Attached files

file filename
EX-10.48 - LETTER AGREEMENT - GAIN Capital Holdings, Inc.exhibit1048.htm
EX-31.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit3111.htm
EX-32.1 - CEO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit3211.htm
EX-21.1 - SUBSIDARY LIST - GAIN Capital Holdings, Inc.exhibit2111.htm
EX-23.1 - CONSENT - GAIN Capital Holdings, Inc.exhibit2311.htm
EX-32.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit3221.htm
EXCEL - IDEA: XBRL DOCUMENT - GAIN Capital Holdings, Inc.Financial_Report.xls
EX-31.2 - CFO CERTIFICATION - GAIN Capital Holdings, Inc.exhibit3121.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 FORM 10-K 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     .
Commission File Number 001-35008
  GAIN CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
20-4568600
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
Bedminster One
135 Route 202/206
Bedminster, New Jersey
 
07921
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (908) 731-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common stock, $0.00001
 
New York Stock Exchange
 
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    o Yes    x  No

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes    x No

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.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.  o
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
 
¨
Accelerated filer
ý
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2014, was approximately $187 million.
As of March 13, 2015, the registrant had 43,391,811 shares of common stock, $0.00001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year is incorporated by reference into Part III of this Form 10-K.




GAIN Capital Holdings, Inc.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
EXHIBIT INDEX
 
 

3


PART I

FORWARD-LOOKING INFORMATION

In this Annual Report on Form 10-K, the words “GAIN,” the “Company,” “our,” “we” and “us” refer to GAIN Capital Holdings, Inc. and, except as otherwise specified herein, to GAIN’s subsidiaries. GAIN’s fiscal year ended on December 31, 2014.

This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which GAIN operates and management’s current beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect that management or GAIN “believes,” “expects,” “anticipates,” “plans” and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements included in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the section entitled “Item 1A – Risk Factors” below and discussed elsewhere herein. The risks and uncertainties described below are not the only ones we face. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.
ITEM 1.
BUSINESS
OVERVIEW

We are a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. We service retail and institutional customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Jersey City, New Jersey; Chicago, Illinois; Powell, Ohio; Grand Rapids, Michigan; London, England; Cornwall, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore.
We offer our customers access to a diverse range of over 12,500 financial products, including foreign exchange, or forex, precious metals, “contracts for difference”, or CFDs, which are investment products with returns linked to the performance of underlying commodities, indices, individual equities, bonds and interest rate products, OTC options on forex, as well as futures and options on futures on more than 30 global exchanges. In the United Kingdom, we also offer spread bets, which are investment products similar to CFDs, but that offer more favorable tax treatment for residents of that country.
We have invested considerable resources since our inception to develop our proprietary trading platforms to provide our customers with advanced price discovery, trade execution and order management functions, while improving our ability to acquire and service our customers efficiently as well as manage market and credit risk associated with our customer’s trading activity. Today our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research and analysis, automated trading and account management.

The following table sets forth key financial data and operating metrics for our business:

Key Financial Data

(in millions)

Year Ended December 31,

2014
 
2013
 
2012
 
2011
 
2010
Net Revenue
$
369.5

 
$
267.6

 
$
151.8

 
$
182.0

 
$
190.2

Net income applicable to Gain Capital Holdings, Inc.(1)
$
31.6

 
$
31.3

 
$
2.6

 
$
15.7

 
$
36.9

Adjusted net income(2)
$
36.9

 
$
33.9

 
$
4.3

 
$
15.7

 
$
37.8




4



Key Operating Metrics

(Unaudited)

Year Ended December 31,

2014
 
2013
 
2012
 
2011
 
2010
Retail

 

 

 

 

                   Funded Accounts
133,771

 
133,056

 
85,099

 
76,485

 
85,562

                   Active OTC Accounts(3)
94,895

 
98,696

 
60,219

 
63,435

 
64,313

                   Futures Contracts (millions)(4)
7.0

 
5.4

 
1.5

 

 

                   OTC Trading Volume (billions)
$
2,430.5

 
$
1,796.7

 
$
1,303.4

 
$
1,574

 
$
1,324.8

Average Daily Volume (billions)
$
9.4

 
$
6.9

 
$
5.0

 
$
6.0

 
$
5.1

Client Assets (millions)
$
759.6

 
$
739.3

 
$
446.3

 
$
310.4

 
$
256.7

Institutional

 

 

 

 

Trading Volume (billions)
$
5,118.0

 
$
3,965.1

 
$
1,952.6

 
$
853.9

 
239.3

Average Daily Volume (billions)
$
19.8

 
$
15.2

 
$
7.5

 
$
3.3

 
0.9


(1)
For the periods prior to the closing of our initial public offering in December 2010, our net income/(loss) was affected by the changes in our embedded derivative liability attributable to the redemption feature of our previously outstanding preferred stock. This redemption feature and the associated embedded derivative liability was no longer required to be recognized following the conversion of all of our preferred stock into common stock in connection with the completion of our initial public offering in December 2010.
(2)
Adjusted net income is a non-GAAP financial measure and represents our net income excluding restructuring, acquisition and integration-related expenses, impairment on investment and gain on extinguishment of debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Income Statement Line Items and Key Operating Metrics” and “Reconciliation of Non-GAAP Financial Measures,” for discussion and reconciliation of non-GAAP financial measures.
(3)
Represents accounts which executed a transaction over the last 12 months.
(4)
Futures contracts represent the total number of contracts transacted by customers of our futures business.


Growth Strategies

We intend to grow our business and increase our profitability principally by employing the following growth strategies:

 
Continue to enhance our proprietary trading platforms and innovative trading tools in order to attract customers and increase our market share;    
Strategically expand our operations and customer base through business acquisitions, investments and partnerships, including our pending acquisition of City Index (Holdings) Limited;
Expand our product offerings in order to facilitate clients' trading of our wide range of financial products and to generate more revenue per customer;
Identify and enter high-growth markets in order to expand our presence globally in markets where we believe there are large revenue opportunities; and         
Capture additional market share by taking advantage of consolidation within the retail trading industry.


5


The following achievements demonstrate the focus on our growth strategies during 2014:
             
The expansion of our futures business through our acquisition of a majority interest in Global Asset Advisors, LLC, a Chicago-based futures brokerage firm, and Top Third Ag Marketing, LLC, which uses options-based hedging strategies to help clients manage the risks of producing agricultural products;
The acquisition of Galvan Research and Trading, Ltd., which, along with its affiliates Galvan LLP and Faraday Research LLP, provides individual investors with professional advice and trading recommendations across a wide range of markets, including forex, individual equities, equity indices and other market sectors; and    
The acquisition of the software and other intellectual property assets utilized to operate the electronic trading platform offered to customers in our GTX business.
In addition, on October 31, 2014, we entered into a Share Purchase Agreement with City Index Group Limited, INCAP Gaming B.V., and IPGL Limited in which we agreed to purchase the entire issued and outstanding share capital of City Index (Holdings) Limited ("City Index"), a global online trading firm specializing in CFDs, forex and spread betting. For more information about these transactions, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Events" elsewhere in this Form 10-K.

Our Retail Business

Our retail businesses represented 64.1% of our net revenue for the year ended December 31, 2014. We conduct our retail business primarily through our FOREX.com brand. As of December 31, 2014, we had 133,771 funded retail accounts.

We provide our retail customers around the world with access to an exceptionally diverse range of 12,500 global financial markets, including spot forex, precious metals and CFDs on commodities, indices, individual equities and interest rate products, OTC options on forex, as well as exchange-traded products such as futures and options on futures. In the United Kingdom, we also offer spread bets, which are investment products similar to CFDs, but that offer more favorable tax treatment to residents of that country. We offer these products under the diverse regulatory environments in which we operate. For example, because of U.S. regulations, neither we, nor our subsidiaries, offer CFDs or spread bets in the United States or to U.S. residents.

We seek to attract and support our customers through direct and indirect channels. Our primary direct channel for our retail OTC business is our Internet website, FOREX.com, which is available in multiple languages, including English, Chinese, Japanese, Russian and Arabic. Our indirect channel includes our relationships with introducing brokers, who solicit customers on our behalf, and white label partners, who offer our trading services to their customers under their own brand. Total retail trading volume sourced through direct and indirect channels was 51% and 49%, respectively, for the year ended December 31, 2014.

Customers for our exchange traded futures services on major U.S. and European futures and options exchanges are also sourced directly through our GAIN Capital Group, LLC subsidiary, as well as indirectly through a network of introducing brokers.
 
We generate revenue in our retail business in two ways: (1) trading revenue from our market making activities for OTC products, earned principally from the bid/offer spread we offer our customers and any net gains and losses generated through changes in the market value of the currencies and other products held in our net exposure and (2) fees, including financing charges for positions held overnight, commissions for futures and equity CFD trades and advisory services, and other account related fees.

The following are the key components of our retail business:
Innovative trading tools
We have made significant investment in the development and support of our award-winning proprietary trading technology in order to provide our customers with an enhanced customer experience and multiple ways to trade and manage their accounts, tailored to their level of experience and preferred mode of access. In addition, we also selectively offer third party trading tools that we believe complement our proprietary offerings. We believe that our proprietary trading technology has and will continue to provide us with a significant competitive advantage because we have the ability to adapt quickly to our customers’ changing needs, rapidly incorporate new products and features and offer our customers multiple ways to engage with us.


6


Competitive pricing and fast, accurate trade execution
For our OTC business, we have leveraged our extensive experience in the global OTC markets to develop highly automated processes, which allow us to deliver tight bid/offer spreads generally reflective of currently available pricing in the markets we offer and to execute our customers’ trades quickly and efficiently.
In this regard, we have longstanding relationships with a large number of institutional liquidity providers, as well as access to multiple liquidity venues, which we believe allow us to offer our customers superior liquidity and more competitive pricing with tighter bid/offer spreads than many of our competitors. In addition, we have developed a proprietary pricing engine that electronically aggregates quotes from our liquidity sources based on the midpoint price between the available “best bid” and “best offer.” This proprietary technology enables us to update our prices, on average three times a second for each market we offer, helping to ensure that our prices accurately reflect current price levels. Our proprietary technology also enables us to provide our customers with high-speed trade execution. In 2014, we handled over 11 million trade requests through FOREX.com's proprietary platform and executed 99.9% of trades in less than one second, with an average execution speed of .06 seconds. We have established a set of standards we use to measure execution quality for FOREX.com, and we publish execution statistics on a monthly basis. The FOREX.com execution scorecard, which is available on our website, demonstrates our ability to provide fast, accurate trade executions, as well as our commitment to transparency in our business. We believe we are the only firm in our industry to voluntarily publish a monthly execution scorecard with the level of detail that we provide.
For our exchange-traded business, we have invested in high-speed connectivity to over 30 global electronic exchanges to deliver streaming quotes and high-speed executions.
Automated customer onboarding and account management
We have developed proprietary technology to automate or otherwise facilitate operational functions that are core to our business and that we believe are important to our ability to deliver a superior customer experience. This includes a highly automated account opening and customer verification process, fast online account funding and withdrawals with a wide variety of automated payment methods, and on-demand delivery of customer information, such as account statements and other account-related reporting. In 2013, we also added account opening and funding functions to our mobile trading applications in order to improve the experience for the increasing number of customers who trade primarily through their mobile devices. Given the highly regulated and global nature of our business, these processes are customized to each regulatory jurisdiction in which we operate, and are further tailored to customer needs and preferences in specific countries in order to make it easier for clients in these countries to open accounts with us and then to fund and trade in those accounts. As a result, we are becoming increasingly successful at acquiring clients from countries in the world where we do not have a local office, particularly in the Middle East and Asia Pacific regions.

Sophisticated risk management
Because we are exposed to market and credit risk in connection with our retail trading activities, developing and maintaining robust risk management capabilities is a high priority.

We allow our customers to trade notional amounts greater than the funds they have on deposit with us through the use of leverage, making management of credit risk a key focus for us. The maximum leverage available to retail traders is generally set by the regulator in each jurisdiction. We manage customer credit risk through a combination of providing trading tools that allow our customers to avoid taking on excessive risk and automated processes that close customer positions in accordance with our policies, in the event customers exceed their credit limits. For example, our customer trading platforms provide a real-time margin monitoring tool to enable customers to know when they are approaching their margin limits. In addition, if a customer’s equity falls below the amount required to support one or more positions, we will automatically liquidate positions to bring the customer’s account into margin compliance.

In addition, we actively monitor and assesses various market factors, including volatility and liquidity, and takes steps to address identified risks, such as proactively adjusting required customer margins (both initial and maintenance). For example, on January 15, 2015, the Swiss National Bank, or SNB, unexpectedly announced that it would move interest rates to -0.75% and abandon the 1.20 floor for EUR/CHF that it had previously maintained. The announcement led to unprecedented volatility in the Swiss franc, which negatively impacted many market participants. However, as part of our risk management framework, our previous assessment of the risk exposure relating to EUR/CHF led us to increase client margin requirements to 5%, as of September 26, 2014, in order to help mitigate the risk of negative client equity in the event the price floor was abandoned.
    
We have also developed other policies and procedures to manage market risk in our business. When a retail customer executes a trade with us, the trade may be naturally hedged against an offsetting trade from another customer, hedged through an

7


offsetting trade with one of our liquidity providers or may become part of our net exposure portfolio. For naturally hedged trades, we receive the entire bid/offer spread we offer our customers on the two offsetting transactions. For immediately offset trades, we earn the difference between the retail bid/offer spread we offer our customers and the wholesale bid/offer spread we receive from our liquidity providers. Customer trades in our net exposure portfolio are managed pursuant to our risk-management policies and procedures, including risk limits established by the Risk Committee of our Board of Directors, and we receive the net gains or losses generated through the management of our net exposure.
Our risk management policies and procedures have been developed to enable us to effectively manage our exposure to market risk, particularly in connection with the management of our net exposure. Our net exposure is evaluated each second and is continuously rebalanced throughout the trading day, thereby minimizing the risk we will be adversely affected by changes in the market prices of the products we hold. This real-time rebalancing of our portfolio enables us to curtail risk and to be profitable in both up and down market scenarios.
In our exchange-traded business, we are exposed to debit/deficit risk with our clients. If an adverse market move related to a client’s position(s) occurs and we are unable to collect a margin call in a timely manner, the client account may incur a loss, resulting in a debit balance. If a client account were to incur a loss resulting in a debit balance and we were unable to collect such debit balance from our client, we would incur debit/deficit expense, which could have a material adverse effect on our results of operations. In recognition of this risk, we monitor all client accounts in near real time and have employed multiple risk mitigation measures to help ensure that our client accounts are properly margined at all times.
Our risk management policies and procedures are established and reviewed regularly by the Risk Committee of our Board of Directors. Our risk-management team of senior traders monitors risk exposure continuously and updates senior management both informally over the course of the trading day and formally through real-time, intraday and end-of-day reporting. We do not take proprietary directional market positions and therefore do not initiate market positions for our own account in anticipation of future movements in the relative prices of the products that we offer.

Customers
Our retail customers consist primarily of self-directed traders, who execute trades on their own behalf, and, to a lesser extent, managed account customers who have engaged an intermediary to make trading decisions on their behalf.
Our typical self-directed customer is generally comfortable making trading decisions and is specifically interested in trading leveraged products, which typically have a higher risk/reward profile. For the year ended December 31, 2014, self-directed customers represented approximately 98.0% of our retail trading volume.
The intermediaries engaged by our managed account customers, which we refer to as authorized traders, include professional money managers, which trade a significant amount of aggregated customer funds, and individuals that trade for a small number of customer accounts. For the year ended December 31, 2014, managed account customers collectively represented approximately 2.0% of our retail trading volume.

Sales and Marketing
In connection with our retail business, we look to acquire new customers as cost-efficiently as possible, primarily through online marketing efforts such as advertising on third-party websites, search engine marketing and email marketing. Our experienced in-house marketing team creates highly targeted online campaigns tailored to experienced traders, as well as marketing programs and materials designed to support and educate novice traders. We use sophisticated tracking and measurement techniques to monitor the results of individual campaigns and continually work to optimize our overall marketing results.
Our principal lead-generation tool is to offer prospective customers access to free registered practice trading accounts for a 30-day trial period. From a prospective customer’s point of view, we believe the registered practice trading account serves two important functions. First, it allows the prospective customer to evaluate our trading platform, tools and services. Second, for less experienced traders, it serves as an educational tool, providing the prospective customers with the opportunity to try trading in a risk-free environment, without committing any capital. During this trial period, our customer service team is available to assist and educate the prospective customers. 
We also actively forge partnerships with introducing brokers in order to expand our customer base. We work with a variety of different types of introducing brokers, ranging from small, specialized firms that specifically identify and solicit customers interested in forex trading, to larger, more established financial services firms. Introducing brokers direct customers to us in return for either a commission on each referred customer’s trading volume or a share of net revenue generated by each referred customer’s trading activity.


8


Competition
The market for our retail services is rapidly evolving and highly competitive. Our competitors vary by region in terms of regulatory status, breadth of product offering, size and geographic scope of operations. Our main competitors can be categorized as follows:

Regulated Forex Firms, such as Forex Capital Markets LLC and OANDA Corporation. Like us, these firms have also expanded globally over the past several years, and we consider them to be competitors in the United States, as well as in several of our key international markets.
    
Global Multi-Product OTC Trading Firms, including firms such as Interactive Brokers, IG Group Holdings plc and CMC Group. These firms generally offer a broad set of asset classes and earn a significant percentage of their revenue from non-forex products, including CFD trading on equity indices and commodities and exchange-traded products, such as futures, options and listed equities.

Our Institutional Business

For our institutional customers, we provide agency execution services and offer access to markets and self-directed trading in foreign exchange, commodities, equities, options and futures via an electronic communications network, or ECN, through our GTX platform. We also offer high touch sales and trading aided by a team of sales employees. For the year ended December 31, 2014, our institutional business represented 34.4% of our net revenue.

