Bats Global Markets, Inc. - FORM 10-Q

Attached files

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EX-32.1 - EX-32.1 - Bats Global Markets, Inc.	bats-20160930ex321476ee4.htm
EX-31.2 - EX-31.2 - Bats Global Markets, Inc.	bats-20160930ex312442f31.htm
EX-31.1 - EX-31.1 - Bats Global Markets, Inc.	bats-20160930ex311acd4f1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2016

☐	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: 001-37732

Bats Global Markets, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		42-3583191
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

8050 Marshall Drive, Suite 120, Lenexa, Kansas	66214
(Address of Principal Executive Offices)	(Zip Code)

(913) 815-7000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October 31, 2016, the registrant had 93,873,991 shares of common stock and 2,518,219 shares of non-voting common stock, $0.01 par value per share, outstanding.

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TABLE OF CONTENTS

2015
		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Financial Condition—As of September 30, 2016 and December 31, 2015	1
	Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2016 and 2015	2
	Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2016 and 2015	3
	Condensed Consolidated Statement of Changes in Stockholders’ Equity—Nine months ended September 30, 2016	4
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2016 and 2015	5
	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47

SIGNATURES		48

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About This Form 10-Q

Throughout this Quarterly Report on Form 10-Q, unless otherwise specified:

“Bats Global Markets”, “Bats”, the “Company”, “we,” “us” and “our” refer to Bats Global Markets, Inc.

“BZX,” “BYX,” “EDGX,” and “EDGA” refer to our consolidated subsidiaries, each a registered national securities exchange operated in the United States.

“Bats Trading” and “Trading” refer to our broker-dealer entity operated in the United States.

“DE Route” refers to our former broker-dealer entity operated in the United States.

“BTL” refers to Bats Trading Limited, the U.K. operator of our Multilateral Trading Facility, or MTF, and our Regulated Market, or RM, under its Recognized Investment Exchange, or RIE, status, and known as “Bats Europe”.

“Chi-X Europe” refers to our broker-dealer operated in the United Kingdom.

“Bats Hotspot” and “Hotspot” refer to our foreign currency exchange operated in the United States and the United Kingdom.

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q, the “Risk Factors” section in our final prospectus that was filed with the U.S. Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) on April 15, 2016, and the “Risk Factors” section in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 that was filed with the SEC on August 5, 2016.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in this Quarterly Report on Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed in the “Risk Factors” section in this Quarterly Report on Form 10-Q, under the caption entitled “Risk Factors” in our final prospectus as filed with the SEC on April 15, 2016, and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, that was filed with the SEC on August 5, 2016. You should specifically consider the numerous risks outlined in the “Risk Factors” section in this Quarterly Report on Form 10-Q, and under the “Risk Factors” in our final prospectus.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Except as required by law, we are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Bats Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Financial Condition

(in millions, except share data)


	September 30,		December 31,
	2016		2015
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	69.1	$	75.1
Restricted cash		1.8		—
Financial investments:
Trading investments, at fair value		0.5		0.5
Available-for-sale investments, at fair value		—		47.2
Accounts receivable, net, including $13.4 and $40.3 from related parties at September 30, 2016 and December 31, 2015, respectively		135.6		131.0
Income taxes receivable		—		16.0
Other receivables		2.1		5.4
Prepaid expenses		6.7		5.1
Total current assets		215.8		280.3
Property and equipment, net		25.2		29.6
Goodwill		727.2		741.3
Intangible assets, net		218.2		239.0
Deferred income taxes, net		11.2		0.6
Investment in EuroCCP		11.1		11.4
Other assets		9.0		4.8
Total assets	$	1,217.7	$	1,307.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities, including $3.7 and $15.2 to related parties at September 30, 2016 and December 31, 2015, respectively	$	83.3	$	72.9
Section 31 fees payable		25.1		93.0
Current portion of long-term debt		4.1		83.9
Current portion of contingent consideration liability to related party		6.6		6.6
Total current liabilities		119.1		256.4
Long-term debt, less current portion		595.2		593.7
Contingent consideration liability to related party, less current portion		54.4		58.8
Unrecognized tax benefits		11.4		8.0
Deferred income taxes		0.2		7.4
Other liabilities		2.6		2.8
Commitments and contingencies
Stockholders’ equity (1):
Common stock, $0.01 par value. 362,500,000 voting and 29,000,000 non-voting shares authorized at September 30, 2016 and December 31, 2015; 92,847,321 voting and 7,818,090 non-voting shares issued at September 30, 2016; 74,991,527 voting and 21,146,136 non-voting shares issued at December 31, 2015		1.0		1.0
Common stock in treasury, at cost, 473,330 and 458,237 voting shares at September 30, 2016 and December 31, 2015, respectively; 3,799,871 non-voting shares at September 30, 2016		(6.8)		(6.5)
Additional paid-in capital		276.7		270.6
Retained earnings		193.8		125.0
Accumulated other comprehensive loss, net		(29.9)		(10.2)
Total stockholders’ equity		434.8		379.9
Total liabilities and stockholders’ equity	$	1,217.7	$	1,307.0

(1)

All share amounts have been adjusted to give effect to the 1-for-2.91 stock split in April 2016.

See accompanying notes to condensed consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in millions, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Revenues:
Transaction fees, including $47.3 and $159.2 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $218.6 and $438.1 for the nine months ended September 30, 2016 and 2015, respectively	$	307.1	$	361.8	$	1,011.1	$	970.1
Regulatory transaction fees, including $12.2 and $33.6 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $53.1 and $98.9 for the nine months ended September 30, 2016 and 2015, respectively		71.8		73.2		222.8		207.0
Market data fees, including $0.4 and $0.6 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $2.1 and $1.8 for the nine months ended September 30, 2016 and 2015, respectively		36.4		35.2		110.1		99.4
Connectivity fees and other, including $3.1 and $8.1 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $11.9 and $21.8 for the nine months ended September 30, 2016 and 2015, respectively		26.3		21.8		74.4		58.7
Total revenues		441.6		492.0		1,418.4		1,335.2
Cost of revenues:
Liquidity payments, including $43.2 and $151.2 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $220.5 and $417.8 for the nine months ended September 30, 2016 and 2015, respectively		250.8		302.1		832.5		805.7
Section 31 fees		71.8		73.2		222.8		207.0
Routing and clearing, including $8.9 and $10.2 from related parties for the three months ended September 30, 2016 and 2015, respectively, and $29.7 and $29.1 for the nine months ended September 30, 2016 and 2015, respectively		10.2		12.7		32.6		36.7
Total cost of revenues		332.8		388.0		1,087.9		1,049.4
Revenues less cost of revenues		108.8		104.0		330.5		285.8
Operating expenses:
Compensation and benefits		23.6		20.9		68.7		58.4
Depreciation and amortization		10.4		10.5		31.2		28.5
Systems and data communication		4.5		5.0		13.5		21.4
Occupancy		0.7		0.7		2.1		2.4
Professional and contract services		5.4		1.8		10.5		8.9
Regulatory costs		2.8		2.9		8.6		8.6
Changes in fair value of contingent consideration liability to related party		0.5		1.7		2.2		1.7
General and administrative		5.3		5.6		17.8		20.9
Total operating expenses		53.2		49.1		154.6		150.8
Operating income		55.6		54.9		175.9		135.0
Non-operating (expenses) income:
Interest expense, net		(7.4)		(12.9)		(29.9)		(34.2)
Loss on extinguishment of debt		—		—		(17.6)		—
Equity in earnings of EuroCCP		0.3		0.4		1.2		1.0
Other income		—		0.1		0.2		1.6
Income before income tax provision		48.5		42.5		129.8		103.4
Income tax provision		20.0		17.2		53.3		42.9
Net income	$	28.5	$	25.3	$	76.5	$	60.5
Basic earnings per share (1)	$	0.30	$	0.27	$	0.81	$	0.64
Diluted earnings per share (1)	$	0.29	$	0.27	$	0.79	$	0.64


Basic weighted average shares outstanding (1)		94.8		94.6		94.8		94.5
Diluted weighted average shares outstanding (1)		96.8		95.4		96.4		95.2

(1)

All per share amounts have been adjusted to give effect to the 1-for-2.91 stock split in April 2016.

See accompanying notes to condensed consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in millions)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Net income	$	28.5	$	25.3	$	76.5	$	60.5
Other comprehensive loss
Foreign currency translation adjustments		(8.0)		(10.1)		(35.4)		(6.7)
Income tax benefit		0.8		3.8		15.7		2.5
Other comprehensive loss, net of tax		(7.2)		(6.3)		(19.7)		(4.2)
Comprehensive income	$	21.3	$	19.0	$	56.8	$	56.3

See accompanying notes to condensed consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(unaudited)

(in millions, except share data)


													Accumulated
	Common stock outstanding(1)				Common		Common		Additional				other		Total
	Voting	Class A non-voting	Class B non-voting	Non-voting	stock		stock		paid-in		Retained		comprehensive		stockholders’
	shares	shares	shares	shares	Par value		in treasury (2)		capital		earnings		loss, net		equity
Balance at December 31, 2015	74,533,290	8,993,978	12,152,158	—	$	1.0	$	(6.5)	$	270.6	$	125.0	$	(10.2)	$	379.9
Common stock issued under employee stock plans	724,502	—	—	—		—		—		—		—		—		—
Share repurchases	(11,718)	—	—	—		—		(0.3)		—		—		—		(0.3)
Reclassification and conversion	17,127,917	(8,993,978)	(12,152,158)	4,018,219		—		—		—		—		—		—
Stock-based compensation	—	—	—	—		—		—		6.1		—		—		6.1
Dividend	—	—	—	—		—		—		—		(7.7)		—		(7.7)
Other comprehensive loss, net of tax	—	—	—	—		—		—		—		—		(19.7)		(19.7)
Net income	—	—	—	—		—		—		—		76.5		—		76.5
Balance at September 30, 2016	92,373,991	—	—	4,018,219	$	1.0	$	(6.8)	$	276.7	$	193.8	$	(29.9)	$	434.8

(1)

All per share amounts have been adjusted to give effect to the 1-for-2.91 stock split in April 2016.

(2)

Includes 3,799,871 shares held in treasury for non-voting common stock surrendered for conversion to common stock.

See accompanying notes to condensed consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in millions)


	Nine months ended September 30,
	2016		2015
Cash flows from operating activities:
Net income	$	76.5	$	60.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31.2		28.5
Loss on extinguishment of debt		17.6		—
Amortization of debt issuance cost and debt discount		4.2		4.6
Realized gain on termination of revolving credit facility		—		(1.1)
Deferred income taxes		(18.1)		5.6
Stock-based compensation expense		6.1		4.2
Changes in fair value of contingent consideration liability to related party		2.2		1.7
Provision for uncollectable accounts receivable		0.1		0.2
Equity in earnings of EuroCCP		(1.2)		(1.0)
Changes in assets and liabilities:
Receivables, including $(26.9) and $(5.4) from related parties for the periods ended September 30, 2016 and 2015, respectively		14.1		0.4
Trading financial investments, net		—		6.5
Prepaid and other assets		(6.0)		(2.8)
Accounts payable and accrued expenses, including $(11.5) and $7.0 to related parties for the periods ended September 30, 2016 and 2015, respectively		10.7		(19.5)
Section 31 fees payable		(67.9)		(83.5)
Payment of contingent consideration liability to related party		(0.9)		—
Unrecognized tax benefit		4.2		4.0
Other liabilities		(0.2)		(0.2)
Net cash provided by operating activities		72.6		8.1
Cash flows from investing activities:
Acquisition, net of cash acquired		(12.6)		(360.9)
Purchases of available-for-sale financial investments		(128.3)		(110.6)
Proceeds from maturities of available-for-sale financial investments		175.5		172.0
Change in restricted cash		(1.8)		14.0
Purchases of property and equipment		(6.8)		(12.3)
Net cash provided by (used in) investing activities		26.0		(297.8)
Cash flows from financing activities:
Proceeds from long-term debt		646.7		373.8
Principal payments of long term debt		(735.8)		(102.4)
Debt issuance costs and additional debt discount		(11.0)		(16.5)
Distributions paid		(7.7)		(4.8)
Payment of contingent consideration liability to related party		(5.7)		—
Proceeds from the exercise of stock options		—		0.1
Proceeds from employee stock purchase plan		—		0.7
Purchases of treasury stock		(0.3)		(1.5)
Net cash (used in) provided by financing activities		(113.8)		249.4
Effect of foreign currency exchange rate changes on cash and cash equivalents		9.2		(4.0)
Decrease in cash and cash equivalents		(6.0)		(44.3)
Cash and cash equivalents:
Beginning of year		75.1		122.2
End of year	$	69.1	$	77.9
Supplemental disclosure of cash paid:
Cash paid for income taxes, net of refunds	$	29.1	$	31.6
Cash paid for interest		25.9		29.4
Supplemental disclosure of noncash transactions:
Forfeiture of common stock for payment of exercise of stock options	$	—	$	0.9
Supplemental disclosure of noncash investing activities:
Property and equipment acquired	$	—	$	0.3
Goodwill acquired		8.5		308.2
Intangible assets acquired		3.5		111.0
Other assets acquired		0.7		5.2
Liabilities assumed		(0.1)		(63.8)

See accompanying notes to condensed consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

(1)Organization and Basis of Presentation

Bats Global Markets, Inc. and its consolidated subsidiaries (the Company or Bats) is a global financial technology company that provides trade execution, market data, trade reporting, connectivity and risk management solutions to brokers, market makers, asset managers and other market participants, ultimately benefiting retail and institutional investors across multiple asset classes. The Company’s asset classes comprise listed cash equity securities in the United States (U.S.) and Europe, listed equity options in the United States, and institutional spot foreign currency (FX) globally. The Company is headquartered in the Kansas City, Missouri, area with additional offices in New York, New York, Chicago, Illinois, San Francisco, California, London, United Kingdom (U.K.), Singapore and Quito, Ecuador.

In September 2016, the Company announced that it has entered into a merger agreement with CBOE Holdings, Inc. The transaction is expected to close in the first half of 2017.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. These adjustments are of a normal recurring nature. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2015.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the condensed consolidated financial statements and accompanying notes. Material estimates that are particularly susceptible change in the near team include the receivable from market data fees, the valuation of goodwill and unrecognized tax benefits. Actual results could differ from those estimates.

Initial Public Offering and Stock Split

On April 20, 2016, in connection with the closing of the Company’s initial public offering (IPO) in which certain stockholders of the Company sold 15,295,000 shares of existing common stock at a public offering price of $19.00 per share, the Company effected a stock split at a ratio of 1-for-2.91 of each share of the Company’s outstanding common stock and non-voting common stock, after giving effect to the reclassification of each share of Class A non-voting common stock to voting common stock and Class B non-voting common stock to non-voting common stock. All references to shares and per-share data in the Company’s condensed consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis.

Reclassifications

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation. The Company had historically voluntarily disclosed transactions with all stockholders irrespective of beneficial ownership. The condensed consolidated financial statements herein reflect related party transactions with only related persons, as defined by U.S. GAAP and Item 404 of Regulation S-K under the Securities and Exchange Act (the “Exchange Act”).

Recent Accounting Pronouncements, Adopted

In the first quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest, which simplified the presentation of debt issuance cost by changing the classification of debt issuance cost from an asset to a contra-liability directly deducted from the face amount of the debt to which it relates. All periods presented have conformed to this new classification, which resulted in a $9.9 million reclassification from total assets to total liabilities as of December 31, 2015.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

In the first quarter of 2016, the Company adopted ASU 2015-17, Income Taxes—Balance Sheet Classification of Deferred Taxes. Deferred tax liabilities and assets are now classified as noncurrent on the consolidated statements of financial condition. All periods presented have conformed to this new classification, which resulted in a $0.6 million reclassification from current deferred tax assets to deferred income taxes, net as of December 31, 2015.

