Fair Value Measurements for Operating Entities and Consolidated Funds

The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the accompanying condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of June 30, 2014 and December 31, 2013:

Operating Entities



	Assets at Fair Value as of June 30, 2014
	Level 1		Level 2		Level 3		Total
			(dollars in thousands)
Securities owned and derivatives
US Government securities	$	2,509	$	—	$	—	$	2,509
Preferred stock	—		—		2,324		2,324
Common stocks	331,034		12,414		419		343,867
Convertible bonds	—		9,533		1,750		11,283
Corporate bonds	—		199,985		—		199,985
Warrants and rights	885		—		3,346		4,231
Mutual funds	16,764		—		—		16,764
Receivable on derivative contracts, at fair value
Futures	92		—		—		92
Equity swaps	—		55		—		55
Options	7,238		—		37,658		44,896
Other investments
Portfolio Funds	—		21,280		62,687		83,967
Real estate investments	—		—		2,262		2,262
Lehman claim	—		—		418		418
	$	358,522	$	243,267	$	110,864	$	712,653



	Liabilities at Fair Value as of June 30, 2014
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities sold, not yet purchased and derivatives
Common stocks	$	235,534	$	—	$	—	$	235,534
Corporate bonds	—		58		—		58
Payable for derivative contracts, at fair value
Futures	11		—		—		11
Currency forwards	—		156		—		156
Equity and credit default swaps	—		2,280		—		2,280
Options	13,248		—		37,658		50,906
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (a)	$	—	$	—	$	6,783	$	6,783
	$	248,793	$	2,494	$	44,441	$	295,728

(a) In accordance with the terms of purchase agreements for acquisitions that closed during 2012, the Company is required to pay to the sellers a portion of future net income of the acquired businesses, if certain revenue targets are achieved through the period ending October 2016. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of June 30, 2014 can range from $1.6 million to $12.9 million.



	Assets at Fair Value as of December 31, 2013
	Level 1		Level 2		Level 3		Total
			(dollars in thousands)
Securities owned and derivatives
US Government securities	$	9	$	—	$	—	$	9
Preferred stock	—		—		324		324
Common stocks	171,277		2,103		3,559		176,939
Convertible bonds	—		4,008		1,950		5,958
Corporate bonds	—		121,372		—		121,372
Warrants and rights	107		—		5,805		5,912
Mutual funds	525		—		—		525
Receivable on derivative contracts, at fair value
Futures	285		—		—		285
Currency forwards	—		22		—		22
Equity swaps	—		70		—		70
Options	9,698		—		—		9,698
Other investments
Portfolio Funds	—		19,402		51,649		71,051
Real estate investments	—		—		2,088		2,088
Lehman claim	—		—		378		378
	$	181,901	$	146,977	$	65,753	$	394,631



	Liabilities at Fair Value as of December 31, 2013
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities sold, not yet purchased and derivatives
Common stocks	$	130,899	$	—	$	—	$	130,899
Corporate bonds	—		55		—		55
Payable for derivative contracts, at fair value
Futures	275		—		—		275
Currency forwards	—		301		—		301
Equity swaps	—		525		—		525
Options	6,573		—		—		6,573
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (a)	—		—		6,937		6,937
	$	137,747	$	881	$	6,937	$	145,565

Consolidated Funds' investments



	Assets at Fair Value as of June 30, 2014
	Level 1		Level 2		Level 3		Total
			(dollars in thousands)
Other investments
Portfolio Funds	$	—	$	49,103	$	145,371	$	194,474
Lehman claims	—		—		4,090		4,090
	$	—	$	49,103	$	149,461	$	198,564



	Assets at Fair Value as of December 31, 2013
	Level 1		Level 2		Level 3		Total
			(dollars in thousands)
Other investments
Portfolio Funds	—		26,964		155,674		182,638
Lehman claims	—		—		4,842		4,842
	$	—	$	26,964	$	160,516	$	187,480

The following table includes a rollforward of the amounts for the three and six months ended June 30, 2014 and 2013, for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.