In contrast to our retail business, in our institutional business, we primarily act as agent between the principals to the transactions that are executed and earn commissions or commission equivalents (markup/markdown). Our institutional business also facilitates client orders through riskless principal trades.

Electronic Execution Services

Through our GTX platform, we provide deep liquidity in spot and forward foreign exchange and precious metals to buy-side and sell-side firms, including banks, brokers, hedge funds, Commodity Trading Advisors, or CTAs, and asset managers. GTX’s unique centrally-cleared prime brokerage model supports true peer-to-peer trading capabilities, meaning every GTX client has an opportunity to add market liquidity to the venue by posting real-time bids and offers, as well as trade on the bid and offers of other participants. We act as an agent for the trades executed on the GTX platform and, therefore, do not assume any market or credit risk. We generate revenue by charging a commission on trades executed on the platform. For the year ended December 31, 2014, net revenue from our ECN business represented 22% of the net revenue of our institutional business.

Our GTX Direct offering allows professional traders who meet certain qualifications, but do not have a credit line with a prime broker, access to the liquidity of the GTX marketplace. Through GTX Direct, our clients deposit collateral with us and we make trades through the GTX trading platform on our clients’ behalf, earning a commission for each trade.

GTX is powered by software and intellectual property that we first licensed on a exclusive basis in 2010. After undertaking significant development and enhancement efforts, we acquired the software and intellectual property in July 2014.
Institutional Sales and Trading
Our institutional sales and trading business serves a broad range of participants across several asset classes, allowing clients to interact with the market based on their specific needs and preferences. As a result, we are able to attract a base of clients with diverse investment styles and strategies.
Nearly all of our revenue from institutional sales and trading consists of commissions derived from transaction execution services for institutional clients, conducted on an agency basis, as well as commission-equivalents generated on riskless principal transactions. Over the past several years we have built up this business primarily through a focus on our client service and an expansion of our sales and trading team. For the year ended December 31, 2014, net revenue from our institutional sales and trading business represented 78% of the net revenue of our institutional business.


9


Sales and Marketing

We have a direct sales team that is dedicated to building relationships with potential institutional customers and expanding our institutional business. Since its inception in 2010, our institutional business has quickly expanded to include customers throughout the United States, Europe and Asia.

Competition

In general, competition for business with institutional clients is based on a variety of factors, including technology, execution quality, client relationships, client service, cost and reputation.

GTX competes with other firms offering electronic trading platforms, such as ICAP, through its EBS offering; Reuters; Currenex, owned by State Street Bank; BATS Global Markets, Inc., through its Hotspot offering; Integral Development Corp.; and others.

Our institutional sales and trading group competes for clients with similar groups at leading brokers, including IG Group Holdings plc, CMC Group and Saxo Bank, as well as with boutique asset management firms.

Intellectual Property

We rely on a combination of trademark, copyright, trade secret and unfair competition laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our brands (e.g., FOREX.com, GAIN Capital, GFT, GTX, Open E Cry and OEC). We also enter into confidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. We rigorously control access to our proprietary technology. Currently, we do not have any pending or issued patents.

We use a variety of service marks that have been registered with the U.S. Patent and Trademark Office, including: GAIN Capital (registered service mark), FOREX.com GAIN Capital Group (registered service mark), Trade Real-Time (registered service mark), ForexPro (registered service mark), ForexPremier (registered service mark), Forex Insider (registered service mark), ForexTrader (registered service mark), FOREX.com (registered service mark), ForexPlus (registered service mark), It’s Your World. Trade It. (registered service mark), GFT (registered service mark),  “GFT and Lion Head” (registered service mark), “Lion Head” (registered service mark),  G3BO (registered service mark), GFT Markets (registered service mark), Dealbook (registered service mark), CFD 360 (Registered Service Mark), FX 360° (registered service mark), OEC (registered service mark), OEC One Link (registered service mark) and Open E Cry (registered service mark). We also use a variety of trademarks that have been registered with the U.S. Patent and Trademark Office, including: GFT (registered trademark),  “GFT and Lion Head” (registered trademark), “Lion Head” (registered trademark), Dealbook360 (registered trademark),  Dealbook (registered trademark), Foresight-A.I. (registered trademark) and Open E Cry (registered trademark).

Regulation

Overview
Our business and industry are highly regulated. Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the United Kingdom (through which we have accessed regulatory passport rights to operate in a number of European Economic Area jurisdictions), Japan, Australia, Hong Kong, Canada, Singapore and the Cayman Islands. Government regulators and self-regulatory organizations oversee the conduct of our business in many ways, and several perform regular examinations to monitor our compliance with applicable statutes, regulations and rules. These statutes, regulations and rules cover all aspects of our business, including:
sales and marketing activities, including our interaction with, and solicitation of, customers;
trading practices, including the types of products and services we may offer;
treatment of customer assets, including custody, control, safekeeping and, in certain countries, segregation of our customer funds and securities;
maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries;
continuing education requirements for our employees;
anti-money laundering practices;
recordkeeping and reporting; and
supervision regarding the conduct of directors, officers and employees.


10


In some jurisdictions in which we offer our products and services, we are not subject to regulation as a result of the nature of the market or the manner in which we conduct our business. We consult with legal counsel in jurisdictions in which we operate on a regular basis as to whether we have the required authorizations, licenses or approvals or whether we may conduct our business cross-border with residents in that jurisdiction without obtaining local regulatory authorization, approval or consent. In addition, on an on-going basis we proactively evaluate our activities in jurisdictions in which we are not currently licensed or registered. To the extent that we wish to serve customers in a jurisdiction in which we determine licensing or registration is required, we may also elect to direct such customers to a licensed white label or other partner, rather than pursuing licensing or registration ourselves.

Though we conduct our business in a manner which we believe complies with applicable local law, regulators may assert authority over activities that they deem to take place within the jurisdiction they regulate, and new laws, rules or regulations may be enacted that change the regulatory landscape and result in new, or clarify preexisting, registration or licensing requirements.

The primary responsibility for ensuring that we maintain compliance with all applicable regulatory requirements is vested in our legal and compliance departments. In addition, our legal and compliance departments are responsible for our ongoing training and education programs, supervision of our personnel required to be licensed by one or more of our regulators, review of sales, marketing and other communications and other related functions. In addition, all of our sales employees are licensed pursuant to applicable regulation.

U.S. Regulation

In the United States, the CFTC and the NFA regulate our forex and futures trading activities. Historically, the principal legislation covering our U.S. forex business was the Commodity Exchange Act, which provides for federal regulation of all commodities and futures trading activities and requires all futures and commodity options to be traded on organized exchanges. In recent years, as in the case of other companies in the financial services industry, our forex business has been subject to increasing regulatory oversight. Specifically, in 2008, Congress passed the CFTC Reauthorization Act, which amended the Commodity Exchange Act to grant the CFTC express authority to regulate the retail forex industry. On October 18, 2010, the CFTC adopted a series of rules which regulate various aspects of our business, including:

creating “retail foreign exchange dealers,” or RFEDs, a new regulated category of forex brokers focused on retail investors that are permitted to act as counterparty to retail forex transactions;
imposing an initial minimum security deposit amount of 2.0% of the notional value for retail forex transactions in “major currency” pairs and 5.0% of the notional value for all other retail forex transactions;
providing that introducing brokers must either (i) register with the CFTC and become members of the NFA or apply for an exemption from registration and (ii) meet the minimum net capital requirements applicable to futures and commodity options introducing brokers or enter into a guarantee agreement with a CFTC-regulated forex dealer member and permitting only one such guarantee agreement per introducing broker;
requiring that a risk disclosure statement be provided to every retail forex customer, including disclosure of the number of profitable and unprofitable non-discretionary accounts maintained by the forex broker during the four most recent calendar quarters;
prohibiting RFEDs, FCMs and introducing brokers from including statements in sales and marketing materials that would appear to convey to potential retail forex customers that there is a guaranty against loss, and requiring that FCMs, RFEDs and introducing brokers provide retail forex customers with enhanced written disclosure statements that, among other things, inform customers of the risk of loss; and
requiring RFEDs to maintain net capital of at least $20.0 million, plus 5.0% of the RFED’s retail customer obligations in excess of $10.0 million. In addition, in the event an RFED’s net capital position falls below 110.0% of the minimum net capital requirement, the RFED would be subject to additional reporting requirements.

On January 31, 2015, the NFA enacted a rule prohibiting forex and futures customers in the United States from funding their accounts with credit cards.

In response to the SNB market event, the NFA has also increased the minimum security deposit requirements on certain major currency pairs to 3.0% and 5.0% of notional value, and to 6.0%, 9.0% or 20% on certain other currency pairs. U.S. and foreign regulators have expressed their intention to review existing regulation in a number of areas as a result of the SNB market event.


11


Our exchange-traded futures business, which is carried on by our subsidiary Gain Capital Group, LLC, is subject to the CFTC Net Capital Rule (Regulation 1.17). Our OTC foreign exchange business carried on by our subsidiary Gain Capital Group, LLC under the Forex.com brand, is also subject to the CFTC Net Capital Rule (Regulation 5.7). Under applicable provisions of these regulations, Gain Capital Group, LLC is required to maintain adjusted net capital of the greater of $1.0 million or 8% of Customer and Non-Customer Maintenance Margin or $20,000,000 plus 5% of all liabilities owed to retail customers exceeding $10,000,000. At December 31, 2014, Gain Capital Group, LLC maintained $17.3 million more than the required minimum regulatory capital for a total of 1.7 times the required capital and at all times maintained compliance with all applicable regulations.

In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. A number of significant provisions contained in the law affect, or will affect once implementing regulations are adopted by the appropriate federal agencies, our business. Specifically, the Dodd-Frank Act includes:

rules that, beginning in October 2010, require us to ensure that our customers residing in the United States have accounts open only with our NFA-member operating entity, GAIN Capital Group, LLC;
amendments to the Commodity Exchange Act that, beginning on July 15, 2011, required essentially all retail transactions in any commodity other than foreign currency to be executed on an exchange, rather than OTC;
a requirement that federal banking regulators adopt new rules regarding the conduct and operation of retail forex businesses by banks; and
a requirement that the SEC adopt rules regarding the conduct and operation of retail forex businesses by broker-dealers.

The Dodd-Frank Act also provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. The Dodd-Frank Act requires the registration of swap dealers with the CFTC and imposes significant regulatory requirements on swap dealers. Effective February 27, 2013, GAIN GTX, LLC, became registered with the CFTC and NFA as a swap dealer. Certain of our other subsidiaries may be required to register, or may register voluntarily, as swap dealers.

Swap dealers are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherence to risk management policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capital requirements. Swap dealers also are subject to additional duties, including internal and external business conduct and documentation standards with respect to their swap counterparties. Swap dealers are also subject to rules under the Dodd-Frank Act regarding segregation of customer collateral for cleared transactions, position limits, large trader reporting regimes, compensation requirements and anti-fraud and anti-manipulation requirements related to activities in swaps.

The specific parameters of these swap dealer requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAIN GTX and any other of our subsidiaries that register as a swap dealer remains unclear. It is likely, however, that these entities will face increased costs due to the registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers could require us to restructure our businesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance with swap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, and the changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition.

U.S. Patriot Act and Anti-Money Laundering
Like other companies in the financial services industry, we are subject to a variety of statutory and regulatory requirements concerning our relationships with customers and the review and monitoring of their transactions. Specifically, we are subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, which requires that we maintain a comprehensive anti-money laundering, or AML, program, a customer identification program, or CIP, designate an AML compliance officer, provide specified employee training and conduct an annual independent audit of our AML program. Consistent with the Patriot Act, our CIP includes both documentary and non-documentary review and analysis of potential customers. Under our CIP, we review each prospective customer’s identity internally and also contract with third-party firms that perform extensive background checks on each prospective customer, including through review of the U.S. Treasury Department’s Office of Foreign Assets and Control, Specially Designated Nationals and Blocked Persons lists. These procedures and tools, coupled with our periodic training, assist us in complying with the Patriot Act, as well as the CFTC’s and NFA’s applicable AML and CIP requirements.


12


International Regulation

We have provided below a brief description of the key aspects of the regulations governing our operations in the jurisdictions in which we have registered with, or obtained a license from, the local regulator, as well as material regulatory developments affecting our business in other jurisdictions important to our business, including developments that have presented risks or uncertainties for our operations.

United Kingdom
GAIN Capital Forex.com U.K. Ltd., or GCUK, is registered in the U.K. and regulated by the Financial Conduct Authority, or FCA, as a full scope €730k BIPRU Investment Firm. GCUK is required to maintain the greater of $1.0 million (€730,000) or the Financial Resources Requirement, which is calculated as the sum of the firm’s operational, credit, counterparty, concentration, market and forex risk. The regulatory capital held is required to be in excess of 110% of its requirements at all times. At December 31, 2014, GCUK maintained $4.5 million more than the minimum required regulatory capital for a total of 1.1 times the required capital and at all times maintained compliance with all applicable regulations.

Galvan Research and Trading, Ltd., or Galvan, is registered in the U.K. and regulated by the FCA as a BIPRU Limited Licence Firm. Galvan is required to maintain a base financial resources requirement of $0.1 million (€0.05 million) and a capital requirement of the higher of either credit risk plus market risk or fixed overhead requirement. At December 31, 2014, Galvan maintained $1.1 million more than the minimum required regulatory capital for a total of 3.2 times the required capital and at all times maintained compliance with all applicable regulations.

Japan
Forex.com Japan Co., Ltd., or GC Japan, is a registered Type I financial instruments business firm regulated by the Japan Financial Services Agency, or FSA, in accordance with Financial Instruments and Exchange Law (Law No. 25 of 1948, as amended). GC Japan is a member of the Financial Futures Association of Japan. GC Japan is subject to a minimum capital adequacy ratio of 120%, which is derived by dividing Net Capital (as defined in Law No. 25) by the sum of GC Japan’s market, counterparty credit risk and operational risk. At December 31, 2014, GC Japan maintained $6.2 million more than the minimum required regulatory capital for a total of 3.7 times the required capital and at all times maintained compliance with all applicable regulations.

GC Japan is also regulated by the Japan Ministry of Economy, Trade and Industry, or the METI, and the Japan Ministry of Agriculture, Forestry and Fisheries, or the MAFF. As required under applicable law, on January 1, 2011, we obtained a license from the METI and MAFF.

Australia
GAIN Capital Forex.com Australia, Pty. Ltd., or GCAU, is regulated under the laws of Australia, including the Corporations
Act 2001 (Commonwealth of Australia). The Australian Securities and Investments Commission, or ASIC, is the corporate, markets and financial services regulator in Australia responsible for administering aspects of the Corporations Act 2001. GCAU holds an Australian Financial Services License that has been issued by ASIC. GCAU is required to maintain a minimum capital requirement of $0.8 million (1.0 million AUD). At December 31, 2014, GCAU maintained $1.9 million more than the minimum required regulatory capital for a total of 3.4 times the required capital and at all times maintained compliance with all applicable regulations.
 
Effective January 31, 2014, ASIC increased the Net Tangible Assets (NTA) requirement, as part of RG166: Licensing: Financial Requirements, for OTC derivative issuers.  ASIC requires retail OTC derivative issuers to have at all times the greater of AUD$ 1,000,000 or 10% of average revenue on hand at all times.  RG166 outlines that, at the minimum, 50% of the NTA requirement is required to be held in cash or cash equivalents and 50% in liquid assets.  OTC derivative issuers must report to ASIC if their NTA falls below 110% of the requirement within 3 business days after becoming aware of the event. 
 
ASIC has also recently implemented additional reporting regulations. As part of phase 2 of RG251 under ASIC, GCAU began transaction reporting on October 1, 2014 and will be required to begin position reporting on April 1, 2015.  Australian Financial Service Licensees (AFSL) are required to report commodity, credit, equity, interest, and foreign exchange derivatives transactions and positions.  AFSL holders will need to report to ASIC approved trade repositories under the Corporations Act 2001 as per the reporting requirement.   

Hong Kong
GAIN Capital - Forex.com Hong Kong, Ltd., or GCHK, is licensed by the Securities and Futures Commission, or SFC, to carry out Type 3 Regulated Activity, Leveraged Foreign Exchange Trading. GCHK is subject to the requirements of section 145 of

13


the Securities and Futures Ordinance (Cap.571). Under this rule, GCHK is required to maintain a minimum liquid capital requirement of the higher of $1.9 million or the sum of 1.5% of its aggregate gross foreign currency position and 5% of its adjusted liabilities and clients’ margin calculated in accordance with applicable rules. At December 31, 2014, GCHK maintained $1.9 million more than the minimum required regulatory capital for a total of 2.0 times the required capital and at all times maintained compliance with all applicable regulations.

Cayman Islands
GAIN Global Markets, Inc., or GGMI, our Cayman Island subsidiary, is a registered securities arranger with the Cayman Islands Monetary Authority, or CIMA. GGMI is required to maintain a capital level that is the greater of one quarter of relevant annual expenditure, or $100,000. At December 31, 2014, GGMI maintained $0.1 million more than the minimum required regulatory capital for a total of 2.0 times the required capital and at all times maintained compliance with all applicable regulations.

Canada
GAIN Capital - Forex.com Canada, Ltd., or GCCA, is a Dealer Member of the Investment Industry Regulatory Organization of Canada, or IIROC, and regulated under the laws of Canada, including the Canadian Investor Protection Fund. In Canada, the securities industry is governed by provincial or territorial legislation, and there is no national regulator. Local legislation differs from province to province and territory to territory, but generally requires that forex dealing representatives register with applicable regulators and self-regulatory organizations in order to offer forex and/or CFD products to retail clients. GCCA’s principal provincial regulator is the Ontario Securities Commission, or OSC. GCCA is required to maintain risk-adjusted capital in excess of the minimum capital requirement. At December 31, 2014, GCCA maintained $1.4 million more than the minimum required regulatory capital for a total of 8.0 times the required capital and at all times maintained compliance with all applicable regulations.

