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As filed with the Securities and Exchange Commission on November 3, 2010.
Registration No. 333-161632
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 6
to
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
GAIN CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
         
Delaware   6221   20-4568600
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
Bedminster One
135 Route 202/206
Bedminster, New Jersey 07921
(908) 731-0700
 
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Glenn H. Stevens
President and Chief Executive Officer
GAIN Capital Holdings, Inc.
Bedminster One
135 Route 202/206
Bedminster, New Jersey 07921
(908) 731-0700
(Name, address including zip code and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Andrew P. Gilbert, Esq.
David C. Schwartz, Esq.
DLA Piper LLP
300 Campus Drive, Suite 100
Florham Park, New Jersey 07932
Tel: (973) 520-2550
Fax: (973) 520-2575
  Joseph A. Hall, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Tel: (212) 450-4500
Fax: (212) 450-3500
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date hereof.
 
 
 
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, Dated November 3, 2010
 
(GAIN CAPITAL HOLDINGS, INC. LOGO)
 
          Shares
 
GAIN Capital Holdings, Inc.
 
COMMON STOCK
 
 
 
 
This is an initial public offering of shares of common stock of GAIN Capital Holdings, Inc. No public market currently exists for our common stock. We anticipate the initial public offering price will be between $      and $      per share.
 
 
We are selling          shares of common stock and the selling stockholders are selling           shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.
 
 
We intend to list the common stock on the New York Stock Exchange under the symbol “GCAP.
 
 
 
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 18.
 
 
 
 
PRICE $           PER SHARE
 
 
 
 
                 
        Underwriting
      Proceeds to
    Price to
  Discounts and
      Selling
    Public   Commissions   Proceeds to Us   Stockholders
 
Per Share
  $             $             $             $          
Total
  $                  $                  $                  $               
 
 
The selling stockholders have granted the underwriters the right to purchase an additional shares of common stock to cover over-allotments.
 
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
The underwriters expect to deliver the shares of common stock to purchasers on          , 2010.
 
 
 
 
MORGAN STANLEY DEUTSCHE BANK SECURITIES
 
          , 2010


 

 
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You should rely only on the information contained in this prospectus. We, the selling stockholders and the underwriters have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
 
Unless otherwise stated, all references to “us,” “our,” “GAIN,” “GAIN Capital,” “we,” the “Company” and similar designations refer to GAIN Capital Holdings, Inc. and its subsidiaries. Our logo, trademarks and service marks are the property of GAIN Capital Holdings, Inc. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus that we believe is important to understanding how our business is currently being conducted. You should read the entire prospectus carefully, including the “Risk Factors” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, the consolidated financial statements and related notes included in this prospectus before making an investment decision. Our preferred stock contains a redemption feature which allows the holders of our preferred stock to require us to repurchase the preferred stock at a fixed price. Such repurchase right must be recorded by us at fair value as a non-cash gain or loss from the recorded level in the immediately prior period. This embedded derivative causes fluctuation in our net income which is not reflective of our operating performance and will no longer exist at and after our initial public offering. As a result, we have presented adjusted net income, a financial measure not calculated in accordance with Generally Accepted Accounting Principles in the United States, or GAAP, which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. As a result, it may be difficult to compare our financial performance to that of other companies.
 
Our Company
 
We are an online provider of retail and institutional foreign exchange, or forex, trading and related services founded in 1999 by a group of experienced trading and technology professionals. We offer our customers 24-hour direct access to the global over-the-counter, or OTC, foreign exchange markets, where participants trade directly with one another rather than through a central exchange or clearinghouse. We also offer some of our retail customers access to other global markets on an OTC basis, including the spot gold and silver markets, as well as equity indices and commodities via instruments linked to the performance of the price of an underlying security called “contracts-for-difference”. Our trading platforms provide a wide array of information and analytical tools that allow our customers to identify, analyze and execute their trading strategies efficiently and cost-effectively. We believe our proprietary technology, multilingual customer service professionals and effective educational programs provide a high degree of customer satisfaction and loyalty. Furthermore, our scalable and flexible technology infrastructure allows us to enhance our product service offerings to meet the rapidly changing needs of the marketplace.
 
Forex trading is one of the fastest-growing areas of retail trading in the financial services industry. In a forex trade, participants buy one currency and simultaneously sell another currency. We refer to the two currencies that make up a forex trade as a currency pair. The first currency noted in the pair is the base currency and the second is the counter currency. According to the 2010 Triennial Bank Survey from the Bank for International Settlements, average daily turnover in the global forex market in April 2010 was $4.0 trillion, an increase of approximately 20.0% from the $3.3 trillion reported by the Bank for International Settlements in April 2007. The Bank for International Settlements notes that the U.S. dollar is the most commonly traded currency, with approximately 85.0% of all forex trades involving the U.S. dollar. The forex market has emerged from its previous role as a currency hedge to become an investable asset class. Historically, access to the forex market was only available to commercial and investment banks, corporations, hedge funds and other large financial institutions. In the last decade, retail investors have gained increasing access to this market largely through the emergence of online retail forex providers like us. According to a 2010 analysis by the Aite Group, a financial services market research firm, global retail forex trading volumes have grown from average daily volumes of approximately $10.0 billion in 2001 to approximately $125.0 billion in 2009 representing a compound annual growth rate of 37.1%.
 
We have a geographically diverse customer base and currently service customers residing in more than 140 countries worldwide. For the year ended December 31, 2009, 49.7% of our customer base was located in the United States, representing approximately 54.5% of our total annual trading volume, while approximately 50.3% of our customer base was located outside of the United States, representing approximately 45.5% of our total annual trading volume. We believe we are one of the largest provider of retail forex trading to customers in the United States based on active traded accounts. Our total annual customer trading volume, which is based on the U.S. dollar equivalent of notional amounts traded, grew from $231.9 billion in 2005 to $1.2 trillion in 2009, representing a compound annual growth rate of 50.8%. Our annual net revenue grew from $37.9 million in 2005 to $153.3 million


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in 2009, representing a compound annual growth rate of 41.8%. Our net income grew from $8.2 million in 2005 to $28.0 million in 2009, representing a compound annual growth rate of 35.9%. Our adjusted net income, a non-GAAP financial measure which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock, increased from $8.2 million in 2005 to $26.3 million in 2009, representing a compound annual growth rate of 33.8%.
 
We are regulated in the United States by the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, the National Futures Association, and the U.S. Securities Exchange Commission, in the United Kingdom by the Financial Services Authority, in Japan by the Financial Services Authority, in Hong Kong by the Securities and Futures Commission and in Australia by the Australian Securities and Investments Commission. For the nine months ended September 30, 2010, 71.6% of our trading volume was from customers in jurisdictions in which we are currently licensed or authorized by local government bodies or self-regulatory organizations.
 
We use financial metrics, including tradable retail accounts and traded retail accounts, to measure our aggregate customer account activity. Tradable retail accounts represent retail customers who maintain cash balances with us that are sufficient to execute a trade in compliance with our policies. As of September 30, 2010 we had 70,618 tradable retail accounts compared to 47,374 as of September 30, 2009. We believe the number of tradable retail accounts is an important indicator of our ability to attract new retail customers that can potentially lead to trading volume and revenue in the future, however, it does not represent actual trades executed. We believe that the most relevant measurement which correlates to volume and revenue is the number of traded retail accounts, because this represents retail customers who executed a transaction with us during a particular period. During the nine months ended September 30, 2010, 52,486 traded retail accounts executed a forex transaction with us compared to 43,565 traded retail accounts for the nine months ended September 30, 2009, representing an increase of 20.5%.
 
Our customer base is comprised of self-directed retail traders, managed retail traders and institutional customers who utilize our online platforms and tools to trade forex and contracts-for-difference. For the nine months ended September 30, 2010, self-directed retail investors represented 79.0% of our customer trading volume. Managed accounts, which are accounts managed by authorized intermediaries trading on behalf of a retail account holder, represented 8.7% of our customer trading volume for the nine months ended September 30, 2010. Institutional customers represented 12.3% of our volume for the nine months ended September 30, 2010.
 
We seek to attract and support customers through direct, indirect and institutional channels. Our primary direct channel for our retail business is our Internet website, FOREX.com, which is available in English, traditional and simplified Chinese, Japanese, Russian and Arabic. It provides retail traders of all experience levels with full trading capabilities, along with extensive educational and support tools. Our indirect channel includes our relationships with retail financial services firms, such as broker-dealers, futures commission merchants, and retail banking institutions. These firms offer our trading services to their existing customers under their own brand in exchange for a revenue-sharing arrangement with us. We refer to these firms as our “white label partners”. We also have relationships with currency brokers who refer their customers to us for a fee. We refer to these firms as “introducing brokers”. Globally, we have relationships with more than 500 white label partners and introducing brokers who were active for the nine months ended September 30, 2010. Our institutional channel, which we launched in March 2010, sources our institutional customers, consisting of commercial and investment banks, hedge funds and other professional traders, through our direct sales team. Our total customer trading volume sourced through direct, indirect, and institutional channels was 50.4%, 37.3%, and 12.3%, respectively for the nine months ended September 30, 2010. For the year ended December 31, 2009, total customer trading volume sourced through direct and indirect channels was 65.4% and 34.6%, respectively.
 
The majority of our revenue is derived from our retail customers’ trading activity in our forex and contracts-for-difference product offerings. We generally act as the counterparty to our retail customers’ trades and as an agent for trades conducted by our institutional customers. The counterparties to our institutional customers’ trades are third party financial institutions. We receive transaction fees for our institutional customers’ trades and the third-party financial institution who is counterparty to the transaction incurs the market risk. For our retail customer business, we have used our extensive experience in the global OTC markets and online trading to develop risk-


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management systems and procedures that allow us to manage market and credit risk in accordance with predefined exposure limits in real-time. A key component of our approach to managing risk is that we do not actively initiate market positions for our own account in anticipation of future movements in the relative prices of products we offer. We refer to such positions as proprietary directional market positions. Instead, we continuously evaluate market risk exposure and actively hedge a portion of our customer transactions on a continuous basis. For the nine months ended September 30, 2010, a minimum of 90.9% of our average daily trading volume, on any given day, was either naturally hedged, where one of our customers executing a trade in a currency is offset by a trade taken by another customer, or hedged by us with a third party financial institution. To facilitate our risk-management activities, we maintain levels of capital in excess of those currently required under applicable regulations. As of September 30, 2010, we maintained capital levels of $92.5 million, which represents approximately 2.9 times the capital we are required to hold.
 
We believe that we provide our customers with access to forex liquidity at competitive rates. We maintain relationships with three established global prime brokers, including Deutsche Bank AG, UBS AG, and The Royal Bank of Scotland plc as well as relationships with 13 additional wholesale forex trading partners and access to other trading platforms and other wholesale forex trading partners, which give us access to over 25 potential liquidity providers. We believe these relationships give us access to a pool of forex liquidity, which ensures that we are able to execute our customers’ trades in any of the 39 currency pairs or six contracts-for-difference product offerings we offer and in the notional amount they request.
 
We believe that our approach to managing market and credit risk provides us with a diversified revenue stream that is governed by both risk-management and profit maximization principles.
 
Our Market Opportunity
 
The retail forex market has grown rapidly over the past decade, with daily trading volumes growing at a compound annual growth rate of 37.1% from average daily volumes of approximately $10.0 billion in 2001 to approximately $125.0 billion in 2009 according to a 2010 analysis performed by the Aite Group.
 
Historically, participation in the forex trading market was only available to commercial and investment banks and other large institutional investors. We believe that the expansion of online forex trading firms, such as our company, has led to reduced trading costs and increased investor awareness of the forex market, resulting in greater retail participation. We believe that improved accessibility and convenience has spurred the growth of our industry, similar to the impact online equity brokers had on growth in the U.S. equities markets in the late 1990s.
 
We believe retail forex trading is poised for continued, rapid growth as a result of the following trends:
 
  •  increasing recognition of currency trading as an alternative investment and as a tool for portfolio diversification by retail traders, authorized traders and investment professionals globally;
 
  •  improved access to the forex market, reduced transaction costs and more efficient execution;
 
  •  increased availability of investor education relating to the forex market and trading opportunities;
 
  •  expansion of marketing efforts by many leading firms in the forex industry;
 
  •  increasing media coverage of the forex market; and
 
  •  rising global broadband and wireless penetration.
 
Despite the strong growth of the retail forex market, online retail forex investors still represent a small fraction of total online investors. The Aite Group estimates that, as of July 2010, there were more than 110 million online retail investors globally, but only 1.1 million online retail investors who trade forex. Since retail forex is an asset class that can be traded 24 hours per day, five days a week, it is convenient for many online investors as they can trade at any time of the day.


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Our Competitive Strengths
 
We believe that we have maintained and will continue to enhance our strong position in the retail forex market by leveraging the following competitive strengths:
 
Leading FOREX.com Brand Name and Strong Global Marketing Capability
 
We believe that we have developed FOREX.com into a leading brand in the online forex trading industry. For the nine months ended September 30, 2010, FOREX.com averaged approximately 1.7 million “unique” visitors per month (as measured by Google Analytics, a website statistics service which monitors our website over a specified period of time and then subtracts all repeat visits by each individual visitor over such period). We currently service customers from over 140 countries.
 
Our sales and marketing strategy leverages the strength of our FOREX.com brand name by employing a combination of direct marketing techniques and focused branding programs. Through our direct marketing efforts, in 2009 we generated approximately 0.8 million registered users of our demonstration retail trading accounts which simulate live trading on our proprietary platform, referred to as registered practice trading accounts, representing a compound annual growth rate of 41.4% from approximately 0.2 million registered practice trading account users in 2005. Complementing our direct marketing strategy, we have assembled a multilingual retail sales force that utilizes a highly interactive approach to convert registered retail practice trading accounts into retail tradable accounts and manage ongoing customer retention efforts.
 
We have successfully expanded the FOREX.com brand from one that was U.S.-based, to a brand used in multiple international markets. We currently market to retail traders in English, Japanese, Arabic, traditional and simplified Chinese, and Russian, and have global online and offline advertising campaigns that direct prospective customers to the FOREX.com website in each of our target markets.
 
We have grown our company internationally through an efficient business model that combines our centralized trading, middle- and back-office functions, which are located in the United States, with direct and indirect marketing techniques tailored for each local market. This approach is designed to achieve a consistent brand experience while minimizing overhead costs.
 
Superior Customer Experience and Service Focus
 
We offer current and prospective customers a high level of service and a wide range of customizable tools and resources to assist them in learning about trading forex and other asset classes and to prepare them for trading in the market. We offer comprehensive education and training programs, the majority of which are utilized by prospective customers, which have been internally developed and designed to accommodate a variety of experience levels and learning preferences, from self-study to fully instructional programs. We also employ a multilingual staff of trained, licensed customer service representatives located in the United States to handle customer inquiries via telephone, email and online chat seven days a week, with continuous 24-hour coverage beginning Sunday at 10:00 a.m. through Friday at 5:00 p.m. and on Saturday from 9:00 a.m. to 5:00 p.m. (Eastern Standard Time).
 
In May 2009, Forrester Research, a leading independent research company, conducted a survey of nearly 500 of our customers in the United States on our behalf in which more than 79.0% indicated they were very satisfied with FOREX.com.
 
Consistent Execution Quality
 
We believe our customers choose us in part because of the consistent quality of our trade execution capabilities, which is comprised of three main aspects: pricing, certainty of execution and timing. We believe that our proprietary rate engine provides our customers with access to forex liquidity at competitive market rates. We are able to provide our customers with a high degree of certainty in the execution of their trades as a result of our relationships with three established global prime brokers, including Deutsche Bank AG, UBS AG, and The Royal Bank of Scotland plc as well as relationships with 13 additional wholesale forex trading partners, and access to other trading platforms and other wholesale forex trading partners, which give us access to over 25 potential liquidity providers. We believe these relationships give us access to a pool of forex liquidity, which ensures that we are able to


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execute our customers’ trades in any of the 39 currency pairs or six contracts-for-difference product offerings we offer and in the notional amount they request.
 
Proven Track Record of Innovation
 
We believe that our proprietary technology infrastructure provides us with significant competitive advantages and allows us to quickly adapt to meet the rapidly changing needs of the marketplace. As a result we have a long history of introducing new products, services and innovative tools for our customers. For example, over the past two years we have introduced the following products and services:
 
  •  February 2009 — We introduced trading of gold and silver in the spot market.
 
  •  August 2009 — For our customers located outside of the United States, we introduced trading in oil contracts-for-difference, including “Brent Crude Oil” and “West Texas” contracts-for-difference.
 
  •  September 2009 — We launched a new version of our active trader platform, FOREXTrader PRO, featuring an updated user interface designed to improve overall usability and deliver faster trade execution, enhanced charting tools and improved chart-based trading capabilities.
 