In the third quarter of 2016, the Company adopted ASU 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. This ASU’s purpose is to simplify accounting for share-based payment transactions. Among other things, the ASU requires that excess tax benefits and tax deficiencies associated with share-based compensation be recognized as income tax provision verses the current requirements to record the impact to additional paid-in capital or income tax provision, depending on circumstances. The 2016 periods presented have conformed to this new classification. The change was immaterial to the consolidated financial statements and the Company continues to account for forfeitures on an actual basis.

Recent Accounting Pronouncements, Not yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition guidance in ASC 605, Revenue Recognition. The new revenue recognition standard sets forth a five-step revenue recognition model to determine when and how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to receive in exchange for those goods or services. The standard also requires more detailed disclosures. The standard provides alternative methods of initial adoption and is effective for the Company on January 1, 2017. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to January 1, 2018. The Company is currently assessing the impact that this standard will have on the consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). This standard simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. First, it requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer also should record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied prospectively to adjustments to provisional amounts that are identified after December 15, 2015 and that are within the measurement period. Upon transition, an entity would be required to disclose the nature of, and reason for, the change in accounting principle. An entity would provide that disclosure in the first annual period of adoption and in the interim periods within the first annual period. This ASU is not expected to have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, (Topic 842). The ASU will require organizations that lease assets—referred to as ‘‘lessees’’—to recognize on the consolidated statement of financial condition the assets and liabilities for the rights and obligations created by those leases. The ASU is effective for the Company beginning on January 1, 2019. The Company is currently assessing the impact that this standard will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323). The ASU’s purpose is to simplify the accounting for equity method investments by eliminating the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. It now requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The update is effective for the Company for the annual reporting period beginning January 1, 2017 and is not expected to have a material impact on the Company’s consolidated financial statements.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

In March 2016, the FASB issued ASU 2016-08, Revenue for Contracts with Customers (Topic 606): Principal versus Agent Considerations. The update clarifies implementation guidance on principal versus agent considerations by further explaining that the entity is considered a principal if it controls the promised service before transferring it to the customer. This update is effective for the Company along with ASU 2014-09 for the annual reporting period beginning January 1, 2018. This update is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for the Company for the annual reporting period beginning January 1, 2019. The Company is currently assessing the impact that this standard will have on the consolidated financial statements.

(2)Acquisitions

ETF.com

On April 1, 2016, the Company completed the acquisition of ETF.com for $12.6 million in cash. ETF.com is a provider of exchange traded fund (ETF) data, news and analysis, with approximately $3.0 million in annual revenue for 2015. The purchase price was allocated to goodwill ($8.5 million), intangible assets ($3.5 million) and working capital ($0.6 million) and is recorded in the U.S. Equities segment.

Hotspot

On March 13, 2015 (the Hotspot Acquisition Date), the Company completed the acquisition of Hotspot FX Holdings LLC (the Bats Hotspot Acquisition) for $365 million in cash and a contingent consideration liability estimated at $62.6 million. This acquisition represents further expansion into non-equity trading businesses for the Company.

The results of Hotspot’s operations have been included in the condensed consolidated financial statements since the Hotspot Acquisition Date.

The amounts of revenue and operating (loss) income of Hotspot are included in the Company’s condensed consolidated statements of income from the Hotspot Acquisition Date to the three and nine months ended September 30, 2016 and 2015 and are as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Revenue	$	11.6	$	10.1	$	34.3	$	23.2
Operating (loss) income		0.1		(0.8)		(2.9)		0.5
Net (loss) income		0.1		(0.1)		(5.9)		4.4

The following unaudited pro forma financial information presents the combined results for the nine months ended September 30, 2015 including Hotspot had the Hotspot Acquisition Date been January 1, 2015 (in millions, except earnings per share):


Revenue	$	1,344.3
Operating income		131.8
Net income		57.0
Earnings per share:
Basic	$	0.60
Diluted	$	0.60

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

The supplemental 2015 pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect the additional depreciation and amortization that would have been charged assuming the adjusted fair values of property and equipment and acquired intangible assets had been applied on January 1, 2015. They include pro forma adjustments of $4.7 million for acquisition-related costs, such as fees to investment bankers, attorneys, accountants and other professional advisors and severance to employees.

(3)Investments

Financial Investments

The Company’s financial investments with original or acquired maturities longer than three months, but that mature in less than one year from the consolidated statement of financial condition date are classified as current assets and are summarized as follows (in millions):


	September 30, 2016
	Cost basis		Unrealized gains		Unrealized losses		Fair value
Available-for-sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Trading securities:
U.S. Treasury securities		0.5		—		—		0.5

Total financial investments	$	0.5	$	—	$	—	$	0.5


	December 31, 2015
	Cost basis		Unrealized gains		Unrealized losses		Fair value
Available-for-sale:
U.S. Treasury securities	$	47.2	$	—	$	—	$	47.2
Trading securities:
U.S. Treasury securities		0.5		—		—		0.5

Total financial investments	$	47.7	$	—	$	—	$	47.7

(4)Allowance for Doubtful Accounts

Allowance for doubtful accounts consisted of the following (in millions):


Balance at December 31, 2015	$	0.4
Additions:
Charges to income, included in general and administrative expenses		0.1
Deductions:
Charges for which reserves were provided		—
Balance at September 30, 2016	$	0.5

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

(5)Property and Equipment, Net

Property and equipment consisted of the following as of September 30, 2016 and December 31, 2015 (in millions):


	September 30,		December 31,
	2016		2015
Computer equipment and software	$	66.8	$	74.1
Office furniture and fixtures		2.2		2.2
Leasehold improvements		9.0		8.8
Total property and equipment		78.0		85.1
Less accumulated depreciation		(52.8)		(55.5)
Property and equipment, net	$	25.2	$	29.6

Depreciation expense was $3.6 million and $3.4 million for the three months ended September 30, 2016 and 2015 respectively, and $10.7 million and $10.2 million for the nine months ended September 30, 2016 and 2015, respectively.

(6)Goodwill and Intangible Assets, Net

The following table presents the details of goodwill by segment (in millions):


	U.S.		European
	Equities		Equities		Global FX		Total
Balance as of December 31, 2015	$	253.5	$	179.6	$	308.2	$	741.3
Additions		8.5		—		—		8.5
Changes in foreign currency exchange rates		—		(22.6)		—		(22.6)
Balance as of September 30, 2016	$	262.0	$	157.0	$	308.2	$	727.2

The following table presents the details of the intangible assets (in millions):


	U.S.		European				Corporate
	Equities		Equities		Global FX		and Other		Total
Balance as of December 31, 2015	$	106.6	$	32.6	$	99.6	$	0.2	$	239.0
Additions		3.5		—		—		—		3.5
Amortization		(6.0)		(3.7)		(10.8)		—		(20.5)
Changes in foreign currency exchange rates		—		(3.8)		—		—		(3.8)
Balance as of September 30, 2016	$	104.1	$	25.1	$	88.8	$	0.2	$	218.2

For the three months ended September 30, 2016 and 2015 amortization expense was $6.8 million and $7.1 million, respectively. For the nine months ended September 30, 2016 and 2015 amortization expense was $20.5 million and $18.3 million, respectively. The estimated future amortization expense is $6.7 million for the remainder of 2016, $23.7 million for 2017, $19.6 million for 2018, $16.2 million for 2019, $13.2 million for 2020 and $9.0 million for 2021.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present the categories of intangible assets at September 30, 2016 and December 31, 2015 (in millions):


									Weighted
	September 30, 2016								Average
	U.S.		European				Corporate		Amortization
	Equities		Equities		Global FX		and Other		Period (in years)
Trademarks and trade names	$	3.9	$	0.5	$	15.3	$	—	Indefinite
Customer relationships		43.7		37.6		81.2		—	17.5
Noncompete agreements		3.9		—		1.9		—	2.5
Trading registrations and licenses		71.9		9.0		—		—	Indefinite
Domain names		—		—		—		0.2	Indefinite
Technology		0.5		—		12.6		—	4.4
Accumulated amortization		(19.8)		(22.0)		(22.2)		—
	$	104.1	$	25.1	$	88.8	$	0.2


									Weighted
	December 31, 2015								Average
	U.S.		European				Corporate		Amortization
	Equities		Equities		Global FX		and Other		Period (in years)
Trademarks and trade names	$	1.6	$	0.6	$	15.3	$	—	Indefinite
Customer relationships		43.0		43.0		81.2		—	18.6
Noncompete agreements		3.9		—		1.9		—	0.7
Trading registrations and licenses		71.9		10.3		—		—	Indefinite
Domain names		—		—		—		0.2	Indefinite
Technology		—		—		12.6		—	6.0
Accumulated amortization		(13.8)		(21.3)		(11.4)		—
	$	106.6	$	32.6	$	99.6	$	0.2

(7)

(7)Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of September 30, 2016 and December 31, 2015 (in millions):


	September 30, 2016		December 31, 2015
Accounts payable	$	40.1	$	42.9
Deferred income		1.6		1.5
Dividends payable		0.4		0.5
Income taxes payable		8.0		—
Unrecognized tax benefit		6.0		5.2
Accrued expenses		27.2		22.2
Accrued termination benefits		—		0.6
	$	83.3	$	72.9

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

(8)Debt

As of September 30, 2016 and December 31, 2015, the long-term debt consisted of the following (in millions):


	September 30,		December 31,
	2016		2015
Term loan	$	613.4	$	698.7
Less: debt discount and debt issuance cost		(14.1)		(21.1)
Total debt		599.3		677.6
Less: current portion		(4.1)		(83.9)
Total long-term debt	$	595.2	$	593.7

In June 2016, the Company refinanced its term loan with new seven-year $650 million term loan (the “2016 Term Facility”). The 2016 Term Facility decreased the spread on the interest rate to, subject to compliance with a leverage ratio pricing grid, LIBOR plus 350 basis points, and includes 50 basis points of original issue discount. Under the 2016 Term Facility, the required annual amortization also decreased from 7.5% per annum to 1.0% per annum, calculated on the basis of the outstanding principal amount of the 2016 Term Facility. In addition to scheduled amortization payments, the Company may be required to make prepayments of principal based on a percentage of Excess Cash Flow, as defined in the 2016 Term Facility, or with 100% of the net cash proceeds of certain assets sales or debt incurrences. In addition, the Company entered into a new three-year $100 million revolving credit facility with an interest rate based on, subject to compliance with a leverage ratio grid, LIBOR plus 275 basis points, which includes an undrawn fee, subject to compliance with a leverage ratio grid, of 37.5 basis points, replacing the revolving credit facility under the Amended 2014 Loan. The impact of the amended terms on the present value of cash flows was greater than 10%; therefore, the amendment was accounted for as an extinguishment resulting in a loss of $17.6 million that was recorded in a separate line item within non-operating expenses in the condensed statement of income.

The unamortized debt discount of $3.1 million and debt issuance cost of $11.0 million will be amortized as part of interest expense, net through June 30, 2023, the maturity date of the term loan. The effective interest rate was 4.2% at September 30, 2016.

The credit agreement for the term loan contains customary reporting requirements, events of default and affirmative and negative covenants, including a financial covenant not to exceed a maximum leverage ratio measured each quarter through the term of the loan, as further described in the credit agreement. The financial covenant places restrictions concerning the Company’s ability to declare dividends and obtain additional financing, and requires that any proceeds from the sale of assets first be used to pay down the term loan. As of September 30, 2016, the Company was in compliance with the terms of the credit arrangement for the term loan.

The Company and certain subsidiaries have guaranteed the repayment of obligations under the credit agreement and have granted pledges of the shares of certain subsidiaries along with a security interest in certain other assets of the Company and certain subsidiaries as collateral.

Interest expense recognized on the term loans and revolving loans is included in interest expense, net in the condensed consolidated statements of income, and for the three and nine months ended September 30, 2016 and 2015 is as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Components of interest expense:
Contractual interest	$	6.9	$	11.0	$	26.0	$	29.4
Amortization of debt discount		0.1		1.0		2.0		2.3
Amortization of debt issuance cost		0.6		0.9		2.2		2.6
Interest expense	$	7.6	$	12.9	$	30.2	$	34.3

(8)

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

(9)Accumulated Other Comprehensive Loss, Net

The following represents the changes in accumulated other comprehensive loss by component, net of tax (in millions):


	Foreign currency
	translation
	adjustment
Balance at December 31, 2015	$	(10.2)
Other comprehensive loss, net of tax		(19.7)
Balance at September 30, 2016	$	(29.9)

(9)

(10)Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of investments included in Level 1 include listed equities and listed derivatives.

Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over‑the‑counter derivatives. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.

Level 3: Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the circumstances and the best information available at the time and may require significant management judgment or estimation. Investments that are included in this category generally include equity and debt positions in private companies.

Instruments Measured at Fair Value on a Recurring Basis

The following table presents the Company’s fair value hierarchy for those assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in millions):


	September 30, 2016
	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Trading securities:
U.S. Treasury securities		0.5		0.5		—		—
Total assets	$	0.5	$	0.5	$	—	$	—
Liabilities:
Contingent consideration liability to related party	$	61.0	$	—	$	—	$	61.0
Total liabilities	$	61.0	$	—	$	—	$	61.0

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


	December 31, 2015
	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	47.2	$	47.2	$	—	$	—
Trading securities:
U.S. Treasury securities		0.5		0.5		—		—
Total assets	$	47.7	$	47.7	$	—	$	—
Liabilities:
Contingent consideration liability to related party	$	65.4	$	—	$	—	$	65.4
Total liabilities	$	65.4	$	—	$	—	$	65.4

The following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis:

Available-for-sale and trading securities

Financial investments classified as trading and available‑for‑sale consist of highly liquid U.S. Treasury securities. These securities are valued by obtaining feeds from a number of live data sources, including active market makers and inter‑dealer brokers and therefore categorized as Level 1.

Contingent consideration liability

The Company entered into a contingent consideration arrangement with the purchase of Hotspot from a related party on March 13, 2015. The fair value of this liability at September 30, 2016 was $61.0 million. That value is based on estimates of discounted future cash payments, a significant unobservable input, and is considered a Level 3 measurement.

Fair Value of Financial Instruments

The following table presents the Company’s fair value hierarchy for those financial instruments held by the Company as of September 30, 2016 and December 31, 2015 (in millions):


	September 30, 2016
	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	69.1	$	69.1	$	—	$	—
Restricted cash		1.8		1.8		—		—
Trading investments		0.5		0.5		—		—
Accounts receivable		135.6		—		135.6		—
Other receivables		2.1		—		2.1		—
Total assets	$	209.1	$	71.4	$	137.7	$	—
Liabilities:
Accounts payable	$	39.5	$	—	$	39.5	$	—
Section 31 fees payable		25.1		—		25.1		—
Contingent consideration liability to related party		61.0		—		—		61.0
Long-term debt		599.3		—		599.3		—
Total liabilities	$	724.9	$	—	$	663.9	$	61.0

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


	December 31, 2015
	Total		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	75.1	$	75.1	$	—	$	—
Trading investments		0.5		0.5		—		—
Available-for-sale investments		47.2		47.2		—		—
Accounts receivable		131.0		—		131.0		—
Other receivables		5.4		—		5.4		—
Total assets	$	259.2	$	122.8	$	136.4	$	—
Liabilities:
Accounts payable	$	42.9	$	—	$	42.9	$	—
Section 31 fees payable		93.0		—		93.0		—
Contingent consideration liability to related party		65.4		—		—		65.4
Long-term debt		677.6		—		677.6		—
Total liabilities	$	878.9	$	—	$	813.5	$	65.4

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other receivables, accounts payable and Section 31 fees payable approximate fair value due to their liquid or short-term nature.

Long-term debt

The carrying amount of long-term debt approximates its fair value based on quoted LIBOR at September 30, 2016 and December 31, 2015 and is considered a Level 2 measurement.