Singapore

GFT Global Markets Asia Pte Limited, or GFT SG, is a sole proprietorship foreign exchange trading firm registered with the Monetary Authority of Singapore, or MAS, and operates as an approved holder of Capital Markets Services License.    GFT SG is subject to the requirements of MAS and pursuant to the Securities and Futures Act (Cap.289) and a Commodity Brokers License granted under the Commodity Trading Act by the International Enterprise of Singapore. Under these rules, GFT SG is required to maintain a minimum liquid capital requirement of $1.5 million (2.0 million SGD). At December 31, 2014, GFT SG maintained $1.8 million more than the required minimum regulatory capital for a total of 2.2 times the required capital and at all times maintained compliance with all applicable regulations.

Global Anti-Money Laundering
Our anti-money laundering and customer identification programs are designed to comply with applicable rules and regulations on a global basis. In addition, we have developed proprietary methods for risk-management and continue to add specialized processes, queries and automated reports designed to identify potential money laundering, fraud and other suspicious activities.
 
Employees

As of December 31, 2014, we had 479 employees. None of our employees are covered by collective bargaining agreements.

Corporate Information

We were incorporated in Delaware in October 1999 as GAIN Capital, Inc. Our principal executive offices are located at Bedminster One, 135 Route 202/206, Bedminster, New Jersey 07921. We operate our trading risk management and most administrative services out of our New York, New York; Bedminster, New Jersey; Jersey City, New Jersey; Chicago, Illinois; Powell, Ohio; Grand Rapids, Michigan; London, England; Cornwall, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore offices. A complete list of our subsidiaries can be found in Exhibit 21.1.

Available Information

GAIN maintains a corporate website with the address www.gaincapital.com. Its intended use is as a regular means of disclosing material public information and for complying with disclosure obligations under Regulation FD promulgated by the SEC. Such disclosures are included on the website under the heading “Investor Relations.” Accordingly, investors should monitor such portions of the website, in addition to following our press releases, SEC filings and public conference calls and webcasts.


14


We are not incorporating information contained in the website by reference into this Annual Report on Form 10-K. We will make available, free of charge through the website under the heading “Investor Relations,” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after electronically filing such material with, or furnishing such material to, the SEC. In addition, we make available on our website (i) our Proxy Statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, (ii) the charters for the committees of our Board of Directors, including the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Risk Committee and (iii) our Code of Business Conduct and Ethics governing our directors, officers and employees. We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the rules of the SEC and the New York Stock Exchange.

Materials filed with the SEC can also be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC also maintains a website, www.sec.gov, containing the reports, proxy statements and other information that we file with the SEC.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

Our revenue and profitability are influenced by trading volume and currency volatility, which are directly impacted by domestic and international market and economic conditions that are beyond our control.

During recent years, there has been significant disruption and volatility in the global financial markets. Many countries, including the United States and some member countries of the European Union, have recently experienced recessionary conditions. Our revenue is influenced by the general level of trading activity in the global financial markets. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s financial markets and to fluctuations in trading levels. We have generally experienced greater trading volume in periods of volatile markets. In the event we experience lower levels of market volatility, our revenue and profitability will likely be negatively affected as occurred during the first, third and fourth quarters of 2012, and the first and second quarters of 2014, when volatility levels were at or below previous four year lows. In addition, our customer base is primarily comprised of individual retail customers who view trading in the markets we offer as an alternative investment class. If global economic conditions limit the disposable income of our customers, our business could be materially adversely affected as our customers may choose to curtail their trading, which could result in reduced customer trading volume and trading revenue.

Like other financial services firms, our business and profitability are directly affected by elements that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of market transactions, changes in supply and demand for currencies, movements in currency exchange rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one or more of these factors, or other factors, may adversely affect our business and results of operations and cash flows. A weakness in equity markets, could result in reduced trading activity by our customers and, therefore, could have a material adverse effect on our business, financial condition and results of operations and cash flows. As a result, period-to-period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.

Our risk-management policies and procedures may not be effective and may leave us exposed to unidentified or unexpected risks.

We are dependent on our risk-management policies and the adherence to such policies by our trading staff. Our policies, procedures and practices used to identify, monitor and control a variety of risks, including risks related to human error, customer defaults, market movements, fraud and money-laundering, are established and reviewed by the Risk Committee of our Board of Directors. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in the market. Our risk-management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing software or hardware failures. In addition, we may elect to adjust our risk-management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk-management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. These methods may not protect us against all risks or may protect us less

15


than anticipated, in which case our business, financial condition and results of operations and cash flows may be materially adversely affected.

Our trading activities involve significant risks and unforeseen events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We offer our clients access to a wide array of products, including forex, CFDs, spread bets, futures, futures options, OTC currency derivatives and gold and silver spot trading products. Our trading activities in these various products involve significant risks.

Through our retail and institutional forex trading activities, our principal sources of revenues and profits arise from the difference between the prices at which we buy and sell, or sell and buy, foreign currencies. We may incur trading losses for a variety of reasons, including:

price changes in foreign currencies;
lack of liquidity in foreign currencies in which we have positions; and
inaccuracies in our proprietary pricing mechanism, or rate engine, which evaluates, monitors and assimilates market data and reevaluates our outstanding currency quotes, and is designed to publish prices reflective of prevailing market conditions throughout the trading day.

These risks may affect the prices at which we are able to sell or buy foreign currencies or may limit or restrict our ability to either resell foreign currencies that we have purchased or repurchase foreign currencies that we have sold.
In addition, competitive forces often require us to match the breadth of quotes our competitors display and to hold varying amounts and types of foreign currencies at any given time. By having to maintain positions in certain currencies, we are subjected to a high degree of risk. We may not be able to manage such risk successfully and may experience significant losses from such activities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

All of the risks that pertain to our trading activities in the forex market also apply to our CFDs, spread bets, futures, futures options, OTC currency derivatives and gold and silver spot trading products and any other products we may offer in the future. These risks include market risk, counterparty risk, liquidity risk, technology risk, third-party risk and risk of human error. In addition, unexpected events can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our existing trading platforms or our failure to properly manage the market risks associated with making markets for new products. The profit margins for these products may not be similar to the profit margins we have realized with respect to forex trading.

In addition, due to regulatory restrictions, CFDs are not and may not be offered in the United States by us or any of our U.S. or non-U.S. subsidiaries, and CFDs are not eligible for resale to U.S. persons. To the extent our current CFD product offerings constitute an offer or sale of securities under the U.S. federal securities laws, we will need to comply with those U.S. federal securities laws. Our CFD product offerings are not currently registered with the SEC or any other U.S. regulator. To the extent our CFD offerings constitute OTC futures contracts or other financial derivative instruments, they are prohibited under the provisions of the U.S. Commodity Exchange Act. To the extent our CFD offerings are determined to constitute swaps or security-based swaps under the Dodd-Frank Act, the Commodity Exchange Act or the federal securities laws, we would be required to comply with such U.S. laws with respect to such offerings. Failure to effectively manage these risks or properly comply with local laws or regulations relating to our product offerings, including U.S. federal securities laws, may expose us to fines, penalties or other sanctions that could have a material adverse effect upon our business, financial condition and results of operations and cash flows.

In our exchange traded futures business, we are exposed to debit/deficit risk with our clients. If an adverse market move relative to a client’s position(s) occurs and we are unable to collect a margin call in a timely manner, the client account may incur a loss, resulting in a debit balance, which could be material and have a material adverse effect upon our financial condition and results of operations.

Our proposed acquisition of City Index and any future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.

On October 31, 2014, we entered into a definitive agreement to acquire City Index and intend to continue to pursue other acquisitions as part of our strategy to increase the range of products that we offer, especially into non-forex products, and to

16


expand our businesses into new markets and geographies. We expect to incur a number of costs associated with the City Index acquisition, including, but not limited to, fees paid to legal, financial, tax and accounting advisors, filing fees and printing costs. Any future acquisitions may also result in significant transaction expenses. The City Index acquisition and any future acquisitions also present risks associated with offering new products or entering new markets and integrating the acquired companies. Other areas where we may face risks include:

diversion of management time and focus from operating our business to address challenges that may arise in integrating the acquired business;
transition of operations, users and customers onto our existing platforms or onto platforms of the acquired company;
failure to successfully further develop the acquired business;
failure to realize anticipated operational or financial synergies;
implementation or remediation of controls, procedures, and policies at the acquired company;
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries;
liability for activities of the acquired company before the acquisition, such as violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; and
integration of the acquired business’ accounting, human resource and other administrative systems, and coordination of trading and sales and marketing functions.
 
When the City Index acquisition is completed, there will be an additional 5,319,149 shares of our Common Stock outstanding. In addition, although it is not possible to determine the exact maximum number of shares of Common Stock that will be issuable upon conversion of the convertible notes to be issued in the City Index acquisition until such notes are issued on or around the closing date of the acquisition, to the extent that we elect to settle any conversions of the convertible notes by issuing shares of our Common Stock or a combination of cash and shares of our Common Stock, the convertible notes will have a dilutive effect on our Common Stock, and such dilutive effect may be substantial.

Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, amortization expenses, impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results. Additionally, any new businesses that we may acquire, including City Index, once integrated with our existing operations, may not produce expected or intended results. Our failure to address these risks or other problems encountered in connection with our future acquisitions could cause us to fail to realize the anticipated benefits of such acquisitions or incur unanticipated liabilities, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The accounting method for convertible debt securities that may be settled in cash, such as our 4.125% Convertible Senior Notes due 2018 and the convertible notes to be issued in connection with the City Index acquisition, could have a material effect on our reported financial results.

In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as our 4.125% Convertible Senior Notes and the convertible notes to be issued in connection with the expected closing of our acquisition of City Index) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. The liability component of the notes is initially valued at the fair value of a similar debt instrument that does not have an associated equity component and is reflected as a liability in our Consolidated Balance Sheets in an amount equal to the fair value. The equity component of the notes is included in the additional paid-in capital section of our stockholders’ equity on our Consolidated Balance Sheets, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. This original issue discount is amortized to non-cash interest expense over the term of the notes, and, as a result, we record a greater amount of interest expense in current periods. Accordingly, we will report lower net income in our financial results than would have been recorded had we reflected only cash interest expense in our consolidated income statement because ASC 470-20 will require the interest expense associated with the notes to include both the current period’s amortization of the original issue discount and the notes’ cash coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.
In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as our 4.125% Convertible Senior Notes and the convertible notes to be issued in connection with our acquisition of City Index) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon

17


conversion of the notes are not included in the calculation of diluted earnings per share unless the conversion value of the notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, were issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of the notes, then our diluted earnings per share could be adversely affected.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business
to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness,
including our 4.125% Convertible Senior Notes that were issued in November 2013 and the convertible notes that will be issued in connection with the expected closing of our acquisition of City Index, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt because of factors beyond our control. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Any disruption or corruption of our proprietary technology could have a material adverse effect on our business, financial condition and results of operations and cash flows.

We rely on our proprietary technology to receive and properly process internal and external data. Any disruption in the proper functioning or any corruption of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits or require us to suspend our services, any of which could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Systems failures could cause interruptions in our services or decreases in the responsiveness of our services, which could harm our business.

If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems have in the past experienced periodic interruptions and disruptions in operations, which we believe will continue to occur from time to time. Our systems also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, our DRP may not work effectively during an emergency. Any systems failure that causes an interruption in our services or decreases the responsiveness of our services could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.

We may not be able to develop and adopt new technologies in a timely fashion, which could adversely impact our ability to compete in the markets in which we operate.

Our success in the past has largely been attributable to our proprietary technology that has taken many years to develop. If our competitors develop more advanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. Our industry is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.

We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.

We rely on a combination of trademark, copyright, trade secret and unfair competition laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our brands. We do not have any patents.

18


While we rigorously control access to our proprietary technology and enter into confidentiality and invention assignment agreements with our employees, consultants and other third parties, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. Such unauthorized use and infringement would undermine the competitive benefits offered by our proprietary technology and could adversely impact our business and results of operations.

We also license or are permitted to use intellectual property or technologies owned by others. In the event such intellectual property or technology becomes material to our business, the loss of our license or our inability to otherwise continue use of such technologies would have a material adverse effect on our business. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.

Attrition of customer accounts and failure to attract new accounts in a cost-effective manner could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Our customer base is primarily comprised of individual retail customers who generally trade with us for short periods. Although we offer products and tailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customers may not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. Although we have spent significant financial resources on sales and marketing expenses and related expenses and plan to continue to do so, these efforts may not be cost-effective at attracting new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print and television advertising, are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, our sales and marketing methods are subject to regulation by the Commodity Futures Trading Commission, or CFTC, and National Futures Association, or NFA, in the United States and other regulators in non-US jurisdictions. The rules and regulations of these organizations impose specific limitations on our sales methods, advertising and marketing. If we do not achieve our advertising objectives, our profitability and growth may be materially adversely affected.
 
We are subject to litigation risk which could adversely affect our reputation, business, financial condition and results of operations and cash flows.

Many aspects of our business involve risks that expose us to potential liability under U.S. federal and state laws, as well as the rules and enforcement efforts of our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other market participants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, made materially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcement actions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed to have violated applicable rules and regulations in one or more jurisdictions.

The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms has been increasing and may continue to increase. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers, regulators or self-regulatory organizations may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.

Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts and collateral. Although our customer agreements generally provide that we may exercise such rights with respect to customer accounts and collateral as we deem reasonably necessary for our protection, our exercise of these rights may lead to claims by customers that we did so improperly.

We may also have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter, could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.


19


We may be subject to customer litigation, financial losses, regulatory sanctions and harm to our reputation as a result of employee misconduct or errors that are difficult to detect and deter.

There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Our employees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activities on behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as improperly record or otherwise try to hide improper activities from us.

In addition, employee errors, including mistakes in executing, recording or reporting transactions for customers, may cause us to enter into transactions that customers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are unwound or reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errors may be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems. Misconduct by our employees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to detect or deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commit good faith errors that could subject us to financial claims for negligence or otherwise, as well as regulatory actions.

Misconduct by employees of our customers can also expose us to claims for financial losses or regulatory proceedings when it is alleged we or our employees knew or should have known that an employee of our customer was not authorized to undertake certain transactions. Dissatisfied customers can make claims against us, including claims for negligence, fraud, unauthorized trading, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by associated persons or failures in the processing of transactions.

Our customer accounts may be vulnerable to identity theft and credit card fraud.

Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. We continue to work with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. When there is unauthorized access to credit card data that results in financial loss, there is the potential that we could experience reputational damage and parties could seek damages from us.

If our reputation is harmed, or the reputation of the online financial services industry as a whole is harmed, our business, financial condition and results of operations and cash flows may be materially adversely affected.

Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, our business prospects could be materially adversely affected. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, client data protection, record keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanctions could materially adversely affect our reputation, thereby reducing our ability to attract and retain customers and employees.

In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or the forex industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. A perception of instability within the online financial services industry also could materially adversely affect our ability to attract and retain customers.

The loss of our key employees could materially adversely affect our business, including our ability to grow our business.

Our key employees, including Glenn Stevens, our chief executive officer, have significant experience in the forex industry and have made significant contributions to our business. In addition, other senior employees have made significant contributions to our business. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a

20


material adverse effect on our business. In addition, our ability to grow our business is dependent, to a large degree, on our ability to retain such employees.
 
The industries in which we operate are highly competitive and we may be adversely affected if we are unable to compete effectively.

The forex market has only recently become accessible to retail investors and is a rapidly evolving industry characterized by intense competition and evolving domestic and global regulatory oversight and rules. Tighter spreads and increased competition could make our business less profitable. Our prospects may be materially adversely affected by our ability to adapt to these changes and effectively manage the risks, expenses and difficulties frequently encountered in the operation of a business in a rapidly evolving industry. We face similar competitive pressure in the other industries in which we operate, including with regard to our institutional and exchange traded futures products.

In addition, our competitors include sophisticated institutions which have larger customer bases, more established name recognition and substantially greater financial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to:

develop products and services that are similar to ours, or that are more attractive to customers than ours in one or more of our markets;
provide products and services we do not offer;
provide execution and clearing services that are more rapid, reliable, efficient or less expensive than ours;
offer products and services at prices below ours to gain market share and to promote other businesses, such as forex options, futures, listed securities, CFDs, precious metals and OTC derivatives;
adapt at a faster rate to market conditions, new technologies and customer demands;
offer better, faster and more reliable technology;
outbid us for desirable acquisition targets;
more efficiently engage in and expand existing relationships with strategic alliances;
market, promote and sell their products and services more effectively; and
develop stronger relationships with customers.

These competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do, and, therefore, may be better able to respond to changes in the industries in which we operate, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidity requirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair our ability to attract customer assets. Access to capital also determines the degree to which we can expand our operations. Therefore, if we are unable to maintain or increase our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue and earnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share or increase it in desirable markets. Increased competition could also result in narrowing bid/offer spreads, which could materially adversely affect our business, financial condition and results of operations and cash flows. Any reduction in revenues without a commensurate reduction in expenses would decrease our profitability. We may not be able to compete effectively against these firms, particularly those with greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations and cash flows.

We may be unable to effectively manage our growth.

As we continue to seek to grow our business, both organically and by selectively pursuing acquisitions, we may need to expand and upgrade the reliability and scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expand and upgrade our technology systems and infrastructure to accommodate increases in our business activity in a timely manner, which could lead to operational breakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigation or customer claims, regulatory sanctions or increased regulatory scrutiny. In addition, we will need to continue to attract, hire and retain highly skilled and motivated executives and employees. We may not be able to attract or retain the executives and employees necessary to manage our growth effectively.


21


We may be unable to respond to customers’ demands for new services and products and our business, financial condition and results of operations and cash flows may be materially adversely affected.