  •  February 2010 — We introduced website trading into the FOREX.com offering, which provides streamlined trading, research and account management features in a secure, web-based environment. The availability of website trading complements our downloadable active trader platform, FOREXTrader PRO, and is an important part of our long-term strategy to attract a more diverse customer base, including novice traders who desire an easy-to-use trading experience that also includes education, research and customer support tools in a secure, customer-friendly website, and self-directed retail investors in the United States who are already accustomed to trading via the websites of their online brokerage firms.
 
  •  February 2010 — We introduced a version of the FOREX.com website designed for smartphones and web-enabled mobile devices. This version provides customers and registered practice trading account users with secure account access to trade and manage their accounts from their mobile devices as well as access to quotes, charts, news and research and an extensive learning section featuring articles and video tutorials.
 
  •  March 2010 — We launched GAIN GTX, our institutional electronic communications network, for our institutional customers consisting of commercial and investment banks, hedge funds, institutional asset managers, corporate treasuries and proprietary trading firms. GAIN GTX allows our institutional customers to enter forex bids and offers or to buy or sell instantly at competitive prices from leading participating banks including forex dealers, clearing banks and prime brokers.
 
  •  April 2010 — We launched a new Arabic language service under our FOREX.com U.K. division to service growing demand from retail traders in the Middle East.
 
  •  June 2010 — We further expanded our product offering to include equity index contracts-for-difference. Equity index contracts-for-difference give our customers outside the United States access to trade popular global equity indices located in the United Kingdom, Germany, France and United States.
 
  •  July 2010 — We launched a full-featured iPhone application that provides our customers and registered practice trading account users with mobile trading capabilities along with real-time news, charts, research and account information.
 
Extensive Risk-Management Experience and Capital Position in Excess of Current Regulatory Requirements
 
We have leveraged our management team’s extensive experience to develop proprietary risk-management systems and procedures that allow us to manage market and credit risk in accordance with predefined exposure limits in real time and maintain a conservative capital position while taking into account specific market events and market volatility. A key component of our approach to managing risk is that we do not actively initiate proprietary directional market positions in anticipation of future movements in the relative prices of the products we offer. Instead, we continuously evaluate market risk exposure and actively hedge customer transactions through our


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wholesale forex trading platform on a continuous basis. As a result of our hedging activities, we are likely to have open positions with various products we offer. For the nine months ended September 30, 2010, a minimum of 90.9% of our average daily trading volume, on any given day, was either naturally hedged where one of our customers executing a trade in a currency was offset by a trade taken by another customer, or hedged by us with a third-party financial institution.
 
As part of our risk-management philosophy, we maintain capital levels in excess of those required under applicable regulations in multiple jurisdictions. We believe that our excess capital position in the United States compares favorably to that of many of our competitors that operate primarily in forex trading and positions us favorably for potential future increases of minimum capital requirements domestically and abroad. Additionally, we believe that our capital position enhances our access to foreign exchange liquidity, thereby improving our ability to provide customers with attractive pricing and facilitating our trading and hedging activities. In addition, our capital position allows us to provide capital to our affiliates as needed, to accommodate their business growth and meet potential increases of their minimum capital requirements.
 
Experienced Management Team
 
Our senior management team is comprised of experienced executives with significant forex, financial services and financial technology expertise. In addition, our senior management team has extensive experience in many critical aspects of our business, including trading and risk-management, retail brokerage operations, compliance, application development and technology infrastructure. For example, prior to joining us in 2000, Glenn Stevens, our President and Chief Executive Officer had more than 15 years of forex and global markets experience including seven years as managing director and chief forex dealer at Merrill Lynch & Co., Inc., and Mr. O’Sullivan, our Chief Dealer, served for six years as director of the New York British Pound Sterling desk of Merrill Lynch & Co., Inc., prior to his joining us in 2000. We believe the experience of our senior management team, including more than 25 years of forex trading experience for our President and Chief Executive Officer and more than 20 years of forex trading experience for our Chief Dealer, has been integral to our historical success and will be critical to our successful expansion into new markets and products in the future.
 
Risks Associated with Our Business
 
An investment in our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows, including:
 
  •  The Retail Forex Market has Only Recently Become Accessible to Retail Investors, and Accordingly, We Have a Limited Operating History Upon Which to Evaluate Our Performance.  Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
 
  •  Our Operations May be Restricted by Existing and Evolving Regulatory Requirements.  We operate in a heavily regulated environment that imposes significant compliance requirements and where failure to comply may result in regulatory actions and sanctions against us. For example, in August 2010 the Commodity Futures Trading Commission released new rules relating to the regulation of retail forex trading, including minimum security deposits, registration, risk disclosures relating to profits, record keeping, financial reporting, minimum capital and other operational standards. In addition, jurisdictions such as Japan and the United Kingdom have imposed additional regulatory requirements on our business operations in those jurisdictions.
 
  •  The Susceptibility of Our Revenue and Profitability to Changes in Domestic and International Market and Economic Conditions.  Our revenue and profitability is influenced by trading volume and currency volatility, which are directly impacted by disruption and volatility in domestic and international markets and economic conditions that are beyond our control.
 
  •  The Risk That Our Risk-Management Policies and Procedures May not be Effective and May Expose us to Unidentified or Unanticipated Risks.  We depend upon our risk-management policies to identify, monitor


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  and control a variety of risks. Some of our methods for managing risk are discretionary in nature and based upon internally developed controls and observed historical market behaviors. Such policies may not adequately prevent losses or anticipate changes in the market.
 
  •  The Impact on Our Business from Potential Trading Losses.  A substantial portion of our revenue and operating profits is derived from our role as a market maker. In such role, we are exposed to significant pricing and liquidity risks, as well as to risks relating to possible inaccuracies in our proprietary pricing mechanism, which may result in trading losses.
 
  •  The Risk of Corruption or Disruption of Our Proprietary Technology.  Our success in the past has largely been attributable to our proprietary technology. We rely on our proprietary technology to receive and properly process internal and external data in order to run our business. Any disruption or corruption of our proprietary technology may result in service interruptions or other negative consequences.
 
  •  The Loss of Our Key Personnel.  Our key employees have significant experience in the forex industry and have made significant contributions to our business and operations. Our continued success is dependent upon the retention of these employees.
 
  •  Our Dependence on Wholesale Forex Trading Partners and Prime Brokers in Order to Continually Provide Our Market Making Services.  Given the level of our customers’ trading volume, we depend upon third-party financial institutions to provide us with access to forex market liquidity and competitive wholesale forex pricing spreads. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
 
  •  A Risk of Default by Financial Institutions Holding Our Funds and Other Counterparties with Whom We do Business.  Our forex market making operations require a commitment of capital that involves risk of losses because of the potential failure or default by the counterparties with whom we do business.
 
You should consider these risks and others described in this prospectus before investing in our common stock. For a more detailed discussion of these and other significant risks associated with operating our business and investing in our common stock, you should read the section entitled “Risk Factors” beginning on page 18 of this prospectus.
 
Our Growth Strategies
 
We intend to pursue the following strategies to continue to grow our forex business and to continue to expand our product offerings to our customers:
 
Increase Penetration in Our Existing Markets
 
We believe we are one of the largest provider of retail forex trading in the United States based on active traded accounts. The Aite Group estimates that, as of July 2010, there were over 110 million retail online investors globally, but only 1.1 million online retail investors who traded forex. We plan to increase our presence in the U.S. market and other existing markets by continuing to focus on reaching the greatest number of prospective customers who may open registered practice trading accounts. We seek to accomplish this by employing a mixture of on- and off-line advertising, search engine marketing, email marketing, television and radio advertising, attendance at industry trade shows and strategic and public media relations. We intend to continue to focus on converting our registered practice trading accounts into traded retail accounts in order to grow our business and increase our market share. We believe we can most effectively generate registered practice trading accounts and convert them into traded retail accounts by continuing to tailor our marketing strategy to each customer type we target and by offering prospective customers training, educational tools and superior customer service.


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Continue the International Expansion of Our Retail Customer Base
 
We intend to enhance our growth through the continued expansion of our international customer base into new markets and continue to penetrate existing international markets. We believe owning and operating FOREX.com, our leading Internet domain name, as well as our market-leading customer service enhances our ability to promote our advanced trading technology and tools, while also generally building awareness of the forex market among retail investors. In addition to leveraging the FOREX.com brand name globally, we intend to grow internationally by continuing to open offices in areas where a local presence is helpful to our growth efforts and by selectively pursuing strategic acquisitions. To successfully expand into other new international markets, we intend to employ a strategy that centralizes brand management, trading, middle- and back-office functions at our U.S. headquarters and tailors marketing sales and customer support to the local market. We operate in the United Kingdom where our regulatory passport rights allow us to operate in a number of European Economic Area jurisdictions, and we believe Europe is an expanding market we will continue to develop. We have expanded international offices and will continue to deploy resources and capital to meet the global requirements to service our customers. In 2006, we registered with the Cayman Islands Monetary Authority in the Cayman Islands. In 2008, we acquired RCG GAIN Limited (formerly a joint venture with Rosenthal Collins Group, now known as GAIN Capital-Forex.com U.K., Ltd.), in the United Kingdom, which is registered with the Financial Services Authority, and a U.S. registered broker-dealer (now known as GAIN Capital Securities, Inc.), which is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority. Between 2008 and 2009, we acquired Fortune Capital Co. Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.), which maintains a securities license with the Financial Services Authority in Japan, and incorporated GAIN Capital-Forex.com Hong Kong, Ltd., which is registered with the Securities and Futures Commission. In 2009, we incorporated GAIN Capital-Forex.com Australia, Pty. Ltd., which received regulatory approval from Australian Securities and Investments Commission in March 2010.
 
Continue Growth of Our Institutional Forex Business
 
The institutional forex trading market is composed of commercial and investment banks, hedge funds, institutional asset managers, corporate treasuries and other professional traders that trade with each other predominantly through electronic communications networks. We believe that we can continue to expand our institutional forex customer trading base by offering these institutions a superior technology product in the form of our GAIN GTX electronic communications network trading platform. GAIN GTX was designed specifically for institutional investors and features advanced algorithmic trading capabilities, order management and routing tools and, we believe, a pool of forex liquidity from anonymous and disclosed liquidity providers via our extensive network of wholesale forex trading partners.
 
Expand Our Product Offering
 
We intend to grow our business by offering our customers additional products complementary to our current product offerings. Approximately two-thirds of our existing customers have told us that they trade or have traded other financial products, such as equities, futures and options. As a result, we believe we have significant growth opportunities to cross-sell complementary products to these customers. Expanding our product offerings to include other financial products will enable our customers to execute diversified trading strategies across various products from a single, integrated trading platform. We believe our proprietary and scalable technology infrastructure, as well as our track record of introducing new products to our customers, will allow us to attract and satisfy our customers’ increased trading needs, which will in turn result in increased customer trading volume with us.
 
  •  Forex Trading Products
 
We intend to expand our existing forex offerings by increasing the number of available currency pairs, as well as adding OTC currency options and a range of other currency-related investment products.
 
  •  Contracts-For-Difference
 
We intend to build upon our existing contracts-for-difference product offerings outside of the United States to support trading of other financial instruments and commodity products located in various jurisdictions, including


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Europe, Japan, Hong Kong, Australia and the United States. Contracts-for-difference are instruments linked to the performance of the price of an underlying security, including precious metals, energy products and other commodities, as well as stock indices and government bonds. Because contracts-for-difference are margin-based and are OTC-traded, we believe that we can effectively apply our market making and risk-management expertise to these financial instruments.
 
  •  Listed Exchange Products
 
Our status as a registered Futures Commission Merchant provides us with the ability to offer a variety of exchange-traded products, including futures and options on equity and fixed-income indices, and commodities, to our customers. We also intend to expand the offerings of GAIN Capital Securities, Inc. to include advanced options trading, as well as fixed-income and other equities products.
 
Increase Our Partnerships with Other Financial Services Firms
 
We currently support more than a dozen major white label partnerships with major financial institutions, securities firms and registered broker-dealers, representing 37.3% of our trade volume for the nine months ended September 30, 2010. We intend to continue to develop relationships with white label partners and introducing brokers which provide us with additional channels to attract prospective customers whom we believe we could not otherwise efficiently solicit. These prospective customers include individuals who have demonstrated significant loyalty to their existing financial services firm as well as individuals in jurisdictions where we are not currently registered with the local regulator. In these circumstances, the partnership arrangements are more profitable for us, since the customers provided through these partnerships generate trading revenue for us but generally do not require us to incur any incremental direct marketing or regulatory compliance expenses. White label partners and introducing broker relationships who were first active in the nine months ended September 30, 2010 represented 9.0% of our total trading volume.
 
Pursue Strategic Acquisitions and Alliances to Expand Our Product and Service Offerings and Geographic Reach
 
We intend to continue to selectively pursue attractive acquisition and alliance opportunities. In the past, we have successfully expanded the breadth of our product and service offerings by acquiring companies with complementary products and services, such as our acquisitions of RCG GAIN Limited (now known as GAIN Capital-Forex.com U.K., Ltd.), Fortune Capital Co. Ltd. (now known as GAIN Capital Forex.com Japan, Co. Ltd.) and a U.S. registered broker-dealer of equity securities (now known as GAIN Capital Securities, Inc.). More recently, we acquired assets of MG Financial LLC, a forex trading firm, on September 14, 2010 and on October 5, 2010, we entered into an asset purchase agreement with Capital Market Services, LLC, and affiliated entities, to acquire the retail forex trading accounts of this forex trading firm. Additionally, we will consider acquisitions and alliances in key geographic markets to establish or increase our presence and accelerate our growth. Following this offering, we will have the ability to use our common stock as an additional currency with which to pursue future acquisitions.
 
Capture Additional Market Share as a Result of Increased Regulatory Requirements
 
Regulators in the United States and other jurisdictions have established and continue to establish, a series of new regulations that impact retail forex brokers, including substantial increases in minimum required regulatory capital, increased oversight of third-party introducing brokers and regulations regarding the execution of trades. While complying with these regulations may increase our operational costs, we believe that these regulations have given retail investors more confidence in retail forex as an asset class and in retail forex firms that are able to comply with them. We believe that these regulations have reduced the number of firms offering retail forex services, even as the number of retail forex customers and the retail forex trade volume has grown. As the retail forex industry consolidates, scale and ability to comply with regulation will become increasingly important for retail forex brokers, presenting opportunities to larger firms, such as us, that can meet the more stringent regulatory requirements.


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Corporate Information
 
We were incorporated in Delaware in October 1999 as GAIN Capital, Inc. In order to expand, either directly or through wholly-owned subsidiaries, into business activities not regulated by the Commodity Futures Trading Commission or the National Futures Association, on August 1, 2003, all outstanding capital stock of GAIN Capital, Inc. was converted into capital stock of GAIN Capital Group, Inc. pursuant to an agreement and plan of merger by and among GAIN Capital Group, Inc., GAIN Merger Sub Inc. (a wholly-owned subsidiary of GAIN Capital Group, Inc.) and GAIN Capital, Inc. Pursuant to such agreement and plan of merger, GAIN Merger Sub Inc., merged with and into GAIN Capital, Inc., the surviving entity, and the holders of capital stock, warrants and options of GAIN Capital, Inc. received capital stock, warrants and options of GAIN Capital Group, Inc. on a one-for-one basis, and GAIN Capital, Inc. continued to exist as a wholly-owned subsidiary of GAIN Capital Group, Inc. The GAIN Capital, Inc. stockholders before the merger were the same as the GAIN Capital Group, Inc. stockholders after the merger.
 
As a condition to entering into a credit facility in 2006, the lending banks required that we pledge the ownership interests in certain of our operating subsidiaries as collateral. In order to facilitate this pledge, on March 27, 2006, all outstanding capital stock of GAIN Capital Group, Inc. was converted into capital stock of GAIN Capital Holdings, Inc. pursuant to an Agreement and Plan of Merger by and among GAIN Capital Group, Inc., GH Formation, Inc. (a wholly-owned subsidiary of GAIN Capital Group, Inc.) and GAIN Capital Holdings, Inc. Pursuant to such agreement and plan of merger, GH Formation, Inc. merged with and into GAIN Capital Group, Inc., the surviving entity, and the holders of capital stock, warrants and options of GAIN Capital Group, Inc. received capital stock, warrants and options of GAIN Capital Holdings, Inc. on a one-for-one basis, and GAIN Capital Group, Inc. continued to exist as an indirect wholly-owned subsidiary of GAIN Capital Holdings, Inc. The GAIN Capital Group, Inc. stockholders before the merger were the same as the GAIN Capital Holdings, Inc. stockholders after the merger.
 
For tax planning purposes, contemporaneously with the foregoing merger, on March 27, 2006, GAIN Capital Group, Inc. was converted to a limited liability company, GAIN Capital Group, LLC, and GAIN Capital, Inc. was converted to a limited liability company, GAIN Capital, LLC, thereby allowing profits and losses to pass through such entities. At the same time, GAIN Holdings, LLC, a newly created holding company and wholly-owned subsidiary of GAIN Capital Holdings, Inc., became the sole member and holder of all of the membership interests of GAIN Capital Group, LLC. On April 28, 2006, GAIN Capital, LLC merged with and into GAIN Capital Group, LLC and ceased to exist as a separate entity. The membership interests of GAIN Holdings, LLC were pledged as collateral in connection with the credit facility referenced above.
 