Information on Level 3 Financial Liabilities

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities during the nine months ended September 30, 2016.


	Level 3 Financial Liabilities for the Nine Months Ended September 30, 2016
	Balance at		Realized (gains)
	Beginning of		losses during				Balances at end
	Period		period		Settlements		of period
Liabilities
Contingent consideration liability to related party	$	65.4	$	2.2	$	(6.6)	$	61.0
Total Liabilities	$	65.4	$	2.2	$	(6.6)	$	61.0

(11)Segment Reporting

The Company operates under four reportable segments: U.S. Equities, European Equities, U.S. Options and Global FX. Segment performance is primarily based on operating income (loss). The Company has aggregated all of its corporate costs, as well as other business ventures, within Corporate Items and Eliminations; however, operating expenses that relate to activities of a specific segment have been allocated to that segment.

The U.S. Equities segment includes listed cash equities and exchange‑traded products (ETPs) transaction services that occur on BZX, BYX, EDGX and EDGA. It also includes the listed cash equities and exchange‑traded products routed transaction services that occur on Trading and through January 12, 2015, routed transaction services that occurred on DE Route. In addition, it includes the listings business where ETPs and the Company are listed on BZX and includes the recently acquired ETF.com.

The European Equities segment includes the pan‑European listed cash equities transaction services, ETPs, exchange‑traded commodities, and international depository receipts that occur on the RIE, operated by BTL. It

Table of Contents

Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

also includes the listed cash equities and exchange-traded products routed transaction services that occur on Chi-X Europe, as well as the listings business where ETPs can be listed on BTL.

The U.S. Options segment includes the listed equity options transaction services that occur on BZX and EDGX. It also includes the listed equity options routed transaction services that occur on Trading.

The Global FX segment includes institutional spot FX services that occur on the Hotspot Platform. The Company acquired Hotspot on March 13, 2015.

Summarized financial data of reportable segments was as follows (in millions):


									Corporate
			European						items and
	U.S. Equities		Equities		U.S. Options		Global FX		eliminations		Total
Three months ended September 30, 2016
Revenues	$	340.4	$	24.0	$	66.8	$	10.4	$	—	$	441.6
Operating income (loss)		47.2		7.4		5.5		(0.3)		(4.2)		55.6

Three months ended September 30, 2015
Revenues	$	377.6	$	30.0	$	74.3	$	10.1	$	—	$	492.0
Operating income (loss)		43.8		9.0		3.7		(1.0)		(0.6)		54.9


									Corporate
			European						items and
	U.S. Equities		Equities		U.S. Options		Global FX		eliminations		Total
Nine months ended September 30, 2016
Revenues	$	1,105.4	$	82.5	$	200.7	$	29.8	$	—	$	1,418.4
Operating income (loss)		145.8		25.9		15.0		(3.3)		(7.5)		175.9

Nine months ended September 30, 2015
Revenues	$	1,034.6	$	90.1	$	187.3	$	23.2	$	—	$	1,335.2
Operating income (loss)		106.9		25.8		7.2		(4.0)		(0.9)		135.0

(10)

(12)Employee Benefit Plans

The Company offers a 401(k) retirement plan eligible to all U.S. employees. The Company matches participating employee contributions dollar for dollar of up to five percent of salary. The Company’s contribution amounted to $0.4 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $1.4 million and $ 1.3 million for the nine months ended September 30, 2016 and 2015, respectively. This expense is included in compensation and benefits in the condensed consolidated statements of income.

BTL operates a stakeholder contribution plan and contributes to employee‑selected stakeholder contribution plans. The Company matches participating employee contributions of up to five percent of salary. All employees of BTL are eligible to participate. The Company’s contribution amounted to $0.1 million for both the three months ended September 30, 2016 and 2015, and $0.4 million for both the nine months ended September 30, 2016 and 2015. This expense is included in compensation and benefits in the condensed consolidated statements of income.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

(13)Related Party Transactions

Certain related parties conduct trading activity through the Company. The extent of such activity is presented in the accompanying condensed consolidated statements of financial condition, income and cash flows.

Certain related parties also own certain percentages of the term loans outstanding. As of September 30, 2016, $96.2 million of the Company’s outstanding term loans is held by related parties.

In March 2015, the Company entered into a Transaction Services Agreement (TSA) with an affiliate of a certain stockholder, the seller of Hotspot. In connection with this TSA, the following expenses were recorded in the condensed consolidated statements of income for the period indicated:


	Three Months Ended				Nine Months Ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Systems and data communication	$	0.1	$	0.2	$	0.3	$	0.4
Occupancy		—		—		—		0.1
General and administrative		—		0.2		0.1		0.4
Total	$	0.1	$	0.4	$	0.4	$	0.9

(14)Regulatory Capital

As a broker‑dealer registered with the Securities and Exchange Commission (SEC), Trading is subject to the SEC’s Uniform Net Capital rule (Rule 15c3‑1), which requires the maintenance of minimum net capital, as defined. The SEC’s requirement also provides that equity capital may not be withdrawn or a cash dividend paid if certain minimum net capital requirements are not met. Trading computes the net capital requirements under the basic method provided for in Rule 15c3‑1.

As of September 30, 2016 and December 31, 2015, Trading is required to maintain net capital equal to the greater of 6.67% of aggregate indebtedness items, as defined, or $0.1 million. At September 30, 2016 and December 31, 2015, Trading had net capital of $6.1 million and $2.3 million, respectively, which was $5.5 million and $1.8 million, respectively, in excess of its required net capital of $0.6 million and $0.5 million, respectively.

As entities regulated by the Financial Conduct Authority (FCA), BTL is subject to the Financial Resource Requirement (FRR) and Chi-X Europe is subject to the Capital Resources Requirement (CRR). As a RIE, BTL computes its FRR in accordance with its Financial Risk Assessment, as agreed by the FCA. This FRR was $16.5 million at September 30, 2016 and $17.2 million at December 31, 2015. At September 30, 2016 and December 31, 2015, BTL had capital in excess of its required FRR of $24.3 million and $15.0 million, respectively.

As a Banks, Investment firms, PRUdential (BIPRU) 50k firm as defined by the Markets in Financial Instruments Directive of the FCA, Chi‑X Europe computes its CRR as the greater of the base requirement of $0.1 million at September 30, 2016 and December 31, 2015, or the summation of the credit risk, market risk and fixed overheads requirements, as defined. At both September 30, 2016 and December 31, 2015, Chi‑X Europe had capital in excess of its required CRR of $0.4 million.

(15)Stock-Based Compensation

The Company utilizes equity award programs for offering long‑term incentives to its employees. The equity incentives have been granted in the form of nonstatutory stock options and restricted stock. In conjunction with these programs, the Company recognized stock-based compensation expense of $2.1 million and $1.6 million for the three months ended September 30, 2016 and 2015, respectively, and $6.1 million and $4.2 million for the nine months ended September 30,

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

2016 and 2015, respectively. This expense is included in compensation and benefits in the condensed consolidated statements of income.

There are four equity incentive plans pursuant to which stock options and restricted stock have been granted: the Bats Global Markets, Inc. 2009 Stock Option Plan (2009 Plan), the Third Amended and Restated Bats Global Markets, Inc. 2012 Equity Incentive Plan (2012 Plan), the Bats Global Markets, Inc. 2016 Omnibus Incentive Plan (Omnibus Plan) and the Bats Global Markets, Inc. Non-Employee Directors Compensation Plan (Directors Plan). Options and restricted stock granted under these plans generally vest over four years except for the Directors Plan, which generally vest over one year. Options granted under the 2009 Plan and 2012 Plan have ten‑year contractual terms. Pursuant to the 2009 Plan, 2012 Plan, Omnibus Plan and Directors Plan, the Company is authorized to grant restricted stock or stock options up to 6,388,663, 3,710,250, 4,074,000 and 291,000 shares, respectively.

No new awards may be made under the 2009 Plan or the 2012 Plan. The Company has adopted the Omnibus Plan and Directors Plan for future awards.

Stock Options

Summary stock option activity is presented below:


				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number	exercise		contractual	intrinsic
	of shares	price		term (years)	value
Outstanding, December 31, 2015	1,946,038	$	9.56	5.5	$	12,098,084
Exercised	—
Outstanding and expected to vest, September 30, 2016	1,946,038	$	9.56	4.6	$	39,873,398
Exercisable at September 30, 2016	1,466,892	$	8.59	3.4	$	31,473,968

Summary of the status of nonvested options is presented below:


		Weighted
		average grant-
Nonvested options	Options	date fair value
December 31, 2015 – Nonvested	479,146	$	4.64
Vested	—		—
Granted	—		—
September 30, 2016 – Nonvested	479,146	$	4.64

Restricted Stock

Summary restricted stock activity is presented below:


		Weighted
		average
	Number of	grant date
	shares	fair value
Nonvested stock at December 31, 2015	887,778	$	14.23
Granted	727,877		16.32
Vested	(32,084)		13.21
Forfeited	(3,375)		15.69
Nonvested stock at September 30, 2016	1,580,196	$	15.21

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

The total unrecognized compensation expense related to nonvested restricted stock is approximately $18.5 million, which will be recognized over a weighted average remaining period of 2.8 years.

The Company purchased 11,718 treasury shares for $0.3 million during the nine months ended September 30, 2016, as the result of 31,393 shares of restricted stock vesting to satisfy the employee income tax withholdings upon exercise.

(16)Income Taxes

The Company records income tax expense during interim periods based on the best estimate of the full year’s tax rate as adjusted for discrete items, if any, that are taken into account in the relevant interim period. Each quarter, the Company updates its estimate of the annual effective tax rate and any change in the estimated rate is recorded on a cumulative basis. The effective tax rate from continuing operations was 41.2% and 40.5% for the three months ended September 30, 2016 and 2015, respectively. The increase in the three months ended September 30, 2016 against the comparable period in the prior year was due to an increase in non-deductible expenses and unrecognized tax benefits partially offset by a lower effective state tax rate. The effective tax rate from continuing operations was 41.1% and 41.5% for the nine months ended September 30, 2016 and 2015, respectively. The decrease was due to a lower overall effective state tax rate.

(17)Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share, after giving effect to the 1-for-2.91 stock split (in millions, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator:
Net income	$	28.5	$	25.3	$	76.5	$	60.5
Denominator:
Weighted average common shares outstanding for basic earnings per share		94.8		94.6		94.8		94.5
Weighted average effect of dilutive securities:
Stock options and restricted stock		2.0		0.8		1.6		0.7
Denominator for diluted earnings per share		96.8		95.4		96.4		95.2
Basic and diluted earnings per share:
Basic earnings per share	$	0.30	$	0.27	$	0.81	$	0.64
Diluted earnings per share	$	0.29	$	0.27	$	0.79	$	0.64

(18)Commitments and Contingencies

Legal Proceedings

From time to time the Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that the outcome of any of the reviews, inspections or other legal proceedings will have a material impact on the consolidated financial position, results of operations or cash flows; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance.

On April 18, 2014, the City of Providence, Rhode Island filed a securities class action lawsuit in the Southern District of New York against Bats and Direct Edge, as well as 14 other securities exchanges. The action purports to be brought on behalf of all public investors who purchased and/or sold shares of stock in the United States between April 18, 2009 and the present on a registered public stock exchange (Exchange Defendants) or a United States-based alternate trading venue and were injured as a result of the misconduct detailed in the complaint, which includes allegations that the defendants

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

committed fraud through a variety of business practices associated with, among other things, what is commonly referred to as high frequency trading. On May 2, 2014 and May 20, 2014, American European Insurance Company and Harel Insurance Co., Ltd. each filed substantially similar class action lawsuits against the Exchange Defendants which were ultimately consolidated with the City of Providence, Rhode Island securities class action lawsuit. On June 18, 2015, Judge Jesse Furman of the Southern District of New York held oral argument on the pending Motion to Dismiss and thereafter, on August 26, 2015, the Court issued an Opinion and Order granting Defendant’s Motion to Dismiss, dismissing the Complaint in full. Plaintiff filed a Notice of Appeal of the dismissal on September 24, 2015 and its appeal brief on January 7, 2016. Respondent’s brief was filed on April 7, 2016 and oral argument was held on August 24, 2016. Given the preliminary nature of the proceedings, the Company is unable to estimate what, if any, liability may result from this litigation. However, the Company believes that the claims are without merit and intends to litigate the matter vigorously.

On May 23, 2014 and May 30, 2014, Harold R. Lanier filed three class action lawsuits in the Southern District of New York against Bats and other securities exchanges. The complaints were identical in all substantive respects, but each related to the dissemination of market data under a different market system – (i) the NASDAQ UTP Plan Market System; (ii) the OPRA Market System; and (iii) the Consolidated Quotation System and the Consolidated Tape System. Each of the actions purported to be brought on behalf of all subscribers who entered into contracts with the exchanges for the receipt of market data and were injured as a result of the misconduct detailed in the complaints, which includes allegations that the defendants did not provide market data services in a non-discriminatory manner or provide subscribers with “valid” data (i.e., data that is accurate and not stale). On January 16, 2015, Judge Katherine Forrest of the Southern District of New York held oral argument on the pending Motion to Dismiss and thereafter, on April 28, 2015, the Court filed an Opinion and Order granting the exchange defendants’ Motion to Dismiss, terminating all three class action lawsuits with prejudice. On May 20, 2015, Plaintiff filed a Notice of Appeal of the dismissal and on September 1, 2015, Appellant filed its appeal brief. Respondent’s brief was filed on November 24, 2015 and Appellant’s reply brief was filed on December 8, 2015. Oral argument was held on March 3, 2016. On September 23, 2016, the Court filed a Judgment affirming the District Court’s dismissal of all three class action lawsuits. Appellant thereafter filed a petition for a rehearing before the panel or the entire appellate court on October 7, 2016. Given the preliminary nature of the proceedings, the Company is unable to estimate what, if any, liability may result from this litigation. However, the Company believes that the claims are without merit and intends to litigate the matter vigorously.

Securities Industry and Financial Markets Association (SIFMA) has filed a number of denial of access applications with the SEC to set aside proposed rule changes to establish or modify fees for Bats market data products and related services. Each application is being held in abeyance pending a decision on a separate SIFMA denial of access application held before the SEC’s Chief Administrative Law Judge, (ALJ), regarding fees proposed by Nasdaq and the NYSE for their respective market data products. On June 1, 2016, the ALJ issued a decision rejecting SIFMA’s denial of access challenge to the Nasdaq and NYSE fees at issue, concluding that the exchanges do not enjoy monopoly pricing power over their depth of book feeds. On July 19, 2016, SIFMA petitioned the SEC for review of the ALJ decision. An adverse ruling in that matter could cause the SEC to more closely examine exchange market data fees, which in turn could result in the Company having to reduce the fees it charges for market data.

In addition, as a self-regulatory organization under the jurisdiction of the SEC, the Company is subject to routine reviews and inspections by the SEC, Bats Trading is subject to reviews and inspections by the Financial Industry Regulatory Authority (“FINRA”), and BTL and Chi-X Europe are subject to regulatory oversight in the United Kingdom by the FCA. The Company has from time to time received inquiries and investigative requests from the SEC’s Office of Compliance Inspections and Examinations as well as the Division of Enforcement seeking information about the Company’s compliance with the federal securities laws as well as the Company’s members’ compliance with the federal securities laws.

(19)Subsequent Events

On November 2, 2016, the Board of Directors declared a regular quarterly cash dividend of $0.08 per share on the Company’s outstanding common stock, which is payable on December 13, 2016, to stockholders of record at the close of business on November 30, 2016.

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Bats Global Markets, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

There have been no additional subsequent events that would require disclosure in, or adjustment to, the condensed consolidated financial statements as of and for the quarter ended September 30, 2016.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Form 10-Q and with our audited consolidated financial statements included in our final prospectus filed with the SEC on April 15, 2016.