The market for Internet-based and mobile trading is characterized by:

changing customer demands;
the need to enhance existing services and products or introduce new services and products;
evolving industry practices; and
rapidly evolving technology solutions.

New services and products provided by our competitors may render our existing services and products less competitive. Our future success will depend, in part, on our ability to respond to customers’ demands for new services and products on a timely and cost-effective basis and to adapt to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing or marketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction or availability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Our international operations present special challenges and our failure to adequately address such challenges or compete in these markets, either directly or through joint ventures with local firms, could have a material adverse effect on our business, financial condition and results of operations and cash flows.

In 2014, we generated approximately 84.1% of our retail trading volume from customers outside the United States. Expanding our business in new markets is an important part of our growth strategy. Due to certain cultural, regulatory and other challenges relevant to those markets, however, we may be at a competitive disadvantage in those regions relative to local firms or to international firms that have a well-established local presence. These challenges include:

less developed or mature local technological infrastructure and higher costs, which could make our products and services less attractive or accessible in emerging markets;
difficulty in complying with the diverse regulatory requirements of multiple jurisdictions, which may be more burdensome, not clearly defined and subject to unexpected changes, potentially exposing us to significant compliance costs and regulatory penalties;
less developed and established local financial and banking infrastructure, which could make our products and services less accessible;
reduced protection of intellectual property rights;
inability to enforce contracts;
difficulties and costs associated with staffing and managing foreign operations, including reliance on newly hired local personnel;
tariffs and other trade barriers;
currency and tax laws that may prevent or restrict the transfer of capital and profits among our various operations around the world; and
time zone, language and cultural differences among personnel in different areas of the world.

In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to do business locally, we may seek to operate through joint ventures with local firms. Doing business through joint ventures may limit our ability to control the conduct of the business and could expose us to reputational and greater operational risks. We may also face intense competition from other international firms over relatively scarce opportunities for market entry. Given the intense competition from other international brokers that are also seeking to enter these new markets, we may have difficulty finding suitable local firms willing to enter into the kinds of relationships with us that we may need to gain access to these markets. This competition could make it difficult for us to expand our business internationally as planned.

If our operating subsidiaries are unable to pay us dividends when needed, we may be unable to satisfy our obligations when they arise.

As a holding company with no material assets other than the stock of our operating subsidiaries, nearly all of our funds generated from operations are generated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to regulation and requirements of various regulatory bodies, including the CFTC and NFA in the United States, the FCA in the United Kingdom, the FSA, METI and

22


MAFF in Japan, the SFC in Hong Kong, IIROC and the Ontario Securities Commission, or OSC, in Canada and the CIMA in the Cayman Islands, relating to liquidity and capital standards, which may have the effect of limiting funds available for the payment of dividends to the holding company. Accordingly, if our operating subsidiaries are unable to pay us dividends and make other payments to us when needed, due to regulatory restrictions or otherwise, we may be unable to satisfy our obligations when they arise.

Risks Related to Regulation

Failure to comply with the rapidly evolving laws and regulations governing our businesses may result in regulatory agencies taking action against us, which could significantly harm our business.

Substantially all of our operations are conducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations. Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders.

Among other things, we are subject to regulation with regard to:

sales and marketing activities, including our interaction with, and solicitation of, customers;
trading practices, including the types of investment products we may offer;
the methods by which customers can fund accounts with us, including the recently implemented NFA ban on the use of credit cards to fund accounts in the United States;
treatment of customer assets, including custody, control, safekeeping and, in certain countries, segregation of our customer funds and securities;
maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries;
continuing education requirements for our employees;
anti-money laundering practices;
record keeping and reporting; and
supervision regarding the conduct of directors, officers and employees.

Compliance with these regulations is complicated, time consuming and expensive. Our ability to comply with all applicable laws and regulations is dependent in large part on our internal legal and compliance functions, as well as our ability to attract and retain qualified personnel, which we may not be able to do. Regulators and self-regulatory organizations broadly oversee the conduct of our business and several perform regular examinations of our operations to monitor our compliance with applicable laws and regulations. If a regulator finds that we have failed to comply with applicable rules and regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in some cases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. In addition, we could incur significant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies. An adverse resolution of any future actions or investigations by such regulatory agencies against us could result in a negative perception of our company and cause the market price of our common stock to decline or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.

As a result of recent regulatory changes in certain jurisdictions, our operations and profitability may be disrupted and we may be subject to regulatory action taken against us if a regulatory authority determines that our operations are out of compliance, or requires us to comply with additional regulatory requirements.

Recently, the legislative and regulatory environment in which we operate has undergone significant changes, and U.S. and foreign regulators have expressed their intention to review existing regulation in a number of areas as a result of the highly publicized market disruption that occurred in January 2015 when the SNB announced that it would move interest rates to -0.75% and abandon the 1.20 floor for EUR/CHF that it had previously maintained. Our ability to expand our presence in various jurisdictions throughout the world will depend on the nature of future changes to the regulatory environment and our ability to continue to comply with evolving requirements. To the extent one or more regulators determines that our current activities do not comply with applicable law or regulations in a given jurisdiction, our services may be disrupted, we may elect to shift our services to a white label partner or we may be required to withdraw or modify our service offering.

In August 2010, the CFTC released new rules, effective as of October 18, 2010, relating to the retail forex industry regarding, among other things, increased initial minimum security deposits, registration of introducing brokers, money managers and fund managers, increased risk disclosures, including disclosures relating to customer profits and losses, record keeping, financial

23


reporting, minimum capital and other operational standards. In addition, the rules established 50-to-1 as the maximum leverage permitted to be provided to U.S. customers in major currency pairs, and 20-to-1 in all other currency pairs. More recently, following the SNB market event, the NFA lowered the maximum leverage in the United States to 33-to-1 or 20-to-1for certain major currency pairs, and to 17-to-1, 11-to-1 and 5-to-1 for certain other currency pairs. Regulators in other jurisdictions may make similar adjustments to maximum leverage limits. We can provide no assurance that maximum leverage limits in the United States, or elsewhere, will not be decreased further, which could materially adversely affect our business, results of operations and financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010, has had and is expected to continue to have a significant effect on our U.S. retail business. For example, the Dodd-Frank Act further amended the Commodity Exchange Act to prohibit essentially all OTC retail transactions in any commodity other than foreign currency after July 15, 2011. As a result, after such date, we are not permitted to offer our U.S. retail customers leveraged spot metals trading or any product other than forex. The Dodd-Frank Act also provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. Swap dealers are required to register with the CFTC and are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including, among other things, new capital requirements, a new margin regime for uncleared swaps and a new segregation regime for collateral of counterparties to uncleared swaps. Swap execution facilities, as defined by the Commodity Exchange Act, are also required to register with the CFTC with respect to transactions involving swaps that are subject to mandatory clearing requirements and are subject to a comprehensive regulatory regime with new obligations for cleared swap activities for which they are registered, including, among other things, a variety of core principles and other requirements, such as maintaining a rule book defining the rules of the swap execution facility and its members. Areas required to be covered in the rule book include, but are not limited to: governance, participants, participant obligations, trading practices, reporting, clearing, business conduct, disciplinary rules, arbitration and other matters. While the specific parameters of these swap dealer and swap execution facility requirements are still being developed by the relevant regulators, it is likely that any of our subsidiaries that are required to register as swap dealers (such as GAIN GTX, LLC and GTX SEF, LLC, which have registered with the CFTC and NFA as a swap dealer and a swap execution facility, respectively) will face increased costs due to the registration and regulatory requirements listed above. Any of these new regulatory developments, alone or in combination, could have a material adverse effect on our business and profitability.

In the European Union, government officials have announced the intention to propose new laws to regulate OTC derivatives. The new laws would, among other things, require mandatory central clearing of some derivatives, higher collateral requirements and higher capital charges for certain OTC derivatives. In February 2014, the European Market Infrastructure Regulation, or EMIR, enacted reporting requirements requiring all open trade positions under the applicable asset classes, including all over-the-counter and exchange traded derivatives, to be reported, on a back-dated basis from August 2012 to the present, to an approved trade repository. Many of these initiatives are still at the consultation stage and details for many aspects of the legislative proposals have not yet been published. If the products that we offer are subjected to mandatory central clearing, exchange trading, higher collateral requirements or higher capital charges, our business, financial condition and results of operations could be materially adversely affected.

In Japan, regulations, which became effective in August 2011, prohibit our ability to offer Japanese residents leverage for forex products in excess of 25-to-1. For spot gold that we offer in Japan, beginning July 1, 2011, the maximum allowable leverage became 20-to-1. Japanese authorities may adopt additional regulatory changes in the future, or other regulators could follow in the Japanese regulators’  example, and such changes to permitted margin or other aspects of our business could materially adversely affect our financial condition, results of operations and cash flows.

In Australia, ASIC has proposed its intention to issue new guidance on advertising materials, to introduce disclosure benchmarks for OTC CFD providers and to require OTC CFD providers to adopt written customer suitability policies.

In addition, the changing regulatory environment may create uncertainty with respect to certain practices or types of transactions that, in the past, may have been considered permissible and appropriate among financial services firms. Certain established practices may be called into question or become subject to additional regulatory requirements. These legal or regulatory uncertainties and additional regulatory requirements could result in a loss of, or increase in the cost of, business and could materially adversely affect our revenue, profitability and results of operations. Finally, because of changes in regulation, regulatory interpretations, enforcement practices or for other reasons, we may be found to have violated local regulation and, as a result, we may be subject to enforcement actions and penalties or customer claims in those local jurisdictions.


24


As we operate in many jurisdictions without local registration, licensing or authorization, we may be subject to possible enforcement action and sanction for our operations in such jurisdictions if our operations are determined to have violated regulations in those jurisdictions. Further, our growth may be limited by various restrictions and we remain at risk that we may be required to cease operations if we become subject to regulation by local government bodies.

For the year ended December 31, 2014, approximately 81% of our trading volume was attributable to customers resident in a jurisdiction where we or our white label partners are licensed, regulated or deal with customers cross-border in a manner that we believe does not require us to be regulated in that jurisdiction. The remaining 19% of our retail trading volume was attributable to customers in jurisdictions in which we or our white label partners are not currently licensed or authorized by the local government or applicable self-regulatory organization. We determine the nature and extent of services we can offer and the manner in which we conduct our business in the various jurisdictions in which we serve customers based on a variety of factors, including legal advice received from local counsel, our review of applicable U.S. and local laws and regulations and, in some cases, our discussions with local regulators. In cases in which we operate in jurisdictions based on local legal advice, we are exposed to the risk that our legal and regulatory analysis is subsequently determined by a local regulatory agency or other authority to be incorrect and that we have not been in compliance with local laws or regulations, including local licensing or authorization requirements, and to the risk that the regulatory environment in a jurisdiction may change, including in a circumstance where laws or regulations or licensing or authorization requirements that previously were not enforced become subject to enforcement.

In jurisdictions in which we are not licensed or authorized, we may be subject to a variety of restrictions regarding the manner in which we conduct our business or serve customers, including restrictions on:

our sales and marketing activities;
the use of a website specifically targeted to potential customers in a particular country;
the minimum income level or financial sophistication of potential customers we may contact;
our ability to have a physical presence in a particular country; or
the types of services we may offer customers physically present in each country.

These restrictions may limit our ability to grow our business in any such jurisdiction or may result in increased overhead costs or degradation in our services in that jurisdiction. Consequently, we cannot assure you that our international expansion plans will be achieved.

We may be subject to possible enforcement action and penalties if we are determined to have previously offered, or currently offer, our services in violation of applicable laws and regulations in any of the markets in which we serve customers. In any such case, we may be required to cease the conduct of our business with customers in one or more jurisdictions. We may also determine that compliance with the laws or licensing, authorization or other regulatory requirements for continuing the business in one or more jurisdictions are too onerous to justify making the necessary changes. In addition, any such event could negatively impact our relationship with the regulators or self-regulatory organizations in the jurisdictions where we are subject to regulation.

We are required to maintain high levels of capital, which could constrain our growth and subject us to regulatory sanctions.

Our regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries. In the United States, as a Futures Commission Merchant, or FCM, and a Retail Forex Exchange Dealer, or RFED, we are required to maintain adjusted net capital of $20.0 million plus 5.0% of the amount of retail customer liabilities over $10.0 million. On a worldwide basis, as of December 31, 2014, we were required to maintain approximately $76.3 million in minimum capital in the aggregate across all jurisdictions. Regulators continue to evaluate and modify regulatory capital requirements from time to time in response to market events and to improve the stability of the international financial system. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed and ultimately adopted, which could further increase our minimum capital requirements in the future.

Even if regulators do not change existing regulations or adopt new ones, our minimum capital requirements will generally increase in proportion to the size of the business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increase our revenue, and our inability to increase our capital on a cost-efficient basis could constrain our growth. In addition, in many cases, we are not permitted to withdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate our capital resources most efficiently throughout our global operations. In particular, these restrictions could adversely affect our ability to withdraw funds needed to satisfy our ongoing operating expenses, debt service and other cash needs and could affect any future decision by our Board of Directors regarding the payment of our quarterly dividends. Regulators monitor our levels

25


of capital closely and we are required to report the amount of regulatory capital we maintain to our regulators on a regular basis, and must report any deficiencies or material declines promptly. While we expect that our current amount of regulatory capital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to report any capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct business and revocation of our registrations. The imposition of one or more of these sanctions could ultimately lead to our liquidation, or the liquidation of one or more of our operating subsidiaries.

Servicing customers via the Internet may require us to comply with the laws and regulations of each country in which we are deemed to conduct business. Failure to comply with such laws may negatively impact our financial results.

Since our services are available over the Internet in foreign countries and we have customers residing in foreign countries, foreign jurisdictions may require us to qualify to do business in their country. We believe that the number of our customers residing outside of the United States will continue to increase over time. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to Internet services available to the residents of each country from service providers located elsewhere. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Procedures and requirements of the Patriot Act and other anti-money laundering and know your customer regulations may expose us to significant costs or penalties.

As participants in the financial services industry, we are, and our subsidiaries are, subject to numerous laws and regulations, including the United States Patriot Act, that require that we know our customers and monitor transactions for suspicious financial activities. The cost of complying with the Patriot Act and similar laws and regulations is significant. We face the risk that our policies, procedures, technology and personnel directed toward complying with these laws and regulations are insufficient and that we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Risks Related to Third Parties

If we lose access to our prime brokers and other liquidity providers, we may be unable to provide competitive trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.

We rely on third-party financial institutions to provide us with market liquidity. We maintain relationships with a large network of liquidity providers, including established global prime brokers such as J.P. Morgan, Citibank and UBS. We depend on these relationships, particularly those with our prime brokers, for our access to a pool of liquidity to ensure that we are able to execute our customers’ trades in the products we offer at the notional amounts our customers request. These liquidity providers, although under contract with us, may terminate our arrangements at any time. If we were to experience a disruption in the services provided by a liquidity provider, particularly one of our prime brokers, due to a financial, technical or other adverse development, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another liquidity provider that allows us to offer competitive trading services in a timely fashion. In the event of the insolvency of one of our prime broker or other liquidity providers, we might not be able to recover any or all of the funds we have on deposit with such entity since we will be among the entity’s unsecured creditors. In the event that we no longer have access to the levels of liquidity that we currently have, we may be unable to provide competitive trading services, which would materially adversely affect our business, financial condition and results of operations and cash flows.

A systemic market event that impacts the various market participants with whom we interact could have a material adverse effect on our business, financial condition and results of operations and cash flows.

We interact with various third parties through our relationships with our liquidity providers, white label partners and introducing brokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, a system collapse in the financial system could occur, which would have a material adverse effect on our business, financial condition and results of operations and cash flows.

We are subject to risk of default by financial institutions that hold our funds and our customers’ funds.

We have significant deposits of our own funds and our customers' funds with banks and other financial institutions, including liquidity providers. In the event of the insolvency of one of these financial institutions, we might not be able to fully recover

26


the assets we have deposited since we will be among the institution’s unsecured creditors. As a result, our business could be materially adversely affected by the loss of these funds.

Customer funds deposited with us in the United States are not permitted to be segregated from our own funds for purposes of applicable bankruptcy or insolvency laws, meaning such funds may be at risk of default if we were to become insolvent.

Pursuant to CFTC and NFA regulations for our U.S.-regulated subsidiaries, customer funds deposited with us are not permitted to be segregated from our own funds for purposes of applicable bankruptcy and insolvency laws. Because our customers’ funds are aggregated with our own for these purposes, in the event we were to become insolvent, our customers may be unable to fully recover the funds they have deposited with us, as they will be among our unsecured creditors, and the extent to which these funds will be entitled to insurance by the Federal Deposit Insurance Corporation is uncertain.

We are subject to credit risk in that a customer’s losses may exceed the amount of cash in their account.

Our trading operations require a commitment of our capital and involve risk of loss because of the potential that a customer’s losses may exceed the amount of cash in their account. Our margin policy allows customers to leverage their account balances by trading notional amounts that may be significantly larger than their cash balances. We mark our customers’ accounts to market each time a currency price in their portfolio changes. While this allows us to closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change or other market events, such as the extreme volatility in the Swiss franc following the SNB market event in January 2015. Although we have the ability to alter our margin requirements without prior notice to our customers, this may not eliminate the risk that our access to liquidity becomes limited or market conditions, including currency price volatility and liquidity constraints, change faster than our ability to modify our margin requirements. Changes in market conditions or unforeseen extreme market events could result in our customers experiencing losses in excess of the funds they have deposited with us.  In such an event, we may not be able to recover the negative client equity from our customers, which may result in a trading loss for us.  In addition, if we cannot recover funds from our customers, we may nonetheless be required to fund positions we hold with our liquidity providers or other third parties.  Any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Failure of third-party systems or third-party service and software providers upon which we rely could adversely affect our business.