Our principal executive offices are located at Bedminster One, 135 Route 202/206, Bedminster, New Jersey 07921. Our telephone number is (908) 731-0700. On August 18, 2009, we entered into a lease agreement for approximately 45,000 square feet of office space at 135 Route 202/206, Bedminster, New Jersey, which we are using as our new principal executive offices. The term of the lease runs from January 1, 2010 to December 1, 2025, and we moved to our new facilities in January 2010. We believe this new facility will accommodate our needs for the foreseeable future. We operate our market making services out of our Bedminster (New Jersey), London and Tokyo offices and our sales and support services out of our Bedminster, New York City, Woodmere (Ohio), London, Tokyo, Hong Kong, and Australia offices. Our corporate website address is www.gaincapital.com. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. We have included our website address as an inactive textual reference only. As of September 30, 2010, we employed 361 individuals worldwide.
 
We are registered with the Commodity Futures Trading Commission as a Future Commission Merchant, Forex Dealer Merchant and Retail Foreign Exchange Dealer. We are also a member of the National Futures Association. Our subsidiary, GAIN Capital Forex.com Japan, Co. Ltd., a Tokyo-based introducing broker is regulated by the Financial Services Authority in Japan. In April 2010, GAIN Capital Forex.com Japan, Co. Ltd. became our wholly-owned subsidiary. We also operate GAIN Capital Securities, Inc., a registered broker-dealer (which is registered with the U.S. Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority). We are authorized as principal and counterparty to spot foreign currency trades, contracts-for-difference and gold and silver spot contracts in the United Kingdom, Japan, and Australia. We are also registered as a


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Securities Arranger with the Cayman Islands Monetary Authority in the Cayman Islands and registered with the Securities and Futures Commission in Hong Kong and the Australian Securities and Investment Commission in Australia, to act as an introducer to GAIN Capital Group, LLC in the United States. Furthermore, beginning in October 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, will require us to ensure that all of our customers resident in the United States have accounts with our National Futures Association-registered operating entity.
 
Between 2006 and 2008, a significant portion of our trading volume, trading revenue, net income and cash flow was generated from residents of China. When we commenced offering our forex trading services through our Chinese language website to residents of China in October 2003, we believed that our operations were in compliance with applicable Chinese regulations. However, as a result of our review of our regulatory compliance in China during 2008, in May 2008 we became aware of a China Banking and Regulatory Commission prohibition on forex trading firms providing retail forex trading services through direct solicitation to Chinese residents through the Internet without a China Banking and Regulatory Commission permit. We do not have such a permit and to our knowledge, no such permit exists. The regulatory rules and process in China are complex and are not as clear as those in many other jurisdictions. As a result of this regulatory uncertainty, we decided to terminate all service offerings to residents of China and ceased our trading support operations located in that country. As of December 31, 2008, we no longer accepted new customers.
 
Based on our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010. We cannot provide any assurance that we will not be subject to fines, penalties or sanctions, and if so in what amounts, relating to our historical and current forex trading services through the Internet to Chinese residents.
 
As a result of the termination of our trading operations in China in December 2008, all references to “China” refer to mainland China and exclude the Hong Kong and Macau Special Administrative Regions. The historical financial information presented in this prospectus may not be indicative of our future performance. For the year ended December 31, 2009, net revenue associated with customers residing in China was immaterial compared to $24.4 million for the year ended December 31, 2008. Our total direct expenses attributable to our operations in China were less than $0.4 million for the year ended December 31, 2009, compared to $5.9 million for the prior year.
 
 


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THE OFFERING
 
Common stock offered by us            shares
 
Common stock offered by the selling stockholders            shares
 
Total common stock offered in this offering            shares
 
Common stock to be outstanding immediately after this offering            shares
 
Over-allotment option            shares offered by selling stockholders
 
Use of proceeds We intend to use the proceeds we receive from this offering only to cover historical and expected costs from this offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
 
Proposed New York Stock Exchange symbol “GCAP”
 
Risk factors See “Risk Factors” beginning on page 18 of this prospectus and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of          , 2010. The number of shares of our common stock to be outstanding after this offering does not take into account:
 
  •             shares of common stock issuable upon the exercise of outstanding stock options as of          , 2010 at a weighted average exercise price of $      per share;
 
  •             shares of common stock issuable pursuant to outstanding restricted stock units as of          , 2010;
 
  •  an aggregate of           shares of common stock that will be reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan as of the closing of this offering; and
 
  •  an aggregate of           shares of common stock that will be reserved for future issuance under our 2010 Employee Stock Purchase Plan.
 
 
 
 
Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option granted by the selling stockholders, and has been adjusted to reflect the      -for-1 stock split of our common stock effected immediately prior to the completion of this offering, the conversion of all outstanding shares of our preferred stock into an aggregate of           shares of common stock upon the completion of this offering and the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws upon the completion of this offering.

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table presents our summary historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2007, 2008 and 2009 and the consolidated statements of financial condition data as of December 31, 2008 and 2009 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2005 and 2006 and the consolidated statements of financial condition data as of December 31, 2005, 2006 and 2007 are derived from our audited historical consolidated financial statements not included in this prospectus.
 
The consolidated statements of income data for the nine month periods ended September 30, 2010 and 2009 and the consolidated statement of financial condition data as of September 30, 2010 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus which have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. The consolidated statements of financial condition data as of September 30, 2009 are derived from our consolidated financial statements not included in this prospectus. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year ended December 31, 2010.
 
Due to the non-cash impact of the redemption feature contained in our preferred stock which requires fair value accounting, there are fluctuations in our net income which will cease upon our initial public offering and which are not reflective of our operating performance.
 
The pro forma consolidated statement of financial condition data as of September 30, 2010 gives effect to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. The pro forma earnings per common share data for the year ended December 31, 2009 and the nine months ended September 30, 2010 reflect the sale by us of           newly issued shares of our common stock and the sale by our selling stockholders of           shares of common stock pursuant to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus.


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2005(1)     2006(2)     2007(2)     2008(2)     2009(2)     2009(2)     2010(2)  
    (in thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                                       
REVENUE
                                                       
Trading revenue
  $ 36,249     $ 69,471     $ 118,176     $ 186,004     $ 153,375     $ 114,332     $ 147,667  
Other revenue
    223       242       437       2,366       2,108       1,119       1,914  
                                                         
Total non-interest revenue
    36,472       69,713       118,613       188,370       155,483       115,451       149,581  
Interest revenue
    1,519       3,145       5,024       3,635       292       228       243  
Interest expense
    (110 )     (2,431 )     (4,299 )     (3,905 )     (2,456 )     (1,848 )     (1,676 )
                                                         
Total net interest revenue/(expense)
    1,409       714       725       (270 )     (2,164 )     (1,620 )     (1,433 )
                                                         
Net revenue
    37,881       70,427       119,338       188,100       153,319       113,831       148,148  
                                                         
EXPENSES
                                                       
Employee compensation and benefits
    9,511       17,258       25,093       37,024       41,503       29,621       34,031  
Selling and marketing
    3,256       12,517       21,836       29,312       36,875       26,791       28,192  
Trading expenses and commissions
    7,279       10,321       10,436       16,310       14,955       10,431       18,601  
Bank fees
    507       935       2,316       3,754       4,466       3,415       3,170  
Depreciation and amortization
    494       897       1,911       2,496       2,689       2,013       2,568  
Communications and data processing
    424       873       1,659       2,467       2,676       1,950       2,209  
Occupancy and equipment
    530       1,045       1,616       2,419       3,548       2,391       2,963  
Bad debt provision/(recovery)
    836       574       1,164       1,418       760       593       514  
Professional fees
    761       1,295       1,380       3,104       3,729       2,549       2,623  
Software expense
    21       78       123       888       1,132       712       1,431  
Professional dues and memberships
    15       48       187       773       698       565       205  
Write-off of deferred initial public offering costs
                      1,897                    
Change in fair value of convertible, redeemable preferred stock embedded derivative(2)
          61,732       165,280       (181,782 )     (1,687 )     40,820       48,936  
Impairment of intangible assets
          165                                
Other
    155       3,085       (627 )     1,424       1,746       1,091       3,846  
                                                         
Total
    23,789       110,823       232,374       (78,496 )     113,090       122,942       149,289  
                                                         
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    14,092       (40,396 )     (113,036 )     266,596       40,229       (9,111 )     (1,141 )
Income tax expense
    5,881       9,063       21,615       34,977       12,556       11,423       18,192  
Equity in earnings of equity method investment
    (3 )     (43 )           (214 )                  
                                                         
NET INCOME/(LOSS)
    8,208       (49,502 )     (134,651 )     231,405       27,673       (20,534 )     (19,333 )
                                                         
Net income/(loss) applicable to noncontrolling interest
                      (21 )     (321 )     (15 )     (402 )
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ 8,208     $ (49,502 )   $ (134,651 )   $ 231,426     $ 27,994     $ (20,519 )     (18,931 )
                                                         
Effect of redemption of preferred shares
          (39,006 )           (63,913 )                  
Effect of preferred share accretion
    (63 )     2,205                                
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. Common Shareholders
  $ 8,145     $ (86,303 )   $ (134,651 )   $ 167,513     $ 27,994     $ (20,519 )     (18,931 )
                                                         
Earnings/(loss) per common share:
                                                       
Basic
  $ 1.96     $ (30.90 )   $ (70.89 )   $ 130.12     $ 21.41     $ (15.71 )   $ (14.26 )
                                                         
Diluted
  $ 0.49     $ (30.90 )   $ (70.89 )   $ 11.17     $ 1.88     $ (15.71 )   $ (14.26 )
                                                         
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
                                                       
Basic
    4,157,464       2,792,895       1,899,386       1,287,360       1,307,379       1,306,265       1,327,124  
                                                         
Diluted
    16,634,016       2,792,895       1,899,386       15,002,277       14,909,184       1,306,265       1,327,124  
                                                         
Pro forma (unaudited)(3)
                                                       
Pro forma earnings/(loss) per common share:
                                                       
Basic
                                  $ 20.12     $ 15.54     $ 22.61  
                                                         
Diluted
                                  $ 1.76     $ 1.36     $ 2.01  
                                                         
 
 
(footnotes appear on the following page)


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(1) These amounts do not include the impact of the embedded derivative liability of approximately $37.6 million (unaudited) as of December 31, 2005 and the change in fair value for the year ended December 31, 2005 of $28.8 million (unaudited).
(2) For each of the periods indicated, in accordance with Financial Accounting Standards Board Accounting Standards Codification 815, Derivatives and Hedging, we accounted for an embedded derivative liability attributable to the redemption feature of our outstanding preferred stock. This redemption feature and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with the completion of this offering.
(3) These amounts do not include the impact of the change in fair value of our preferred stock embedded derivative, the effect of redemption of preferred stock and the effect of preferred stock accretion. For the year ended December 31, 2009 and the nine months ended September 30, 2010, the change in fair value of our preferred stock embedded derivative resulted in a gain of $1.7 million and a loss of $48.9 million, respectively.
 
                                                         
    As of December 31,   As of September 30,
    2005   2006   2007   2008   2009   2009   2010
    (in thousands unless otherwise stated)
 
Consolidated Statements of Financial Condition Data:
                                                       
Cash and cash equivalents
  $ 22,482     $ 31,476     $ 98,894     $ 176,431     $ 222,524     $ 197,938     $ 258,012  
Receivables from brokers
  $ 59,080     $ 71,750     $ 74,630     $ 50,817     $ 76,391     $ 100,171     $ 89,569  
Total assets
  $ 82,661     $ 113,491     $ 180,628     $ 264,816     $ 351,940     $ 315,710     $ 405,361  
Payables to brokers, dealers, futures commission merchants, and other regulated entities
  $ 4,577     $ 5,248     $ 2,163     $ 1,679     $ 2,769     $ 1,732     $ 5,857  
Payables to customers
  $ 5,031     $ 70,321     $ 106,741     $ 122,293     $ 196,985     $ 168,266     $ 216,587  
Convertible, redeemable preferred stock embedded derivative
  $     $ 99,286     $ 264,566     $ 82,785     $ 81,098     $ 123,604     $ 130,034  
Notes payable
  $     $ 27,500     $ 49,875     $ 39,375     $ 28,875     $ 31,500     $ 21,000  
Total shareholders’ equity/(deficit)
  $ 23,605     $ (154,242 )   $ (316,340 )   $ (172,154 )   $ (139,890 )   $ (188,831 )   $ (154,983 )
 
Selected Operational Data
 
                                                         
    As of December 31,   As of September 30,
    2005   2006   2007   2008   2009   2009   2010
    ($ in thousands unless otherwise stated)
 
Number of opened retail accounts(4):
                                                       
Total
    30,626       63,576       105,924       154,190       211,136       195,559       264,834  
China
    3,202       8,395       19,869       27,358       27,362       27,362       28,819  
Number of tradable retail accounts:
                                                       
Total
    11,761       27,836       41,120       36,744       51,652       47,374       70,618  
China
    1,631       4,799       9,702       2,839       1       8       1,029  
Adjusted net capital in excess of regulatory requirements(5)
  $ 20,065     $ 15,296     $ 44,856     $ 98,571     $ 71,087     $ 68,604     $ 60,565  
 
 
 
(footnotes continued on next page)


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        Nine Months Ended
    Year Ended December 31,   September 30,
    2005   2006   2007   2008   2009   2009   2010
    ($ in thousands unless otherwise stated)
 
Number of traded retail accounts:
                                                       
Total
    13,896       28,270       43,139       52,555       52,755       43,565       52,486  
China
    2,416       5,533       11,568       11,647       7       6       269  
Total trading volume (dollars in billions)
                                                       
Total
  $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,246.7     $ 928.3     $ 1,093.9  
China
  $ 24.4     $ 50.8     $ 103.4     $ 172.4     $ 0.4     $ 0.2     $ 0.7  
Net deposits received from retail customers (dollars in millions):
                                                       
Total
  $ 70.2     $ 102.8     $ 184.2     $ 277.3     $ 257.1     $ 186.9     $ 205.2  
China
  $ 6.8     $ 10.5     $ 26.0     $ 25.3     $ (1.4 )   $ (1.3 )   $ 0.3  
Retail revenue per million traded
  $ 176.8     $ 155.3     $ 175.2     $ 124.1     $ 123.0     $ 122.6     $ 154.1  
 
(4) Opened retail customer accounts represent accounts opened with us on a cumulative basis at any time since we commenced operations.
(5) Adjusted net capital in excess of regulatory requirements represents the excess funds over the regulatory minimum requirements as defined by the regulatory bodies that regulate our operating subsidiaries.
Selected Geographic Data
 
                                                         
                        Nine Months Ended
                        September 30,
    2005   2006   2007   2008   2009   2009   2010
 
Customer trading volume by region (dollars in billions)
                                                       
U.S. 
  $ 122.2     $ 238.3     $ 355.4     $ 878.9     $ 679.2     $ 506.8     $ 579.0  
China(6)(7)
    24.4       50.8       103.4       172.4       0.4       0.2 (7)     0.7 (8)
Canada
    9.6       29.2       58.6       122.9       142.5       122.2       62.9  
Europe, Middle East and Africa
    27.9       42.9       64.3       153.1       179.5       126.5       182.3  
Asia (ex-China)
    33.8       42.7       54.0       96.4       159.1       110.0       194.5  
Rest of World
    14.0       43.5       38.8       74.9       86.0       62.6       74.5  
                                                         
Total
  $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,246.7     $ 928.3     $ 1,093.9  
                                                         
 
(6) As a result of our review of our regulatory compliance in China, we decided to terminate our service offerings to residents of China and ceased our trading operations located in that country as of December 31, 2008.
(7) For the year ended December 31, 2009, a small number of existing customer accounts, which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China, continued to trade using our platform. The trading activity by these residual accounts resulted in the trading volume for the period. All of these accounts were closed as of December 31, 2009.
(8) Based on our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010.
 
Reconciliation of Net Income/(Loss) to Adjusted Net Income
 
Our Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D, and Series E contains a redemption feature which allows the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding. We have determined that this redemption feature effectively provides such holders with an embedded option derivative meeting the definition of an “embedded derivative” pursuant to Financial Accounting Standards Board Accounting Standards Codification 815, Derivatives and Hedging. Consequently, the embedded derivative must be bifurcated and accounted for separately. Because the embedded derivative in our preferred stock will no longer be applicable following conversion of our preferred stock in connection with this offering, there will be no further accounting adjustment required for change in fair value of the embedded derivative in our preferred stock. This redemption feature and related accounting treatment will no longer be applicable upon conversion of our preferred stock in connection with our initial public offering.

