regulated subsidiaries and adjust the amounts of regulatory capital as necessary to ensure compliance with regulatory capital requirements. We also maintain excess regulatory capital to accommodate periods of unusual or unforeseen market volatility. In addition, we monitor regulatory developments regarding capital requirements and prepare for changes in the required minimum levels of regulatory capital that may occur in the future.

Legal Risk

Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and commercial risk such as the risk that counterparty’s performance obligations will be unenforceable. We are generally subject to extensive regulation in the different jurisdictions in which we conduct our business. We have established procedures based on legal and regulatory requirements that are designed to foster compliance with applicable statutory and regulatory requirements. We have also established procedures that are designed to require that our policies relating to conduct, ethics and business practices are followed.

Credit Risk

Credit risk represents the loss that we would incur if a counterparty fails to perform its contractual obligations in a timely manner. We manage credit risk with a global, independent risk management function that is responsible for measuring, monitoring and controlling the counterparty credit risks inherent in our business activities. 

Our risk team's processes for managing credit risk include a qualitative and quantitative risk assessment of significant counterparties prior to engaging in business activity, as well as on an ongoing basis. The review includes formal financial analysis and due diligence when appropriate.

Our risk team is responsible for approving new counterparties and establishing credit limits to manage credit risk exposure by counterparty and business line. The assigned limits reflect the various elements of assessed credit risk and are subsequently revised to correspond with changes in the counterparties’ credit profiles. Our risk team communicates counterparty limits to the business areas as well as senior management, and oversees compliance with the established limits.

Where appropriate, counterparty exposure is monitored on a daily basis and the collateral, if required, is marked to market daily to accurately reflect the current exposure.

Foreign Currency Risk

Our international businesses include transactions in currencies other than the U.S. dollar. As such, changes in foreign exchange rates relative to the U.S. dollar can affect the value of our non-U.S. dollar assets, liabilities, revenues and expenses. Additionally, our foreign subsidiary in India has a functional currency other than the U.S. dollar which exposes us to foreign currency transaction gains and losses. A portion of these risks are hedged, but fluctuations in currency exchange rates could impact our results of operations, financial position and cash flows.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures. KCG's management, with the participation of KCG's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, KCG's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2016, KCG's disclosure controls and procedures are effective.

(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in KCG's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)

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during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, KCG's internal control over financial reporting. 

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PART II

Item 1. Legal Proceedings

The information required by this Item is set forth in the “Legal Proceedings” section in Footnote 18 "Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements included in Part I, Item 1 "Financial Statements (Unaudited)" herein.

Item 1A. Risk Factors

In addition to the other information set forth below and in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/ or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information about our purchases of KCG Class A Common Stock during the third quarter of 2016 (in thousands, except average price paid per share):

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2016 - July 31, 2016
Common stock repurchases	1			1	$	138,761
Employee transactions (2)	466			—
Total	467	$	13.34	1
August 1, 2016 - August 31, 2016
Common stock repurchases	—			—	$	138,543
Employee transactions (2)	108			—
Total	108	$	14.52	—
September 1, 2016 - September 30, 2016
Common stock repurchases	—			—	$	138,543
Employee transactions (2)	122			—
Total	122	$	14.56	—
Total
Common stock repurchases	1			1	$	138,543
Employee transactions (2)	696			—
Total	697	$	13.74	1

Totals may not add due to rounding.

⁽¹⁾ In April 2016, our Board of Directors authorized an expanded share repurchase program of up to $200.0 million of our Class A Common Stock and Warrants (including the $2.4 million of remaining capacity under the previously authorized repurchase program). We may repurchase shares from time to time in open market transactions, accelerated stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. We caution that there are no assurances that any further repurchases will actually occur.

⁽²⁾ Represents shares of the Company's Class A Common Stock withheld in satisfaction of tax withholding obligations upon vesting of employee restricted equity awards.

Item 3. Defaults Upon Senior Securities

Not applicable.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K)	DESCRIPTION OF EXHIBITS
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.
101**	The following financial statements from KCG Holdings, Inc's Quarterly Report on Form 10-Q for the three months ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015, (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015, (iii) Consolidated Statements of Financial Condition at September 30, 2016 and December 31, 2015, (iv) Consolidated Statement of Changes in Equity for the nine months ended September 30, 2016 (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 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 Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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 November 2016.

KCG HOLDINGS, INC.
By:	/s/ DANIEL COLEMAN
	Daniel Coleman
	Chief Executive Officer

By:	/s/ STEFFEN PARRATT
	Steffen Parratt
	Chief Financial Officer

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