Overview

We are a leading global operator of securities exchanges and other electronic markets enabled by world-class technology. We provide trade execution, market data, trade reporting, connectivity and risk management solutions to brokers, market makers, asset managers and other market participants, ultimately benefiting retail and institutional investors across multiple asset classes. Our principal objective is to improve markets by maximizing efficiency and mitigating trade execution risk for market participants. Our asset class focus currently comprises listed cash equity securities in the United States and Europe, listed equity options in the United States and institutional spot FX globally, as well as ETPs, including ETFs, in the United States and Europe.

On September 25, 2016, we entered into an Agreement and Plan of Merger (the Merger Agreement) with CBOE Holdings, Inc. (CBOE Holdings) under which CBOE Holdings agreed to acquire us in a cash and stock transaction valued at approximately $3.2 billion (based on the closing price of CBOE Holdings’ common stock on September 23, 2016). The Merger Agreement also contains an election procedure allowing each of our stockholders to seek all cash or all stock, subject to proration and adjustment. The Merger Agreement has been approved by the board of directors of each company by unanimous votes. The transaction is subject to certain regulatory approvals and other customary closing conditions and is expected to close in the first half of 2017.

Business Segments

We currently operate along four business segments. Our management allocates resources, assesses performance and manages our business according to these segments:

U.S. Equities. Our U.S. Equities segment includes listed cash equities and ETP transaction services that occur on BZX, BYX, EDGX and EDGA. It also includes the listed cash equities routed transaction services that occur on Trading and through January 12, 2015 routed transaction services that occurred on DE Route. It also includes the listings business where ETPs and the Company are listed on BZX and the recently acquired ETF.com.

European Equities. Our European Equities segment includes pan‑European listed equities transaction services, ETPs, exchange‑traded commodities, and international depository receipts that occur on our MTF, and a listing and trading venue on our RM, which together we refer to as Bats Europe. It also includes the listed cash equities and exchange-traded products routed transaction services that occur on Chi-X Europe, as well as the listings business where ETPs can be listed on BTL.

U.S. Options. Our U.S. Options segment includes our listed equity options markets on BZX and EDGX. It also includes the listed equity options routed transaction services that occur on Trading.

Global FX. Our Global FX segment includes institutional spot FX services that occur on the Hotspot Platform. The Company acquired Hotspot on March 13, 2015.

Key Events

We consider the following significant recent milestones in our history.

January 2014: Acquired Direct Edge Holdings LLC in the “Direct Edge Acquisition”, which included the two exchanges, EDGX and EDGA.

January 2015: Integrated the EDGX and EDGA exchange operations into the Bats technology platform.

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March 2015: Acquired Hotspot FX Holdings, LLC in the “Bats Hotspot Acquisition” which included KCG Hotspot FX LLC, the operator of an electronic trading platform for institutional spot FX, or the Bats Hotspot Platform.

September 2015: Launched the Bats Hotspot platform in London sucessfully.

November 2015: Launched EDGX Options.

March 2016: Launched Bats‑T3P SPY Volatility Index successfully.

April 2016: Acquired ETF.com, a provider of ETF data, news and analysis.

April 2016: Completed our IPO of 15,295,000 shares of common stock for $19.00 per share.

June 2016: Refinanced our outstanding credit facility with a new seven-year $650 million term loan that decreased the spread on the interest rate to one-month LIBOR plus 350 basis points decreased the annual mandatory amortization to 1%, and includes 50 basis points of original issue discount. We also refinanced our revolving credit facility with a new three-year $100 million revolving credit facility.

June 2016: Bats Europe launched a U.K.-focused benchmark index series successfully.

September 2016: Signed an agreement to merge with CBOE Holdings, Inc.

November 2016: Acquired Javelin.

Factors Affecting Results of Operations

In broad terms, our business performance is impacted by a number of drivers, including macroeconomic events affecting the risk and return of financial assets, investor sentiment, the regulatory environment for capital markets, geopolitical events, central bank policies and changing technology, particularly in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends, including:

trading volumes in listed cash equity securities and ETPs in both the U.S. and Europe, volumes in listed equity options and volumes in institutional spot FX trading, which are driven primarily by overall macroeconomic conditions;

the demand for the U.S. tape plan market data distributed by the Securities Information Processor (SIP), which determines the pool size of the industry market data revenue we receive based on our market share;

the demand for information about, or access to, our markets, which is dependent on the products we trade, our importance as a liquidity center and the quality and pricing of our data and access services;

continuing pressure in transaction fee pricing due to intense competition in the United States and Europe;

regulatory changes relating to market structure or affecting certain types of instruments, transactions, pricing structures, capital market participants or reporting or compliance requirements; and

technological advances and members’ demand for speed, efficiency and reliability.

Currently our business drivers are defined by investors' and companies' cautiously optimistic outlook about the pace of global economic recovery. The U.S. and European listed cash equity securities markets have historically experienced growth in trading volumes. From time to time, however, volumes have declined due to economic performance, volatility and other related factors.

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Recently, volumes in institution spot FX trading have been lower than expected when we purchased Bats Hotspot. If these trends continue, the future fair value of our goodwill related to that acquisition could be affected. Should this continue over an extended period of time, or should other events occur indicating the carrying value of the goodwill might be impaired, we would test the goodwill for impairment and recognize any impairment loss to the extent that the carrying amount exceeds the fair value. We will continue to monitor institution spot FX trading volumes and other factors in order to determine if there are any indications of impairment prior to the planned annual impairment test in December.

A number of significant structural, political and monetary issues continue to confront the global economy, instability could return at any time, resulting in an increased level of market volatility, oscillating trading volumes and a return of market uncertainty. In contrast, many of the largest customers of our transactional businesses continue to adapt their business models as they address the implementation of regulatory changes initiated following the global financial crisis.

On June 23, 2016, the U.K. voted to leave the European Union (E.U.) in a referendum (the Brexit Vote). At this stage, both the terms and the timing of the U.K.'s exit from the E.U. are unclear, and it is unlikely to be before the first quarter of 2019. Moreover, the nature of the relationship of the U.K. with the remaining E.U. member states has yet to be discussed and negotiations with the E.U. on the terms of the exit have yet to commence. This brings economic, market, with legal and regulatory uncertainties until the terms of the exit can be defined in the coming years.

Financial Summary

The following summarizes changes in financial performance for the three and nine months ended September 30, 2016 and 2015:


	Three Months Ended September 30,					Increase/	Percent	Nine Months Ended September 30,					Increase/	Percent
	2016		2015			(Decrease)	Change	2016		2015			(Decrease)	Change
	(in millions, except trading days, percentages and as noted below)							(in millions, except trading days, percentages and as noted below)
Total revenues	$	441.6	$	492.0	$	(50.4)	(10.2%)	$	1,418.4	$	1,335.2	$	83.2	6.2%
Total cost of revenues		332.8		388.0		(55.2)	(14.2%)		1,087.9		1,049.4		38.5	3.7%
Revenues less cost of revenues		108.8		104.0		4.8	4.6%		330.5		285.8		44.7	15.6%
Total operating expenses		53.2		49.1		4.1	8.4%		154.6		150.8		3.8	2.5%
Operating income		55.6		54.9		0.7	1.3%		175.9		135.0		40.9	30.3%
Income before income tax provision		48.5		42.5		6.0	14.1%		129.8		103.4		26.4	25.5%
Income tax provision		20.0		17.2		2.8	16.3%		53.3		42.9		10.4	24.2%
Net income	$	28.5	$	25.3	$	3.2	12.6%	$	76.5	$	60.5	$	16.0	26.4%
Basic earnings per share	$	0.30	$	0.27	$	0.03	11.1%	$	0.81	$	0.64	$	0.17	26.6%
Diluted earnings per share		0.29		0.27		0.02	7.4%		0.79		0.64		0.15	23.4%
Organic net revenue (1)		108.8		104.0		4.8	4.6%		320.1		283.4		36.7	12.9%
EBITDA(2)		66.3		65.9		0.4	0.6%		190.9		166.1		24.8	14.9%
EBITDA margin(3)		60.9%		63.4%		(2.5%)	*		57.8%		58.1%		-0.3%	*
Normalized EBITDA(2)	$	70.8	$	67.3	$	3.5	5.2%	$	217.6	$	172.5	$	45.1	26.1%
Normalized EBITDA margin(4)		65.1%		64.7%		0.4%	*		65.8%		60.4%		5.4%	*
Adjusted earnings(5)	$	35.3	$	30.3	$	5.0	16.5%	$	104.8	$	75.0	$	29.8	39.7%
Diluted weighted average shares outstanding		96.8		95.4		1.4	1.5%		96.4		95.2		1.2	1.3%
Diluted adjusted earnings per share	$	0.36	$	0.32	$	0.04	12.5%	$	1.09	$	0.79	$	0.30	38.0%
U.S. Equities:
Average Daily Volume (ADV):
Matched shares ADV (in billions)		1.4		1.6		(0.2)	(12.5)%		1.6		1.5		0.1	6.7%
Routed shares ADV (in billions)		0.1		0.1		—	—		-		-		—	—
Total touched shares ADV (in billions)		1.5		1.7		(0.2)	(11.8)%		1.6		1.5		0.1	6.7%
Market ADV (in billions)		6.6		7.3		(0.7)	(9.6)%		7.4		6.9		0.5	7.2%
Trading days		64		64		—	0.0%		189		188		1	0.5%
Bats ETPs (in billions of shares)		20.5		27.8		(7.3)	(26.3%)		76.0		68.0		8.00	11.8%
Bats ETPs: launches (number of launches)		11		—		11	*		47		7		40	571.4%
Bats ETPs: listings (number of listings)		103		33		70	212.1%		103		33		70	212.1%
European Equities (in billions of ADNV)
Average Daily Notional Value (ADNV):
Matched and touched ADNV (in billions)	€	9.2	€	12.1	€	(2.9)	(24.0)%	€	10.8	€	12.7	€	(1.9)	(15.0)%
Market ADNV (in billions)		39.8		49.7		(9.9)	(19.9)%		46.6		52.4		(5.8)	(11.1)%
Trading days		66		66		—	—		193		192		1	0.5%

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Average Euro/British pound exchange rate	£	0.848	£	0.717	£	0.131	18.3%	£	0.800	£	0.727	£	0.073	10.0%
U.S. Options:
ADV:
Matched contracts		1.7		1.9		(0.2)	(10.5)%		1.7		1.6		0.1	6.2%
Routed contracts		—		—		—	*		—		—		—	*
Total touched contracts		1.7		1.9		(0.2)	(10.5)%		1.7		1.6		0.1	6.2%
Market ADV		15.1		17.8		(2.7)	(15.2)%		15.8		16.3		(0.5)	(3.1)%
Trading days		64		64		—	—		189		188		1	0.5%
Global FX:
ADNV (in billions)	$	25.7	$	25.9	$	(0.2)	(0.8)%	$	27.0	$	26.9	$	0.1	0.4%
Trading days		66		66		—	*		195		144		51	35.4%
Market share:
U.S. Equities		20.8%		21.7%		(0.9%)	*		20.8%		21.1%		(0.3%)	*
ETPs		24.2%		22.9%		1.3%	*		25.1%		22.4%		2.7%	*
ETPs: launches		16.4%		0.0%		16.4%	*		24.6%		3.3%		21.3%	*
ETPs: listings		5.3%		1.8%		3.5%	*		5.3%		1.8%		3.5%	*
European Equities		23.0%		24.4%		(1.4%)	*		23.2%		24.2%		(1.0%)	*
U.S. Options		11.0%		10.9%		0.1%	*		11.0%		9.9%		1.1%	*
Net capture:
U.S. Equities (net capture per one hundred touched shares) (6)	$	0.022	$	0.020	$	0.002	10.0%	$	0.021	$	0.021	$	—	—
European Equities (net capture per matched notional value in basis points) (7)		0.156		0.134		0.022	16.4%		0.150		0.132		0.018	13.6%
U.S. Options (net capture per touched contract) (8)	$	0.059	$	0.027	$	0.032	118.5%	$	0.053	$	0.024	$	0.029	120.8%
Global FX (net capture per one million dollars traded) (9)	$	2.70	$	2.95	$	(0.25)	(8.5)%	$	2.68	$	3.00	$	(0.32)	(10.7)%
Average British pound/U.S. dollar exchange rate	$	1.313	$	1.532	$	(0.219)	(14.3)%	$	1.393	$	1.532	$	(0.139)	(9.1)%

* Not meaningful

(1)Organic net revenue is defined as revenues less cost of revenues excluding revenues less cost of revenues of any acquisition for the quarter the business was acquired and the following year comparable quarter. Organic net revenue does not represent, and should not be considered as, an alternative to revenues less cost of revenues, or net revenue, as determined in accordance with U.S. GAAP. We have presented organic net revenue because we consider it an important supplemental measure of our performance and we use it as the basis for monitoring our own core operating financial performance relative to other operators of electronic exchanges. We also believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. We believe that investors may find this non-GAAP measure useful in evaluating our performance compared to that of peer companies in our industry. Other companies may calculate organic net revenue differently than we do. Organic net revenue has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

The following is a reconciliation of revenues less cost of revenues to organic net revenue:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Revenues less cost of revenues	$	108.8	$	104.0	$	330.5	$	285.8
Recent acquisitions:
Global FX revenues less cost of revenues (for the three months ended March 31, 2016 and 2015)		—		—		(10.4)		(2.4)
Organic net revenue	$	108.8	$	104.0	$	320.1	$	283.4

(2)

EBITDA is defined as income before interest, income taxes, depreciation and amortization. Normalized EBITDA is defined as EBITDA before acquisition-related costs, IPO costs, tax restructuring costs, loss on extinguishment of debt, debt restructuring costs and gain on extinguishment of revolving credit facility. EBITDA and Normalized EBITDA do not represent, and should not be considered as, alternatives to net income or cash flows from operations, each as determined in accordance with U.S. GAAP. We have presented EBITDA and Normalized EBITDA because we consider them important supplemental measures of our performance and believe that they are frequently used by analysts, investors and other interested parties in the evaluation of companies. In addition, we use Normalized EBITDA as a measure of operating performance for preparation of our forecasts, evaluating our leverage ratio for the debt to earnings covenant included in our

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outstanding credit facility and calculating employee and executive bonuses. Other companies may calculate EBITDA and Normalized EBITDA differently than we do. EBITDA and Normalized EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP.