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Historically, in accordance with Financial Accounting Standards Board Accounting Standards Codification 815, we have adjusted the carrying value of the embedded derivative to the fair value of our company at each reporting date, based upon the Black-Scholes options pricing model, and reported the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded in our Consolidated Statements of Operations and Comprehensive Income. This has impacted our net income but has not affected our cash flow generation or operating performance. This accounting treatment causes our earnings to fluctuate, but in our view does not reflect operating or future performance of our company. We further discuss the accounting for the embedded derivative in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Fair Value of Derivative Liabilities.”
 
To reconcile between our net income/(loss) and adjusted net income, we use a financial measure not calculated in accordance with GAAP. Adjusted net income is a non-GAAP financial measure and represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock.
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2007     2008     2009     2009     2010  
    (in thousands unless otherwise stated)  
 
Net (loss)/income applicable to GAIN Capital Holdings, Inc. 
  $ (134,651 )   $ 231,426     $ 27,994     $ (20,519 )   $ (18,931 )
Change in fair value of convertible, redeemable preferred stock embedded derivative
    165,280       (181,782 )     (1,687 )     40,820       48,936  
                                         
Adjusted net income
  $ 30,629     $ 49,644     $ 26,307     $ 20,301     $ 30,005  
                                         
Adjusted earnings per common share
                                       
Basic
  $ 16.13     $ 38.56     $ 20.12     $ 15.54     $ 22.61  
                                         
Diluted
  $ 2.05     $ 3.31     $ 1.76     $ 1.36     $ 2.01  
                                         
 
We believe our reporting of adjusted net income and adjusted earnings per common share better assists investors in evaluating our operating performance. We also believe adjusted net income and adjusted earnings per common share give investors a presentation of our operating performance in prior periods that more accurately reflects how we will be reporting our operating performance in future periods. However, adjusted net income and adjusted earnings per common share are not a measure of financial performance under GAAP and such measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net income/(loss) and earnings per common share.
 
                         
    As of September 30, 2010  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
    (in thousands)  
 
Consolidated Statement of Financial Condition Data:
                       
Cash and cash equivalents
  $ 258,012                  
Total assets
  $ 405,361                  
Notes payable
  $ 21,000                  
Total convertible, redeemable preferred stock
  $ 130,034                  
Total shareholders’ deficit
  $ (154,983 )                
 
The pro forma financial information gives effect to the           -for-1 stock split of our common stock effected immediately prior to the completion of this offering and the conversion of all of our Series A, B, C, D, and E preferred stock into an aggregate of           shares of common stock upon the closing of this offering of our common stock.
 
The pro forma as adjusted financial information is based upon the actual initial public offering price and other terms of this offering determined at pricing.


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RISK FACTORS
 
Investing in our common stock involves a substantial risk. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to invest in our common stock. If any of the events highlighted in the following risks actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the trading price of our common stock could decline and you could lose all or part of your investment.
 
Risks Related to Our Business
 
The Retail Foreign Exchange, or Forex, Market Has Only Recently Become Accessible to Retail Investors and, Accordingly, We Have a Limited Operating History Upon Which to Evaluate Our Performance.
 
The retail forex market has only recently become accessible to retail investors. Prior to 1996, retail investors generally did not directly trade in the forex market and, we believe most current retail forex traders only recently viewed currency trading as an alternative investment class. We commenced doing business in October 1999 and our forex trading operations were launched in June 2000, at which time we began offering forex trading services domestically and internationally. Accordingly, we have only a limited operating history in a relatively new international retail forex trading market upon which you can evaluate our prospects and future performance. Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving domestic and global regulatory oversight and rules.
 
Our Revenue and Profitability Are Influenced by Trading Volume and Currency Volatility, Which Are Directly Impacted by Domestic and International Market and Economic Conditions That Are Beyond Our Control.
 
During the past few years, there has been significant disruption and volatility in the global financial markets. Many countries, including the United States, have recently experienced recessionary conditions. Our revenue is influenced by the general level of trading activity in the forex market. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s currency markets and to fluctuations in trading levels. We have generally experienced greater trading volume in periods of volatile currency markets. In the event we experience lower levels of currency volatility, our revenue and profitability will likely be negatively affected. Like other financial services firms, our business and profitability are directly affected by elements that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of foreign currency transactions, changes in supply and demand for currencies, movements in currency exchange rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one or more of these factors, or other factors, may adversely affect our business and results of operations and cash flows. A weakness in equity markets, such as the current economic slowdown causing a reduction in trading volume in U.S. or foreign securities and derivatives, could result in reduced trading activity in the forex market and, therefore, could have a material adverse effect on our business, financial condition and results of operations and cash flows. As a result, period-to-period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.
 
Reduced Spreads in Foreign Currencies, Levels of Trading Activity and Trading Through Alternative Trading Systems Could Reduce Our Profitability.
 
Computer-generated buy and sell programs and other technological advances and regulatory changes in the forex market may continue to tighten spreads on foreign currency transactions. Tighter spreads and increased competition could make the execution of trades and market making activities less profitable. In addition, new and enhanced alternative trading systems have emerged as an option for individual and institutional investors to avoid directing their trades through market makers, which could result in reduced revenue derived from our market making business.


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Our Risk-Management Policies and Procedures May Not Be Effective and May Leave Us Exposed to Unidentified or Unexpected Risks.
 
We are dependent on our risk-management policies and the adherence to such policies by our trading staff. Our policies, procedures and practices used to identify, monitor and control a variety of risks, including risks related to human error, customer defaults, market movements, fraud and money-laundering, are established and reviewed by the risk committee of our board of directors. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in the market. Our risk-management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing software or hardware failures. In addition, we may elect to adjust our risk-management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk-management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. These methods may not protect us against all risks or may protect us less than anticipated, in which case our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
We May Incur Material Trading Losses From Our Market Making Activities.
 
A substantial portion of our revenue and operating profits is derived from our role as a market maker. In our role as a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, foreign currencies. Since these activities involve the purchase or sale of foreign currencies for our own account, we may incur trading losses for a variety of reasons, including:
 
  •  price changes in foreign currencies;
 
  •  lack of liquidity in foreign currencies in which we have positions; and
 
  •  inaccuracies in our proprietary pricing mechanism, or rate engine, which evaluates, monitors and assimilates market data and reevaluates our outstanding currency quotes, and is designed to publish prices reflective of prevailing market conditions throughout the trading day.
 
These risks may affect the prices at which we are able to sell or buy foreign currencies, or may limit or restrict our ability to either resell foreign currencies that we have purchased or repurchase foreign currencies that we have sold.
 
In addition, competitive forces often require us to match the breadth of quotes other market makers display and to hold varying amounts and types of foreign currencies at any given time. By having to maintain positions in certain currencies, we are subjected to a high degree of risk. We may not be able to manage such risk successfully and may experience significant losses from such activities, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We Are Exposed to Losses Due to Lack of Accurate or Timely Information.
 
As a market maker, we provide liquidity by buying from sellers and selling to buyers. We may frequently trade with parties who have different or more timely information than we do, and as a result, we may accumulate unfavorable positions preceding price movements in currency pairs in which we are a market maker. In a forex trade, participants buy one currency and simultaneously sell another currency. We refer to the two currencies that make up a forex trade as a currency pair. The first currency noted in the pair is the base currency and the second is the counter currency. Should the frequency or magnitude of these unfavorable positions increase, our business, financial condition and results of operations and cash flows would be materially adversely affected.


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We Depend on Our Proprietary Technology. Any Disruption or Corruption of Our Proprietary Technology or Our Inability to Maintain Technological Superiority in Our Industry Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows. We May Experience Failures While Developing Our Proprietary Technology.
 
We rely on our proprietary technology to receive and properly process internal and external data. Any disruption for any reason in the proper functioning, or any corruption, of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits, or require us to suspend our services and could have a material adverse effect on our business, financial condition and results of operations and cash flows. In order to remain competitive, our proprietary technology is under continuous development and redesign. As we develop and redesign our proprietary technology, there is an ongoing risk that failures may occur and result in service interruptions or other negative consequences such as slower quote aggregation, slower trade execution, erroneous trades, or mistaken risk-management information.
 
Our success in the past has largely been attributable to our proprietary technology that has taken many years to develop. We believe our proprietary technology has provided us with a competitive advantage relative to many forex market participants. If our competitors develop more advanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. The forex market is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.
 
Systems Failures Could Cause Interruptions in Our Services or Decreases in the Responsiveness of Our Services Which Could Harm Our Business.
 
If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems have in the past experienced periodic interruptions and disruptions in operations, which we believe will continue to occur from time to time. Our systems also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, our DRP may not work effectively during an emergency. Any systems failure that causes an interruption in our services or decreases the responsiveness of our services could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.
 
We May Not Be Able to Protect Our Intellectual Property Rights or May Be Prevented From Using Intellectual Property Necessary for Our Business.
 
We rely on a combination of trademark, copyright, trade secret and fair business practice laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our brand. We also enter into confidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. We also rigorously control access to proprietary technology. We do not have any patents. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We also license or are permitted to use intellectual property or technologies owned by others. In the event such intellectual property or technology becomes material to our business, our inability to continue use such technologies would have a material adverse effect on our business. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.
 
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.


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Our Cost Structure Is Largely Fixed. If Our Revenues Decline and We Are Unable to Reduce Our Costs, Our Profitability Will Be Adversely Affected.
 
Our cost structure is largely fixed. We base our cost structure on historical and expected levels of demand for our products and services, as well as our fixed operating infrastructure, such as computer hardware and software, hosting facilities and security and staffing levels. If demand for our products and services declines and, as a result, our revenues decline, we may not be able to adjust our cost structure on a timely basis and our profitability may be materially adversely affected.
 
Attrition of Customer Accounts and Failure to Attract New Accounts Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows. Even if We Do Attract New Customers, We May Fail to Attract the Customers in a Cost-Effective Manner, Which Could Materially Adversely Affect Our Profitability and Growth.
 
Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods. Although we offer products and tailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customers may not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2009, we incurred sales and marketing expenses of $36.9 million. Although we have spent significant financial resources on sales and marketing expenses and related expenses and plan to continue to do so, these efforts may not be cost-effective at attracting new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print and television advertising, are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, our sales and marketing methods are subject to regulation by the Commodity Futures Trading Commission, or CFTC, and National Futures Association, or NFA. The rules and regulations of these organizations impose specific limitations on our sales methods, advertising and marketing. If we do not achieve our advertising objectives, our profitability and growth may be materially adversely affected.
 
Our Business Could Be Adversely Affected if Global Economic Conditions Continue to Negatively Impact Our Customer Base.
 
Our customer base is primarily comprised of individual retail customers who view foreign currency trading as an alternative investment class. If global economic conditions continue to negatively impact the forex market or adverse developments in global economic conditions continue to limit the disposable income of our customers, our business could be materially adversely affected as our customers may choose to curtail their trading in the forex market which could result in reduced customer trading volume and trading revenue.
 
We Are Subject to Litigation Risk Which Could Adversely Affect Our Reputation, Business, Financial Condition and Results of Operations and Cash Flows.
 
Many aspects of our business involve risks that expose us to liability under U.S. federal and state laws, as well as the rules and enforcement efforts of our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other market participants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, made materially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcement actions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed to have violated applicable rules and regulations in various jurisdictions.
 
The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms has been increasing and may continue to increase. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers, regulators or self-regulatory


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organizations may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.
 
Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts and collateral. Although our customer agreements generally provide that we may exercise such rights with respect to customer accounts and collateral as we deem reasonably necessary for our protection, our exercise of these rights may lead to claims by customers that we did so improperly.
 
Even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.
 
We May Be Subject to Customer Litigation, Financial Losses, Regulatory Sanctions and Harm to Our Reputation as a Result of Employee Misconduct or Errors That Are Difficult to Detect and Deter.
 
There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Our employees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activities on behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as improperly record or otherwise try to hide improper activities from us.
 
In addition, employee errors, including mistakes in executing, recording or reporting transactions for customers, may cause us to enter into transactions that customers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are unwound or reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errors may be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems.
 
Misconduct by our employees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to deter or detect employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commit good faith errors that could subject us to financial claims for negligence or otherwise, as well as regulatory actions.
 
Misconduct by employees of our customers can also expose us to claims for financial losses or regulatory proceedings when it is alleged we or our employees knew or should have known that an employee of our customer was not authorized to undertake certain transactions. Dissatisfied customers can make claims against us, including claims for negligence, fraud, unauthorized trading, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by associated persons or failures in the processing of transactions.
 
Any Restriction in the Availability of Credit Cards as a Payment Option for Our Customers Could Adversely Affect Our Business, Financial Condition and Results of Operations and Cash Flows.
 
We currently allow our customers to use credit cards to fund their accounts with us and 76.7% of our customers deposits were funded in this manner for the nine months ended September 30, 2010. There is a risk that in the future, new regulations or credit card issuing institutions may restrict the use of credit and debit cards as a means to fund accounts used to trade in investment products. The elimination or a reduction in the availability of credit cards as a means to fund customer accounts or any increase in the fees associated with such use, could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our Customer Accounts May Be Vulnerable to Identity Theft and Credit Card Fraud.
 
Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. We continue to work with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. When there is unauthorized access to credit card


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data that results in financial loss, there is the potential that we could experience reputational damage and parties could seek damages from us.
 
Failure to Maintain the Anonymity of Our Institutional Customers on Our GTX Electronic Communications Network, or ECN, Could Harm Our Reputation and Result in a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
We operate our GTX ECN as a fully anonymous trading environment that offers our institutional customers direct market access and trade execution capabilities. If outside individuals determine the identity of our institutional customers, we may be subject to customer claims against us for negligence, fraud, failure to supervise, employee error and intentional misconduct, among others. Any such claims may harm our reputation and result in a material adverse effects on our business, financial condition and results of operations and cash flows.
 
A Financial Services Firm’s Reputation Is Critically Important. If Our Reputation Is Harmed, or the Reputation of the Online Financial Services Industry as a Whole Is Harmed, Our Business, Financial Condition and Results of Operations and Cash Flows may be Materially Adversely Affected.
 
Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, client data protection, record keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanction would materially adversely affect our reputation, thereby reducing our ability to attract and retain customers and employees.
 
In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or forex industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. The perception of instability within the online financial services industry could materially adversely affect our ability to attract and retain customers.
 
The Loss of Our Key Employees Would Materially Adversely Affect Our Business, Including Our Ability to Grow Our Business.
 
Our key employees, including Glenn Stevens, our chief executive officer, and Alexander Bobinski, our executive vice president, operations, have significant experience in the forex industry and have made significant contributions to our business. Henry Lyons, our chief financial officer, has significant experience with publicly traded companies and has made significant contributions to our company. In addition, Timothy O’Sullivan, our chief dealer, Samantha Roady, our chief marketing officer, and Andrew Haines, our chief information officer, have made significant contributions to our business. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. In addition, our ability to grow our business is dependent, to a large degree, on our ability to retain such employees. Currently, we have entered into an employment agreement with Mr. Stevens which will continue, unless earlier terminated by the parties, until December 31, 2010. The term of Mr. Stevens’ agreement will be automatically extended for an additional one-year period unless terminated. Our employment of Mr. Lyons, Mr. Bobinski, Mr. O’Sullivan, Mr. Haines and Ms. Roady is “at will” and not for any specified period of time.


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Any Future Acquisitions May Result in Significant Transaction Expenses, Integration and Consolidation Risks and Risks Associated With Entering New Markets, and We May Be Unable to Profitably Operate Our Consolidated Company.
 
Although our growth strategy has not focused historically on acquisitions, we may in the future selectively pursue acquisitions and new businesses. Any future acquisitions may result in significant transaction expenses and present new risks associated with entering additional markets or offering new products and integrating the acquired companies. Because acquisitions historically have not been a core part of our growth strategy, we do not have significant experience in successfully completing acquisitions. We may not have sufficient management, financial and other resources to integrate companies we acquire or to successfully operate new businesses and we may be unable to profitably operate our expanded company. Additionally, any new businesses that we may acquire, once integrated with our existing operations, may not produce expected or intended results.
 