	Three Months Ended June 30, 2014
	Balance at March 31, 2014		Transfers in		Transfers out		Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains (losses)			Balance at June 30, 2014		Change in unrealized gains/(losses) relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	324	$	—	$	—	$	2,000	$	—		$	—		$	2,324	$	—
Common stocks	410		—		—		9		—			—			419		—
Convertible bonds	1,950		—		—		—		(200		)	—			1,750		—
Options, asset	42,856		—		—		—		—			(5,198		)	37,658		(5,198		)
Options, liability	42,856		—		—		—		—			(5,198		)	37,658		(5,198		)
Warrants and Rights	3,268		—		—		—		—			78			3,346		108
Portfolio Funds	58,583		—		—		5,050		(1,778		)	832			62,687		(187		)
Real estate	42,283		—		—		10,000		(50,000		)	(21		)	2,262		(21		)
Lehman claim	390		—		—		—		(76		)	104			418		104
Contingent consideration liability	6,861		—		—		—		(78		)	—			6,783		—
Consolidated Funds
Portfolio Funds	143,059		—		—		—		(86		)	2,398			145,371		2,398
Lehman claim	3,776		—		—		—		—			314			4,090		314



	Three Months Ended June 30, 2013
	Balance at March 31, 2013		Transfers in		Transfers out			Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains (losses)			Balance at June 30, 2013		Change in unrealized gains/(losses) relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	2,332	$	—	$	(2,000	)	$	—	$	—		$	1		$	333	$	1
Common stocks	2,278		—		—			—		(8		)	3			2,273		2
Warrants and Rights	3,243		—		—			—		—			(1,107		)	2,136		(998		)
Warrants and Rights, sold not yet purchased	3		—		—			—		—			(3		)	—		—
Portfolio Funds	25,559		—		—			8,981		(2,857		)	1,149			32,832		1,437
Real estate	1,875		—		—			—		—			283			2,158		283
Lehman claim	660		—		—			—		(382		)	—			278		—
Contingent consideration liability	8,116		—		—			—		(188		)	—			7,928		—
Consolidated Funds
Portfolio Funds	178,357		—		—			—		(2,918		)	2,429			177,848		2,312
Lehman claim	15,140		—		—			—		—			294			15,434		293



	Six Months Ended June 30, 2014
	Balance at December 31, 2013		Transfers in		Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains (losses)			Balance at June 30, 2014		Change in unrealized gains/(losses) relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	324	$	—	$	—			$	2,000	$	—		$	—		$	2,324	$	—
Common stocks	3,559		—		(3,150		)	(b)	9		—			1			419		1
Convertible bonds	1,950		—		—				—		(200		)	—			1,750		—
Options, asset	—		—		—				35,710		—			1,948			37,658		1,948
Options, liability	—		—		—				35,710		—			1,948			37,658		1,948
Warrants and Rights	5,805		—		—				—		(1,328		)	(1,131		)	3,346		244
Portfolio Funds	51,649		—		—				9,435		(3,020		)	4,623			62,687		3,212
Real estate	2,088		—		—				50,000		(50,027		)	201			2,262		201
Lehman claim	378		—		—				—		(76		)	116			418		116
Contingent consideration liability	6,937		—		—				—		(154		)	—			6,783		—
Consolidated Funds
Portfolio Funds	155,674		—		—				—		(16,030		)	5,727			145,371		5,727
Lehman claim	4,842		—		—				—		(980		)	228			4,090		228