The following is a reconciliation of net income to EBITDA and Normalized EBITDA:


			Three Months Ended September 30,
			2016																2015
			U.S. Equities			European Equities			U.S. Options			Global FX		Corporate				Total	U.S. Equities			European Equities				U.S. Options				Global FX		Corporate				Total

Net income (loss)	$	46.6		$	6.2		$	5.5		$	(0.3)		$		(29.5)	$	28.5			$	43.3		$	9.6	$		3.7	$	(1.0)		$		(30.3)	$	25.3
Interest		—			—			—			—				7.4		7.4				—			—			—		—				12.9		12.9
Income tax provision		0.6			1.5			—			—				17.9		20.0				0.5			—			—		—				16.7		17.2
Depreciation and amortization		4.3			1.5			0.5			4.1				—		10.4				4.6			2.0			0.5		3.4				—		10.5
EBITDA		51.5			9.2			6.0			3.8				(4.2)		66.3				48.4			11.6			4.2		2.4				(0.7)		65.9
Acquisition-related costs		—			—			—			0.6				3.4		4.0				(0.8)			—			—		1.7				—		0.9
IPO costs		—			—			—			—				0.3		0.3				—			—			—		—				0.5		0.5
Tax restructuring costs		—			—			—			—				0.2		0.2				—			—			—		—				—		—
Normalized EBITDA	$	51.5		$	9.2		$	6.0		$	4.4		$		(0.3)	$	70.8			$	47.6		$	11.6	$		4.2	$	4.1		$		(0.2)	$	67.3


	Nine Months Ended September 30,
	2016												2015
	U.S. Equities		European Equities		U.S. Options		Global FX		Corporate		Total		U.S. Equities		European Equities		U.S. Options		Global FX		Corporate		Total

Net income (loss)	$	143.5	$	22.0	$	15.0	$	(3.2)	$	(100.8)	$	76.5	$	106.4	$	26.8	$	7.2	$	(3.6)	$	(76.3)	$	60.5
Interest		—		—		—		—		29.9		29.9		—		—		—		—		34.2		34.2
Income tax provision		2.3		5.3		—		—		45.7		53.3		0.6		—		—		—		42.3		42.9
Depreciation and amortization		12.8		4.6		1.5		12.3		—		31.2		13.8		6.2		1.4		7.1		—		28.5
EBITDA		158.6		31.9		16.5		9.1		(25.2)		190.9		120.8		33.0		8.6		3.5		0.2		166.1
Acquisition-related costs		0.2		—		—		2.3		3.4		5.9		0.2		—		—		6.4		(0.2)		6.4
IPO costs		—		—		—		—		3.0		3.0		—		—		—		—		0.5		0.5
Tax restructuring costs		—		—		—		—		0.2		0.2		—		—		—		—		—		—
Loss on extinguishment of debt		—		—		—		—		17.6		17.6		—		—		—		—		—		—
Debt restructuring		—		—		—		—		—		—		—		—		—		—		0.5		0.5
Gain on extinguishment of revolving credit facility		—		—		—		—		—		—		—		—		—		—		(1.0)		(1.0)
Normalized EBITDA	$	158.8	$	31.9	$	16.5	$	11.4	$	(1.0)	$	217.6	$	121.0	$	33.0	$	8.6	$	9.9	$	(0.0)	$	172.5

(3)EBITDA margin represents EBITDA divided by revenues less cost of revenues.

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(4)Normalized EBITDA margin represents Normalized EBITDA divided by revenues less cost of revenues.

(5)Adjusted earnings is defined as net income adjusted for amortization, acquisition-related costs, IPO costs, tax restructuring costs, loss on extinguishment of debt, debt restructuring costs and gain on extinguishment of revolving credit facility, net of the income tax effects of these adjustments. Adjusted earnings does not represent, and should not be considered as, an alternative to net income, as determined in accordance with U.S. GAAP. We have presented Adjusted earnings because we consider it an important supplemental measure of our performance and we use it as the basis for monitoring our own core operating financial performance relative to other operators of electronic exchanges. We also believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. We believe that investors may find this non-GAAP measure useful in evaluating our performance compared to that of peer companies in our industry. Other companies may calculate Adjusted earnings differently than we do. Adjusted earnings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

The following is a reconciliation of net income to Adjusted earnings:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Net income	$	28.5	$	25.3	$	76.5	$	60.5
Amortization		6.8		7.1		20.5		18.4
Acquisition-related costs		4.0		0.9		5.9		6.4
IPO costs		0.3		0.5		3.0		0.5
Loss on extinguishment of debt		—		—		17.6		—
Debt restructuring costs		—		—		—		0.5
Gain on extinguishment of revolving credit facility		—		—		—		(1.0)
Tax restructuring costs		0.2		—		0.2		—
Tax effects of adjustments		(4.5)		(3.5)		(18.9)		(10.3)
Adjusted earnings	$	35.3	$	30.3	$	104.8	$	75.0

(6)net capture per one hundred touched shares refers to annual transaction fees less liquidity payments and routing and clearing costs divided by the product of one-hundredth ADV of touched shares on BZX, BYX, EDGX and EDGA and the number of trading days.

(7)net capture per matched notional value refers to annual transaction fees less liquidity payments in British pounds divided by the product of ADNV in British pounds of shares matched on Bats Europe and the number of trading days.

(8)net capture per touched contract refers to annual transaction fees less liquidity payments and routing and clearing costs divided by the product of ADV of touched contracts and the number of trading days.

(9)net capture per one million dollars traded refers to annual transaction fees less liquidity payments, if any, divided by the product of one-thousandth of ADNV traded on the Bats Hotspot FX market and the number of trading days, divided by two, which represents the buyer and seller that are both charged on the transaction.

Revenues

Total revenues decreased in the three months ended September 30, 2016, primarily as a result of lower transaction fees due to a 9.6% decrease in U.S. equities market ADV compared to the same period of 2015. For the nine months ended September 30, 2016, total revenues increased primarily driven by a 7.2% increase in U.S. equities market ADV compared to the same period of 2015. The following summarizes changes in revenues for the three and nine months ended September 30, 2016, compared to the three and nine months ended September 30, 2015:

Three Months Ended September 30,

Increase/

Percent

Nine Months Ended September 30,

Increase/

Percent

2016

2015

(Decrease)

Change

2016

2015

(Decrease)

Change

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	(in millions, except percentages)							(in millions, except percentages)
Transaction fees	$	307.1	$	361.8	$	(54.7)	(15.1)%	$	1,011.1	$	970.1	$	41.0	4.2%
Regulatory transaction fees		71.8		73.2		(1.4)	(1.9)%		222.8		207.0		15.8	7.6%
Market data fees		36.4		35.2		1.2	3.4%		110.1		99.4		10.7	10.8%
Connectivity fees and other		26.3		21.8		4.5	20.6%		74.4		58.7		15.7	26.7%
Total revenues	$	441.6	$	492.0	$	(50.4)	(10.2)%	$	1,418.4	$	1,335.2	$	83.2	6.2%

Transaction Fees

Transaction fees decreased for the three months ended September 30, 2016 compared to the same period in 2015 primarily driven by our U.S. Equities segment. For the three months ended September 30, 2016, the U.S. Equities segment transaction fees decreased $54.7 million compared to the three months ended September 30, 2015, primarily due to decreased market ADV of 6.6 billion shares for the three months ended September 30, 2016 compared to an ADV of 7.3 billion shares for the three months ended September 30, 2015, a decline of 9.6%. The U.S. Options segment contributed $8.5 million to the decrease, primarily driven by decreased market ADV of 15.1 million contracts in the three months ended September 30, 2016 compared to 17.8 million contracts in the three months ended September 30, 2015, a decline of 15.2%. European Equities transaction fees decreased $6.3 million primarily driven by a 19.9% decrease in ADNV compared to the same period in 2015, and a decrease in the average exchange rate of the British pound to the U.S. dollar decreasing transaction fees by $3.4 million in the three months ended September 30, 2016. Global FX transaction fees decreased $1.0 million compared to the same period in 2015 due to an 8.5% decrease in net capture in the three months ended September 30, 2016.

For the nine months ended September 30, 2016, U.S. Equities market ADV increased 7.2% to 7.4 billion shares, contributing $37.8 million to transaction fees compared to the same period in 2015. The U.S. Options segment contributed $8.3 million to the increase primarily driven by an increase in market share from 9.9% in 2015 to 11.0% in 2016. The Global FX segment also contributed $5.0 million to the increase in 2016 revenues compared to 2015 due to the Bats Hotspot Acquisition in March 2015. The decrease in the average exchange rate of the British pound to the U.S. dollar contributed $6.4 million to the decrease in transaction fees from the European Equities segment from 2015 to 2016. Also contributing to the decrease was an 11.1% decrease in market ADNV from 2015 to 2016.

Regulatory Transaction Fees

Regulatory transaction fees decreased for the three months ended September 30, 2016, compared to the same period in 2015 primarily due to a 12.5% decrease, in U.S. Equities matched shares ADV. For the nine months ended September 30, 2016, regulatory transaction fees increased compared to 2015 driven primarily by a 6.7% increase in U.S. Equities matched shares ADV.

Market Data Fees

Market data fees increased in the three months ended September 30, 2016 compared to the same period in 2015 primarily due to pricing changes in U.S. Equities proprietary market data implemented in the first quarter 2016 which contributed $1.9 million to this increase. This was offset by a decrease in industry market data fees from the U.S. tape plan due to a slight decrease in U.S. Equities market share from 21.7% in the three months ended September 30, 2016 to 20.8% in the same period in 2015.

Market data fees increased in the nine months ended September 30, 2016 compared to the same period in 2015 due to pricing changes in proprietary market data implemented in the third quarter of 2015 and first quarter of 2016 which contributed $7.4 million, an audit recovery of $1.4 million received from the U.S. Tape Plan in the first quarter 2016 and increased U.S. Options market share from 9.9% in 2015 to 11.0% in 2016 contributing $0.7 million in the nine months ended September 30, 2016.

Connectivity Fees and Other

Connectivity fees and other revenues increased for the three and nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to U.S. Options and Global FX pricing changes to logical ports in the fourth quarter of 2015 and the third quarter of 2016 contributing $1.1 million and $1.2 million, respectively, to revenues in the three

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months ended September 30, 2016, and $2.9 million and $1.2 million to revenues in the nine months ended September 30, 2016, respectively. Also contributing to the increase was incremental revenue from the ETF.com acquisition in April 2016 of $1.0 million in the three months ended September 30, 2016 and $1.7 million in the nine months ended September 30, 2016.

Cost of Revenues

Cost of revenues decreased in the three months ended September 30, 2016 compared to the same period in 2015 primarily due to a 9.6% decrease in U.S. equities market ADV. Our U.S. Options segment market ADV also decreased 15.2% for the three months ended September 30, 2016 compared to the same period in 2015. Cost of revenues increased in the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to an 7.2% increase in U.S. Equities market ADV which increased liquidity payments by $37.0 million.

The following summarizes changes in cost of revenues for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015:


	Three Months Ended September 30,					Increase/	Percent	Nine Months Ended September 30,					Increase/	Percent
	2016		2015			(Decrease)	Change	2016		2015			(Decrease)	Change
	(in millions, except percentages)							(in millions, except percentages)
Liquidity payments	$	250.8	$	302.1	$	(51.3)	(17.0)%	$	832.5	$	805.7	$	26.8	3.3%
Section 31 fees		71.8		73.2		(1.4)	(1.9)%		222.8		207.0		15.8	7.6%
Routing and clearing		10.2		12.7		(2.5)	(19.7)%		32.6		36.7		(4.1)	(11.2)%
Total cost of revenues	$	332.8	$	388.0	$	(55.2)	(14.2)%	$	1,087.9	$	1,049.4	$	38.5	3.7%

Liquidity Payments

Liquidity payments decreased in the three months ended September 30, 2016 compared to the same period in 2015 with the U.S. Equities segment contributing $35.2 million to the decrease, primarily driven by a 9.6% decrease in market ADV. The U.S. Options segment liquidity payments decreased $11.4 million driven by decreased market ADV of 15.2% compared to the same period in 2015. The European Equities segment contributed $4.7 million to the decrease due to a decrease in market ADNV of 19.9% and the decrease in the average exchange rate of the British pound to U.S. dollar over this period.

Liquidity payments increased in the nine months ended September 30, 2016 compared to the same period in 2015 with the U.S. Equities segment contributing $37.0 million to the increase, driven by a 7.2% increase in market ADV. This was offset by a decrease in U.S. Options segment liquidity payments of $1.2 million, primarily driven by a 3.1% decrease in market ADV. The European Equities segment also decreased $9.0 million due to decreased market ADNV of 11.1% and a decrease in the average exchange rate of the British pound to U.S. dollar, which decreased liquidity payments $6.3 million and $2.8 million, respectively, for the nine months ended September 30, 2016 compared to the same period in 2015.

Section 31 Fees

Section 31 fees decreased for the three months ended September 30, 2016, compared to the same periods in 2015, primarily due to a 12.5% decrease, in U.S. Equities matched shares ADV. For the nine months ended September 30, 2016, regulatory transaction fees increased compared to 2015 driven primarily by a 6.7% increase in U.S. Equities matched shares ADV.

Routing and Clearing

The decrease in routing and clearing fees for the three and nine months ended September 30, 2016 was driven by a 17.2% decrease and 17.1% decrease of routed and clearing fees per routed contract in our U.S. Options segment respectively compared to the same period in 2015.

Revenues Less Cost of Revenues

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Revenues less cost of revenues increased in the three months ended September 30, 2016 compared to the same period in 2015 primarily due to a 118.5% increase in U.S. Options net capture contributing $2.9 million, pricing changes of U.S. Options and Global FX connectivity fees in the fourth quarter of 2015 and the third quarter of 2016, respectively, contributing $2.3 million, and pricing changes to U.S. Equities proprietary market data in the first quarter of 2016 contributing $1.9 million in the three months ended September 30, 2016. These were offset by a 9.6% decrease in U.S. Equities market ADV, contributing $1.3 million to the decrease, and the decrease of the in the average exchange rate of the British pound to U.S. dollar, which decreased revenues less cost of revenues by $1.9 million.

Revenues less cost of revenues increased in the nine months ended September 30, 2016, compared to the same period in 2015 primarily as a result of a 120% increase in U.S. Options net capture contributing $10.0 million, the pricing changes to U.S. Options and Global FX connectivity fees and U.S. Equities proprietary market data contributing $12.5 million and $7.4 million, respectively, a 7.2% increase in U.S. Equities market ADV that contributed $7.7 million to the increase and an additional $10.0 million from the additional quarter of Bats Hotspot activity in 2016. Bats Hotspot was acquired on March 13, 2015.

The following tables summarize the components of revenues less cost of revenues for the three and nine months ended September 30, 2016, presented as a percentage of revenues less cost of revenues and compared to the three and nine months ended September 30, 2015:


						Percentage of Revenues Less Cost of Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,
	2016		2015		Change	2016	2015
	(in millions)
Transaction fees less liquidity payments and routing and clearing costs	$	46.1	$	47.0	(1.9)%	42.4%	45.2%
Market data fees		36.4		35.2	3.4%	33.5%	33.8%
Connectivity fees		26.3		21.8	20.6%	24.1%	21.0%
Revenues less cost of revenues	$	108.8	$	104.0	4.6%	100.0%	100.0%


						Percentage of Revenues Less Cost of Revenues
	Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015
	(in millions)
Transaction fees less liquidity payments and routing and clearing costs	$	146.0	$	127.7	14.3%	44.2%	44.7%
Market data fees		110.1		99.4	10.8%	33.3%	34.8%
Connectivity fees		74.4		58.7	26.7%	22.5%	20.5%
Revenues less cost of revenues	$	330.5	$	285.8	15.6%	100.0%	100.0%

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Fluctuations in Revenues Less Cost of Revenues

Fluctuations in revenues less cost of revenues are driven by various factors. Volume variances are driven by changes in overall industry volume and our share of those volumes, while net capture variances are driven primarily by pricing changes. The following table summarizes the fluctuations in revenues less cost of revenues for the three and nine months ended September 30, 2016 compared to the same periods in 2015, and attributes the fluctuations to various sources:


	Three Months Ended September 30,				Nine Months Ended September 30,
			Percentage				Percentage
	Total		of Total		Total		of Total
	(in millions)				(in millions)

Market volume	$	(4.3)		(89.6%)	$	13.3		29.8%
Market share		(1.2)		(25.0%)		0.5		1.1%
Net capture		5.9		122.9%		11.5		25.7%
Connectivity		5.7		118.8%		21.3		47.7%
Average British pound/U.S. dollar exchange rate		(2.9)		(60.4%)		(5.0)		(11.2)%
Other		1.6		33.3%		3.1		6.9%
Revenues less cost of revenues	$	4.8		100.0%	$	44.7		100.0%

Transaction Fees Less Liquidity Payments and Routing and Clearing Costs

Transaction fees less liquidity payments and routing and clearing costs increased in the three months ended September 30, 2016 compared to the same period in 2015 primarily driven by an increase in U.S. Options net capture from $0.027 per contract for the three months ended September 30, 2015 to $0.059 per contract for the three months ended September 30, 2016. This was offset by a $1.9 million decrease due to the lower average exchange rate of the British pound to U.S. dollar, reflected in our European Equities segment, a $1.3 million decrease due to a 9.6% decrease in U.S. Equities market ADV and a $1.0 million decrease in our Global FX segment due to an 8.5% decrease in net capture.