We rely on certain third-party computer systems or third-party service and software providers, including trading platforms, back-office systems, Internet service providers, software development partners and communications facilities. For example, for the year ended December 31, 2014, 37.9% of our retail trading volume was derived from trades utilizing the MetaTrader platform, a third-party trading platform we license that is particularly popular in the international retail trading community. Any interruption in these third-party services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any third party is terminated, we may not be able to find an alternative systems or services provider on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Security breaches in our computer infrastructure may jeopardize confidential information transmitted over the Internet, cause interruptions in our operations or give rise to liabilities to third parties.

Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the safeguarding of confidential personal information could also inhibit our customers’ use of our systems over the Internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance policies may not protect us against all of such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition and results of operations and cash flows.


27


Failure to maintain relationships with introducing brokers who direct new customers to us could have a material adverse effect on our business, financial condition and results of operations and cash flows.

We have relationships with introducing brokers who direct new customers to us and provide marketing and other services for these customers. In certain jurisdictions, we are only able to provide our services through introducing brokers. For the year ended December 31, 2014, approximately 31.6% of our retail trading volume was derived from introducing brokers. Many of our relationships with introducing brokers are nonexclusive or may be terminated by the brokers on short notice. In addition, under our agreements with introducing brokers, they have no obligation to provide us with new customers or minimum levels of transaction volume. Our failure to maintain our relationships with these introducing brokers, the failure of the introducing brokers to provide us with customers or our failure to create new relationships with introducing brokers would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one or more of our introducing brokers, we could lose the brokers’ services or be required to increase the compensation we pay to retain the brokers. In addition, we may agree to set the compensation for one or more introducing brokers at a level where, based on the transaction volume generated by customers directed to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the introducing broker.

Our business or reputation could be harmed by introducing broker misconduct or errors that are difficult to detect and deter.

It may be perceived that we are responsible for any improper conduct by our introducing brokers, even though we do not control their activities. Many of our introducing brokers operate websites, which they use to advertise our services or direct customers to us. It is difficult for us to closely monitor the contents of their websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. Any disciplinary action taken against any of our introducing brokers in the United States and abroad could have a material adverse effect on our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.

Failure to develop or maintain relationships with white label partners who direct customer trading volume to us could have a material adverse effect on our business, financial condition and results of operations and cash flows.

We have relationships with white label partners who provide trading services to their customers by using our trading platform and other services and, therefore, provide us with an additional source of revenue. For the year ended December 31, 2014, approximately 17.2% of our retail trading volume was derived from white label partners. Many of our relationships with white label partners are non-exclusive or may be terminated by them on short notice. In addition, our white label partners have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white label partners, the failure of these white label partners to continue to offer online trading services to their customers using our trading platform, the loss of requisite licenses by our white label partners or our inability to enter into new relationships with white label partners would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one or more of our white label partners, we could lose the white label partnerships or be required to increase the compensation we pay to retain the white label partners.

Our relationships with our white label partners also may expose us to significant regulatory, reputational and other risks as we could be harmed by white label partner misconduct or errors that are difficult to detect and deter.

If any of our white label partners provided unsatisfactory service to their customers or were deemed to have failed to comply with applicable laws or regulations, our reputation may be harmed as a result of our affiliation with such white label partner. Any such harm to our reputation could have a material adverse effect on our business, financial condition and results of operations and cash flows.

The terms of certain of our agreements with our white label partners may require us to pay for increased trading volume that does not increase our trade revenue.

We pay certain white label partners and introducing brokers based on the volume of trading activity of the customers they introduce to us, regardless of whether the trading activity from such trading volume is profitable to us. Certain market conditions may be conducive to high trading volume by these customers but not to trading activity by such customers that allows us to generate significant revenue. As such, we may incur losses from these arrangements in the event that we are required to pay for increased trading volume but do not generate corresponding increased revenue from the related trade flow. These losses could have a material adverse effect on our results of operations, particularly our EBITDA and net revenue.

28



Risks Related to our Common Stock

The market price of our common stock may be volatile.

Our results of operations and cash flows have fluctuated significantly from period to period in the past based on a variety of factors, including some that are beyond our control, such as currency volatility and fluctuations in trading volume. These variations, along with any failure to achieve operating results that meet or exceed the expectations of our investors and the market as a whole, could result in significant price and volume fluctuations in our common stock. Other factors that could affect the market price of our common stock include:

future announcements concerning us or our competitors, including the announcement of acquisitions;
changes in government regulations or in the status of our regulatory approvals or licensure;
public perceptions of risks associated with our services or operations;
developments in our industry; and
general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors.

If securities analysts stop publishing research or reports about us or our business or if they downgrade our common stock, the market price of our common stock could decline.

The market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If any analyst who covers us downgrades our stock or lowers its future stock price targets or estimates of our operating results, our stock price could decline rapidly. Furthermore, if any analyst ceases to cover us, we could lose visibility in the market, which in turn could cause the market price of our common stock to decline.

Our stockholder rights plan may prevent efforts by our stockholders to effect a change of control of our company or a change in our management.

We have adopted a stockholder rights plan, commonly referred to as a poison pill. The rights plan is intended to deter an attempt to acquire us in a manner or on terms not approved by our Board of Directors. The rights plan will not prevent an acquisition that is approved by our Board of Directors. Our rights plan could substantially impede the ability of public stockholders to benefit from a change in control and, as a result, may reduce the market price of our common stock and the ability of holders of our common stock to realize any potential change of control premium.

We may be unable to obtain capital when we need it, on acceptable terms, or at all.

Our business depends on the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs from internally generated funds and from our offering of convertible debt securities. While we currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months, we may need to raise additional funds to:

support more rapid expansion;
develop new or enhanced services and products;
respond to competitive pressures;
acquire new businesses, products or technologies; or
respond to unanticipated requirements.

Additional financing may not be available when needed on terms favorable to us or at all.


29


The limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price.

Our common stock is relatively illiquid. As of March 13, 2015, we had 43,391,811 shares of common stock outstanding (excluding shares held by us as treasury stock). The average daily trading volume in our common stock during the 60 calendar days ended March 1, 2015 was approximately 0.4 million shares. A more active public market for our common stock may not develop, which could continue to adversely affect the liquidity of our common stock and adversely affect the trading price of our common stock. Moreover, without a large public float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile than that of other companies or the market as a whole. In addition, in the absence of an active public trading market, you may be unable to liquidate your investment in us at a satisfactory price.

Stockholders may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions, conversion of our 4.125% Convertible Senior Notes or the convertible notes that will be issued in connection with our acquisition of City Index, or otherwise.

As of December 31, 2014, we had approximately 14.4 million shares of common stock authorized but unissued, and, on March 12, 2015, our stockholders approved an amendment to our certificate of incorporation that authorizes an additional 60.0 million shares of common stock. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our Board of Directors in its sole discretion, whether in connection with acquisitions, in future common stock offerings or otherwise. As of December 31, 2014, we have reserved an aggregate of 8.1 million shares for issuance under our equity incentive compensation plans (consisting of 2.5 million to be issued pursuant to future awards and grants under the 2010 Omnibus Incentive Compensation Plan, or 2010 Plan, 5.2 million shares that are subject to outstanding grants under a predecessor plan and the 2010 Plan, and 0.4 million shares to be issued pursuant to the 2011 Employee Stock Purchase Plan). In addition, our 4.125% Convertible Senior Notes are convertible into shares of our common stock, although we may, at our election and subject to certain limitations, choose to settle any conversion by the payment or delivery of cash, shares of our common stock, or a combination thereof. Prior to June 1, 2018, the notes may be converted only upon the occurrence of specified events set forth in the indenture pursuant to which they were issued, while on or after June 1, 2018, holders may convert their notes at any time. The convertible notes that are to be issued in connection with our acquisition of City Index will be convertible into shares of common stock on terms similar to those of our 4.125% Convertible Senior Notes. Any common stock that we issue, including under our 2010 Plan, 2011 Employee Stock Purchase Plan or other equity incentive plans that we may adopt in the future, or upon conversion of our 4.125% Convertible Senior Notes or the convertible notes issued in connection with the City Index acquisition will dilute the percentage ownership held by investors who own our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

ITEM 2. PROPERTIES

We are a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. We service retail and institutional customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Jersey City, New Jersey; Chicago, Illinois; Powell, Ohio; Grand Rapids, Michigan; London, England; Cornwall, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore. All of our office space was leased as of December 31, 2014.

While we believe that these facilities are adequate to meet our current needs, it may become necessary to secure additional space in the future to accommodate any future growth. We believe that such additional space will be available as needed in the future on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on our quarterly or annual operating results, cash flows or consolidated financial position.

On February 16, 2012, we received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by a third-party money management firm, incorporated in the United Kingdom, which has since been closed down by the United Kingdom’s Financial Conduct Authority. The investment firm, Cameron Farley Ltd, had opened a

30


corporate account with us and invested the individuals’ money, representing such funds as its own, while operating a fraudulent scheme. Though a complaint has been filed and served on us, the claimants requested, and we agreed, to follow the United Kingdom’s Pre-Action Protocol, a pre-litigation process intended to resolve matters without the need to engage in formal litigation. We submitted a Response to the Letter before Claim on July 4, 2012. On July 5, 2012, we received a substantially similar Letter of Claim on behalf of further individuals. Subsequently, the parties agreed to consolidate claims by those other similarly situated individuals with the pending Pre-Action Protocol process. The parties agreed it would be more appropriate for the proceedings to be dealt with in the Commercial Court and the matters were transferred pursuant to Consent Orders dated March 14, 2013. We subsequently filed an application for strike out and/or summary judgment in respect of all claims on March 15, 2013. The claimants filed an answer to our motion on June 2, 2013 and subsequently we filed a response to this answer on July 15, 2013. A hearing was held on our application for strike out and/or summary judgment on September 18 and 19, 2013. After the hearing, the judge asked the claimants to respond in writing to his additional questions from the hearing. The claimants had until October 11, 2013 to provide answers and we were given until November 1, 2013 to respond. On February 26, 2014, the judge denied our motion for strike out and/or summary judgment. A case management conference was held by the Court on October 17, 2014. The parties are now in discovery. We can provide no assurances that this matter will be successfully resolved. This matter is currently pending and, as of the date of this report, a potential loss or a potential range of loss cannot be reasonably estimated.

Through our acquisition of OEC, we became the subject of a patent infringement lawsuit originally filed against OEC on February 9, 2010 in the U.S. District Court for the Northern District of Illinois by Trading Technologies International, Inc. seeking injunctive relief and unspecified damages. As reflected in a Second Amended Complaint filed on June 15, 2011, plaintiff alleges infringement of 12 patents relating to real-time display of price quotes and market depth on OEC's electronic trading interfaces. The case was consolidated with 11 related cases in February 2011, and the parties have exchanged infringement, non-infringement and invalidity contentions for several of the disputed patents. In June 2011, the court stayed discovery to allow summary judgment briefing on the ramifications of a recent Federal Circuit decision. On February 9, 2012, the court issued an order, which granted defendants' motions for summary judgment, resulting in a substantial narrowing of the scope of plaintiff's claims. Plaintiff filed a motion for reconsideration of that ruling on March 8, 2012. Plaintiff also filed a motion for certification of judgment for interlocutory appeal. The court denied plaintiff's motion for reconsideration but granted plaintiff's motion for certification of judgments of patent invalidity with respect to four of the asserted patents. On August 30, 2013, the Federal Circuit issued its opinion vacating and remanding the court's judgment of patent invalidity regarding four of the asserted patents. On remand, defendants renewed their motion for summary judgment of patent invalidity. In April 2014, the court deferred its consideration of defendants' renewed motion for summary judgment and signaled its intent to re-start the litigation by requesting that the parties submit a proposed pre-trial schedule. Soon thereafter, one of the defendants filed Certified Business Method (“CBM”) review petitions with the United States Patent and Trademark Office concerning five of the asserted patents.  The court is currently considering a request to stay the case based on the filing of those CBM petitions. Plaintiff's complaint does not specify the amount of damages sought. As of the date of this report, a potential loss or a potential range of loss cannot be reasonably estimated.


ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

31


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the New York Stock Exchange under the symbol “GCAP” on December 15, 2010. Prior to that date, there was no established trading market for our common stock. As of March 13, 2015, we estimate that we had approximately 97 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

The following table details the high and low closing prices for the common stock as reported by the New York Stock Exchange for the periods indicated.


2014
 
2013
Quarter
High
 
Low
 
High
 
Low
First Quarter
$
11.81

 
$
7.82

 
$
4.61

 
$
4.06

Second Quarter
$
11.14

 
$
7.58

 
$
6.45

 
$
4.27

Third Quarter
$
7.71

 
$
6.01

 
$
14.31

 
$
5.44

Fourth Quarter
$
9.11

 
$
6.18

 
$
12.32

 
$
7.15


DIVIDEND POLICY
Prior to the fourth quarter of 2011, we retained all earnings for investment in our business. In October 2011, our Board of Directors approved a policy of paying quarterly dividends, subject to available cash flow from operations, other considerations and the determination by our Board of Directors of the amount. Each quarter since, we have paid a $0.05 per share dividend to holders of our common stock. The latest dividend of $0.05 per share was declared on February 25, 2015, payable on March 23, 2015 to stockholders of record on March 13, 2015.

Although we intend to continue our policy of paying quarterly dividends, any declaration and payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our Board of Directors deems relevant. The Board’s ability to declare a dividend is also subject to limits imposed by Delaware corporate law. In addition, our subsidiaries are permitted to pay dividends to us subject to (i) certain regulatory restrictions related to the maintenance of minimum net capital in those of our subsidiaries that are subject to net capital requirements imposed by applicable law or regulation and (ii) general restrictions imposed on dividend payments under the laws of the jurisdiction of incorporation or organization of each subsidiary.

RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES

None.

REPURCHASES OF COMMON STOCK

During the year ended December 31, 2014, we repurchased approximately 0.1 million shares of our common stock pursuant to the terms of our approved stock repurchase plan.


32




 

 
Total
 
Maximum Number


 

 
Number of Shares
 
(or Approximate


 

 
Purchased as
 
Dollar Value) of


 

 
Part of Publicly
 
Shares that May

Total Number
 

 
Announced
 
Yet Be Purchased

of Shares
 
Average Price
 
Plans or
 
Under the Plans or
Period
Purchased(1)
 
Paid per Share(1)
 
Programs(1)
 
Programs(1)(2)
January 2014

 

 

 
$
9,321,167

February 2014

 

 

 
$
9,321,167

March 2014

 

 

 
$
9,321,167

April 2014

 

 

 
$
9,321,167

May 2014
100,000

 
$
7.93

 
100,000

 
$
8,528,167

June 2014

 

 

 
$
8,528,167

July 2014

 

 

 
$
8,528,167

August 2014

 

 

 
$
8,528,167

September 2014

 

 

 
$
8,528,167

October 2014

 

 

 
$
8,528,167

November 2014

 

 

 
$
8,528,167

December 2014

 

 

 
$
8,528,167


(1)
In May 2013, the Company announced that its Board of Directors approved a share repurchase plan, which authorizes the expenditure of up to $15.0 million for the purchase of the Company’s common stock.
(2)    Transaction fees related to the share purchases are deducted from the total remaining allowable expenditure amount.


STOCK PERFORMANCE GRAPH

The following performance chart assumes an investment of $100 on December 15, 2010 (the date our shares began trading on the NYSE) and compares the change at December 31, 2010 through December 31, 2014 in the market price for our common stock with the Russell 2000 Index, the NASDAQ Composite Index, and a peer group identified by us (the “Selected Peer Group Index”). The Selected Peer Group Index was selected to include publicly-traded companies engaging in one or more of our lines of business.

The Selected Peer Group Index is weighted according to the respective issuer’s stock market capitalization and is comprised of the following companies: Advent Software, Inc., BGC Partners, Inc., DST Systems, E*Trade Financial Corporation, FactSet Research Systems, Inc., FXCM, Inc., GFIG Group, Inc., INTL FCStone Inc., Investment Technology Group, Inc., Knight Capital Group, Inc., Market Axcess Holdings, Inc., MSCI, Inc., and SWS Group, Inc.

The comparisons in the graphs below are based on historical data and are not intended to forecast the possible future performance of our common stock.

33



EQUITY COMPENSATION PLAN INFORMATION

The following table provides information with respect to our compensation plans under which equity compensation was authorized as of December 31, 2014.



 

 
Number of


 

 
securities remaining

Number of
 
Weighted-average
 
available for future

securities to be
 
exercise price
 
issuance under

issued upon exercise
 
of
 
equity compensation

of outstanding
 
outstanding
 
plans (excluding

options, warrants
 
options, warrants
 
securities reflected

and rights
 
and rights
 
in column (a)
Plan category
(a)
 
(b)
 
(c)(1)
Equity compensation plans approved by security holders
3,042,656

 
$
5.52

 
2,428,950


(1)
In accordance with the 2010 Omnibus Incentive Compensation Plan, an additional 1.4 million shares were made available for issuance on the first trading day of 2015; these shares are excluded from this calculation.


ITEM 6. SELECTED FINANCIAL DATA

The financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements as of December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014December 31, 2013 and December 31, 2012, included in this annual report on Form 10-K. The selected Consolidated Statement of Operations data for the years ended December 31, 2011 and 2010 and the selected Consolidated Balance Sheet data as of December 31, 2012, 2011 and 2010 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results of operations are not necessarily indicative of future results.


