Segment Reporting

9 Months Ended

Sep. 30, 2016

Segment Reporting

Segment Reporting

(15) Segment Reporting

The Company is organized into four geographic operating segments through which the Company’s chief operating decision maker manages the Company’s business. The U.S., Canadian, European and Asia Pacific Operations segments provide the following categories of products and services:

· Execution Services — includes (a) self-directed trading using algorithms, smart routing and matching through POSIT in cash equities (including single stocks and portfolio lists), futures and options and (b) portfolio trading and high-touch trading desks providing execution expertise

· Workflow Technology  — includes trade order and execution management software applications in addition to network connectivity

· Analytics — includes (a) tools enabling portfolio managers and traders to improve pre-trade and real-time execution performance, (b) portfolio construction and optimization decisions and (c) securities valuation

The accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company allocates resources to, and evaluates the performance of, its reportable segments based on income or loss before income tax expense. Consistent with the Company’s resource allocation and operating performance evaluation approach, the effects of inter-segment activities are eliminated except in limited circumstances where certain technology related costs are allocated to a segment to support that segment’s revenue producing activities. Commissions and fees revenue for trade executions and commission share revenues are principally attributed to each segment based upon the location of execution of the related transaction, except that commissions and fees for trade executions by Canadian clients in the U.S. market are attributed to the Canadian Operations instead of the U.S. Operations. Recurring revenues are principally attributed based upon the location of the client using the respective service.

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

A summary of the segment financial information is as follows (dollars in thousands):

	U.S.		Canadian		European		Asia Pacific
	Operations		Operations		Operations		Operations		Corporate		Consolidated
Three Months Ended September 30, 2016
Total revenues	$	48,774	$	13,719	$	28,894	$	12,502	$	296	$	104,185
Income (loss) before income tax expense (1) (2) (3) (4)		(8,528)		1,496		4,709		901		(26,376)		(27,798)
Identifiable assets		418,357		108,647		328,731		61,367		—		917,102
Three Months Ended September 30, 2015
Total revenues	$	66,039	$	14,899	$	28,899	$	10,351	$	221	$	120,409
Income (loss) before income tax expense (5)		752		3,595		4,830		(411)		(5,576)		3,190
Identifiable assets		1,263,395		99,413		267,863		63,146		—		1,693,817
Nine Months Ended September 30, 2016
Total revenues	$	173,677	$	45,605	$	92,236	$	34,539	$	3,406	$	349,463
(Loss) income before income tax expense (1) (2) (3) (4) (6) (7)		(9,297)		7,616		16,672		208		(56,293)		(41,094)
Nine Months Ended September 30, 2015
Total revenues	$	221,967	$	50,516	$	99,079	$	38,385	$	683	$	410,630
(Loss) income before income tax expense (5)		17,543		10,964		23,723		2,298		(37,947)		16,581

The following notes relate to Corporate activity:

(1) In the third quarter of 2016, the Company accrued $22.1 million for a potential settlement with the SEC with respect to an inquiry involving pre-released American Depositary Receipts and incurred legal fees related to this matter of $1.6 million. For more information, see Note 18, Contingencies – Legal Matters.

(2) The Company’s new Chief Executive Officer was granted cash and stock awards upon the commencement of his employment in January 2016, a significant portion of which replaced awards he forfeited at his former employer. The amount expensed for these awards during the three and nine month periods ended September 30, 2016 was $0.5 million and $3.8 million, respectively. Due to U.S. tax regulations, only a small portion of the amount expensed for these awards was eligible for a tax deduction.

(3) In the third quarter of 2016, the Company substantially completed the liquidation of its investment in its Israel entity that ceased operations in December 2013. During the Company’s period of ownership and through December 2013, the Company had $1.1 million in accumulated foreign exchange translation gains as a component of equity, which have been reclassified as a gain that reduced other general and administrative expenses in the Condensed Consolidated Statement of Operations.

(4) In the first half of 2016, the Company incurred a charge of $4.8 million, net of an insurance recovery of $0.5 million, to settle an arbitration case with its former CEO and incurred legal fees of $2.7 million. During the three months ended September 30, 2016, the Company recorded a reimbursement of $0.9 million of these legal fees from its insurance carrier. For more information, see Note 18, Contingencies – Legal Matters.

(5) In the third quarter of 2015, the Company reached a final settlement with the SEC to pay an aggregate amount of $20.3 million in connection with the SEC’s investigation into a proprietary trading pilot. The Company fully reserved for this matter and incurred associated legal and related costs of $2.3 million in the second quarter of 2015. In the third quarter of 2015, the Company incurred $2.6 million in legal and related costs to finalize the settlement order. For more information, see Note 18, Contingencies – Legal Matters.

(6) In the second quarter of 2016, the Company received insurance proceeds of $2.4 million from its corporate insurance carrier to settle a claim for lost profits arising from an August 2015 outage in its outsourced primary data center in the U.S. Additionally, the Company generated a nominal gain on the completion of the sale of Investment Research in May 2016.

(7) During the second quarter of 2016, the Company incurred $4.4 million in restructuring charges related to (a) the reduction in its high-touch trading and sales organizations and (b) the closing of its U.S. matched-book securities lending operations and its Canadian arbitrage trading desk.

The table below details the total revenues for the categories of products and services provided by the Company (dollars in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenues:
Execution Services	$	70,240	$	85,734	$	243,441	$	304,128
Workflow Technology		22,723		22,837		69,410		71,460
Analytics		10,926		11,617		33,206		34,359
Corporate (non-product)		296		221		3,406		683
Total Revenues	$	104,185	$	120,409	$	349,463	$	410,630

In December 2015 the Company sold its energy research operations and in May 2016 the Company sold its remaining investment research operations, both of which were within the Research, Sales and Trading (“RS&T”) product group. Beginning in the second quarter 2016, the remaining portfolio trading and high-touch execution offerings, previously grouped within RS&T, were combined with the electronic execution and liquidity solutions, previously grouped with the Electronic Brokerage (“EB”) product group, to form the new Execution Services product group to create an optimal alignment for cross-selling synergies. The entire historic activity of EB and RS&T, including the divested research operations,  has been reclassified to the Execution Services product group to conform to the current presentation. For more information on the sale of the remaining investment research operations, see Note 3, Divestitures.  Also, in the second quarter 2016, the Company changed the name of its Platforms product group to Workflow Technology.