Transaction fees less liquidity payments and routing and clearing costs increased in the nine months ended September 30, 2016 compared to the same period in 2015 primarily driven by an increase in U.S. Options net capture from $0.024 per contract in 2015 to $0.053 per contract in 2016 that resulted in a $10.0 million increase to transaction fees less liquidity payments and routing and clearing costs. Also contributing to the increase was a 7.2% increase in U.S. Equities market ADV that contributed $4.3 million and Global FX revenue of $5.0 million due to the Bats Hotspot Acquisition in first quarter 2015. Offsetting these increases was a $3.6 million decrease due to the decreased value of the British pound in 2016.

Market Data Fees

Market data fees increased in the three months ended September 30, 2016 compared to the same period in 2015 primarily due to pricing changes in U.S. Equities proprietary market data that were implemented in the first quarter of 2016 which contributed $1.9 million to this increase. This was offset by a decrease in industry market data fees from the U.S. tape plan, due to a slight decrease in U.S. Equities market share from 21.7% in the three months ended September 30, 2015 to 20.8% in the same period in 2016.

Market data fees increased in the nine months ended September 30, 2016 compared to the same period in 2015 due to pricing changes in proprietary market data that were implemented in the third quarter of 2015 and first quarter of 2016 which contributed $7.4 million, an audit recovery of $1.4 million received from the U.S. Tape Plan in the first quarter 2016 and increased U.S. Options market share from 9.9% in 2015 to 11.0% in 2016 contributing $0.7 million in the nine months ended September 30, 2016.

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Connectivity Fees

Connectivity fees and other revenues increased for the three and nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to U.S. Options and Global FX pricing changes to logical ports in the fourth quarter of 2015 and the third quarter of 2016, respectively, contributing $1.1 million and $1.2 million, respectively, to the three months ended September 30, 2016, and $2.9 million and $1.2 million to the nine months ended September 30, 2016, respectively.

Operating Expenses

Total operating expenses increased slightly in the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015. For the three months ended September 30, 2016, operating expenses increased 4.9%, primarily driven by increased professional fees related to the planned merger with CBOE Holdings and compensation and benefits due to an increased global headcount of 16.0% from December 31, 2015 to September 30, 2016. For the nine months ended September 30, 2016, operating expenses increased 1.4%, primarily driven by the Direct Edge acquisition synergies recognized in systems and data communication expenses offset by increased compensation and benefits expenses due to the Bats Hotspot acquisition in March 2015 and an increased global headcount of 16.0% from December 31, 2015 to September 30, 2016. The following summarizes changes in operating expenses for the three and nine months ended September 30, 2016, compared to the three and nine months ended September 30, 2015


	Three Months Ended September 30,					Increase/	Percent	Nine Months Ended September 30,						Increase/	Percent
	2016		2015			(Decrease)	Change	2016			2015			(Decrease)	Change
	(in millions, except percentages)								(in millions, except percentages)
Operating expenses:
Compensation and benefits	$	23.6	$	20.9	$	2.7	12.9%	$		68.7	$	58.4	$	10.3	17.6%
Depreciation and amortization		10.4		10.5		(0.1)	(1.0)%			31.2		28.5		2.7	9.5%
Systems and data communication		4.5		5.0		(0.5)	(10.0)%			13.5		21.4		(7.9)	(36.9)%
Occupancy		0.7		0.7		—	—			2.1		2.4		(0.3)	(12.5)%
Professional and contract services		5.4		1.8		3.6	200.0%			10.5		8.9		1.6	18.0%
Regulatory costs		2.8		2.9		(0.1)	(3.4)%			8.6		8.6		-	0.0%
Change in fair value of contingent consideration liability		0.5		1.7		(1.2)	(70.6)%			2.2		1.7		0.5	29.4%
General and administrative		5.3		5.6		(0.3)	(5.4)%			17.8		20.9		(3.1)	(14.8)%
Total operating expenses	$	53.2	$	49.1	$	4.1	8.4%	$		154.6	$	150.8	$	3.8	2.5%

Compensation and Benefits

Compensation and benefits increased for the three and nine months ended September 30, 2016 compared to the same periods in 2015 primarily driven by increased global headcount from 281 associates as of September 30, 2015 to 326 associates as of September 30, 2016, offset by the timing of quarterly milestone bonuses achieved in 2016 compared to 2015. The Bats Hotspot acquisition in March 2015 also contributed to the increase for the nine months ended September 30, 2016.

Depreciation and Amortization

Depreciation and amortization stayed flat for three months ended September 30, 2016. For the nine months ended September 30, 2016, depreciation and amortization increased primarily due to an increase in amortization recorded of

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$5.2 million for the intangible assets acquired with the Bats Hotspot Acquisition in March 2015, offset by a $1.6 million decrease in the European Equities segment due to the intangible assets amortized using the cash flow method.

Systems and Data Communication

Systems and data communication costs decreased for the three and nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to synergies achieved from the Direct Edge Acquisition as the Direct Edge legacy data center space was terminated in the second quarter of 2015.

Occupancy

Occupancy expenses remained flat for the three months ended September 30, 2016 compared to the same period in 2015 and decreased for the nine months ended September 30, 2016, compared to the same periods in 2015. The decrease for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily driven by the termination of the lease of the Direct Edge office space in the second quarter of 2015.

Professional and Contract Services

Professional and contract services fees increased for the three months ended September 30, 2016 compared to the same period in 2015 primarily due to $3.4 million of professional fees incurred in 2016 related to the planned merger with CBOE Holdings. For the nine months ended September 30, 2016, professional and contracted services fees increased due to $3.4 million of professional fees incurred in 2016 for the planned merger with CBOE Holdings and $3.0 million in IPO costs.

General and Administrative

General and administrative expenses decreased for the three months ended September 30, 2016 driven by synergies from the Direct Edge acquisition. General and administrative expenses decreased compared to the same period in 2015 primarily due to a $6.0 million accelerated expense of legacy Direct Edge servers that were no longer being used after the Direct Edge technology integration in January 2015, offset by a $1.5 million VAT recovery recorded in 2015 and $0.6 million of additional services that occurred in 2016 in preparation of our being a public company.

Operating Income

As a result of the items above, operating income for the three and nine months ended September 30, 2016 was $55.6 million and $175.9 million, respectively, compared to $54.9 million and $135.0 million for the three and nine months ended September 30, 2015, an increase of $0.7 million, or 1.3%, for the three months ended September 30, 2016, and $40.9 million, or 30.3%, for the nine months ended September 30, 2016.

Interest Expense, Net

Interest expense, net decreased in the three months ended September 30, 2016 primarily due to a debt refinancing on June 30, 2016. The decrease for the nine months ended September 30, 2016 compared to the same period in 2015 was also driven by a debt refinancing in 2016 and offset by the additional debt issued in March 2015 to finance the Bats Hotspot Acquisition.

Loss on extinguishment of debt

With the refinancing of our debt in second quarter 2016, we recorded a $17.6 million loss on extinguishment of debt.

Other Income

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Other income decreased for the nine months ended September 30, 2016 against the prior year due to the foreign currency gain on the revolving credit facility extinguished in March 2015.

Income Before Income Tax Provision

As a result of the above, income before income tax provision for the three and nine months ended September 30, 2016 was $48.5 million and $129.8 million respectively, compared to $42.5 million and $103.4 million for the three and nine months ended September 30, 2015, respectively, an increase of $6.0 million and $26.4 million, respectively.

Income Tax Provision

For the three and nine months ended September 30, 2016, income tax provision was $20.0 million and $53.3 million respectively, compared with $17.2 million and $42.9 million for the three and nine months ended September 30, 2015 respectively. The effective tax rate for the three and nine months ended September 30, 2016 was 41.2% and 41.1%, respectively, compared to 40.5% and 41.5% for the three and nine months ended September 30, 2015, respectively. The increase in the three months ended September 30, 2016 against the comparable period in the prior year was due to higher non-deductible expenses and tax reserves partially offset by a lower state tax rate. The decrease in the nine months ended September 30, 2016 was due to a lower state tax rate.

We are investigating a potential change in our foreign holding company structure. Should this change happen, our future effective tax rate could be impacted and we could incur a material expenditure as a result.

Net Income

As a result of the items above, net income for the three and nine months ended September 30, 2016 was $28.5 million and $76.5 million, respectively, compared to $25.3 million and $60.5 million for the three and nine months ended September 30, 2015, respectively, an increase of $3.2 million and $16.0 million, respectively.

Segment Operating Results

The following summarizes our total revenues by segment:


						Percentage of Total Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,
	2016		2015		Change	2016	2015

U.S. Equities	$	340.4	$	377.6	(9.9)%	77.1%	76.7%
European Equities		24.0		30.0	(20.0)%	5.4%	6.1%
U.S. Options		66.8		74.3	(10.1)%	15.1%	15.1%
Global FX		10.4		10.1	3.0%	2.4%	2.1%
Total revenues	$	441.6	$	492.0	(10.2)%	100.0%	100.0%

						Percentage of Total Revenues
	Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015

U.S. Equities	$	1,105.4	$	1,034.6	6.8%	77.9%	77.5%
European Equities		82.5		90.1	(8.4)%	5.8%	6.7%
U.S. Options		200.7		187.3	7.2%	14.1%	14.0%
Global FX		29.8		23.2	28.4%	2.2%	1.8%
Total revenues	$	1,418.4	$	1,335.2	6.2%	100.0%	100.0%

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The following summarizes our total revenues less cost of revenues by segment:


						Percentage of Revenues Less Cost of Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,
	2016		2015		Change	2016	2015

U.S. Equities	$	71.1	$	69.3	2.6%	65.3%	66.7%
European Equities		15.9		17.1	(7.0)%	14.6%	16.4%
U.S. Options		11.4		7.5	52.0%	10.5%	7.2%
Global FX		10.4		10.1	3.0%	9.6%	9.7%
Total revenues less cost of revenues	$	108.8	$	104.0	4.6%	100.0%	100.0%

						Percentage of Revenues Less Cost of Revenues
	Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015

U.S. Equities	$	216.2	$	193.8	11.6%	65.4%	67.8%
European Equities		52.4		50.9	2.9%	15.9%	17.8%
U.S. Options		32.1		17.9	79.3%	9.7%	6.3%
Global FX		29.8		23.2	28.4%	9.0%	8.1%
Total revenues less cost of revenues	$	330.5	$	285.8	15.6%	100.0%	100.0%

U.S. Equities

The following summarizes revenues, cost of revenues, operating expenses and operating income for our U.S. Equities segment:


						Percentage of Total Revenues							Percentage of Total Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,		Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015	2016		2015		Change	2016	2015
	(in millions, except percentages, trading days and as noted below)
Revenues:
Transaction fees	$	219.4	$	258.3	(15.1)%	49.7%	52.5%	$	737.3	$	699.5	5.4%	52.0%	52.4%
Regulatory transaction fees		70.0		71.4	(2.0)%	15.9%	14.5%		217.3		202.4	7.4%	15.3%	15.2%
Market data fees		31.7		30.6	3.6%	7.2%	6.2%		95.4		86.7	10.0%	6.7%	6.5%
Connectivity fees and other		19.3		17.3	11.6%	4.3%	3.5%		55.4		46.0	20.4%	3.9%	3.4%
Total revenues		340.4		377.6	(9.9)%	77.1%	76.7%		1,105.4		1,034.6	6.8%	77.9%	77.5%
Cost of revenues:
Liquidity payments		190.1		225.3	(15.6)%	43.0%	45.8%		642.0		605.0	6.1%	45.3%	45.3%
Section 31 fees		70.0		71.4	(2.0)%	15.9%	14.5%		217.3		202.4	7.4%	15.3%	15.2%
Routing and clearing		9.2		11.6	(20.7)%	2.1%	2.4%		29.9		33.4	(10.5)%	2.1%	2.5%
Total cost of revenues		269.3		308.3	(12.7)%	61.0%	62.7%		889.2		840.8	5.8%	62.7%	63.0%
Revenues less cost of revenues		71.1		69.3	2.6%	16.1%	14.0%		216.2		193.8	11.6%	15.2%	14.5%
Operating expenses		23.9		25.5	(6.3)%	5.4%	5.2%		70.4		86.9	(19.0)%	5.0%	6.5%
Operating income	$	47.2	$	43.8	7.8%	10.7%	8.8%	$	145.8	$	106.9	36.4%	10.2%	8.0%

EBITDA (1)	$	51.5	$	48.4	6.4%	11.7%	9.8%	$	158.6	$	120.8	31.3%	11.2%	9.0%
EBITDA margin (2)		72.4%		69.8%	*	*	*		73.4%		62.3%	*	*	*
Normalized EBITDA (1)	$	51.5	$	47.6	8.2%	11.7%	9.7%	$	158.8	$	121.0	31.2%	11.2%	9.1%
Normalized EBITDA margin (3)		72.4%		68.7%	*	*	*		73.5%		62.4%	*	*	*
ADV (in billions):
Matched shares		1.4		1.6	(12.5)%	*	*		1.6		1.5	6.7%	*	*
Routed shares		0.1		0.1	—	*	*		—		—	—	*	*
Total touched shares		1.5		1.7	(11.8)%	*	*		1.6		1.5	6.7%	*	*
Market ADV		6.6		7.3	(9.6)%	*	*		7.4		6.9	7.2%	*	*
Trading days		64		64	—	*	*		189		188	0.5%	*	*
Bats ETPs (in billions of shares)		20.5		27.8	(26.3)%	*	*		76		68	11.8%	*	*
Bats ETPs: launches (number of launches)		11		—	*	*	*		47		7	571.4%	*	*
Bats ETPs: listings (number of listings)		103		33	212.1%	*	*		103		33	212.1%	*	*
Market share		20.8%		21.7%	*	*	*		20.8%		21.1%	*	*	*
ETPs: launches market share		16.4%		—	*	*	*		24.6%		3.3%	*	*	*
Net capture	$	0.022	$	0.020	10.0%	*	*	$	0.021	$	0.021	—	*	*

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* Not meaningful

(1)See footnote (1) to the table under “Financial Summary” above for a reconciliation of net income to EBITDA and Normalized EBITDA, and management’s reasons for using such non-GAAP measures.

(2)EBITDA margin represents EBITDA divided by revenues less cost of revenues.

(3)Normalized EBITDA margin represents Normalized EBITDA divided by revenues less cost of revenues.

For the three and nine months ended September 30, 2016, U.S. Equities operating income increased $3.4 million and $38.8 million, to $47.2 million and $145.8 million, respectively, compared to the same periods in 2015. The increase in revenues less cost of revenues was driven by a pricing change in proprietary market data in first quarter 2016 and incremental revenue from the ETF.com acquisition in April 2016. For both the three and nine months ended September 30, 2016, the decrease in operating expenses compared to the same periods in 2015 was driven by synergies from the Direct Edge acquisition and an expense acceleration in the first quarter of 2015 of $6.0 million for the retirement of legacy Direct Edge leased servers.