	Six Months Ended June 30, 2013
	Balance at December 31, 2012		Transfers in			Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains (losses)			Balance at June 30, 2013		Change in unrealized gains/(losses) relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	2,332	$	—		$	(2,000	)	(b)	$	—	$	—		$	1		$	333	$	1
Common stocks	2,549		—			—				—		(273		)	(3		)	2,273		(263		)
Corporate Bond	515		—			—				2,735		(3,346		)	96			—		—
Warrants and Rights, asset	1,713		290		(a)	—				166		(110		)	77			2,136		270
Warrants and Rights, liability	3		—			—				—		—			(3		)	—		—
Portfolio Funds	25,670		—			—				12,571		(6,733		)	1,324			32,832		1,604
Real estate	1,864		—			—				—		—			294			2,158		294
Lehman claim	706		—			—				—		(382		)	(46		)	278		(46		)
Contingent consideration liability	8,116		—			—				—		(188		)	—			7,928		—
Consolidated Funds
Portfolio Funds	182,920		—			—				—		(9,949		)	4,877			177,848		4,557
Lehman claim	14,124		—			—				—		(1,449		)	2,759			15,434		1,399

(1) Unrealized gains/losses are reported in other income (loss) in the accompanying condensed consolidated statements of

operations.

(a) The security was acquired through an acquisition (See Note 2).

(b) The company completed an initial public offering.

All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying condensed consolidated statements of operations.

Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.

The Company recognizes all transfers and the related unrealized gain (loss) at the beginning of the reporting period.

Transfers between level 1 and 2 generally relate to whether the principal market for the security becomes active or inactive. Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurements or due to change in liquidity restrictions for the investments.

During the three and six months ended June 30, 2014 and 2013, there were no transfers between level 1 and level 2 assets and liabilities.

The following table includes quantitative information as of June 30, 2014 for financial instruments classified within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement of the Company's level 3 financial instruments.



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at June 30, 2014		Valuation techniques	Unobservable Inputs	Range

Level 3 Assets
Common and preferred stocks	$	324	Market multiples and option pricing method	Volatility Market multiples	45% 2x to 3x
Warrants and rights, net	3,346		Model based	Volatility	20% to 100% (weighted average 37%)
Options	37,658		Option pricing models, credit valuation adjustment, debt valuation adjustment	Volatility Credit spreads	30% to 45% 600bps - 750 bps
Other level 3 assets (a)	218,997
Total level 3 assets	260,325
Level 3 Liabilities
Options	37,658		Option pricing models, credit valuation adjustment, debt valuation adjustment	Volatility Credit spreads	30% to 45% 600bps - 750 bps
Contingent consideration	6,783		Discounted cash flows	Projected cash flow and discount rate	6% to 9%
Total level 3 liabilities	$	44,441

(a)

Quantitative disclosures of unobservable inputs and assumptions are not required for investments for which NAV per share is used as a practical expedient to determine fair value, as their redemption features rather than observability of inputs cause them to be classified as a level 3 type asset within the fair value hierarchy. In addition, the fair value of the Consolidated Funds' investments are determined based on net asset value and therefore quantitative disclosures are not included in the table above. The quantitative disclosures also exclude financial instruments for which the determination of fair value is based on prices from prior transactions.

The Company’s equity method investment in CBOE SE is also measured at fair value on a nonrecurring basis. During the three months ended June 30, 2014, the Company wrote down the fair value of its investment as a result of an impairment (See Note 5) which was considered other than temporary. The Company classified its investment in CBOE SE as level 3. The fair market value reflects the weighted average of both the indicative bid level and the liquidation value.

The Company has established valuation policies and procedures and an internal control infrastructure over its fair value measurement of financial instruments which includes ongoing oversight by the valuation committee as well as periodic audits performed by the Company's internal audit group. The valuation committee is comprised of senior management, including non-investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments, including the review of the results of the independent price verification process, approval of new trading asset classes and use of applicable pricing models and approaches.

The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of, improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions. The Company reviews a daily profit and loss report, as well as other periodic reports, and analyzes material changes from period-to-period in the valuation of its investments as part of its control procedures. The Company also performs back testing on a regular basis by comparing prices observed in executed transactions to previous valuations.

The fair market value for level 3 securities may be highly sensitive to the use of industry standard models, unobservable inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight may be applied to industry standard models representing standard valuation metrics such as: discounted cash flows, market multiples, comparative transactions, capital rates, recovery rates and timing, and bid levels. Generally, changes in the weights ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst level 3 securities as they are generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation can result in a significantly lower (higher) fair value measurement.