The Expansion of Our Trading Activities Into Other Financial Products, Including Listed Securities, Contracts for Difference, or CFDs, Over-the-Counter, or OTC, Currency Derivatives and Gold and Silver Spot Trading Entails Significant Risk, and Unforeseen Events in Such Business Could Have An Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
All of the risks that pertain to our trading activities in the forex market also apply to our listed securities, CFDs, OTC currency derivatives and gold and silver spot trading and any other products we may offer in the future. These risks include market risk, counterparty risk, liquidity risk, technology risk, third-party risk and risk of human error. In addition, we have limited experience outside of the forex market and even though we expect to ease into these activities very slowly through internal growth or acquisition, any kind of unexpected event can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our existing trading platform or our failure to properly manage the market risks associated with making-markets for new products. With respect to CFDs, the volatility characteristics of the CFD market may have an adverse impact on our ability to maintain profit margins similar to the profit margins we have realized with respect to forex trading. In addition, by further expanding our listed securities offerings, we are expanding from what is primarily a market making business model into a business model that includes brokerage activities that require reliance upon third-party clearing firms to hold our customers’ funds and execute our customers’ trades. The introduction of these and other potential financial products also poses a risk that our risk-management policies, procedures and practices, and the technology that supports such activities, will be unable to effectively manage these new risks to our business. In addition we would be subject to local securities laws for all of these offerings. Our non-U.S. operating subsidiaries, including, GAIN Capital-Forex.com U.K., Ltd., which is licensed with the Financial Services Authority in the United Kingdom, GAIN Capital-Forex.com Australia, Pty. Ltd., which is licensed with the Australian Securities and Investment Commission, and GAIN Capital Forex.com Japan, Co. Ltd., which is licensed with the Financial Services Authority in Japan, offer and sell CFDs outside the United States to non-U.S. persons. CFDs are not and may not be offered in the United States by us and are not eligible for resale to U.S. persons. They are not currently registered with the U.S. Securities and Exchange Commission or any other U.S. regulator. CFDs may not be enforceable in the United States. To the extent our current CFD product offerings constitute an offer or sale of securities under the U.S. federal securities laws, we will need to comply with those U.S. federal securities laws. Failure to effectively manage these risks or properly comply with local laws or regulations relating to our product offerings, including U.S. federal securities laws, may expose us to fines, penalties or other sanctions that could have a material adverse effect upon our business, financial condition and results of operations and cash flows.
 
We May Be Unable to Effectively Manage Our Rapid Growth and Retain Our Customers.
 
The rapid growth of our business during our short history has placed significant demands on our management and other resources. If our business continues to grow at a rate consistent with our historical growth, we may need to expand and upgrade the reliability and scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expand and upgrade our technology systems and infrastructure to accommodate increases in our business activity in a timely manner, which could lead to operational breakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigation or customer claims, regulatory sanctions or increased regulatory scrutiny.


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In addition, due to our rapid growth, we will need to continue to attract, hire and retain highly skilled and motivated officers and employees. We may not be able to attract or retain the officers and employees necessary to manage this growth effectively.
 
We May Be Unable to Respond to Customers’ Demands for New Services and Products and Our Business, Financial Condition and Results of Operations and Cash Flows May Be Materially Adversely Affected.
 
The market for Internet-based trading is characterized by:
 
  •  changing customer demands;
 
  •  the need to enhance existing services and products or introduce new services and products;
 
  •  evolving industry practices; and
 
  •  rapidly evolving technology solutions.
 
New services and products provided by our competitors may render our existing services and products less competitive. Our future success will depend, in part, on our ability to respond to customers’ demands for new services and products on a timely and cost-effective basis and to adapt to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing or marketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction or availability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We Face Significant Competition. Many of Our Competitors and Potential Competitors Have Larger Customer Bases, More Established Name Recognition and Greater Financial, Marketing, Technological and Personnel Resources Than We Do Which Could Put Us at a Competitive Disadvantage. Additionally, Some of Our Competitors and Many Potential Competitors Are Better Capitalized Than We Are, and Are Able to Obtain Capital More Easily Which Could Put Us at a Competitive Disadvantage.
 
We compete in the OTC markets based in part on our ability to execute our customers’ trades at competitive prices, to retain our existing customers and to attract new customers. Our competitors range from numerous sole proprietors with limited resources to a few sophisticated institutions which have larger customer bases, more established name recognition and substantially greater financial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to:
 
  •  develop products and services that are similar to ours, or that are more attractive to customers than ours, in one or more of our markets;
 
  •  provide products and services we do not offer;
 
  •  provide execution and clearing services that are more rapid, reliable or efficient, or less expensive than ours;
 
  •  offer products and services at prices below ours to gain market share and to promote other businesses, such as forex options listed securities, CFDs, spot-precious metals and OTC derivatives;
 
  •  adapt at a faster rate to market conditions, new technologies and customer demands;
 
  •  offer better, faster and more reliable technology;
 
  •  outbid us for desirable acquisition targets;
 
  •  more efficiently engage in and expand existing relationships with strategic alliances;
 
  •  market, promote and sell their products and services more effectively; and
 
  •  develop stronger relationships with customers.


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These larger and better capitalized competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do, and thus, may be better able to respond to changes in the forex industry, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidity requirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair our ability to provide clearing services and attract customer assets, both of which are important sources of revenue. Access to capital also determines the degree to which we can expand our operations. Thus, if we are unable to maintain or increase our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue and earnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share or increase it in desirable markets. In addition, our competitors could offer their services at lower prices, and we may be required to reduce our fees significantly to remain competitive. A fee reduction without a commensurate reduction in expenses would decrease our profitability. We may not be able to compete effectively against these firms, particularly those with greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations and cash flows. We may in the future face increased competition, resulting in narrowing bid/offer spreads which could materially adversely affect our business, financial condition and results of operations and cash flows.
 
Our International Operations Present Special Challenges and Our Failure to Adequately Address Such Challenges or Compete in These Markets, Either Directly or Through Joint Ventures With Local Firms, Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
In 2009, we generated approximately 45.5% of our trading volume from customers outside the United States. Expanding our business in other emerging markets is an important part of our growth strategy. Due to certain cultural, regulatory and other challenges relevant to those markets, however, we may be at a competitive disadvantage in those regions relative to local firms or to international firms that have a well-established local presence. These challenges include:
 
  •  less developed or mature local technological infrastructure and higher costs, which could make our products and services less attractive or accessible in emerging markets;
 
  •  difficulty in complying with the diverse regulatory requirements of multiple jurisdictions, which may be more burdensome, not clearly defined, and subject to unexpected changes, potentially exposing us to significant compliance costs and regulatory penalties;
 
  •  less developed and established local financial and banking infrastructure, which could make our products and services less accessible in emerging markets;
 
  •  reduced protection of intellectual property rights;
 
  •  inability to enforce contracts in some jurisdictions;
 
  •  difficulties and costs associated with staffing and managing foreign operations, including reliance on newly hired local personnel;
 
  •  tariffs and other trade barriers;
 
  •  currency and tax laws that may prevent or restrict the transfer of capital and profits among our various operations around the world; and
 
  •  time zone, language and cultural differences among personnel in different areas of the world.
 
In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to do business locally, we may seek to operate through joint ventures with local firms as we have done, for example, in Japan. Doing business through joint ventures may limit our ability to control the conduct of the business and could expose us to reputational and greater operational risks. We may also face intense competition from other international firms over relatively scarce opportunities for market entry. Given the intense


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competition from other international brokers that are also seeking to enter these fast-growing markets, we may have difficulty finding suitable local firms willing to enter into the kinds of relationships with us that we may need to gain access to these markets. This competition could make it difficult for us to expand our business internationally as planned.
 
GAIN Capital Holdings, Inc. Is a Holding Company and Accordingly Depends on Cash Flow From Its Operating Subsidiaries to Meet Our Obligations. If Our Operating Subsidiaries Are Unable to Pay Us Dividends When Needed, We May Be Unable to Satisfy Our Obligations When They Arise.
 
As a holding company with no material assets other than the stock of our operating subsidiaries, nearly all of our funds generated from operations are generated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies, including the CFTC and NFA in the United States, the Financial Services Authority in the United Kingdom, the Financial Services Agency in Japan, the Securities and Futures Commission in Hong Kong and the Cayman Islands Monetary Authority in the Cayman Islands, relating to liquidity and capital standards, which limit funds available for the payment of dividends to the holding company. Accordingly, if our operating subsidiaries are unable, due to regulatory restrictions or otherwise, to pay us dividends and make other payments to us when needed, we may be unable to satisfy our obligations when they arise.
 
Risks Related to Regulation
 
We Operate in a Heavily Regulated Environment That Imposes Significant Requirements and Costs on Us. Failure to Comply With the Rapidly Evolving Laws and Regulations Governing Our Forex and Other Businesses May Result in Regulatory Agencies Taking Action Against Us, Which Could Significantly Harm Our Business.
 
In those jurisdictions in which we are regulated, including the United States, the United Kingdom, Japan, Singapore, Australia, Hong Kong and the Cayman Islands, we are regulated by governmental bodies and/or self-regulatory organizations. We received local authorization to conduct our forex trading services in Australia in March 2010.
 
Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders. Substantially all of our operations involving the execution and clearing of transactions in foreign currencies, CFDs, gold and silver and securities are conducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations. In the United States, we are principally regulated by the CFTC, the U.S. Securities and Exchange Commission, or SEC, the Financial Industry Regulatory Authority, or FINRA, and the NFA. We are also regulated by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the United Kingdom, the Australian Securities and Investment Commission in Australia, and the Securities and Futures Commission in Hong Kong, among others. After we have successfully completed our initial public offering we plan to register for a license to trade forex in Singapore. In addition, we operate GAIN Capital Forex.com Japan, Co. Ltd., a Tokyo-based market maker authorized by the Financial Supervisory Authority in Japan. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations. Among other things, we are subject to regulation with regard to: our sales practices, including our interaction with and solicitation of customers and our marketing activities; the custody, control and safeguarding of our customers’ assets; maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries; making regular financial and other reports to regulators; licensing for our operating subsidiaries and our employees and the conduct of our directors, officers, employees and affiliates. Compliance with these regulations is complicated, time consuming and expensive. Our ability to comply with all applicable laws and regulations is dependent in large part on our internal compliance function as well as our ability to attract and retain qualified compliance personnel, which we may not be able to do. If a regulator finds that we have failed to comply with applicable rules and regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in some cases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. In addition, we could incur significant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies. An adverse resolution of any future actions or


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investigations by such regulatory agencies against us could result in a negative perception of our company and cause the market price of our common stock to decline or otherwise have an adverse effect on our business, financial condition and results of operations and cash flows.
 
As a Result of Recent Regulatory Changes in Certain Jurisdictions, Our Operations and Profitability May Be Disrupted and We May Be Subject to Regulatory Action Taken Against Us if a Regulatory Authority Deems Our Operations Are Out of Compliance, or Requires Us to Comply With Additional Regulatory Requirements.
 
Recently, the legislative and regulatory environment in which we operate has undergone significant changes and there are likely to be future regulatory changes affecting our industry. The financial services industry in general has been subject to increasing regulatory oversight in various jurisdictions throughout the world. We have benefited from recent regulatory liberalization in several emerging markets in developing regions which has enabled us to increase our presence in those markets. Our ability to continue to expand our presence in these regions, however, will depend on continued evolution of the regulatory environment and our continued compliance. Moreover, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms are modified. To the extent our current activities are deemed noncompliant with the law in a given jurisdiction, we may incur a disruption in services offered to current customers as we are forced to comply with additional regulations.
 
In August 2010, the CFTC released new rules relating to retail forex regarding, among other things, increased initial minimum security deposits, registration, risk disclosures relating to customer profits, record keeping, financial reporting, minimum capital and other operational standards. The impact on us of these new CFTC regulations, which became effective on October 18, 2010, is uncertain. In particular, the inability to offer customers who are U.S. residents leverage in excess of 50-to-1 for major currency pairs designated by the NFA and 20-to-1 for all other currency pairs (as compared to 100-to-1 previously) may diminish the trading volume of these customers which may affect our revenue and profitability. In addition, we are uncertain of the effect the required risk disclosures will have on our ability to attract and retain our retail customers.
 
Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010 will have broad effects on global derivatives markets generally. For example, this legislation may affect the ability of forex market makers to do business or affect the prices and terms on which such market makers will do business with us. These effects may adversely impact our ability to provide forex transactions to our customers and could have a material adverse affect on our business and profitability. Beginning in October 2010, the Dodd-Frank Act will require us to ensure that our customers resident in the United States have accounts with our NFA-registered operating entity and not our international entities. As a result, some of our customers may decide to transact their trading with a forex broker who is not subject to this requirement.
 
In the European Union, new laws have been proposed to regulate OTC derivatives. These proposals would, among other things, require mandatory central clearing of some derivatives, higher collateral requirements, and higher capital charges for certain OTC derivatives. These proposals are still at the consultation stage and detailed legislative proposals have not yet been published. Accordingly, it is difficult to ascertain what impact these proposals, once adopted, will have on our business, financial condition and results of operations and cash flows. If the products that we trade are subjected to mandatory central clearing, exchange trading, higher collateral requirements or higher capital charges, this may have an impact upon the economics of our business and, thus, have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The Australian Securities and Investment Commission is considering new regulations which would limit certain types of advertising, provide disclosure benchmarks for OTC CFD providers, and impose a policy on customer suitability. In Japan, new regulations, which became effective in August 2010, prohibit our ability to offer Japanese residents leverage in excess of 50-to-1 and in August of 2011 the maximum allowable the leverage in Japan will decrease to 25-to-1. Both of these changes may diminish the trading volume of these customers which may in turn affect our financial condition, results of operations and cash flows. These and other future regulatory changes could have a material adverse effect on our business and profitability and the forex industry as a whole.
 
In addition, the regulatory enforcement environment has created uncertainty with respect to certain practices or types of transactions that, in the past, may have been considered permissible and appropriate among financial


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services firms. More recently, certain practices have been called into question or with respect to which additional regulatory requirements have been imposed. Legal or regulatory uncertainty and additional regulatory requirements could result in a loss of, or increase in the cost of, business.
 
Servicing Customers Via the Internet May Require Us to Comply With the Laws and Regulations of Each Country in Which We Are Deemed to Conduct Business. Failure to Comply With Such Laws May Negatively Impact Our Financial Results.
 
Since our services are available over the Internet in foreign countries and we have customers residing in foreign countries, foreign jurisdictions may require us to qualify to do business in their country. We believe that the number of our customers residing outside of the United States will increase over time. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to Internet services available to their citizens from service providers located elsewhere. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
As We Operate in Many Jurisdictions Without Local Registration, Licensing or Authorization, We May Be Subject to Possible Enforcement Action and Sanction for Our Operations in Such Jurisdictions if Our Operations Are Deemed to Have Violated Regulations in Those Jurisdictions. Our Growth May Be Limited by Various Restrictions and We Remain at Risk That We May Be Required to Cease Operations if We Become Subject to Regulation by Local Government Bodies.
 
For the nine months ended September 30, 2010, 71.6% of our trading volume was from customers in jurisdictions in which we are currently licensed or authorized by local government bodies or self-regulatory organizations. We determine the nature and extent of services we can offer and the manner in which we conduct our business in the various jurisdictions based on a variety of factors.
 
In jurisdictions in which we are not currently licensed or authorized by local government bodies or self-regulatory organizations, we are generally restricted from:
 
  •  direct marketing to retail investors including the operation of a website specifically targeted to investors in a particular foreign jurisdiction; and
 
  •  dealing with customers unless they can be classified as professional, sophisticated or high net worth investors.
 
These restrictions may limit our ability to grow our business in that jurisdiction or may result in increased overhead costs or degradation in service provision to customers in that jurisdiction. Accordingly, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms in certain of those markets are modified. Consequently, we cannot assure you that our international expansion will continue and that we will be able to develop our business in emerging markets as we currently plan.
 
Furthermore, we may be subject to possible enforcement action and sanction if we are determined to have previously offered, or currently offer, our services in violation of local government’s regulations. In these circumstances, we are exposed to sanction by local enforcement agencies and our contracts with customers may be unenforceable. We may also be required to cease the conduct of our business with customers in the relevant jurisdiction and/or we may determine that compliance with the regulatory requirements for continuance of the business is too onerous to justify making the necessary changes to continue that business. For example, between 2006 and 2008, a significant portion of our trading volume, trading revenue, net income and cash flow were generated from residents of China. When we commenced offering our forex trading services to residents of China in October 2003, we believed that our operations were in compliance with applicable Chinese regulations. The regulatory rules and process in China are complex and are not as clear as those in many other jurisdictions. As a result of our review of our regulatory compliance in China during 2008, we decided to terminate all service offerings to residents of China and ceased our trading support operations located in that country. As of December 31, 2008, we no longer accepted new


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customers or maintained direct customer accounts from residents of China. However, due to an ongoing relationship with one of our introducing brokers, eight legacy accounts which were originally sourced through that introducing broker prior to the termination of our service offering in China, remained open. The trading activity by these legacy accounts resulted in an immaterial amount of trading volume to us and were all closed as of December 31, 2009. Pursuant to our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010. We may be subject to fines, penalties or sanctions as a result of our current and historical forex trading services through the Internet to Chinese residents, including our continuation of the eight legacy accounts in China during 2009.
 
The Canadian Regulatory Environment Is Complex and Evolving, and Our Forex Trading Services May Not Be Compliant With the Regulations of All Provinces and Territories in Canada. If We Are Deemed to Have Violated Local Regulations, or if Local Regulators Require, We May Need to Register Our Business in One or More Provinces or Territories, or Offer Our Trading Services Through White Label Partners. Any Such New White Label Partnership Could Negatively Impact Our Profitability Because We Would Have to Share a Portion of Our Revenue With the White Label Partner.
 