European Equities

The following summarizes revenues, cost of revenues, operating expenses and operating income for our European Equities segment:


						Percentage of Total Revenues								Percentage of Total Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,		Nine Months Ended September 30,				Percent
	2016		2015		Change	2016	2015	2016		2015		Change	2016		2015
	(in millions, except percentages, trading days and as noted below)
Revenues:
Transaction fees	$	18.6	$	24.9	(25.3)%	4.2%	5.1%	$	65.0	$	75.1	(13.4)%		4.6%		5.6%
Market data fees		2.4		2.4	—	0.5%	0.5%		7.7		7.0	10.0%		0.5%		0.5%
Connectivity fees and other		3.0		2.7	11.1%	0.7%	0.5%		9.8		8.0	22.5%		0.7%		0.6%
Total revenues		24.0		30.0	(20.0)%	5.4%	6.1%		82.5		90.1	(8.4)%		5.8%		6.7%
Cost of revenues:
Liquidity payments		8.1		12.9	(37.2)%	1.8%	2.6%		30.1		39.2	(23.2)%		2.1%		2.9%
Total cost of revenues		8.1		12.9	(37.2)%	1.8%	2.6%		30.1		39.2	(23.2)%		2.1%		2.9%
Revenues less cost of revenues		15.9		17.1	(7.0%)	3.6%	3.5%		52.4		50.9	2.9%		3.7%		3.8%
Operating expenses		8.5		8.1	4.9%	1.9%	1.6%		26.5		25.1	5.6%		1.9%		1.9%
Operating income	$	7.4	$	9.0	(17.8%)	1.7%	1.9%	$	25.9	$	25.8	—		1.8%		1.9%

EBITDA (1)	$	9.2	$	11.6	(20.7)%	2.1%	2.4%	$	31.9	$	33.0	(3.3)%		2.2%		2.5%
EBITDA margin (2)		57.9%		67.8%	*	*	*		60.9%		64.8%	*		*		*
Normalized EBITDA (1)	$	9.2	$	11.6	(20.7)%	2.1%	2.4%	$	31.9	$	33.0	(3.3)%		2.2%		2.5%
Normalized EBITDA margin (3)		57.9%		67.8%	*	*	*		60.9%		64.8%	*		*		*
ADNV (in billions):
Matched and touched ADNV	€	9.2	€	12.1	(24.0)%	*	*	€	10.8	€	12.7	(15.0)%		*		*
Market ADNV	€	39.8	€	49.7	(19.9)%	*	*	€	46.6	€	52.4	(11.1)%		*		*
Trading days		66		66	—	*	*		193		192	0.5%		*		*
Market share		23.0%		24.4%	*	*	*		23.2%		24.2%	*		*		*
Net capture per matched notional value (in basis points)		0.156		0.134	16.4%	*	*		0.15		0.132	13.6%		*		*
Average British pound/U.S. dollar exchange rate	$	1.313	$	1.532	(14.3)%	*	*	$	1.393	$	1.532	(9.1)%		*		*
Average Euro/British pound exchange rate	£	0.848	£	0.717	18.3%	*	*	£	0.800	£	0.727	10.0%		*		*

* Not meaningful

(1)See footnote (1) to the table under “Financial Summary” above for a reconciliation of net income to EBITDA and Normalized EBITDA, and management’s reasons for using such non-GAAP measures.

(2)EBITDA margin represents EBITDA divided by revenues less cost of revenues.

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(3)Normalized EBITDA margin represents Normalized EBITDA divided by revenues less cost of revenues.

For the three and nine months ended September 30, 2016, the European Equities segment’s operating income decreased $1.6 million and increased $0.1 million, respectively, compared to the three and nine months ended September 30, 2015. For the three months ended September 30, 2016 compared to the same period in 2015, revenues less cost of revenues decreased $1.2 million due to a $2.9 million decrease from the decline in the average exchange rate of the British pound to the U.S. dollar, offset by a 16.4% increase in net capture driven by pricing changes implemented in January 2016. Operating expenses increased $0.4 million, driven by a decrease of $1.5 million primarily as a result of the decreased average exchange rate of the British pound to the U.S. dollar, offset by the $1.5 million VAT recovery recorded in the three months ended September 30, 2015. For the nine months ended September 30, 2016, revenues less cost of revenues increased $1.5 million primarily due to a 13.6% increase in net capture driven by the pricing changes implemented in January 2016, offset by a $5.2 million decrease from the decline in the value of the British pound. Operating expenses increased by $1.4 million due to increased compensation and benefit costs and a $1.5 million VAT recovery recorded in the nine months ended September 30, 2015. This was offset by a decline in the average exchange rate of the British pound to the U.S. dollar.

U.S. Options

The following summarizes revenues, cost of revenues, operating expenses and operating income for our U.S. Options segment:


						Percentage of Total Revenues							Percentage of Total Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,		Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015	2016		2015		Change	2016	2015
	(in millions, except percentages, trading days and as noted below)
Revenues:
Transaction fees	$	60.0	$	68.5	(12.4)%	13.6%	13.9%	$	180.6	$	172.3	4.8%	12.7%	12.9%
Regulatory transaction fees		1.8		1.8	—	0.4%	0.4%		5.5		4.6	19.6%	0.4%	0.3%
Market data fees		2.2		2.2	—	0.5%	0.4%		6.8		5.7	19.3%	0.5%	0.4%
Connectivity fees and other		2.8		1.8	55.6%	0.6%	0.4%		7.8		4.7	66.0%	0.5%	0.4%
Total revenues		66.8		74.3	(10.1)%	15.1%	15.1%		200.7		187.3	7.2%	14.1%	14.0%
Cost of revenues:
Liquidity payments		52.6		64.0	(17.8)%	11.9%	13.0%		160.4		161.6	(0.7)%	11.3%	12.1%
Section 31 fees		1.8		1.8	—	0.4%	0.4%		5.5		4.6	19.6%	0.4%	0.3%
Routing and clearing		1.0		1.0	—	0.2%	0.2%		2.7		3.2	(15.6)%	0.2%	0.3%
Total cost of revenues		55.4		66.8	(17.1)%	12.5%	13.6%		168.6		169.4	(0.5)%	11.9%	12.7%
Revenues less cost of revenues		11.4		7.5	52.0%	2.6%	1.5%		32.1		17.9	79.3%	2.2%	1.3%
Operating expenses		5.9		3.8	55.3%	1.3%	0.8%		17.1		10.7	59.8%	1.2%	0.8%
Operating income	$	5.5	$	3.7	48.6%	1.3%	0.7%	$	15.0	$	7.2	108.3%	1.0%	0.5%

EBITDA (1)	$	6.0	$	4.2	42.9%	1.4%	0.9%	$	16.5	$	8.6	91.9%	1.2%	0.6%
EBITDA margin (2)		52.6%		56.0%	*	*	*		51.4%		48.0%	*	*	*
Normalized EBITDA (1)	$	6.0	$	4.2	42.9%	1.4%	0.9%	$	16.5	$	8.6	91.9%	1.2%	0.6%
Normalized EBITDA margin (3)		52.6%		56.0%	*	*	*		51.4%		48.0%	*	*	*
ADV (in millions):
Matched contracts		1.7		1.9	(10.5%)	*	*		1.7		1.6	6.2%	*	*
Routed contracts		—		—	*	*	*		—		—	*	*	*
Total touched contracts		1.7		1.9	(10.5%)	*	*		1.7		1.6	6.2%	*	*
Market ADV		15.1		17.8	(15.2%)	*	*		15.8		16.3	(3.1%)	*	*
Trading days		64		64	—	*	*		189		188	0.5%	*	*
Market share		11.0%		10.9%	*	*	*		11.0%		9.9%	*	*	*
Net capture per touched contract	$	0.059	$	0.027	118.5%	*	*	$	0.053	$	0.024	120.8%	*	*

* Not meaningful

(1)See footnote (1) to the table under “Financial Summary” above for a reconciliation of net income to EBITDA and Normalized EBITDA, and management’s reasons for using such non-GAAP measures.

(2)EBITDA margin represents EBITDA divided by revenues less cost of revenues.

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(3)Normalized EBITDA margin represents Normalized EBITDA divided by revenues less cost of revenues.

For the three and nine months ended September 30, 2016, the U.S. Options segment’s operating income increased $1.8 million and $7.8 million to $5.5 million and $15.0 million, respectively, compared to the three and nine months ended September 30, 2015. Revenues less cost of revenues increased $3.9 million and $14.2 million for the three and nine months ended September 30, 2016, respectively, compared to the three and nine months ended September 30, 2015, primarily driven by increased net capture from $0.027 and $0.024 per contract for the three and nine months ended September 30, 2015, respectively, to $0.059 and $0.053 per contract for the three and nine months ended September 30, 2016, respectively. Operating expenses increased $2.1 million and $6.4 million for the three and nine months ended September 30, 2016, respectively, primarily driven by increases in compensation and benefit expense due to the launch of our second Options book (EDGX Options) in November 2015.

Global FX

The following summarizes revenues, cost of revenues, operating expenses and operating income for our Global FX segment:


						Percentage of Total Revenues							Percentage of Total Revenues
	Three Months Ended September 30,				Percent	Three Months Ended September 30,		Nine Months Ended September 30,				Percent	Nine Months Ended September 30,
	2016		2015		Change	2016	2015	2016		2015		Change	2016	2015
	(in millions, except percentages and as noted below)
Revenues:
Transaction fees	$	9.1	$	10.1	(9.9)%	2.1%	2.1%	$	28.2	$	23.2	21.6%	2.0%	1.7%
Market data fees		0.1		—	*	—	—		0.2		—	*	—	—
Connectivity fees and other		1.2		—	*	0.3%	—		1.4		—	*	0.1%	—
Total revenues		10.4		10.1	3.0%	2.4%	2.1%		29.8		23.2	28.4%	2.1%	1.7%
Cost of revenues:
Total cost of revenues		—		—	*	—	—		—		—	*	—	—
Revenues less cost of revenues		10.4		10.1	3.0%	2.4%	2.1%		29.8		23.2	28.4%	2.1%	1.7%
Operating expenses		10.7		11.1	(3.6)%	2.5%	2.3%		33.1		27.2	21.7%	2.3%	2.0%
Operating (loss) income	$	(0.3)	$	(1.0)	70.0%	(0.1%)	(0.2%)	$	(3.3)	$	(4.0)	17.5%	(0.2)%	(0.3)%

EBITDA (1)		3.8		2.4	58.3%	0.9%	0.5%		9.1		3.5	160.0%	0.6%	0.3%
EBITDA margin (2)		36.5%		23.8%	*	*	*		30.5%		15.1%	*	*	*
Normalized EBITDA (1)		4.4		4.1	7.3%	1.0%	0.8%		11.4		9.9	15.2%	0.8%	0.7%
Normalized EBITDA margin (3)		42.3%		40.6%	*	*	*		38.3%		42.7%	*	*	*
ADNV (in billions)	$	25.7	$	25.9	(0.8)%	*	*	$	27.0	$	26.9	0.4%	*	*
Net capture per one million dollars traded	$	2.70	$	2.95	(8.5)%	*	*	$	2.68	$	3.00	(10.7)%	*	*
Trading days		66		66	—	*	*		195		144	35.4%	*	*

* Not meaningful

(1)See footnote (1) to the table under “Financial Summary” above for a reconciliation of net income to EBITDA and Normalized EBITDA, and management’s reasons for using such non-GAAP measures.

(2)EBITDA margin represents EBITDA divided by revenues less cost of revenues.

(3)Normalized EBITDA margin represents Normalized EBITDA divided by revenues less cost of revenues.

For the three months ended September 30, 2016 compared to the same period in 2015, the operating loss decreased $0.7 million, primarily driven by the decrease in the change of contingent consideration. For the nine months ended September 30, 2016 compared to the same period in 2015, the operating loss also decreased $0.7 million as a 10.7% decrease in net capture was offset by additional revenues due to the Bats Hotspot Acquisition in March 2015.

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Seasonality

In the securities and FX industries, quarterly revenue fluctuations are common and are due primarily to seasonal variations in trading volumes, as well as competition and technological and regulatory changes. Our business experiences seasonal fluctuations, reflecting reduced trading activity generally during the third quarter of each year and during the last month of the year. As a result, our operating results for the third or fourth quarter of any year may not be indicative of the results we expect for the full year.

Liquidity and Capital Resources

Historically, we have financed our operations, capital expenditures, dividend payments and other cash needs through cash generated from operations, augmented by private placements of our common stock and issuance of debt.

In the near term, we expect that our operations and availability under our revolving credit facility will meet our cash needs to fund our operations, capital expenditures, debt repayments and any dividends. See Note 8 “Debt” of the condensed consolidated financial statements for further information. Our long-term cash needs will depend on many factors including an introduction of new products, enhancements of current products, the geographic mix of our business and any potential acquisitions. We believe our operations and the availability under our revolving credit facility will meet any long-term needs unless an acquisition is identified.

Cash and cash equivalents include cash in banks and all non-restricted, highly liquid investments with original maturities of three months or less at the time of purchase. Cash and cash equivalents as of September 30, 2016 decreased $6.0 million from December 31, 2015 primarily due to the net payments of long-term debt of $89.1 million offset by net income of $76.5 million and changes in various other balance sheet accounts. See “—Cash Flow” below for further discussion.

Our cash and cash equivalents held outside of the United States in various foreign subsidiaries totaled $41.7 million as of September 30, 2016 and $32.8 million as of December 31, 2015. The remaining balance was held in the United States and totaled $27.4 million as of September 30, 2016 and $42.3 million as of December 31, 2015. The majority of cash held outside the United States is available for repatriation, but under current law, could subject us to additional United States income taxes, less applicable foreign tax credits. In connection with the acquisition of ETF.com on April 1, 2016, we have $1.8 million of restricted cash held to be paid to the sellers of ETF.com within 18 months after acquisition date upon release of seller indemnifications per the terms of the acquisition agreement.

Our financial investments include investments with original or acquired maturities longer than three months but that mature in less than one year from the statement of financial condition date and are recorded at fair value. As of September 30, 2016 and December 31, 2015, financial investments primarily consisted of U.S. Treasury securities.

Cash Flow

The following table summarizes our cash flow data for the nine months ended September 30, 2016:


	Nine Months Ended September 30,
	2016		2015

Net cash provided by operating activities	$	72.6	$	8.1
Net cash used in investing activities		26.0		(297.8)
Net cash (used in) provided by financing activities		(113.8)		249.4
Effect of foreign currency exchange rate changes on cash and cash equivalents		9.2		(4.0)
	$	(6.0)	$	(44.3)

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Net Cash Flows Provided by Operating Activities

During the nine months ended September 30, 2016, net cash provided by operating activities was $4.9 million less than net income. The primary adjustment was the decrease of the Section 31 fees payable of $67.9 million, as the fees were paid to the SEC in September, offset by depreciation and amortization of $31.2 million, the loss on extinguishment of debt of $17.6 million and changes in other various balance sheet accounts.

During the nine months ended September 30, 2015, net cash provided by operating activities was $52.4 million less than net income. The primary adjustments were a decrease in Section 31 fees payable of $83.5 million, offset by a non-cash adjustment for depreciation and amortization of $28.5 million.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash flows provided by (used in) investing activities for the nine months ended September 30, 2016 and 2015 were $26.0 million and $(297.8) million, respectively, and reflected changes in net purchases and redemptions of available-for-sale securities of $47.2 million in 2016 and $61.4 million in 2015. In 2016, we acquired ETF.com for $12.6 million and in 2015 we acquired Bats Hotspot for $360.9 million, net of cash acquired. Purchases of property and equipment were $6.8 million and $12.3 million for the nine months ended September 30, 2016 and 2015, respectively.

We expect to spend $10.0 million to $15.0 million in capital expenditures in 2016 primarily for the general maintenance and ongoing enhancement of our data and telecommunications infrastructure and disaster recovery sites.

Net Cash Flows (Used in) Provided by Financing Activities

In connection with the debt refinancing in June 2016, for the nine months ended September 30, 2016, (see discussion under “—Liquidity and Capital Resources—Contractual Obligations” below), we received proceeds from long-term debt of $646.7 million while making principal payments on long-term debt of $735.8 million. We also paid $11.0 million in debt issuance costs and $7.7 million in distributions.