34


Selected Consolidated Statement of Operations

 
 
 
 
 
 
 
 
 

(in thousands, except share and per share data)

Year Ended December 31,

2014
 
2013
 
2012
 
2011(1)
 
2010(1)(4)
Consolidated Statement of Operations Data:

 

 

 

 

Net Revenue
$
369,533

 
$
267,624

 
$
151,804

 
$
182,009

 
$
190,222

Total operating expense
$
317,334

 
$
223,286

 
$
150,218

 
$
158,221

 
$
131,646

Income before income tax expense
$
46,052

 
$
45,105

 
$
1,142

 
$
23,244

 
$
57,452

Net Income applicable to GAIN Capital Holdings, Inc.
$
31,626

 
$
31,311

 
$
2,621

 
$
15,698

 
$
36,988

Earnings per common share:

 

 

 

 

Basic
$
0.76

 
$
0.85

 
$
0.08

 
$
0.46

 
$
8.42

Diluted
$
0.71

 
$
0.79

 
$
0.07

 
$
0.40

 
$
0.98

Weighted average common shares outstanding used in computing earnings per common share

 

 

 

 

Basic
40,561,644

 
36,551,246

 
34,940,800

 
34,286,840

 
4,392,798

Diluted
43,214,895

 
39,632,878

 
37,880,208

 
38,981,792

 
37,742,902

Cash dividends per share
$
0.20

 
$
0.20

 
$
0.20

 
$
0.05

 
$

Selected Consolidated Balance Sheet

 
 
 
 
 
 
 
 
 

(in thousands unless otherwise stated)

Year Ended December 31,

2014
 
2013(5)
 
2012(4)
 
2011(4)
 
2010(2)(3)(4)
Consolidated Balance Sheet Data:

 

 

 

 

Cash and cash equivalents
$
139,403

 
$
39,871

 
$
36,820

 
$
60,221

 
$
27,536

Cash and securities held for customers
$
759,559

 
$
739,318

 
$
446,311

 
$
310,447

 
$
256,674

Receivables from banks and brokers
$
134,908

 
$
227,630

 
$
89,916

 
$
85,401

 
$
98,135

Total assets
$
1,185,887

 
$
1,112,560

 
$
629,262

 
$
504,930

 
$
442,420

Payables to customers, brokers, dealers, FCMs and other regulated entities
$
759,559

 
$
739,318

 
$
446,311

 
$
310,447

 
$
256,674

Notes payable
$

 
$

 
$

 
$
7,875

 
$
18,375

Convertible senior notes
$
68,367

 
$
65,360

 
$

 
$

 
$

Total GAIN Capital Holdings, Inc. shareholders' equity
$
264,894

 
$
234,401

 
$
162,830

 
$
163,974

 
$
148,993


(1)
For each of the periods indicated, in accordance with ASC 815, Derivatives and Hedging, we accounted for an embedded derivative liability attributable to the redemption feature of our then outstanding preferred stock. This redemption feature and the associated embedded derivative liability is no longer required to be recognized due to the conversion of all of our outstanding preferred stock in connection with the completion of our initial public offering of common stock in December 2010.
(2)
In connection with the completion of our IPO, our board of directors approved a 2.29-for-1 stock split of our common stock to be effective immediately prior to the completion of the IPO. The 2.29-for-1 stock split, after giving effect to the receipt by us of 407,692 shares of common stock from all of our pre-IPO common stockholders (on a pro-rata basis) in satisfaction of previously outstanding obligations owed by such stockholders to us, resulted in an effective stock split of 2.26-for-1. Accordingly, all references to share and per share data for periods prior to our IPO have been retroactively restated to reflect the effective 2.26-for-1 stock split.

35


(3)
For the year ended December 31, 2010, all outstanding preferred stock is assumed to be converted for the calculation of diluted shares outstanding.
(4)
In the year ended December 31, 2010 there was an immaterial error in the income tax provision. Accordingly, the net income and earnings per share have been retroactively restated for that year, and total assets and total shareholders' equity have been retroactively restated for the years ended December 31, 2012 and 2011.
(5)
Our consolidated balance sheet as of December 31, 2013 has been revised to reflect the finalization of the purchase price allocations for the GFT acquisition.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto provided under “Item 8. Financial Statements and Supplementary Data” contained elsewhere within this Annual Report on Form 10-K.

Overview

We are a global provider of trading services and solutions, specializing in over-the-counter, or OTC, and exchange-traded markets. We service retail and institutional customers in more than 180 countries worldwide and conduct business from our offices in New York, New York; Bedminster, New Jersey; Jersey City, New Jersey; Chicago, Illinois; Powell, Ohio; Grand Rapids, Michigan; London, England; Cornwall, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong and Singapore.

We offer our customers access to a diverse range of over 12,500 financial products, including foreign exchange, or forex, precious metals, “contracts for difference”, or CFDs, which are investment products with returns linked to the performance of underlying commodities, indices, individual equities, bonds and interest rate products, OTC options on forex, as well as futures and options on futures on more than 30 global exchanges. In the United Kingdom, we also offer spread bets, which are investment products similar to CFDs, but that offer more favorable tax treatment to residents of that country.

We have invested considerable resources over the past 15 years to develop our proprietary trading platforms to provide our customers with advanced price discovery, trade execution and order management functions, while improving our ability to acquire and service our customers efficiently, as well as manage market and credit risk associated with our customer’s trading activity. Today our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research and analysis, automated trading and account management.

As a global provider of online trading services, our results of operations are impacted by a number of external market factors, including market volatility and transaction volumes, competition, the regulatory environment in the various jurisdictions and markets in which we operate and the financial condition of the retail and institutional customers to whom we provide our services. These factors are not the only factors that impacted our results of operations for the most recent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods.

Market Environment and Trading Volatility
Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s financial markets and to fluctuations in market volatility. As a general rule, our businesses typically benefit from volatility in the markets that we serve, as periods of increased volatility often coincide with higher levels of trading by our clients and a higher volume of transactions. However, periods of extreme volatility may result in significant market dislocations that can also lead clients to reduce their trading activity. In addition, volatility that results in trading within a relatively narrow band of prices may lead to less profitable trading activity. Also, low or extremely high market volatility can adversely affect our ability to profitably manage our net exposure, which represents the unhedged portion of the trading positions we enter into with customers in our retail OTC businesses.

Market volatility is driven by a range of external factors, some of which are market specific and some of which are correlated to general macroeconomic conditions. Weakness in equity markets, which occurred in much of 2011 and several of the previous years, can result in reduced overall trading activity. The European sovereign debt crisis, which arose in the second quarter of 2010 and continued throughout 2011 and 2012, created economic uncertainty, adversely affecting the equities and other financial markets for much of this period, leading investors to, at times, reduce their trading activity, and also resulted in anomalous and challenging market conditions over several significant periods during 2011 and 2012. Market conditions again became challenging in late 2013 and early 2014, with volatility in several of the major currencies reaching 5-year lows.

36


Overall market conditions improved in the second half of 2014, primarily due to improved currency and equity volatility during such period.

Competition
The products we offer have generally been accessible to retail investors for a significantly shorter period than many other securities products, such as equities, and our industry is rapidly evolving and characterized by intense competition. Entering new markets often requires us to lower our pricing in order to attract customers and compete with other companies who have already established customer bases in such markets. In addition, in existing markets, on occasion we make short-term decisions to be more aggressive regarding the pricing we offer our customers, or we may decide to offer additional services at reduced rates, or free of charge, in order to attract customers and take market share from our competitors.

Regulatory Environment
In recent years, the financial markets have experienced a major global regulatory overhaul, as regulators and legislators in the United States and abroad have proposed and, in some instances, adopted, a wide range of regulatory changes that have had a significant effect on the manner in which we operate our business. For example, as a result of the Dodd-Frank Act’s requirement that essentially all transactions in commodities be executed on an exchange, after July 15, 2011, we were no longer permitted to offer leveraged spot metal transactions in the United States.

U.S. and foreign regulators have expressed their intention to review existing regulation in a number of areas as a result of the highly publicized market disruption that occurred in January 2015 when the SNB announced that it would move interest rates to -0.75% and abandon the 1.20 floor for EUR/CHF that it had previously maintained. For example, following the SNB market event, the NFA increased margin requirements on certain currency pairs, including those involving the Swiss franc, Swedish krona and Norwegian krone, and regulators in other jurisdictions may follow suit.

Part of our growth strategy is to enter new markets, and as we do so we will become subject to regulation in those markets. Complying with different regulatory regimes in multiple markets is expensive, and in many markets the regulatory environment is unclear and evolving. Changes in regulatory requirements and changes in the interpretation of existing regulatory requirements may force us to alter our business practices.

Global Asset Advisors, LLC and Top Third Ag Marketing LLC Acquisitions

On March 7, 2014, we entered into a Membership Interest Purchase Agreement, which we refer to as the GAA Agreement, with Global Asset Advisors, LLC, or GAA, Lucky Good Dog, L.L.C., or LGD, Glenn A. Swanson and Andrew W. Daniels (as sellers' representative). On March 21, 2014, upon the terms and subject to the conditions set forth in the GAA Agreement, we purchased 55% of the outstanding membership interests in GAA from LGD and Mr. Swanson, whom we collectively refer to as the GAA Sellers, for an aggregate purchase price consisting of (i) $4,420,240 in cash and (ii) 116,801 shares of the Company's common stock. Under the terms of the GAA Agreement, LGD and Mr. Swanson are also entitled to receive, for a period of seven years after the closing of the acquisition, annual payments of a portion of the net interest earned on the assets of clients of GAA at the time of the closing. Under the terms of the Amended and Restated Operating Agreement of GAA, which was executed at the closing of the acquisition, we have, for a period of six years after the closing, a call right to purchase the remaining membership interests in GAA for a price based on a multiple of GAA's trailing twelve month EBITDA. From the third anniversary through the sixth anniversary of the closing date, the GAA Sellers may put their remaining interests in GAA to us on the same terms.

Also on March 7, 2014, we entered into a Membership Interest Purchase Agreement, which we refer to as the Top Third Agreement, with Top Third Ag Marketing LLC, or Top Third, LGD, Mark Gold and Glenn A. Swanson. On March 21, 2014, upon the terms and subject to the conditions set forth in the Top Third Agreement, we purchased 55% of the outstanding membership interests in Top Third from LGD and Messrs. Gold and Swanson, whom we collectively refer to as the Top Third Sellers, for an aggregate purchase price consisting of $4,749,289, a portion of which will be payable to Mr. Gold contingent upon satisfying certain requirements over the three year period following the closing date of the acquisition. Under the terms of the Amended and Restated Operating Agreement of Top Third, which was executed on the closing of the acquisition, we have, for a period of six years after the closing, a call right to purchase the remaining membership interests in Top Third for a price based on a multiple of Top Third's trailing twelve month EBITDA. From the third anniversary through the sixth anniversary of the closing date, the Top Third Sellers may put their remaining interests in Top Third to us on the same terms.


37


Galvan Acquisition

In July 2014, we closed on our acquisition of Galvan Research and Trading, Ltd., or Galvan. Galvan, along with its affiliates Galvan LLP and Faraday Research LLP, provides individual investors with professional advice and trading recommendations across a wide range of markets, including FX, individual equities, equity indices and other market sectors. The consideration for the acquisition consisted of a cash payment at closing of £5.0 million, as well as an earn-out arrangement under which the sellers may be entitled to additional contingent consideration based upon the acquired businesses achieving certain performance targets in 2014, 2015 and 2016. We have estimated the acquisition date preliminary fair value of the contingent consideration to be $10.5 million.

Acquisition of Intellectual Property Assets

On July 10, 2014, we entered into asset purchase agreements with Valaquenta Intellectual Property Limited, or Valaquenta, and Forexster Limited, or Forexster, pursuant to which one of our subsidiaries, GAIN GTX Bermuda, Ltd., or GTX Bermuda, agreed to purchase, from Valaquenta and Forexster, the software and other intellectual property assets utilized to operate the electronic trading platform offered to customers in our GTX business. Prior to the closing of the acquisition, which took place on July 10, 2014, we had agreements with Valaquenta and Forexster granting us the exclusive right to use the intellectual property in the field of forex trading and non-exclusive rights to use the intellectual property for the trading of financial products in the fields of precious metals and hydrocarbons. Following the closing of the acquisition, GTX Bermuda has full rights and title over the intellectual property for the trading of currencies, commodities and all other financial instruments of any kind whatsoever.

The purchase was made with a combination of $12.4 million in cash and $5.3 million of our unregistered common stock. In addition, GTX Bermuda agreed to pay Valaquenta contingent consideration in the event that GTX Bermuda or any of its affiliates in the future provide customers the ability to trade new types of financial instruments using the purchased intellectual property and the trading of such new products generates "Net Revenue" (as defined in the agreement with Valaquenta) in excess of thresholds set out in the agreement.

Subsequent Events

On October 31, 2014, we entered into a Share Purchase Agreement with City Index Group Limited, INCAP Gaming B.V., and IPGL Limited in which we agreed to purchase the entire issued and outstanding share capital of City Index (Holdings) Limited, or City Index, a global online trading firm specializing in CFDs, forex and spread betting. The purchase price consists of (i) $20,000,000 in cash, including $1,000,000 in cash to be held in escrow; (ii) 5,319,149 shares of our common stock, including 4,787,234 shares to be held in escrow; and (iii) 4.125% unsecured convertible senior notes with an aggregate principal amount of $60,000,000, including convertible notes with an aggregate principal amount of $54,000,000 to be held in escrow. The closing of the acquisition was approved by our stockholders at a special meeting held on March 12, 2015. The acquisition is subject to the satisfaction of other customary closing conditions, including certain regulatory approvals, and is expected to close early in the second quarter of 2015.

In light of the changes to our business and operations resulting from the items discussed above, our past results may not be indicative of our future performance.

Key Income Statement Line Items and Key Operating Metrics

The following section briefly describes the key components of our revenues and expenses, our use of non-GAAP financial measures, and key operating metrics we use to evaluate the performance of our business.

Revenue
We generate revenue from trading revenue, commission revenue, other revenue and interest income.

Trading Revenue

Trading revenue is our largest source of revenue and has historically been generated primarily in our retail forex business. As a result of our acquisitions of GFT and City Index, we expect trading revenue generated by non-forex products, particularly CFDs, to materially increase in future periods. Trading revenue represented 64.1% of our total net revenue for the year ended December 31, 2014, and 76.6% of our total net revenue for the year ended December 31, 2013.


38


We generate trading revenue as follows:
for approximately 96% of our customers' trades, we receive a bid/offer spread on such trades; and
with respect to the remaining customer trades, which we refer to as our net exposure, we receive the net gains or losses generated through changes in the market value of the currencies or other products held in our net exposure.

As noted above, for the year ended December 31, 2014, approximately 96% of our average daily retail trading volume was either naturally hedged or hedged by us with one of our liquidity providers, which is consistent with our average daily retail trading volume hedged of approximately 96% in both 2013 and 2012. The remaining 4% of our average daily retail trading volume for each of 2014, 2013 and 2012 consisted of our net exposure.

We manage our net exposure by applying position and exposure limits established under our risk-management policies and by continuous, active monitoring by our traders. Based on our risk management policies and procedures, over time a portion of our net exposure may be hedged with our liquidity providers. Although we do not actively initiate proprietary directional market positions in anticipation of future movements in the relative prices of the products we offer, through our net exposure we are likely to have open positions in various currencies at any given time. In the event of unfavorable market movements, we may take a loss on such positions. See “Sophisticated Risk Management” in Item 1. Business, in this Form 10-K for further details regarding our risk management policies.

Commission Revenue

Commission revenue has historically been comprised of revenue from our GTX business, revenue from our futures business, including GAA and Top Third, and revenue from GAIN Securities, our securities business. In October 2013, GAIN Securities transferred substantially all of its customer accounts to TradeKing, LLC.  Since we acquired GFT in September 2013, we have also realized commission revenue from the sales trader business acquired in that transaction.  Our sales traders offer high-touch trading services to high net worth individuals and smaller institutional investors. In July 2014, we acquired Galvan Research and Trading, Ltd., which, along with its affiliates, provides individual investors with professional advice and trading recommendations across a wide range of markets. Galvan and the other businesses discussed above generally generate revenue by earning a commission on each transaction, which is recorded under commission revenue.

Other Revenue
Other revenue is comprised of account management and transaction fees; inactivity and training fees charged to customer accounts; and foreign currency transaction gains and losses.

Net Interest Revenue / Expense
Net interest revenue/expense consists primarily of the revenue generated by our cash and customer cash held by us at banks and on deposit as collateral with our liquidity providers, less interest paid to our customers.

Our cash and customer cash is generally invested in money market funds, which primarily invest in short-term United States government securities or treasury bills. Such deposits and investments earned interest at an average effective rate of approximately 0.1% for the year ended December 31, 2014 and 2013. Interest paid to customers varies primarily due to the net value of a customer account. A customer’s net account value equals cash on deposit plus the mark to market of open positions as of the measurement date. Interest income and interest expense are recorded when earned and incurred, respectively. Net interest revenue was $0.8 million for the year ended December 31, 2014, compared to net interest revenue of $0.7 million for the year ended December 31, 2013.

Expenses

Our expenses are principally comprised of employee compensation and benefits, selling and marketing, referral fees, trading expenses, interest on long term borrowings, communications and technology expenses, as well as general and administrative expenses.

Starting with the quarter ended June 30, 2014, we changed the presentation of certain expense items in an effort to make our presentation comparable with that of competitors in our industry. These changes were also made to retrospective periods. We now present the interest expense incurred on borrowings and debt, previously presented under "Interest expense" as part of net revenue, under a separate income statement line item, "Interest on long term borrowings", which is shown as part of operating expenses. Also, commissions paid to employees, previously presented under "Trading expenses and commissions," are now presented under "Employee compensation and benefits." Additionally, we have presented compensation paid to our white label partners and introducing brokers, which was also previously presented under "Trading expenses and commissions," under the

39


new caption of "Referral fees." The remaining expense items that were previously presented under "Trading expenses and commissions," including exchange fees, fees for news services and prime broker fees, are now presented under a new caption, "Trading expenses." These changes in presentation had no effect on our net income.

Employee Compensation and Benefits

Employee compensation and benefits includes salaries, bonuses, commissions, stock-based compensation, contributions to benefit programs and other related employee costs.