Approximately 5.7% of our customer trading volume for the nine months ended September 30, 2010 was generated from customers located in Canada, with approximately half of such volume generated from accounts in the Province of Ontario. In Canada, the securities industry is governed by provincial or territorial legislation, and there is no national regulator. Local legislation differs from province to province and territory to territory. We have previously determined that the provincial laws of British Columbia would require us to register as a dealer to offer our trading services directly, so we have conducted our business in British Columbia through Questrade, Inc., a registered investment dealer in Canada, since December 1, 2004. In other provinces and territories in Canada, where we conduct the bulk of our Canadian business, we do so without registering as a registered investment dealer.
 
The Canadian regulatory environment is complex and evolving, and we cannot be certain that our forex trading services are currently compliant with the regulations of each province and territory outside British Columbia. Moreover, local regulators in one or more provinces or territories may in the future announce that forex trading services must be carried out through a registered dealer. For example, on October 30, 2009, the Ontario Securities Commission issued interim guidance pursuant to a staff notice which took the position that rolling spot foreign exchange contracts and similar over-the-counter derivative contracts fall under the definition of securities, which would, absent exemptive relief, require, among other things, us to comply with the dealer registration and prospectus delivery requirements of Ontario securities law. Accordingly, if we deem it advisable, we may seek exemptive relief from these requirements. If we are unsuccessful, we may seek to offer our services in the affected province or territory through a white label partnership with a registered dealer, or seek to register as a dealer in order to offer our trading services directly. In a province or territory where we need to enter into a white label partnership, our profitability would decrease significantly because we would have to share a portion of the revenue generated from customers in that province or territory with the white label partner. In addition to the potential adverse effect on our results of operations as a result of a need to enter into white label partnerships for our business in Canada, we may also be subject to enforcement actions and penalties or customer claims in any province or territory, including Ontario despite our planned application for exemptive relief, where our forex trading operations are deemed to have violated local regulations.
 
We Are Required to Maintain High Levels of Capital, Which Could Constrain Our Growth and Subject Us to Regulatory Sanctions.
 
Our regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries that conduct our spot foreign exchange, CFDs, gold and silver spot trading and securities business. Additionally, as a Futures Commission Merchant, or FCM, and a Forex Dealer Merchant, or FDM, we are required to maintain adjusted net capital of $20.0 million plus 5.0% of the amount of customer liabilities over $10.0 million. As of September 30, 2010, we were required to maintain approximately $31.9 million minimum capital in the aggregate across all jurisdictions, representing a $9.2 million increase from our minimum regulatory capital requirement at September 30, 2009. Regulators continue to evaluate and modify regulatory capital requirements from time to time in response to market events and to improve the stability of the international


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financial system. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed and ultimately adopted, which could further increase our minimum capital requirements in the future.
 
Even if regulators do not change existing regulations or adopt new ones, our minimum capital requirements will generally increase in proportion to the size of our business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increase our revenue, and our inability to increase our capital on a cost-efficient basis could constrain our growth. In addition, in many cases, we are not permitted to withdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate our capital resources most efficiently throughout our global operations. In particular, these restrictions could adversely affect our ability to withdraw funds needed to satisfy our ongoing operating expenses, debt service and other cash needs and could limit any future decision by our board to declare dividends.
 
Regulators monitor our levels of capital closely. We are required to report the amount of regulatory capital we maintain to our regulators on a regular basis, and we must report any deficiencies or material declines promptly. While we expect that our current amount of regulatory capital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to report any capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct business and revocation of our registrations. The imposition of one or more of these sanctions could ultimately lead to our liquidation, or the liquidation of one or more of our subsidiaries.
 
Procedures and Requirements of the Patriot Act May Expose Us to Significant Costs or Penalties.
 
As participants in the financial services industry, we are, and our subsidiaries are, subject to laws and regulations, including the Patriot Act of 2001, that require that we know our customers and monitor transactions for suspicious financial activities. The cost of complying with the Patriot Act and related laws and regulations is significant. We face the risk that our policies, procedures, technology and personnel directed toward complying with the Patriot Act are insufficient and that we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on our business, financial condition and results of operations and cash flows. In addition, as an online financial services provider with customers worldwide, we may face particular difficulties in identifying our customers and monitoring their activities.
 
Risks Related to Third Parties
 
We Are Dependent on Wholesale Forex Trading Partners to Continually Provide Us With Forex Market Liquidity. In the Event That We No Longer Have Access to the Prices and Levels of Liquidity That We Currently Have, We May Be Unable to Provide Competitive Forex Trading Services, Which Will Materially Adversely Affect Our Business, Financial Condition and Results of Operations and Cash Flows.
 
Given the level of our customers’ trading volume, in order to continually provide our market making services, we rely on third-party financial institutions to provide us with forex market liquidity. As of September 30, 2010, we maintain relationships with three established global prime brokers, including Deutsche Bank AG, or Deutsche Bank, UBS AG, or UBS, and the Royal Bank of Scotland plc, or RBS, as well as relationships with 13 additional wholesale forex trading partners, and access to other trading platforms and other wholesale forex trading partners, which give us access to over 25 potential liquidity providers. Through these relationships, our access to a pool of forex liquidity ensures that we are able to execute our customers’ trades in any of the 39 currency pairs or six CFD product offerings we offer and in notional amount they request. These wholesale forex trading partners, although under contract with us, have no obligation to provide us with liquidity and may terminate our arrangements at any time. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.


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We Depend on the Services of Prime Brokers to Assist in Providing Us Access to Liquidity Through Our Wholesale Forex Trading Partners. The Loss of One or More of Our Prime Brokerage Relationships Could Lead to Increased Transaction Costs and Capital Posting Requirements, As Well As Having a Negative Impact on Our Ability to Verify Our Open Positions, Collateral Balances and Trade Confirmations.
 
We depend on the services of prime brokers to assist in providing us access to liquidity through our wholesale forex trading partners. We currently have established three prime brokerage relationships with major financial institutions, including Deutsche Bank, UBS, and RBS, which act as central hubs through which we are able to deal with our existing wholesale forex trading partners. In return for paying a transaction-based prime brokerage fee, we are able to aggregate our customers and our trading positions, thereby reducing our transaction costs and increasing the efficiency of the capital we are required to post as collateral in order to conduct our market making trading activities. Since we trade with our wholesale forex trading partners through our prime brokers, they also serve as a third-party check on our open positions, collateral balances and trade confirmations. If we were to lose one or more of our prime brokerage relationships, we could lose this source of third-party verification of our trading activity, which could lead to an increased number of record keeping or documentation errors. Although we have relationships with wholesale forex trading partners who could provide clearing services as a back-up for our prime brokerage services, if we were to experience a disruption in prime brokerage services due to a financial, technical or other development adversely affecting any of our current prime brokers, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another financial institution in a timely fashion. In the event of the insolvency of a prime broker, we might not be able to fully recover the assets we have deposited (and have deposited on behalf of our customers) with the prime broker or our unrealized profits since we will be among the prime broker’s unsecured creditors.
 
A Systemic Market Event That Impacts the Various Market Participants With Whom We Interact Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
As a forex market maker, we interact with various third parties through our relationships with our prime brokers, wholesale forex trading partners, white label partners and introducing brokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, a system collapse in the financial system could occur, which would have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We Are Subject to Risk of Default by Financial Institutions That Hold Our Funds and Our Customers’ Funds.
 
We have significant deposits with banks and other financial institutions. Pursuant to current guidelines set forth by NFA and CFTC for our U.S.-regulated subsidiaries, we are not required to segregate customer funds from our own funds. As such, we aggregate our customers’ funds and our funds and hold them in collateral and deposit accounts at various financial institutions. In the event of insolvency of one or more of the financial institutions with whom we have deposited these funds, both us and our customers may not be able to recover our funds. Because our customers’ funds are aggregated with our own, they are not insured by the Federal Deposit Insurance Corporation. In any such insolvency we and our customers would rank as unsecured creditors in respect of claims to funds deposited with any such financial institution. As a result, we may be subject to claims by customers due to the loss of such funds and our business would be harmed by the loss of our funds.
 
We Are Subject to Counterparty Risk Whereby Defaults by Parties With Whom We Do Business Can Have an Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
Our forex market making operations require a commitment of capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. Our margin policy allows customers to leverage their account balances by trading notional amounts that may be significantly larger than their cash balances. We mark our customers’ accounts to market each time a currency price in their portfolio changes. While this allows us to closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change. Although we have the ability to alter our margin requirements without prior notice to our customers, this may not eliminate the risk that our access to


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liquidity becomes limited or market conditions, including currency price volatility and liquidity constraints, change faster than our ability to modify our margin requirements. If our customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, since the value of our customers’ forex positions is subject to fluctuation as market prices change, we are subject to market risk in the liquidation of customer collateral to satisfy such obligations. In light of the current turbulence in the global economy, we face increased risk of default by our customers and other counterparties. For example, during the second half of 2008, Lehman Brothers Holdings Inc. declared bankruptcy, and many major U.S. financial institutions consolidated, were forced to merge or were put into conservatorship by the U.S. federal government. Any liability arising from our forex operations could be significant and could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Failure of Third-Party Systems or Third-Party Service and Software Providers Upon Which We Rely Could Adversely Affect Our Business.
 
We rely on certain third-party computer systems or third-party service and software providers, including trading platforms, back-office systems, Internet service providers and communications facilities. For example, for the nine months ended September 30, 2010, 32.8% of our forex trading volume was derived from trades utilizing our MetaTrader platform, a third-party trading platform we license that is popular in the international retail trading community and offers our customers a choice in trading interfaces. Additionally, we also rely on an agreement we entered into with Trading Central whereby Trading Central will provide us with investment research that we distribute to our customers. Any interruption in these third-party services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any third party is terminated, we may not be able to find an alternative systems or services provider on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our Computer Infrastructure May Be Vulnerable to Security Breaches. Any Such Problems Could Jeopardize Confidential Information Transmitted Over the Internet, Cause Interruptions in Our Operations or Give Rise to Liabilities to Third Parties.
 
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the safeguarding of confidential personal information could also inhibit the use of our systems to conduct forex transactions over the Internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance policies may not protect us against all of such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We Have Relationships With Introducing Brokers Who Direct New Customers to Us. Failure to Maintain These Relationships Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
We have relationships with introducing brokers who direct new customers to us and provide marketing and other services for these customers. In certain jurisdictions, we are only able to provide our services through white label partnerships. For the nine months ended September 30, 2010, approximately 29.9% of our forex trading volume was derived from introducing brokers. Many of our relationships with introducing brokers are nonexclusive or may be terminated by the brokers on short notice. In addition, under our agreements with introducing brokers, they have no obligation to provide us with new customers or minimum levels of transaction volume. Our failure to maintain our relationships with these introducing brokers, the failure of the introducing brokers to provide us with customers or our failure to create new relationships with introducing brokers would result in a loss of revenue,


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which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one of our introducing brokers, we could lose the broker’s services or be required to increase the compensation we pay to retain the broker. In addition, we may agree to set the compensation for one or more introducing brokers at a level where, based on the transaction volume generated by customers directed to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the introducing broker. For the nine months ended September 30, 2010, approximately 6.1% of our forex trading volume was derived from TradeStation Securities, Inc., or TradeStation, our largest introducing broker. However, TradeStation recently formed a wholly-owned subsidiary, TradeStation Forex, Inc., with the intent that by the end of 2010 TradeStation Forex Inc. will assume, own and conduct all TradeStation forex brokerage business as an FDM of the NFA, and registered under such classification with the CFTC. TradeStation Forex Inc.’s application for such CFTC registration and NFA membership was made with the NFA in June 2010. We may be unable to offset the loss of TradeStation with new introducing brokers, if at all. If we do not enter into the most economically attractive relationships with introducing brokers, our introducing brokers terminate their relationship with us or our introducing brokers fail to provide us with customers, our business, financial condition and results of operations and cash flows would be materially, adversely affected.
 
Our Relationships With Our Introducing Brokers May Also Expose Us to Significant Reputational and Other Risks as We Could Be Harmed by Introducing Broker Misconduct or Errors That Are Difficult to Detect and Deter.
 
It may be perceived that we are responsible for the improper conduct by our introducing brokers, even though we do not control their activities. Introducing brokers maintain customer relationships and delegate to us the responsibilities associated with forex and back-office operations. Furthermore, many of our introducing brokers operate websites, which they use to advertise our services or direct customers to us. It is difficult for us to closely monitor the contents of their websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. While historically we have been responsible for the activities of our introducing brokers that were not members or associates of the NFA and subject to disciplinary action for failure to adequately supervise them, under the new NFA and CFTC rules, we are no longer responsible for the activities of any party that solicits or introduces a customer to us, as our introducing brokers will now be required to be members of the NFA and therefore directly supervised by the NFA. However, it may be perceived that we are responsible for any misleading statements about us made on websites of our introducing brokers and any disciplinary action taken against any of our introducing brokers in the United States and abroad could have a material adverse effect on our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.
 
We Have Relationships With White Label Partners Who Direct Customer Trading Volume to Us. Failure to Maintain These Relationships or Develop New White Label Partner Relationships Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.
 
We have relationships with white label partners who provide forex trading to their customers by using our trading platform and other services and, therefore, provide us with an additional source of revenue. For the nine months ended September 30, 2010, approximately 7.4% of our forex trading volume was derived from white label partners. Many of our relationships with white label partners are non-exclusive or may be terminated by them on short notice. In addition, our white label partners have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white label partners, the failure of these white label partners to continue to offer online forex trading services to their customers using our trading platform, the loss of requisite licenses by our white label partners or our inability to enter into new relationships with white label partners would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. For the nine months ended September 30, 2010, trading volume generated through Questrade, Inc. represented approximately 1.3% of our total trading volume. Failure to maintain these relationships or failure of these white label partners to continue to offer online forex trading services would result in a significant loss of revenue to us. To the extent any of our competitors offers more attractive compensation terms to one or more of our white label partners, we could lose the white label partnership or be required to increase


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the compensation we pay to retain the white label partner. Our relationships with our white label partners also may expose us to significant regulatory, reputational and other risks as we could be harmed by white label partner misconduct or errors that are difficult to detect and deter. If any of our white label partners provided unsatisfactory service to their customers or are deemed to have failed to comply with applicable laws or regulations, our reputation may be harmed as a result of our affiliation with such white label partner. Any such harm to our reputation would have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Risks Related to the Offering
 
An Active Trading Market for Our Common Stock May Not Develop, Which May Cause Our Common Stock to Trade at a Discount From the Initial Offering Price and Make It Difficult for You to Sell the Shares You Purchase.
 
Prior to this offering, there has been no public trading market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development or maintenance of an active trading market. The initial public offering price per share of our common stock has been determined by agreement among us and the underwriters and may not be indicative of the price at which our common stock will trade in the public trading market after this offering. If an active trading market does not develop, there may be difficulty selling any shares of our common stock.
 
The Market Price of Our Common Stock May Be Volatile, Which Could Cause the Value of Your Investment to Decline.
 
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some of which are beyond our control, could affect the market price of our common stock:
 
  •  quarterly variations in our results of operations and cash flows or the results of operations and cash flows of our competitors;
 
  •  our failure to achieve actual operating results that meet or exceed guidance that we may have provided due to factors beyond our control, such as currency volatility and trading volumes;
 
  •  future announcements concerning us or our competitors, including the announcement of acquisitions;
 
  •  changes in government regulations or in the status of our regulatory approvals or licensure;
 
  •  public perceptions of risks associated with our services or operations;
 
  •  developments in our industry; and
 
  •  general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors.
 
If Securities or Industry Analysts Do Not Publish Research or Reports About Our Business, if They Change Their Recommendations Regarding Our Common Stock Adversely, or if We Fail to Achieve Analysts’ Earnings Estimates, the Market Price and Trading Volume of Our Common Stock Could Decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or business, the market price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our common stock or trading volume to decline. On our part, if we fail to achieve analysts’ earnings estimates, the market price of our common stock would also likely decline.


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Because We Do Not Intend to Pay Dividends for the Foreseeable Future, Investors in the Offering Will Benefit From Their Investment in Shares Only if Our Common Stock Appreciates in Value.
 
We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in this offering have purchased their shares.
 
Certain Provisions in Our Amended and Restated Certificate of Incorporation May Prevent Efforts by Our Stockholders to Change Our Direction or Management.
 
Provisions contained in our amended and restated certificate of incorporation could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a merger, tender offer or other takeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or management may be unsuccessful. See “Description of Capital Stock.”
 
We Cannot Predict Our Future Capital Needs. As a Result, We May Need to Raise Significant Amounts of Additional Capital. We May Be Unable to Obtain the Necessary Capital When We Need It, or on Acceptable Terms, if at All.
 
Our business depends on the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs from internally generated funds and from our preferred equity securities financings. We currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. We may need to raise additional funds to:
 
  •  support more rapid expansion;
 
  •  develop new or enhanced services and products;
 
  •  respond to competitive pressures;
 
  •  acquire complementary businesses, products or technologies; or
 
  •  respond to unanticipated requirements.
 