For the nine months ended September 30, 2015, in connection with the Bats Hotspot Acquisition, $373.8 million of long term debt was issued. We made $102.4 million in principal payments on long term debt, $16.5 million in payments of debt issuance cost and $4.8 million in distributions.

Financial Assets

The following summarizes our financial assets as of September 30, 2016 and December 31, 2015 (in millions):


	September 30,		December 31,
	2016		2015

Cash and cash equivalents	$	69.1	$	75.1
Financial investments		0.5		47.7
Adjusted cash (1)		69.6		54.9

(1)

Adjusted cash represents cash and cash equivalents plus financial investments minus cash collected for Section 31 fees. We have presented Adjusted cash because we consider it an important supplemental measure of our liquidity and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies.

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Debt

The following summarizes our debt obligations as of September 30, 2016 and December 31, 2015 (in millions):


	September 30,		December 31,
	2016		2015

Term loans outstanding	$	599.3	$	677.6
Revolving credit facility		—		—
Current portion of long-term debt		(4.1)		(83.9)
Long-term debt	$	595.2	$	593.7

As of September 30, 2016 and December 31, 2015, we were in compliance with the covenants of our debt agreement.

In addition to the debt outstanding, as of September 30, 2016, we had an additional $100.0 million available through our revolving credit facility. Together with Adjusted cash, we had $169.6 million available to fund our operations, capital expenditures, potential acquisitions, debt repayments and any dividends as of September 30, 2016.

Contractual Obligations

As of September 30, 2016, our contractual obligations included real property leases, operating leases, data and telecommunications agreements, equipment leases and our long-term debt outstanding.

In June 2016, the Company refinanced its Amended 2014 Loan with a new seven-year $650 million term loan (the 2016 Term Facility). The 2016 Term Facility decreased the spread on the interest rate to, subject to compliance with a leverage ratio pricing grid, LIBOR plus 350 basis points, and includes 50 basis points of original issue discount. Under the 2016 Term Facility, the required annual amortization also decreased to 1.0% per annum, calculated on the basis of the outstanding principal amount of the 2016 Term Facility. In addition, the Company entered into a new three-year $100 million revolving credit facility with an interest rate based on, subject to compliance with a leverage ratio grid, LIBOR plus 275, which includes an undrawn fee, subject to compliance with a leverage ratio grid, of 37.5 basis points, replacing the revolving credit facility under the Amended 2014 Loan.

Upon closing of the transaction with CBOE Holdings, the 2016 Term Facility will be repaid.

If the Merger Agreement is terminated under certain specified circumstances, Bats may be required to pay CBOE Holdings a termination fee of $110 million or reimburse CBOE Holdings’ expenses up to $10 million.

There were no other material changes outside the ordinary course of our business with respect to our contractual obligations during the nine months ended September 30, 2016 from those disclosed in our final prospectus filed with the SEC pursuant to Rule 424(b) on April 15, 2016.

Off Balance Sheet Arrangements

As of September 30, 2016 and December 31, 2015, we did not have any off-balance sheet arrangements.

Critical Accounting Policies

In the third quarter of 2016, there were no changes to our critical accounting policies and estimates from those disclosed in the consolidated financial statements and accompanying notes contained in our final prospectus filed on April 15, 2016.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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As a result of our operating activities, we are exposed to market risks such as foreign currency exchange rate risk, equity risk and credit risk. We have implemented policies and procedures to measure, manage and monitor and report risk exposures, which are reviewed regularly by management and our board of directors.

Foreign Currency Exchange Rate Risk

With operations in Europe and Asia, we are subject to currency translation risk as revenues and expenses are denominated in foreign currencies, primarily the British pound, Singapore dollar and the Euro. We also have de minimis exposure to other foreign currencies, including the Swiss Franc, Norwegian Kroner, Swedish Krona and Danish Kroner.

For the three and nine months ended September 30, 2016, our exposure to foreign-denominated revenues and expenses is presented by primary foreign currency in the following table:


	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Euro(1)		British Pound (1)		Euro(1)		British Pound (1)
Foreign denominated % of:
Revenues		2.3%		2.4%		2.5%		2.4%
Cost of revenues		1.6%		0.2%		1.9%		0.5%
Operating expenses		0.9%		—		0.7%		—
Impact of 10% adverse currency fluctuation on:
Revenues	$	1.0	$	0.5	$	3.6	$	3.4
Cost of revenues		0.5		—		2.0		0.6
Operating expenses		0.1		—		0.1		—

(1)An average foreign exchange rate to the U.S. dollar for the period was used.

Equity Risk

Our investment in European operations is exposed to volatility in currency exchange rates through translation of our net assets or equity to U.S. dollars. The assets and liabilities of our European business are denominated in British pounds. Fluctuations in currency exchange rates may create volatility in our reported results as we are required to translate foreign currency reported statements of financial condition and income into U.S. dollars for consolidated reporting. The translation of these non-U.S. dollar statements of financial condition into U.S. dollars for consolidated reporting results in a cumulative translation adjustment, which is recorded in accumulated other comprehensive loss (income) within stockholders' equity on our consolidated statements of financial condition. Our primary exposure to this equity risk as of September 30, 2016 is presented by foreign currency in the following table:


	British Pound (1)
	(in millions)
Net equity investment in Bats Europe	$	237.2
Impact on consolidated equity of a 10% adverse currency fluctuation	$	23.7

(1)Converted to U.S. dollars using the foreign exchange rate of British pounds into U.S. dollars as of September 30,
2016.

Credit Risk

We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by rigorously selecting the counterparties with which we make investments and execute

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agreements. While we provide markets for trading listed cash equity securities in the United States and Europe and listed equity options in the United States, we do not trade securities for our own account. We invest available cash in highly liquid, short-term investments, such as U.S. Treasury securities. Our investment policy is to preserve capital and liquidity. We do not believe there is significant risk associated with these short-term investments.

We do not have counterparty credit risk with respect to trades matched on BZX, BYX, EDGX, EDGA and Bats Europe. With respect to listed cash equities, we deliver matched trades of our customers to NSCC without taking on counterparty risk for those trades. NSCC acts as a central counterparty on all transactions occurring on BZX, BYX, EDGX and EDGA and, as such, guarantees clearance and settlement of all of our matched equity trades. Similarly, with respect to U.S. listed equity options, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on BZX and EDGX and, as such, guarantees clearance and settlement of all of our matched options trades.

In addition, with respect to orders Bats Trading routes to other markets for execution on behalf of our customers, Bats Trading is exposed to some counterparty credit risk in the case of failure to perform on the part of our clearing firms, Morgan Stanley or Wedbush Securities. Morgan Stanley and Wedbush Securities guarantee trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, Bats Trading is potentially exposed to credit risk to the counterparty to a trade routed to another market center between the trade date and one day after the trade date in the event that Morgan Stanley or Wedbush Securities fails. We believe that any potential requirement for us to make payments under these guarantees is remote and accordingly, have not recorded any liability in the consolidated financial statements for these guarantees.

Similarly, with respect to orders in U.S. listed equity options, we route orders for execution to other national securities exchanges through either Bats Trading or through affiliates of Bank of America Merrill Lynch and Wedbush Securities, as discussed above. For orders in U.S. listed equity options routed through Bank of America Merrill Lynch, or Wedbush Securities and executed on another national securities exchange, Bats Trading has counterparty credit risk exposure to Bank of America Merrill Lynch or Wedbush Securities until a trade settles (generally one day after the trade date). For orders in U.S. listed equity options routed directly by Bats Trading to, and executed on, another national securities exchange, Bats Trading also has counterparty credit exposure to Bank of America Merrill Lynch, which acts as Bats Trading's options clearing firm on such transactions. We believe that any potential requirement for us to make payments under these guarantees is remote. Accordingly, we have not recorded any liability in our consolidated financial statements for these guarantees.

Historically, we have not incurred any liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions.

We do not have counterparty credit risk with respect to institutional spot FX trades occurring on the Bats Hotspot Platform because Bats Hotspot is not a counterparty to any FX transactions. All transactions occurring on the Bats Hotspot Platform occur bilaterally between two banks or prime brokers as counterparties to the trade. While Bats Hotspot does not have direct counterparty risk, Bats Hotspot may suffer a decrease in transaction volume if a bank or prime broker experiences an event that causes other prime brokers to decrease or revoke the credit available to the prime broker experiencing the event. Therefore, Bats Hotspot may have risk that is related to the credit of the banks and prime brokers that trade FX on the Bats Hotspot Platform.

We also have credit risk related to transaction fees that are billed in arrears to customers on a monthly basis. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our consolidated statements of financial condition. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets.

On a regular basis, we review and evaluate changes in the status of our counterparties’ creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations. Any such effects to date have been minimal.

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Item 4. Controls and Procedures

(a) Disclosure controls and procedures. Bats Global Markets, Inc.’s management, with the participation of Bats Global Markets, Inc.’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of Bats Global Markets, Inc.’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, Bats Global Markets, Inc.’s Chief Executive Officer and Chief Financial Officer, have concluded that, as of the end of such period, Bats Global Markets, Inc.’s disclosure controls and procedures are effective.

(b) Internal controls over financial reporting. There have been no changes in Bats Global Markets, Inc.’s internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, Bats Global Markets, Inc.’s internal controls over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For the three and nine months ended September 30, 2016, Bats Global Markets, Inc. incorporates herein by reference the discussion set forth in Note 18 (“Commitments, Contingencies and Guarantees—Legal Proceedings”) of the condensed consolidated financial statements included herein, and no other matters were reportable during the period. In addition to the matters incorporated herein by reference, Bats Global Markets, Inc. is from time to time involved in various legal proceedings that arise in the ordinary course of its business. Bats Global Markets, Inc. does not believe, based on currently available information, that the results of any of these various proceedings will have a material adverse effect on its consolidated financial statements as a whole.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors detailed below. These risks could materially and adversely affect our business, financial condition and results of operations. The risks and uncertainties in our final prospectus filed on April 15, 2016, in our Form 10-Q filed on August 4, 2016, and those detailed below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Relating to the Planned Merger

Failure to complete the planned merger within the expected timeframe or at all could have a material adverse impact on our business, financial condition and results of operations.

There can be no assurance that the planned merger will occur. The closing of the merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of our common stock entitled to vote thereon, (ii) approval of the issuance of shares of CBOE Holdings’ common stock in the Merger by the holders of at least a majority of the shares of CBOE Holdings’ common stock entitled to vote thereon and present in person or represented by proxy at the CBOE Holdings stockholder meeting called for such purpose, (iii) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and regulatory approval by the SEC, the Financial Industry Regulatory Authority and the U.K. Financial Conduct Authority, (iv) no court order or other legal restraint or prohibition preventing the consummation of the planned merger transactions or imposing a “burdensome effect” (as defined in the Merger Agreement) upon the consummation thereof, (v) the absence of any pending action commenced by a governmental or regulatory body wherein a judgment would reasonably be expected to prevent the consummation of the planned merger transactions or impose a burdensome effect upon the consummation thereof, (vi) receipt of tax opinions from counsel to each of us and CBOE Holdings with respect to the treatment of the planned merger transactions from a tax perspective, (vii) in the case of CBOE Holdings’ obligation to effect the merger, no exercise of appraisal rights by our stockholders holding more than 20% of the outstanding shares of our common stock, (viii) in the case of each party’s obligation to effect the planned merger, the absence of a material adverse effect with respect to the other party since the date of the Merger Agreement, and (ix) subject to materiality exceptions, the accuracy of the representations and warranties made by CBOE Holdings, CBOE Corporation and CBOE V, LLC, on the one hand, and us on the other hand, and compliance by us and CBOE Holdings, CBOE Corporation and CBOE V, LLC in all material respects with each party’s respective obligations under the Merger Agreement. There can be no assurance that the conditions to the closing of the planned merger will be satisfied in a timely matter or at all.

In particular, before the proposed transactions contemplated by the Merger Agreement, including the planned merger, may be completed, various clearances and approvals must be obtained from certain regulatory and governmental authorities. These regulatory and governmental entities may impose conditions on the granting of such approvals. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the planned merger or of imposing additional costs or limitations on the combined company following the planned merger. The regulatory approvals may not be received at all, may not be received in a timely fashion and may contain conditions on the completion of the planned merger. However, if any such conditions impose a “burdensome effect” as defined in the Merger Agreement, the parties may not be obligated to complete the planned merger, and either we or CBOE Holdings may have the right to terminate the Merger Agreement. In addition, our and CBOE Holdings’ respective obligations to

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complete the planned merger are conditioned on the receipt of certain regulatory approvals or waiver by the other party of such condition.

If CBOE Holdings’ financing for the planned merger becomes unavailable, the planned merger may not be completed.

CBOE Holdings intends to finance all or a portion of the cash component of the merger consideration with debt financing. There are a number of conditions that must be satisfied or waived in order for closing of the debt financing to occur. There is a risk that these conditions will not be satisfied. In the event that the financing currently contemplated is not available, CBOE Holdings may be required to obtain alternative financing on terms that are less favorable to CBOE Holdings than those currently contemplated by CBOE Holdings. In addition, any alternative financing may not be available on acceptable terms, in a timely manner or at all. While obtaining financing is not a condition to CBOE Holdings’ obligation to effect the planned merger under the Merger Agreement, if other financing becomes necessary and CBOE Holdings is unable to secure such other financing, the planned merger may not be completed.

The Merger Agreement contains provisions that may discourage other companies from trying to acquire us for a value greater than the merger consideration.

The Merger Agreement contains provisions that apply both during the pendency of the merger transaction with CBOE Holdings as well as afterward should the planned merger with CBOE Holdings not be consummated that may discourage a third party from submitting a business combination proposal to us that might result in greater value to our stockholders than the planned CBOE Holdings merger. These Merger Agreement provisions include a general prohibition on us from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. In addition, we may be required to pay CBOE Holdings a termination fee in certain circumstances involving acquisition proposals for competing transactions.

Failure to complete the planned merger could negatively impact our stock price and future business and financial results.

If the planned merger is not completed, our ongoing businesses may be adversely affected and we will be subject to several risks and consequences, including the following:

We may be required, under certain circumstances, to pay CBOE Holdings a termination fee of $110 million or reimburse CBOE Holdings’ expenses up to $10 million under the Merger Agreement;

We will be required to pay certain costs relating to the planned merger, whether or not the planned merger is completed, such as legal, accounting, financial advisory and printing fees;

Under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the planned merger that may adversely affect our ability to execute certain of our business strategies; and

Matters relating to the planned merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company and such commitments by our management may impact our business, financial condition and results of operations.

In addition, if the planned merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the planned merger or to enforcement proceedings commenced against us to perform our obligations under the Merger Agreement. If the planned merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially and adversely affect our business, financial condition and results of operations.

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

Unregistered Sales of Equity Securities

None.

Use of Proceeds

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on April 15, 2016.

Purchases of Equity Securities

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits required by this item are listed on the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	Bats Global Markets, Inc.
	(Registrant)

Date: November 7, 2016	By:	/s/ Brian N. Schell
	Name:	Brian N. Schell
	Title:	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of September 25, 2016, by and among CBOE Holdings, Inc., CBOE Corporation, CBOE V, LLC and Bats Global Markets, Inc. (incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on September 28, 2016 (Commission File No. 001-37732)).
10.1		Form of Voting and Support Agreement between CBOE Holdings, Inc. and the directors and executive officers of Bats Global Markets, Inc. (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on September 28, 2016 (Commission File No. 001-37732)).
10.2		Form of Voting and Support Agreement between Bats Global Markets, Inc. and the directors and executive officers of CBOE Holdings, Inc. (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K, filed on September 28, 2016 (Commission File No. 001-37732)).
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification pursuant to Rule 13a-14(b) and section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code).

101*		Interactive data files pursuant to Rule 405 of Regulation S-T.

		* Filed herewith

Bats Global Markets, Inc. - FORM 10-Q - November 7, 2016

Attached files