Revenue Recognition

6 Months Ended

Jun. 30, 2021

Revenue from Contract with Customer [Abstract]

Revenue Recognition

12. Revenue Recognition

Overview of Revenue

The primary sources of revenue for the Company are as follows:

Commissions and Fees

The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.

Principal Transactions

Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.

Market Making

Market making revenue is generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty. Securities owned are recorded at fair market value at the end of the reporting period.

Stock Borrow / Stock Loan

The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin and fully-paid securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company recognizes all self-clearing revenues net of operating expenses related to stock borrow / stock loan. Stock borrow / stock loan also includes any revenues generated from the Company’s fully paid lending programs on a self-clearing or introducing basis. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions.

The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.

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For the three months ended June 30, 2021, stock borrow / stock loan revenue was $2,240,000 ($7,021,000 gross revenue less $4,781,000 expenses). For the three months ended June 30, 2020, stock borrow / stock loan revenue was $771,000 ($2,008,000 gross revenue minus $1,237,000 expenses).

For the six months ended June 30, 2021, stock borrow / stock loan revenue was $4,087,000 ($11,851,000 gross revenue less $7,764,000 expenses). For the six months ended June 30, 2020, stock borrow / stock loan revenue was $1,215,000 ($3,671,000 gross revenue minus $2,456,000 expenses).

Advisory Fees

The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.

Interest, Marketing and Distribution Fees

The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances. Interest income also includes interest payouts from introducing relationships related to short interest, net of charges.

The Company also earns margin interest which is the net interest charged to customers for holding financed margin positions. Marketing and distribution fees consist of 12b-1 fees which are trailing payments from money market funds. Interest, marketing and distribution fees are recorded as earned.

For the periods presented, the Company combined revenue from interest income and revenue from margin interest, marketing and distribution fees as these revenue streams are similar in nature. These revenue streams were historically disaggregated; however, the Company has combined these revenue streams to most accurately present the statements of income.

Other Income

Other income represents fees generated from correspondent clearing fees, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.

Categorization of Revenue

The following table presents the Company’s major revenue categories and when each category is recognized:

	Three Months Ended June 30,				Six Months Ended June 30,
Revenue Category	2021		2020		2021		2020		Timing of Recognition
Trading Execution and Clearing Services
Commissions and fees	$	4,325,000	$	4,887,000	$	11,333,000	$	10,470,000	Recorded on trade date
Principal transactions		4,107,000		2,581,000		8,355,000		5,784,000	Recorded on trade date
Market making		1,758,000		615,000		3,372,000		1,085,000	Recorded on trade date
Stock borrow / stock loan		2,240,000		771,000		4,087,000		1,215,000	Recorded as earned
Advisory fees		403,000		243,000		759,000		505,000	Recorded as earned
Total Trading Execution and Clearing Services		12,833,000		9,097,000		27,906,000		19,059,000
Other Income
Interest, marketing and distribution fees
Interest		1,163,000		909,000		2,317,000		2,240,000	Recorded as earned
Margin interest		2,296,000		1,829,000		4,448,000		4,335,000	Recorded as earned
12b-1 fees		164,000		296,000		317,000		1,084,000	Recorded as earned
Total Interest, marketing and distribution fees		3,623,000		3,034,000		7,082,000		7,659,000
Other income		337,000		488,000		729,000		702,000	Recorded as earned
Total Revenue	$	16,793,000	$	12,619,000	$	35,717,000	$	27,420,000

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The following table presents each revenue category and its related performance obligation:

Revenue Stream	Performance Obligation
Commissions and fees, Principal transactions, Market making, Stock borrow / stock loan, Advisory fees	Provide financial services to customers and counterparties
Interest, marketing and distribution fees, Other income	n / a

Soft Dollar Arrangement

For certain clients of WPS, the Company has soft dollar and commission sharing arrangements with customers that fall both within, and outside of, the safe harbor provisions of Rule 28(e) of the Securities Exchange Act of 1934 ("Rule 28(e)"), as amended. These soft dollar arrangements were determined to be a separate performance obligation that should be allocated a portion of the transaction price.

Under these arrangements, the Company charges additional dollars on customer trades and uses these fees to pay third parties for research, brokerage services, market data, and related expenses (“research services”) on behalf of clients. The Company is an agent in these arrangements, as it does not control the research services before they are transferred to the customer. As such, the revenue from these agreements are recognized net of cost in the line item “Commissions and fees” on the statements of income.

The Company paid client expenses of approximately $103,000 and $134,000 for the three months ended June 30, 2021 and 2020, respectively. The Company paid client expenses of approximately $330,000 and $352,000 for the six months ended June 30, 2021 and 2020, respectively. The Company had an outstanding receivable and payable of approximately $34,000 and $225,000, respectively, as of June 30, 2021.

The receivable and payable related to soft dollar arrangements are in the line items “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statements of financial condition.

As of June 30, 2021 and December 31, 2020, no allowance for uncollectible commissions was necessary as the Company believes all commissions receivable will be realized.

Other Items

For the three and six months ended June 30, 2021 and 2020, there were no costs capitalized related to obtaining or fulfilling a contract with a customer, and thus the Company has no balances for contract assets or contract liabilities. The Company concludes that its revenue streams have the same underlying economic factors, and as such, no disaggregation of revenue is required.