Additional financing may not be available when needed on terms favorable to us.
 
Our Management and Other Affiliates Have Significant Control of Our Common Stock and Could Control Our Actions in a Manner That Conflicts With Our Interests and the Interests of Other Stockholders.
 
As of September 30, 2010, our executive officers, directors and our current investors and their affiliated entities together beneficially own approximately 88.9% of the outstanding capital stock, assuming the exercise of options, warrants and other common stock equivalents which are currently exercisable, held by these stockholders. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.


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Our Internal Controls Over Financial Reporting May Not Be Effective and Our Independent Registered Public Accounting Firm May Not Be Able to Certify as to Their Effectiveness, Which Could Have a Significant and Adverse Effect on Our Business and Reputation.
 
We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, which includes annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm that addresses the effectiveness of internal controls.
 
As we continue our evaluation, we may identify material weaknesses that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002, as amended, for compliance with the requirements of Section 404. We will be required to comply with the requirements of Section 404 for the year ending December 31, 2011. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to opine as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.
 
Shareholders May Be Diluted by the Future Issuance of Additional Common Stock in Connection With Our Incentive Plans, Acquisitions or Otherwise.
 
After this offering we will have approximately           shares of common stock authorized but unissued. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions, in future common stock offerings or otherwise. We have reserved           shares for issuance under our 2010 Omnibus Incentive Compensation Plan and shares under our 2010 Employee Stock Purchase Plan. Any common stock that we issue, including under our 2010 Omnibus Incentive Compensation Plan, 2010 Employee Stock Purchase Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.


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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
 
This prospectus contains forward looking statements. These forward looking statements include, in particular, statements about our plans, strategies and prospects under the headings “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “may,” “should,” “expect,” “scheduled,” “plan,” “seek,” “intend,” “anticipate,” “believe,” “estimate,” “aim,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
 
These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward looking statements we make in this prospectus are set forth in “Risk Factors” and elsewhere in this prospectus. We undertake no obligation to update any of the forward looking statements after the date of this prospectus to conform those statements to reflect the occurrence of future events, except as required by applicable law.
 
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus forms a part, that we have filed with the SEC completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward looking statements by these cautionary statements.
 
INDUSTRY AND MARKET DATA
 
This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.
 
Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately $      million, based on an assumed initial offering price of $      per share, which is the midpoint of the estimated price range shown on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) the net proceeds to us from this offering by $      million.
 
We intend to use the net proceeds we receive from this offering only to cover historical and expected costs from our initial public offering.
 
We will not receive any proceeds from the sale of shares by the selling stockholders.
 
DIVIDEND POLICY
 
We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2010:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to the filing of our amended and restated certificate of incorporation to reflect the      -for-1 stock split of our common stock effected immediately prior to the completion of this offering and the conversion of each share of our outstanding preferred stock into an aggregate of           shares of common stock prior to the completion of this offering (for further information, please see “Description of Capital Stock”); and
 
  •  on a pro forma as adjusted basis to reflect the sale of           shares of our common stock at an assumed initial public offering price of $      per share, the midpoint of the estimated price range listed on the cover page of this prospectus and after deducting the estimated underwriting discount and estimated offering expenses payable by us, including expenses related to the sale of shares of our common stock by the selling stockholders.
 
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of September 30, 2010  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
    (in thousands, except share data)  
 
Cash and cash equivalents
  $ 258,012     $           $        
                         
Long-term debt
  $ 21,000     $       $  
                         
Convertible, redeemable preferred stock:
                       
Undesignated preferred stock, $0.00001 par value; no shares authorized, issued and outstanding, on an actual basis; no shares authorized, no shares issued and outstanding, on a pro forma basis
                     
Series A convertible, redeemable preferred stock, $0.00001 par value, 4,545,455 shares authorized and 865,154 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    2,009                  
Series B convertible, redeemable preferred stock, $0.00001 par value, 7,000,000 shares authorized and 2,610,210 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    5,412                  
Series C convertible, redeemable preferred stock, $0.00001 par value, 2,496,879 shares authorized and 1,055,739 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    5,319                  
Series D convertible, redeemable preferred stock, $0.00001 par value, 3,254,678 shares authorized and 3,254,678 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    39,840                  


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    As of September 30, 2010  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
    (in thousands, except share data)  
 
Series E preferred stock, $0.00001 par value, 3,738,688 shares authorized and 2,611,606 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    116,810                  
                         
Total convertible, redeemable preferred stock
    169,390                  
                         
Common stock, $0.00001 par value, 27,000,000 shares authorized and 1,353,584 shares issued and outstanding on an actual basis; shares authorized and           shares issued and outstanding on a pro forma basis
                       
Additional paid-in capital
    (174,795 )                
Accumulated other comprehensive income
    548                  
Retained earnings
    19,264                  
                         
Total shareholders’ deficit
    (154,983 )                
                         
Total capitalization
  $ 35,407             $  
                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) each of additional paid-in capital and total stockholders’ equity in the pro forma as adjusted column by $      million.
 
The outstanding share information is based upon shares of our common stock outstanding as of          , 2010. This number excludes:
 
  •             shares of our common stock issuable upon the exercise of options that were outstanding as of          , 2010, with a weighted average exercise price of $      per share;
 
  •             shares of common stock issuable pursuant to outstanding restricted stock units as of          , 2010;
 
  •             shares of common stock reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan, which will become effective on the date of this prospectus; and
 
  •             shares of common stock reserved for future issuance under our 2010 Employee Stock Purchase Plan, which will become effective on the date of this prospectus.

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DILUTION
 
If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.
 
The historical net tangible book value of our common stock as of September 30, 2010 was $      million, or $      per share of common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of our common stock outstanding as of September 30, 2010. On a pro forma basis, after giving effect to the     -for-1 stock split and conversion of all outstanding shares of our preferred stock into           shares of common stock immediately upon completion of this offering, our pro forma net tangible book value as of September 30, 2010 was $      million, or $      per share of common stock.
 
After giving effect to our sale in this offering of           shares of our common stock at an assumed initial public offering price of $      per share, the midpoint of the estimated price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2010 would have been $      million, or $      per share of our common stock. This represents an immediate increase of net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to investors purchasing shares in this offering.
 
The following table illustrates this per share dilution:
 
                 
Initial public offering price per share of common stock
          $    
Historical net tangible book value per share as of September 30, 2010
  $                
Decrease in net tangible book value per share attributable to conversion of convertible preferred stock
               
                 
Pro forma net tangible book value per share as of September 30, 2010
  $            
Increase in net tangible book value per share attributable to this offering per share to existing investors
               
                 
Pro forma as adjusted net tangible book value given effect to this offering
               
Dilution per share to investors participating in this offering
          $        
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the mid-point of the price range on the front cover of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $      and increase (decrease) the dilution to new investors in this offering by $     .
 
The following table summarizes, as of September 30, 2010, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our preferred stock into common stock, the total effective cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the estimate price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                         
                Total
    Average
 
    Shares Purchased     Consideration     Price Per
 
    Number     Percent     Amount     Percent     Share  
 
Existing stockholders before this offering
                      %   $             %   $        
Investors participating in this offering
                                       
                                         
Total
            100 %             100 %        
                                         


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A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range on the front cover of this prospectus, would increase (decrease) total consideration paid by new investors in this offering and by all investors by $     , and would increase (decrease) the average price per share paid by new investors by $1.00, assuming the number of shares of common stock offered by us, as set forth on the front cover of this prospectus, remains the same and without deducting the estimated underwriting discounts and offering expenses payable by us in connection with this offering.
 
If the underwriters exercise their over-allotment option in full, the percentage of shares of common stock held by existing stockholders will decrease to approximately     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to           or approximately     % of the total number of shares of our common stock outstanding after this offering.
 
The tables and calculations above are based on the number of shares of common stock outstanding after the completion of this offering. The number of shares of our common stock to be outstanding after this offering does not take into account:
 
  •             shares of common stock issuable upon the exercise of outstanding stock options as of          , 2010 at a weighted average exercise price of $      per share;
 
  •             shares of common stock issuable pursuant to outstanding restricted stock units as of          , 2010;
 
  •  an aggregate of           shares of common stock that will be reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan as of the closing of this offering; and
 
  •  an aggregate of           shares of common stock that will be reserved for future issuance under our 2010 Employee Stock Purchase Plan.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following table presents our selected historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2007, 2008 and 2009 and the consolidated statements of financial condition data as of December 31, 2008 and 2009 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2005 and 2006 and the consolidated statements of financial condition data as of December 31, 2005, 2006 and 2007 are derived from our audited historical consolidated financial statements not included in this prospectus.
 
The consolidated statements of income data for the nine-month periods ended September 30, 2010 and 2009 and the consolidated statement of financial condition data as of September 30, 2010 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus which have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. The consolidated statements of financial condition data as of September 30, 2009 are derived from our consolidated financial statements not included in this prospectus. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year ended December 31, 2010.
 
The historical information presented below includes the non-cash impact of the redemption feature contained in our preferred stock which requires fair value accounting, there are fluctuations in our net income which will cease upon our initial public offering and which is not reflective of our operating performance.
 
The pro forma consolidated statement of financial condition data as September 30, 2010 gives effect to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. The pro forma earnings per common share data for the year ended December 31, 2009 and the nine months ended September 30, 2010 reflect the sale by us of           newly issued shares of our common stock and           shares of our common stock by our selling stockholders pursuant to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus.
 
                                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2005(1)     2006(2)     2007(2)     2008(2)     2009(2)     2009(2)     2010(2)  
    (in thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                                       
REVENUE
                                                       
Trading revenue
  $ 36,249     $ 69,471     $ 118,176     $ 186,004     $ 153,375     $ 114,332     $ 147,667  
Other revenue
    223       242       437       2,366       2,108       1,119       1,914  
                                                         
Total non-interest revenue
    36,472       69,713       118,613       188,370       155,483       115,451       149,581  
Interest revenue
    1,519       3,145       5,024       3,635       292       228       243  
Interest expense
    (110 )     (2,431 )     (4,299 )     (3,905 )     (2,456 )     (1,848 )     (1,676 )
                                                         
Total net interest revenue/(expense)
    1,409       714       725       (270 )     (2,164 )     (1,620 )     (1,433 )
                                                         
Net revenue
    37,881       70,427       119,338       188,100       153,319       113,831       148,148  
                                                         
EXPENSES
                                                       
Employee compensation and benefits
    9,511       17,258       25,093       37,024       41,503       29,621       34,031  
Selling and marketing
    3,256       12,517       21,836       29,312       36,875       26,791       28,192  
Trading expenses and commissions
    7,279       10,321       10,436       16,310       14,955       10,431       18,601  
Bank fees
    507       935       2,316       3,754       4,466       3,415       3,170  
Depreciation and amortization
    494       897       1,911       2,496       2,689       2,013       2,568  
Communications and data processing
    424       873       1,659       2,467       2,676       1,950       2,209  
Occupancy and equipment
    530       1,045       1,616       2,419       3,548       2,391       2,963  


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2005(1)     2006(2)     2007(2)     2008(2)     2009(2)     2009(2)     2010(2)  
    (in thousands, except share and per share data)  
 
Bad debt provision/(recovery)
    836       574       1,164       1,418       760       593       514  
Professional fees
    761       1,295       1,380       3,104       3,729       2,549       2,623  
Software expense
    21       78       123       888       1,132       712       1,431  
Professional dues and memberships
    15       48       187       773       698       565       205  
Write-off of deferred initial public offering costs
                      1,897                    
Change in fair value of convertible, redeemable preferred stock embedded derivative(2)
          61,732       165,280       (181,782 )     (1,687 )     40,820       48,936  
Impairment of intangible assets
          165                                
Other
    155       3,085       (627 )     1,424       1,746       1,091       3,846  
                                                         
Total
    23,789       110,823       232,374       (78,496 )     113,090       122,942       149,289  
                                                         
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    14,092       (40,396 )     (113,036 )     266,596       40,229       (9,111 )     (1,141 )
Income tax expense
    5,881       9,063       21,615       34,977       12,556       11,423       18,192  
Equity in earnings of equity method investment
    (3 )     (43 )           (214 )                  
                                                         
NET INCOME/(LOSS)
    8,208       (49,502 )     (134,651 )     231,405       27,673       (20,534 )     (19,333 )
                                                         
Net income/(loss) applicable to noncontrolling interest
                      (21 )     (321 )     (15 )     (402 )
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ 8,208     $ (49,502 )   $ (134,651 )   $ 231,426     $ 27,994     $ (20,519 )   $ (18,931 )
                                                         
Effect of redemption of preferred shares
          (39,006 )           (63,913 )                  
Effect of preferred share accretion
    (63 )     2,205                                
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. Common Shareholders
  $ 8,145     $ (86,303 )   $ (134,651 )   $ 167,513     $ 27,994     $ (20,519 )     (18,931 )
                                                         
Earnings/(loss) per common share:
                                                       
Basic
  $ 1.96     $ (30.90 )   $ (70.89 )   $ 130.12     $ 21.41     $ (15.71 )   $ (14.26 )
                                                         
Diluted
  $ 0.49     $ (30.90 )   $ (70.89 )   $ 11.17     $ 1.88     $ (15.71 )   $ (14.26 )
                                                         
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
                                                       
Basic
    4,157,464       2,792,895       1,899,386       1,287,360       1,307,379       1,306,265       1,327,124  
                                                         
Diluted
    16,634,016       2,792,895       1,899,386       15,002,277       14,909,184       1,306,265       1,327,124  
                                                         
Pro forma (unaudited)(3)
                                                       
Pro forma earnings/(loss) per common share:
                                                       
Basic
                                  $ 20.12     $ 15.54     $ 22.61  
                                                         
Diluted
                                  $ 1.76     $ 1.36     $ 2.01  
                                                         
 
 
(1) These amounts do not include the impact of the embedded derivative liability of approximately $37.6 million (unaudited) as of December 31, 2005 and the change in fair value for the year ended December 31, 2005 of $28.8 million (unaudited).
(2) For each of the periods indicated, in accordance with FASB ASC 815, Derivatives and Hedging, we accounted for an embedded derivative liability attributable to the redemption feature of our outstanding preferred stock. This redemption feature and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with the completion of this offering.
(3) These amounts do not include the impact of the change in fair value of our preferred stock embedded derivative, the effect of redemption of preferred stock and the effect of preferred share accretion. For the year ended December 31, 2009 and for the nine months ended
 
 
(footnotes continued on next page)

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September 30, 2010 the change in fair value of our preferred stock embedded derivative resulted in a gain of $1.7 million and a loss of $48.9 million, respectively.
 
                                                         
    As of December 31,     As of September 30,  
    2005     2006     2007     2008     2009     2009     2010  
                (in thousands unless otherwise stated)        
 
Consolidated Statements of Financial Condition Data:
                                                       
Cash and cash equivalents
  $ 22,482     $ 31,476     $ 98,894     $ 176,431     $ 222,524     $ 197,938     $ 258,012  
Receivables from brokers
  $ 59,080     $ 71,750     $ 74,630     $ 50,817     $ 76,391     $ 100,171     $ 89,569  
Total assets
  $ 82,661     $ 113,491     $ 180,628     $ 264,816     $ 351,940     $ 315,710     $ 405,361  
Payables to brokers, dealers,
                                                       
Futures commission merchants, and other regulated entities
  $ 4,577     $ 5,248     $ 2,163     $ 1,679     $ 2,769     $ 1,732     $ 5,857  
Payables to customers
  $ 5,031     $ 70,321     $ 106,741     $ 122,293     $ 196,985     $ 168,266     $ 216,587  
Convertible, redeemable preferred stock embedded derivative
  $     $ 99,286     $ 264,566     $ 82,785     $ 81,098     $ 123,604     $ 130,034  
Notes payable
  $     $ 27,500     $ 49,875     $ 39,375     $ 28,875     $ 31,500     $ 21,000  
Total shareholders’ equity/(deficit)
  $ 23,605     $ (154,242 )   $ (316,340 )   $ (172,154 )   $ (139,890 )   $ (188,831 )   $ (154,983 )
 
Selected Operational Data
 
                                                         
    As of December 31,     As of September 30,  
    2005     2006     2007     2008     2009     2009     2010  
    ($ in thousands unless otherwise stated)  
 
Number of opened retail accounts(4):
                                                       
Total
    30,626       63,576       105,924       154,190       211,136       195,559       264,834  
China
    3,202       8,395       19,869       27,358       27,362       27,362       28,819  
Number of tradable retail accounts:
                                                       
Total
    11,761       27,836       41,120       36,744       51,652       47,374       70,618  
China
    1,631       4,799       9,702       2,839       1       8       1,029  
Adjusted net capital in excess of regulatory requirements(5)
  $ 20,065     $ 15,296     $ 44,856     $ 98,571     $ 71,087     $ 68,604     $ 60,565  
 
                                                         
          Nine Months
 
    Year Ended December 31,     Ended September 30,  
    2005     2006     2007     2008     2009     2009     2010  
    ($ in thousands unless otherwise stated)  
 
Number of traded retail accounts:
                                                       
Total
    13,896       28,270       43,139       52,555       52,755       43,565       52,486  
China
    2,416       5,533       11,568       11,647       7       6       269  
Total trading volume (dollars in billions)
                                                       
Total
  $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,246.7     $ 928.3     $ 1,093.9  
China
  $ 24.4     $ 50.8     $ 103.4     $ 172.4     $ 0.4     $ 0.2     $ 0.7  
Net deposits received from retail customers (dollars in millions):
                                                       
Total
  $ 70.2     $ 102.8     $ 184.2     $ 277.3     $ 257.1     $ 186.9     $ 205.2  
China
  $ 6.8     $ 10.5     $ 26.0     $ 25.3     $ (1.4 )   $ (1.3 )   $ 0.3  
Retail revenue per million traded
  $ 176.8     $ 155.3     $ 175.2     $ 124.1     $ 123.0     $ 122.6     $ 154.1  
 
 
(4) Opened customer accounts represent accounts opened with us on a cumulative basis at any time since we commenced operations.
(5) Adjusted net capital in excess of regulatory requirements represents the excess funds over the regulatory minimum requirements as defined by the regulatory bodies that regulate our operating subsidiaries.
 