Selling and Marketing
Our marketing strategy employs a combination of direct online marketing and focused branding programs, with the goal of raising awareness and cost-effectively acquiring customers for our products and services. For the year ended December 31, 2014, selling and marketing expense was $20.2 million, compared to $22.3 million for the year ended December 31, 2013.

Referral Fees

Referral fees consist of compensation paid to our white label partners and introducing brokers. We generally provide white label partners with the platform, systems, and back-office services necessary for them to offer trading services to their customers. Introducing brokers identify and direct customers to us.

Referral fees are largely variable and change principally based on the level of customer trading volume directed to us from our white label partners and introducing brokers, the specific terms of our agreements with the white label partners and introducing brokers, which vary on a partner-by-partner and regional basis, and the relative percentage of trading volume generated from particular relationships in any given period. The majority of our white label and introducing broker partners are paid based on the trading volume generated by the customers they introduce, directly or indirectly, to us, rather than on a revenue sharing basis. As such, during periods in which their customers’ trading activity is not profitable for us, if the associated trading volume remains high, we may be required to make larger payments to these partners despite the fact that we are generating lower revenue from their customers.  Our indirect business accounted for 48.7%, 38.6% and 37.8% of retail trading volume in the years ended December 31, 2014, 2013 and 2012, respectively. The increase in indirect business in 2014 was largely due to the acquisition of GFT.

Trading Expenses
Trading expenses consists of exchange fees paid to stock exchanges and other third-parties for exchange market data that we provide to our customers or use to create our own derived data products, as well as fees for news services and fees paid to prime brokers in connection with our institutional GTX business and futures business.

General and Administrative
General and administrative expenses consist of bank fees, professional fees, occupancy and equipment and other miscellaneous expenses.

Depreciation and amortization
Depreciation and amortization consists of the recognition of expense for physical assets and software purchased for use over a period of several years and of the amortization for internally developed software.

Purchased Intangible Amortization
Purchased intangible amortization consists of amortization related to intangible assets we acquired in 2014, 2013 and 2012 in connection with our acquisitions. The principal intangible assets acquired were technology, customer assets and a non-compete agreement. These intangible assets have useful lives ranging from one year to ten years.

Communications and Technology
Communications and technology consists of communications fees, data fees, product development, software and maintenance expenses.

Bad debt provision
Bad debt provision represents the amounts estimated for the uncollectibility of certain outstanding balances during the period.


40


Restructuring Expenses
In 2014, 2013 and 2012, we incurred restructuring expenses, which reflected costs arising from headcount reductions and other exit costs, measured and disclosed in accordance with ASC 420 and ASC 712.

Acquisition Expenses
In 2014, 2013 and 2012, we incurred acquisition-related expenses, which included costs, such as legal, accounting, valuation and other costs specified in ASC 805. These costs are expensed as incurred.

Integration Expenses
In 2014 and 2013, we incurred integration expenses, which are acquisition-related costs that do not meet the definition of acquisition costs specified in ASC 805. These costs include retention bonuses paid to employees and the cost of retiring redundant assets.

Impairment of Investment
In 2013, our investment in Kapitall, Inc. became impaired. In 2014, the remaining value of the investment was written off.

Interest on long-term borrowings
Interest on long-term borrowings consists of interest expense on our 4.125% Convertible Senior Notes due 2018, issued in November 2013.

Non-GAAP Financial Measures

We use adjusted net income and adjusted earnings per common share, each of which is a non-GAAP financial measure, to evaluate our business. We believe our reporting of adjusted net income and adjusted earnings per share assists investors in evaluating our operating performance. Adjusted net income and adjusted earnings per common share are not measures of financial performance calculated in accordance with GAAP. They should be considered in addition to, but not as a substitute for, other measures of our financial performance reported in accordance with GAAP, such as net income and earnings per common share. Below is a discussion and reconciliation of these non-GAAP financial measures.

Adjusted Net Income
Adjusted net income is a non-GAAP financial measure and represents our net income excluding restructuring and other non-recurring expenses, which include deal-related acquisition costs, such as legal, accounting and valuation expenses, the acceleration of amortization of our TRADE platform, gain on extinguishment of debt and other expenses incurred in connection with, or as a result of, merger and acquisition transactions. We believe this financial measure assists our investors in evaluating our operating performance. This non-GAAP financial measure has certain limitations, including that it does not have a standardized meaning. Therefore, our definition may be different from similar non-GAAP financial measures used by other companies or analysts, and it may be difficult to compare our financial performance to that of other companies.

Adjusted Earnings Per Share
Adjusted earnings per share is a non-GAAP financial measure and represents our net income per share excluding restructuring and other expenses, which include deal-related acquisition costs such as legal, accounting and valuation expenses, the acceleration of amortization of our TRADE platform, gain on extinguishment of debt and other expenses incurred in connection with, or as a result of, merger and acquisition transactions. We believe this financial measure assists investors in evaluating our operating performance. This non-GAAP financial measure has certain limitations, including that it does not have a standardized meaning. Therefore, our definition may be different from similar non-GAAP financial measures used by other companies or analysts, and it may be difficult to compare our financial performance to that of other companies.

Reconciliation of Non-GAAP Financial Measures

The following table provides a reconciliation of GAAP net income to adjusted net income and adjusted earnings per common share (amounts in thousands except per share amounts):


41



Year Ended December 31,

2014
 
2013
 
2012
Net income applicable to GAIN Capital Holdings, Inc.
$
31,626

 
$
31,311

 
$
2,621

Restructuring, net of tax
872

 
1,090

 
1,455

Other items, net of tax(1)
4,355

 
1,544

 
195

Adjusted net income
$
36,853

 
$
33,945

 
$
4,271

Adjusted earnings per common share

 

 

         Basic
$
0.91

 
$
0.93

 
$
0.12

         Diluted
$
0.85

 
$
0.86

 
$
0.11


(1)    Other items, net of tax include acquisition and integration costs.

Operating Metrics

In addition to the financial measures discussed above, we review various key operating metrics, which are described below, to evaluate the performance of our businesses.

 
Key Operating Metrics
 
(Unaudited)
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Retail
 
 
 
 
 
 
 
 
 
Funded Accounts
133,771

 
133,056

 
85,099

 
76,485

 
85,562

Active OTC Accounts
94,895

 
98,696

 
60,219

 
63,435

 
64,313

Futures Contracts (millions)
7.0

 
5.4

 
1.5

 

 

OTC Trading Volume (billions)
$
2,430.5

 
$
1,796.7

 
$
1,303.4

 
$
1,574.0

 
$
1,324.8

Average Daily Volume (billions)
$
9.4

 
$
6.9

 
$
5.0

 
$
6.0

 
$
5.1

Client Assets (millions)
$
759.6

 
$
739.3

 
$
446.3

 
$
310.4

 
$
256.7

Institutional

 

 

 

 

Trading Volume (billions)
$
5,118.0

 
$
3,965.1

 
$
1,952.6

 
$
853.9

 
$
239.3

Average Daily Volume (billions)
$
19.8

 
$
15.2

 
$
7.5

 
$
3.3

 
$
0.9


Funded Accounts
Funded accounts represent retail customers who maintain cash balances with us. We believe the number of funded retail accounts is an important indicator of our ability to attract new retail customers that can potentially lead to trading volume and revenue in the future; however, it does not represent actual trades executed.

Active OTC Accounts
Active OTC accounts represents customers who executed at least one trade during the relevant period. We believe active OTC accounts is an important operating metric because it correlates to our trading volume and revenue.

Futures Contracts
Futures contracts represent the total number of contracts transacted by customers of our futures business.

OTC Trading Volume (Retail)
OTC trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our retail customers. Approximately 32.2% of our overall customer trading volume for the year ended December 31, 2014 was generated by our retail businesses, compared to 31.2% for the year ended December 31, 2013.

42


Average Daily Volume
Average daily volume is the U.S. dollar equivalent of the aggregate notional value of trades executed by our customers in a given period divided by the number of trading days in the given period.

Client Assets
Client assets represent amounts due to clients, including customer deposits and unrealized gains or losses arising from open positions.

Trading Volume (Institutional)
Trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our institutional customers. Approximately 67.8% and 68.8% of our overall customer trading volume for the years ended December 31, 2014 and 2013, respectively, was generated by our institutional trading business.

We believe that our customer trading volumes are driven by eight main factors. Four of these factors are broad external factors outside of our control that generally impact customer trading volumes, and include:
overall economic conditions and outlook;
volatility of financial markets;
legislative changes; and
regulatory changes.
The volatility of financial markets has generally been positively correlated with customer trading volume. Our customer trading volume is also affected by the following additional factors:
the effectiveness of our sales activities;
the competitiveness of our products and services;
the effectiveness of our customer service team; and
the effectiveness of our marketing activities.

In order to increase customer trading volume, we focus our marketing and our customer service and education activities on attracting new customers and extending the duration and scope of the relationship our customers have with us.

For the years ended December 31, 2014 and December 31, 2013, no single retail or institutional customer accounted for more than 4% of our total net revenue.


Results of Operations

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Revenue (amounts in thousands)

Year Ended December 31,

2014
 
2013
REVENUE:

 

Trading revenue
$
236,730

 
$
205,133

Commission revenue
127,070

 
60,727

Other revenue
4,904

 
1,099

Total non-interest revenue
368,704

 
266,959

Interest revenue
1,428

 
821

Interest expense
599

 
156

Total net interest (expense) / revenue
829

 
665

Net Revenue
$
369,533

 
$
267,624


Our total net revenue increased $101.9 million, or 38.1%, for the year ended December 31, 2014, compared to the year ended December 31, 2013.


43


Trading revenue increased $31.6 million, or 15.4%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily a result of the GFT acquisition in September 2013.

Commission revenue increased $66.3 million, or 109.2%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily due to acquisitions completed in late 2013 and throughout 2014. Our sales trader business, which we acquired as part of the GFT acquisition in September 2013, contributed $43.6 million to the increase. Revenue from our futures businesses increased $10.6 million, primarily due to the acquisition of 55% interests in GAA and Top Third in March 2014. Galvan, acquired in July 2014, contributed $5.2 million to this increase. In addition to these acquisition-related increases, commission revenue from our GTX business increased $6.9 million.

Other revenue increased $3.8 million for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily due to foreign currency revaluation.

Our net interest revenue increased from $0.7 million for the year ended December 31, 2013 to $0.8 million for the year ended December 31, 2014.

Expenses


Year Ended December 31,

2014
 
2013
Total operating expenses (amounts in thousands)
$
317,334

 
$
223,286

As a percentage of net revenue
85.9
%
 
83.4
%

Our total operating expenses increased $94.0 million, or 42.1%, for the year ended December 31, 2014, compared to the year ending December 31, 2013. The increase in operating expenses consisted primarily of an increase of $25.3 million in employee compensation and benefits, an increase of $38.6 million in referral fees, an increase of $8.1 million in trading expenses, an increase of $11.7 million in general and administrative, an increase of $5.2 million in purchased intangible amortization and an increase of $4.3 million in communication and technology, partially offset by decreases of $2.1 million in selling and marketing and $0.6 million in depreciation and amortization expenses. The causes of these changes in expenses are discussed in more detail below.

Employee Compensation and Benefits

Year Ended December 31,

2014
 
2013
Employee compensation and benefits (amounts in thousands)
$
99,485

 
$
74,185

As a percentage of net revenue
26.9
%
 
27.7
%

Employee compensation and benefits expenses increased $25.3 million, or 34.1%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. Salaries and benefits (excluding commissions and bonus) increased $5.5 million primarily due to the additional employees acquired in the acquisitions of GFT, GAA, Top Third and Galvan. Commissions increased $23.1 million, primarily due to our sales trader employees, who joined us following the closing of the GFT acquisition in September 2013, as well as the commissions paid to employees who joined us in the acquisitions of GAA, Top Third and Galvan during 2014. Bonus expenses decreased $2.3 million due to our performance compared to the prior year relative to internal budgets.

Selling and Marketing Expenses

Year Ended December 31,

2014
 
2013
Selling and marketing (amounts in thousands)
$
20,213

 
$
22,337

As a percentage of net revenue
5.5
%
 
8.3
%

Selling and marketing expenses decreased $2.1 million, or 9.5%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease was primarily due to the continued optimization of our direct marketing efforts.

44



Referral Fees

Year Ended December 31,

2014
 
2013
Referral fees (amounts in thousands)
$
91,092

 
$
52,503

As a percentage of net revenue
24.7
%
 
19.6
%

Referral fees increased $38.6 million, or 73.5%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase is primarily a result of greater customer trading volume directed to us by our white label partners and introducing brokers, due in part to partner relationships acquired as part of the GFT acquisition.

Trading Expenses

Year Ended December 31,

2014
 
2013
Trading expenses (amounts in thousands)
$
26,285

 
$
18,164

As a percentage of net revenue
7.1
%
 
6.8
%

Trading expenses increased $8.1 million, or 44.7%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. Of the increase, $5.3 million was primarily due to increased exchange fees for our retail business resulting from greater trading volume. There was a $2.8 million increase in clearing and exchange fees associated with our GTX and futures businesses, primarily due to increases in trading volumes in such businesses.

General and Administrative

Year Ended December 31,

2014
 
2013
General and administrative (amounts in thousands)
$
38,509

 
$
26,813

As a percentage of net revenue
10.4
%
 
10.0
%

General and administrative expense increased $11.7 million, or 43.6%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily due to increased bank fees attributable to an increase in customer activity and accounts acquired in the GFT transaction, and an increase in occupancy and equipment, primarily due to the additional locations acquired in the GFT transaction.

Depreciation and Amortization

Year Ended December 31,

2014
 
2013
Depreciation and amortization (amounts in thousands)
$
7,125

 
$
7,768

As a percentage of net revenue
1.9
%
 
2.9
%

Depreciation and amortization decreased by $0.6 million, or 8.3%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease was primarily due to our ceasing to amortize our prepaid exclusive intellectual property rights license acquired from Valaquenta and Forexster. We purchased the Valaquenta and Forexster intellectual property rights in July 2014. These rights are now being amortized as a component of purchased intangible amortization.


45


Purchased Intangible Amortization

Year Ended December 31,

2014
 
2013
Purchased intangible amortization (amounts in thousands)
$
8,080

 
$
2,906

As a percentage of net revenue
2.2
%
 
1.1
%

Purchased intangible amortization increased $5.2 million, or 178.0%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily due to an increase in amortization relating to the acquisitions of GFT, GAA, Top Third, and Galvan, as well as the intellectual property rights acquired from Valaquenta and Forexster.

Communications and Technology

Year Ended December 31,

2014
 
2013
Communications and technology (amounts in thousands)
$
15,567

 
$
11,315

As a percentage of net revenue
4.2
%
 
4.2
%

Communications and technology expenses increased $4.3 million, or 37.6%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was primarily due to our acquisitions of GFT, GAA, Top Third and Galvan.
  
Restructuring expense

Year Ended December 31,

2014
 
2013
Restructuring (amounts in thousands)
$
1,214

 
$
1,570

As a percentage of net revenue
0.3
%
 
0.6
%
Restructuring expenses reflect severance payments and related expenses that arose in connection with headcount reduction initiatives.
 
Acquisition expense

Year Ended December 31,

2014
 
2013
Acquisition expense (amounts in thousands)
$
3,526

 
$
1,824

As a percentage of net revenue
1.0
%
 
0.7
%
Acquisition expenses are costs directly attributable to the acquisitions closed in 2014 and 2013, as well as our impending acquisition of City Index. These costs consist primarily of legal, accounting, and other professional advisory fees.

Integration expense

Year Ended December 31,

2014
 
2013
Integration (amounts in thousands)
$
2,489

 
$
1,950

As a percentage of net revenue
0.7
%
 
0.7
%

Integration expenses are acquisition-related costs that do not meet the definition of acquisition costs specified in the applicable accounting guidance. These costs include incentive payments to employees to remain through the acquisition and costs of retiring redundant assets, as well as accelerated amortization of assets resulting from acquisitions.


46


Income Taxes

Year Ended December 31,

2014
 
2013
Income tax expense (amounts in thousands)
$
12,993

 
$
13,794

Effective tax rate
28.09
%
 
30.58
%

Income tax expense decreased $0.8 million resulting in a tax expense of $13.0 million for the year ended December 31, 2014, compared to income tax expense of $13.8 million for the year ended December 31, 2013. Our effective tax rate in the year ended December 31, 2014 was 28.1%. Please see Note 13 to our audited consolidated financial statements for more information on our effective tax rate.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenue (amounts in thousands)


Year Ended December 31,

2013
 
2012
REVENUE:


 


Trading revenue
$
205,133

 
$
127,520

Commission revenue
60,727

 
21,373

Other revenue
1,099

 
2,331

Total non-interest revenue
266,959

 
151,224

Interest revenue
821

 
627

Interest expense
156

 
47

Total net interest revenue
665

 
580

Net Revenue
$
267,624

 
$
151,804


Our total net revenue increased $115.8 million, or 76.3%, for the year ended December 31, 2013, compared to the year ended December 31, 2012.

Trading revenue increased $77.6 million, or 60.9%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. GFT, which was acquired in September 2013, contributed $16.4 million, or 21.1% to the increase, with the remaining increase primarily driven by increased trading volume primarily due to higher volatility levels in the foreign exchange markets. While volatility levels for the year ended December 31, 2013 were higher when compared to the multi-year lows experienced in 2012, they were still well below 2008-2011 averages.

Commission revenue increased $39.4 million, or 184.3%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase was primarily due to an additional $14.6 million from our GTX business, as well as an increase of $14.3 million from our futures business, reflecting a full year contribution in 2013 for our futures business, which was acquired in August 2012. The sales trader business acquired from GFT contributed an additional $10.4 million in commission.

Other revenue decreased $1.2 million for the year ended December 31, 2013, compared to the year ended December 31, 2012, primarily due to a foreign currency translation loss of $1.5 million in 2013.

Our net interest revenue increased from $0.6 million of revenue for the year ended December 31, 2012 to $0.7 million for the year ended December 31, 2013.


47


Expenses

Year Ended December 31,

2013
 
2012
Total operating expenses (amounts in thousands)
$
223,286

 
$
150,218

As a percentage of net revenue
83.4
%
 
99.0
%

Our total expenses increased $73.1 million, or 48.6%, for the year ended December 31, 2013, compared to the year ending December 31, 2012. The increase was primarily due to an increase of $24.8 million in employee compensation and benefits, an increase of $26.1 million in referral fees, an increase of $8.4 million in trading expense, an increase of $6.9 million in general and administrative expenses, an increase of $2.8 million in depreciation and amortization, an increase of $3.6 million in communications and technology expenses and an increase of $4.7 million in restructuring, acquisition and integration costs. These increases were partially offset by a decrease of $4.6 million in selling and marketing expense and a decrease of $1.2 million in purchase intangible amortization. The causes of these changes in expenses are discussed in more detail below.

Employee Compensation and Benefits

Year Ended December 31,

2013
 
2012
Employee compensation and benefits (amounts in thousands)
$
74,185

 
$
49,357

As a percentage of net revenue
27.7
%
 
32.5
%

Employee compensation and benefits expenses increased $24.8 million, or 50.3%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The GFT acquisition contributed $11.9 million to the increase, with salary and benefits (excluding bonus) otherwise increasing by $3.1 million in 2013 due to the increase in results of operations, the inclusion of a full year of our futures business and the hiring of several senior executives and additional sales employees. Bonus expenses increased $4.7 million in 2013 due to the increase in results of operations compared to the prior year. In addition, sales commissions paid to employees increased $5.1 million in 2013 due to the increase in results of operations of our businesses.

Selling and Marketing Expenses

Year Ended December 31,

2013
 
2012
Selling and marketing (amounts in thousands)
$
22,337

 
$
26,969

As a percentage of net revenue
8.3
%
 
17.8
%

Selling and marketing expenses decreased $4.6 million, or 17.2%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. This decrease was due to a combination of efforts to increase the efficiency of marketing programs and the increased targeting of geographic markets that we believe produce a higher return on investment.

Referral fees

Year Ended December 31,

2013
 
2012
Referral fees (amounts in thousands)
$
52,503

 
$
26,373

As a percentage of net revenue
19.6
%
 
17.4
%

Referral fees increased $26.1 million, or 99.1%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The GFT acquisition contributed $9.1 million of the increase, while commissions and fees paid to introducing brokers increased by $17.0 million as a result of higher levels of customer trading volume directed to us from our white label partners and introducing brokers.


48


Trading Expenses

Year Ended December 31,

2013
 
2012
Trading expenses (amounts in thousands)
$
18,164

 
$
9,786

As a percentage of net revenue
6.8
%
 
6.4
%

Trading expenses increased $8.4 million, or 85.6%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The GFT acquisition contributed $2.5 million of the increase, while clearing and exchange fees associated with our GTX and futures businesses increased $5.7 million compared to the year ended December 31, 2012, primarily due to a significant increase in GTX trading volume and the inclusion of a full year of operating results for our futures business in 2013.

General and Administrative

Year Ended December 31,

2013
 
2012
General and administrative (amounts in thousands)
$
26,813

 
$
19,865

As a percentage of net revenue
10.0
%
 
13.1
%

General and administrative expense increased $6.9 million, or 35.0%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. This increase was primarily due to an increase in professional fees of $3.4 million, an increase in occupancy and equipment expenses of $1.2 million, primarily due to the additional locations acquired in the GFT transaction and other locations added during 2012 being included for the full year in 2013, and an increase in bank fees of $1.7 million primarily attributable to an increase in customer activity and accounts acquired from GFT.

Depreciation and Amortization

Year Ended December 31,

2013
 
2012
Depreciation and amortization (amounts in thousands)
$
7,768

 
$
4,921

As a percentage of net revenue
2.9
%
 
3.2
%

Depreciation and amortization increased by $2.8 million, or 57.9%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The acquisition of GFT contributed approximately $1.0 million of the increase in depreciation and amortization expense. The remaining increase was primarily due to an increase in the amortization of software purchased or developed internally during 2012.

Purchased Intangible Amortization

Year Ended December 31,

2013
 
2012
Purchased intangible amortization (amounts in thousands)
$
2,906

 
$
4,134

As a percentage of net revenue
1.1
%
 
2.7
%

Purchased intangible amortization decreased $1.2 million, or 29.7%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease was primarily due to the intangible assets acquired from Capital Market Services, LLC in October 2010, becoming fully amortized during the second quarter of 2012, partially offset by additional amortization relating to the acquisitions of OEC and GFT.


49


Communications and Technology

Year Ended December 31,

2013
 
2012
Communication and technology (amounts in thousands)
$
11,315

 
$
7,736

As a percentage of net revenue
4.2
%
 
5.1
%

Communications and technology expenses increased $3.6 million, or 46.3%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. This increase was primarily due to the acquisition of GFT.

Restructuring expense

Year Ended December 31,

2013
 
2012
Restructuring (amounts in thousands)
$
1,570

 
$
634

As a percentage of net revenue
0.6
%
 
0.4
%

Restructuring expenses reflect severance payments and related expenses of $1.6 million and $0.6 million that arose in connection with headcount reductions implemented in the years ended December 31, 2013 and December 31, 2012, respectively.

Acquisition expense

Year Ended December 31,

2013
 
2012
Acquisition expense (amounts in thousands)
$
1,824

 
$
85

As a percentage of net revenue
0.7
%
 
0.1
%

Acquisition expenses are costs directly attributable to the acquisitions of GFT in 2013 and OEC in 2012, primarily consisting of legal, accounting and other professional advisory fees.

Integration expense

Year Ended December 31,

2013

2012
Integration (amounts in thousands)
$
1,950


$

As a percentage of net revenue
0.7
%

%

In 2013, we incurred $2.0 million of integration expenses, primarily due to retention payments to GFT employees and accelerated amortization of assets acquired in the GFT transaction.

Income Taxes

Year Ended December 31,

2013
 
2012
Income tax expense/(benefit) (amounts in thousands)
$
13,794

 
$
(1,479
)
As a percentage of net revenue
5.2
%
 
(1.0
)%

Income tax expense increased $15.3 million resulting in a tax expense of $13.8 million for the year ended December 31, 2013, compared to income tax benefit of $1.5 million for the year ended December 31, 2012. Our effective tax rate in the year ended December 31, 2013 was 30.6%. This is lower than the 35% U.S. statutory rate, primarily due to the foreign rate differential from our international operations, where tax rates for those operations are generally lower than the U.S. statutory rate. As such, the proportion of our consolidated taxable earnings originating in foreign jurisdictions impacts our consolidated tax rate. Please see Note 13 to our audited consolidated financial statements for more information on our effective tax rate.

50



Liquidity and Capital Resources

We have historically financed our liquidity and capital needs primarily through the use of funds generated from operations, the issuance of debt and equity securities, including the 4.125% Convertible Senior Notes due 2018 that we issued in the fourth quarter of 2013, and access to secured lines of credit. We plan to finance our future operating liquidity and regulatory capital needs in a manner consistent with our past practice. We expect that our capital expenditures for the next 12 months will be consistent with our historical annual spend.

We primarily hold and invest our cash at various financial institutions and in various investments, including cash held at banks, deposits at our liquidity providers and money market funds which invest in short-term U.S. government securities. In general, we believe all of our investments and deposits are of high credit quality and we have more than adequate liquidity to conduct our businesses.

As a holding company, nearly all of our cash flow is generated by our operating subsidiaries. Historically, we have accessed these funds through the receipt of dividends from these subsidiaries. The following table shows the amount of cash held by our subsidiaries located outside the United States and the amount of undistributed earnings at December 31, 2014 (amounts in millions):
Entity Name
Cash
 
Undistributed
Earnings
GAIN Capital-Forex.com U.K., Ltd.
$
403.6

 
$
74.5

Forex.com Japan Co., Ltd.
67.4

 

GAIN Capital Forex.com Australia, Pty. Ltd.
29.2

 

GFT Global Markets U.K. Ltd.
15.7

 
48.2

GFT Global Markets Asia Pte., Ltd.
10.2

 

GAIN Capital-Forex.com Canada Ltd.
4.4

 

GAIN Capital-Forex.com Hong Kong, Ltd.
4.4

 

Galvan Research and Trading Ltd.
1.3

 
3.4

Faraday Research LLP
0.4

 
0.4

GAIN GTX Singapore Pte. Ltd.
0.4

 

GAIN Global Markets, Inc.
0.3

 

Galvan LLP

 

Island Traders (Cayman) Limited

 

Total
$
537.3

 
$
126.5


At December 31, 2014, we had approximately $78.3 million held in undistributed earnings of our foreign subsidiaries that was indefinitely invested outside the United States. These earnings are expected to be reinvested in the working capital and other business needs of the foreign subsidiaries. No provision has been made for U.S. taxes that would arise if these earnings were repatriated to the United States. If these earnings had been repatriated into the United States as of December 31, 2014, in the form of dividends or otherwise, the Company would have been subject to additional income taxes of approximately $11.0 million.

Some of our operating subsidiaries are subject to requirements of various regulatory bodies, including the CFTC and NFA in the United States, the FCA in the United Kingdom, the FSA, METI and MAFF in Japan, the SFC in Hong Kong, IIROC and the OSC in Canada and the CIMA in the Cayman Islands, relating to liquidity and capital standards,which limit funds available for the payment of dividends to GAIN Capital Holdings, Inc. As a result, we may be unable to access funds which are generated by our operating subsidiaries when we need them.

The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of December 31, 2014 and the actual amounts of capital that were maintained on that date (amounts in millions):


51


Entity Name
Minimum
Regulatory
Capital
Requirements
 
Capital
Levels
Maintained
 
Excess
Net
Capital
GAIN Capital Group, LLC
$
24.7

 
$
42.0

 
$
17.3

GAIN Capital Securities, Inc.
0.1

 
0.4

 
0.3

GAIN Global Markets, Inc.
0.1

 
0.2

 
0.1

GAIN Capital Forex.com Australia, Pty. Ltd.
0.8

 
2.7

 
1.9

GAIN Capital-Forex.com U.K., Ltd.
44.1

 
48.6

 
4.5

GAIN Capital-Forex.com Hong Kong, Ltd.
1.9

 
3.8

 
1.9

GAIN Capital-Forex.com Canada Ltd.
0.2

 
1.6

 
1.4

Forex.com Japan Co., Ltd.
2.3

 
8.5

 
6.2

GFT Global Markets Asia Pte., Ltd.
1.5

 
3.3

 
1.8

Galvan Research and Trading, Ltd.
0.5

 
1.6

 
1.1

Global Assets Advisors, LLC
0.1

 
0.8

 
0.7

Total
$
76.3

 
$
113.5

 
$
37.2


Our futures commission merchant and forex dealer subsidiary, GAIN Capital Group, LLC, is subject to the Commodity Futures Trading Commission Net Capital Rule (Rule 1.17) and NFA Financial Requirements, Sections 11 and 12. Under applicable provisions of these regulations, Gain Capital Group, LLC is required to maintain adjusted net capital of the greater of $1.0 million or 8% of Customer and Non-Customer Maintenance Margin, or $20,000,000 plus 5% of all liabilities owed to retail customers exceeding $10,000,000. Net capital represents current assets less total liabilities as defined by CFTC Rule 1.17. Our current assets primarily consist of cash and cash equivalents reported on our balance sheet as cash, receivables from brokers and trading securities, which are generally short-term U.S. government securities. Our total liabilities include payables to customers, accrued expenses, accounts payable, sales and marketing expense payable, introducing broker fees payable and other liabilities. From net capital we take certain percentage deductions against assets held based on factors required by the Commodity Exchange Act to calculate adjusted net capital. Our net capital and adjusted net capital changes from day to day. As of December 31, 2014, GAIN Capital Group, LLC had net capital of approximately $42.0 million and net capital requirements of $24.7 million. As of December 31, 2014, GAIN Capital Group’s excess net capital was $17.3 million. We believe that we currently have sufficient capital to satisfy these on-going minimum net capital requirements. In accordance with CFTC regulation 1.12 and NFA Financial Requirements Section 1, a 20.0% decrease in GAIN Capital Group, LLC’s net capital and a 30.0% decrease in excess net capital due to a planned equity withdrawal requires regulatory notification and/or approval.

In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. A number of significant provisions contained in the law affect, or will affect once implementing regulations are adopted by the appropriate federal agencies, our business. Among other things, the Dodd-Frank Act provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. The Dodd-Frank Act requires the registration of swap dealers and swap execution facilities with the CFTC and imposes significant regulatory requirements on swap dealers and swap execution facilities. Effective February 27, 2013, GAIN GTX, LLC, became registered with the CFTC and NFA as a swap dealer. Effective April 17, 2014, GTX SEF, LLC became temporarily registered with the CFTC as a swap execution facility. Certain of our other subsidiaries may be required to register, or may register voluntarily, as swap dealers and/or swap execution facilities. Swap dealers and swap execution facilities are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherence to risk management policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capital requirements. The specific parameters of these swap dealer and swap execution facility requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAIN GTX, LLC, GTX SEF, LLC and any other of our subsidiaries that register as a swap dealer and/or swap execution facility remains unclear. It is likely, however, that these entities will face increased costs due to the registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers and swap execution facilities could require us to restructure our businesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance with swap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, and the changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition.

We are required to maintain cash on deposit with our liquidity providers in order to conduct our hedging activities. As of December 31, 2014, we posted $134.9 million in cash with liquidity providers. As of December 31, 2014, our total client assets

52


were $759.6 million. Total client assets represent amounts due to clients, including deposits and unrealized gains or losses arising from open positions.

The table set forth below provides information regarding our total available liquidity as of December 31, 2014 and as of December 31, 2013. We use this non-GAAP measure to evaluate our business operations and our ability to continue to grow through acquisitions (amounts in millions):


As of
 
As of

December 31,
 
December 31,

2014
 
2013
Cash and cash equivalents
139.4

 
39.9

Cash and securities held for customers
759.6

 
739.3

Short term investments(1)
0.2

 
0.8

Receivables from bank and brokers(2)
134.9

 
227.6

                   Total operating cash
1,034.1

 
1,007.6

Less: Cash and securities held for customers
(759.6
)
 
(739.3
)
                   Net operating cash
274.5

 
268.3

Less: Minimum regulatory requirements
(76.3
)
 
(85.7
)
         Senior convertible notes(3)
(80.0
)
 
(80.0
)
                  Available Liquidity(4)
118.2

 
102.6


(1)
Reflects cash that would be received upon the liquidation of short term investments. We estimate that all short term investments as of the date indicated could be liquidated within 1 to 2 business days.
(2)
Reflects cash that would be received from brokers following the close-out of all open positions. We estimate that liquidation of all open positions as of the date indicated could be completed within 1 to 2 business days.
(3)
The note payable amount reflects the aggregate principal amount of the notes outstanding, rather than solely the debt portion that is carried on our Consolidated Balance Sheets at December 31, 2014 and 2013.
(4)
Excludes current liabilities and capital charges associated with open positions.

Convertible Senior Notes

On November 27, 2013, we issued $80 million aggregate principal amount of our 4.125% Convertible Senior Notes due 2018 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the note offering were approximately $77.2 million, after deducting discounts to the initial purchasers and estimated offering expenses payable by the company.
The notes bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2014. The interest payment on the notes was approximately $3.3 million for the year ended December 31, 2014. The notes are convertible into cash, shares of our common stock, or a combination thereof, at our election. The notes will mature on December 1, 2018, unless earlier converted, redeemed or repurchased. We may not redeem the notes prior to December 1, 2016.
As part of the consideration for our acquisition of City Index, we will issue 4.125% unsecured convertible senior notes with an aggregate principal amount of $60,000,000. These notes will bear interest at a fixed rate of 4.125% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election. The notes will mature approximately five years from their date of issuance, unless earlier converted, redeemed or repurchased. We may not redeem the notes until the two year period prior to the maturity date of the notes.
In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as our 4.125% Convertible Senior Notes and the convertible notes to be issued in connection with our acquisition of City Index) in a manner that reflects the issuer’s economic

53


interest cost for non-convertible debt. The liability component of the notes is initially valued at the fair value of a similar debt instrument that does not have an associated equity component and, for our 4.125% Convertible Senior Notes, is reflected as a liability in our consolidated balance sheet in an amount equal to the fair value, which, as of December 31, 2014 and 2013, was $68.4 million and $65.4 million, respectively. The equity component of the notes is included in the additional paid-in capital section of our stockholders’ equity on our Consolidated Balance Sheets, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. The equity component, as of December 31, 2014 and 2013, for our 4.125% Convertible Senior Notes was $12.1 million. This original issue discount is amortized to non-cash interest expense over the term of the notes, and, as a result, we record a greater amount of interest expense in current periods. Accordingly, we will report lower net income in our financial results than would have been recorded had we reflected only cash interest expense in our consolidated income statement because ASC 470-20 will require the interest expense associated with the notes to include both the current period’s amortization of the original issue discount and the notes’ cash coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.
In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as our 4.125% Convertible Senior Notes and the convertible notes to be issued in connection with our acquisition of City Index) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share unless the conversion value of the notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, were issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of the notes, then our diluted earnings per share could be adversely affected.
Credit Facility

As part of our acquisition of GFT in September 2013, all outstanding obligations under a revolving line of credit we maintained at that time were satisfied and the line of credit was terminated.

Cash Flow

The following table sets forth a summary of our cash flow for the three years ended December 31, 2014 (amounts in thousands):


Year ended December 31,

2014
 
2013
 
2012
Cash provided by / (used for) operating activities
$
138,173