 
(footnotes continued on next page)


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Selected Geographic Data
 
                                                         
                                  Nine Months
 
                                  Ended September 30,  
    2005     2006     2007     2008     2009     2009     2010  
 
Customer trading volume by region (dollars in billions)
                                                       
U.S. 
  $ 122.2     $ 238.3     $ 355.4     $ 878.9     $ 679.2     $ 506.8     $ 579.0  
China(6)(7)
    24.4       50.8       103.4       172.4       0.4       0.2 (7)     0.7 (8)
Canada
    9.6       29.2       58.6       122.9       142.5       122.2       62.9  
Europe, Middle East and Africa
    27.9       42.9       64.3       153.1       179.5       126.5       182.3  
Asia (ex-China)
    33.8       42.7       54.0       96.4       159.1       110.0       194.5  
Rest of World
    14.0       43.5       38.8       74.9       86.0       62.6       74.5  
                                                         
Total
  $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,246.7     $ 928.3     $ 1,093.9  
                                                         
 
 
(6) As a result of our review of our regulatory compliance in China, we decided to terminate our service offerings to residents of China and ceased our trading operations located in that country as of December 31, 2008.
(7) For the year ended December 31, 2009, a small number of existing customer accounts, which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China, continued to trade using our platform. The trading activity by these residual accounts resulted in the trading volume for the period, and all were closed as of December 31, 2009.
(8) Based on our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The statements in this discussion regarding the industry outlook, our expectations regarding the future performance of our business, and the other nonhistorical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the “Risk Factors” section. You should read the following discussion together with the section entitled “Risk Factors” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
Overview
 
We are an online provider of retail and institutional foreign exchange, or forex, trading and related services founded in 1999 by a group of experienced trading and technology professionals. We offer our customers 24-hour direct access to the global over-the-counter, or OTC, foreign exchange markets, where participants trade directly with one another rather than through a central exchange or clearinghouse. We also offer some of our retail customers access to other global markets on an OTC basis, including the spot gold and silver markets, as well as equity indices and commodities via instruments called contracts-for-difference, or CFDs. Our trading platforms provide a wide array of information and analytical tools that allow our customers to identify, analyze and execute their trading strategies efficiently and cost-effectively. We believe our proprietary technology, multilingual customer service professionals and effective educational programs provide a high degree of customer satisfaction and loyalty. Furthermore, our scalable and flexible technology infrastructure allows us to enhance our product service offerings to meet the rapidly changing needs of the marketplace.
 
We use financial metrics, including tradable retail accounts and traded retail accounts, to measure our aggregate customer account activity. Tradable retail accounts represent retail customers who maintain cash balances with us that are sufficient to execute a trade in compliance with our policies. As of September 30, 2010 we had 70,618 tradable retail accounts compared to 47,374 as of September 30, 2009. We believe the number of tradable retail accounts is an important indicator of our ability to attract new retail customers that can potentially lead to trading volume and revenue in the future, however, it does not represent actual trades executed. We believe that the most relevant measurement which correlates to volume and revenue is the number of traded retail accounts, because this represents retail customers who executed a transaction with us during a particular period. During the nine months ended September 30, 2010, 52,486 traded retail accounts executed a forex transaction with us compared to 43,565 traded retail accounts for the nine months ended September 30, 2009, representing an increase of 20.5%.
 
Our annual net revenue grew from $119.3 million in 2007 to $153.3 million in 2009 representing a compound annual growth rate of 13.3%. Our annual net revenue from customers residing outside of China grew from $98.7 million for the year ended December 31, 2007 to $153.3 million for the year ended December 31, 2009 representing a compound annual growth rate of 24.6%. For the nine months ended September 30, 2010, we generated $148.1 million of total net revenue and net income of $18.9 million, including a loss of $48.9 million relating to the change in fair value of our preferred stock embedded derivative. For the year ended December 31, 2009 we generated $153.3 million of total net revenue and net income of $28.0 million, including a gain of $1.7 million relating to the change in fair value of our preferred stock embedded derivative. For the year ended December 31, 2008, we generated $188.1 million of total net revenue, including $24.4 million in total net revenue attributable to customers residing in China, and net income of $231.4 million, including $11.1 million in net income attributable to customers residing in China and a gain of $181.8 million relating to the change in the fair value of our preferred stock embedded derivative. The preferred stock embedded derivative liability is attributable to the redemption feature of our outstanding preferred stock which allows the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding. The preferred stock embedded derivative is a non-cash liability and, therefore, causes net income to fluctuate but does not reflect our operating performance. This redemption provision and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with this offering. Excluding the impact of a $48.9 million loss relating to the change in fair market value of our embedded derivative, our adjusted net income for the nine months ended September 30, 2010 was $30.0 million. We believe our net capital position and customer assets help make us one of the largest global retail foreign exchange services providers.


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We believe the following operating measurements are the main drivers of our revenue:
 
  •  customer trading volume;
 
  •  retail trading revenue per million traded;
 
  •  net deposits received from retail customers;
 
  •  traded retail accounts, and
 
  •  retail customer equity.
 
Customer trading volume is the aggregate notional value of trades our customers execute. Retail trading revenue per million traded is the revenue we realize from our forex, CFDs and metals trading activities (including the revenue we realize from the difference between the “bid” price and the “offer” price for our customers executed trades, or the spread revenue) per one million of U.S. dollar-equivalent trading volume, and is calculated as retail trading revenue divided by the result obtained from dividing trading volume by one million. Net deposits received from retail customers represents customers’ deposits less withdrawals for a given period, and correlates to our customers’ ability to place additional trades, which potentially increases our trading volumes. Traded retail accounts impact our revenue because this represents the number of customers who executed trades during a specific period, which impacts customer trading volume. Retail customer equity represents the total amount of cash and unrealized profit (loss) in all of our customer accounts.
 
Our customer base resides in over 140 countries outside of the United States and is comprised of three categories. The first are direct customers sourced through our retail forex trading website, FOREX.com (our flagship brand), which is a currency trading Internet site is available in English, traditional and simplified Chinese, Japanese, Russian and Arabic, and provides currency traders of all experience levels with a full-service trading platform, along with extensive educational and support tools. The second are indirect customers sourced through either retail financial services firms that provide customers to us, which we refer to as introducing brokers, or financial institutions which offer our currency trading services to their existing client base under their own brand, which we refer to as white label partners. The third are institutional customers sourced through hedge funds, institutional asset managers, and proprietary trading firms. For the nine months ended September 30, 2010, 50.4% of customer trading volume was generated from our direct customers, 37.3% was generated from introducing brokers and white label partners, and 12.3% was generated from our institutional customers. For the year ended December 31, 2009, 65.4% of customer trading volume was generated from our direct customers and 34.6% was generated from introducing brokers and white label partners.
 
For the nine months ended September 30, 2010, customer trading volume was $1,093.9 billion, retail trading revenue per million traded was $154.1, net deposits received from retail customers was $205.2 million and the number of traded retail accounts was 52,486. For the year ended December 31, 2009, the total dollar value traded by our customers, or customer trading volume, was $1.2 trillion, retail trading revenue per million traded was $123.0, net deposits received from retail customers was $257.1 million and the number of traded retail accounts was 52,755.
 
Revenue
 
We generate revenue primarily from trading revenue, commissions and interest income. Trading revenue is our largest source of revenue and is derived from gains, offset by losses, from our managed flow portfolio trading positions where we act as counterparty to our customers’ trades and our revenue resulting from the dealing spreads (the difference between the “bid” price and the “offer” price), on customer transactions relating to offset flow where we earn the difference between the retail price quoted to our customers and the wholesale price received from our wholesale forex trading partners. Any position we take is a result of acting as counterparty to our customers’ trades. We do not actively initiate market positions for our own account in anticipation of future movements in the relative prices of the products we offer. We refer to such positions as “proprietary directional market positions”. However, as a result of our hedging activities, we are likely to have open positions in various currencies. For the nine months ended September 30, 2010, a minimum of 90.9% of our average daily trading volume, on any given day, was either naturally hedged, where one of our customers executing a trade in a currency is offset by a trade taken by another customer, or hedged by us with a third-party financial institution.
 
For the nine months ended September 30, 2010, approximately 78.1% of our customer trading volume was directed into our managed flow portfolio, allowing us to keep part or all of the dealing spread, and resulting in daily


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mark-to-market gains or losses based on the performance of the managed flow portfolio. During the same period we offset 9.5% of transaction volume from customers by executing equal and offsetting trades with our wholesale forex trading partners. On these trades we earn the difference between the retail and wholesale spread while minimizing market risk. Regardless of the routing of their trades, our customers’ trading experience is identical with respect to trade execution. The remaining volume for the nine months ended September 30, 2010 of 12.4% was generated from our institutional customers. For the year ended December 31, 2009, 88.7% of our customer trade volume was directed into our managed flow portfolio and we immediately offset the remaining 11.3%. Trading revenue represented 99.7% of our total net revenue for the nine months ended September 30, 2010, and 100.0% of our total net revenue for the year ended December 31, 2009. We believe that our customer trading volumes are driven by ten main factors. Six of these factors are broad external factors outside of our control which impact general forex market trading, as well as our customer trading volumes, and include:
 
  •  changes in the financial strength of market participants;
 
  •  economic and political conditions;
 
  •  trends in business and finance;
 
  •  changes in the supply, demand and volume of foreign currency transactions; and
 
  •  legislative changes; and regulatory changes.
 
Many of the above factors impact the volatility of foreign currency rates, which is in turn positively correlated with forex trading volume. In general, an increase in our customer trading volume results in an increase in our trading revenue derived from spread capture, and an increase in our strategic hedging activities. Our customer trading volume is also affected by four other factors which we believe differentiate us from our competitors:
 
  •  the effectiveness of our sales activities;
 
  •  the attractiveness of our superior website;
 
  •  the effectiveness of our customer service team; and
 
  •  the effectiveness of our marketing activities.
 
In order to increase customer trading volume, we focus our marketing and our customer service and education activities on attracting new customers, growing customer assets on deposit and increasing overall customer trading activity.
 
Trading revenue is recorded on a trade-date basis. Changes in net unrealized gains or losses are recorded under trading revenue on the Consolidated Statements of Income for a specified period of time. For the nine months ended September 30, 2010 and the year ended December 31, 2009, no single customer accounted for more than 3.0% of our trading volume for the period.
 
Other revenue is comprised of account management, transaction and performance fees related to customers who have assigned trading authority to GCAM, inactivity and training fees charged to customer accounts, revenue from GAIN GTX, our newly launched institutional offering, as well as other miscellaneous items. For the nine months ended September 30, 2010, other revenue was $1.9 million, which consisted of GAIN GTX revenue of $1.1 million and for the year ended December 31, 2009, other revenue was $2.1 million.
 
Net interest revenue consists primarily of the revenue generated by our cash and customer cash held by us at banks, money market funds and on deposit at our wholesale forex trading partners, less interest paid to customers on their net liquidating account value and interest expense on notes payable. A customer’s net liquidating account value equals cash on deposit plus the marking to market of open positions as of the measurement date. Our cash and customer cash is generally invested in money market funds which primarily invest in short-term U.S. government securities. Such deposits and investments earned interest at an average effective rate of approximately 0.1% for the nine months ended September 30, 2010, and 0.1% for the year ended December 31, 2009. Interest paid to customers varies among customer accounts primarily due to the net liquidating value of a customer account as well as interest promotions that may be available from time to time. Interest income and interest expense are recorded when earned and incurred. Net interest expense was $1.4 million for the nine months ended September 30, 2010, and $2.2 million for the year ended December 31, 2009.


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Operating Expenses
 
Employee Compensation and Benefits
 
Employee compensation and benefits, includes salaries, bonuses, stock-based compensation, group insurance, contributions to benefit programs and other related employee costs. Compensation and benefits as a percentage of net revenue has increased from 19.7% for the year ended December 31, 2008 to 27.1% for the year ended December 31, 2009, primarily due to a decline in net revenue for the year ended December 31, 2009 from the prior year period. Compensation and benefits was 23.0% of net revenue for the nine months ended September 30, 2010 compared to the prior year period which was 26.0% of net revenue. The decrease in employee compensation and benefits as a percentage of revenue for the nine months ended September 30, 2010 compared to prior period is primarily due to an increase in net revenue for the nine months ended September 30, 2010. The revenue decline for the year ended December 31, 2009 is primarily due to overall economic conditions and our termination of services in China. Bonus costs, which are performance based and vary year to year, represented 21.8% of our employee compensation and benefits for the nine months ended September 30, 2010 compared to 18.1% for the year ended December 31, 2009, 26.4% for the year ended December 31, 2008 and 31.8% for the year ended December 31, 2007.
 
Selling and Marketing
 
Selling and marketing expense is primarily concentrated in online display and search engine advertising, and to a lesser extent print and television advertising. Our marketing strategy employs a combination of direct marketing and focused branding programs, with the goal of raising awareness of our retail forex trading Internet website, FOREX.com, and attracting customers in a cost-efficient manner. As part of our strategy to increase customer trading volume and attract new accounts, we have increased selling and marketing expense from $21.8 million for the year ended December 31, 2007 to $29.3 million for the year ended December 31, 2008 to $36.9 million for the year ended December 31, 2009. For the nine months ended September 30, 2010 selling and marketing expense was $28.2 million compared to $26.8 million for the nine months ended September 30, 2009, as we continue to invest in our global brand to increase trading volumes and customer deposits.
 
Trading Expense and Commissions
 
Trading expense and commissions consists primarily of compensation paid to our white label partners and introducing brokers. We generally provide white label partners with the platform, systems and back-office services necessary for them to offer forex trading services to their customers. We also establish relationships with introducing brokers that identify and direct potential forex trading customers to us. White label partners and introducing brokers generally handle marketing and the other expenses associated with attracting the customers they direct to us. Accordingly, we do not incur any incremental sales and marketing expense in connection with trading revenue generated by customers provided through our white label partners and introducing brokers. We do, however, pay a portion of the forex trading revenue generated by the customers of our white label partners and introducing brokers to our white label partners and introducing broker partners and record this payment under trading expense. These costs are largely variable and fluctuate according to the trading volume produced by the customers directed to us. During the nine months ended September 30, 2010, we generated approximately 37.3% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $18.6 million in total trading expenses and commissions. The trading volume generated through customers introduced to us by white label partners and introducing brokers has increased significantly from the prior period ending September 30, 2009, resulting in the $8.2 million increase for the nine months ended September 30, 2010. During the year ended December 31, 2009, we generated approximately 34.6% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $15.0 million in total trading expenses and commissions compared to the year ended December 31, 2008 when we generated approximately 32.7% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $16.3 million in total trading expenses and commissions.
 
Other Expenses
 
Other expense categories separately disclosed in our results of operations include bank fees, depreciation and amortization, communications and data processing, occupancy and equipment, bad debt provision, professional fees and other miscellaneous expenses.


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Change in Fair Value of Convertible Preferred Stock and Embedded Derivative
 
Our Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D, and Series E contains a redemption feature which allows the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding. We have determined that this redemption feature effectively provides such holders with an embedded option derivative meeting the definition of an “embedded derivative” pursuant to FASB ASC 815, Derivatives and Hedging. Consequently, the embedded derivative must be bifurcated and accounted for separately. This redemption feature and related accounting treatment will no longer be required to be recognized upon conversion of our preferred stock in connection with our initial public offering. Historically, in accordance with FASB ASC 815, we have adjusted the carrying value of the embedded derivative to the fair value of our Company at each reporting date, based upon the Black-Scholes options pricing model, and reported the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded in our Consolidated Statements of Operations and Comprehensive Income. This has impacted our net income but has not affected our cash flow generation or operating performance. This accounting treatment causes our earnings to fluctuate, but in our view does not reflect operating or future performance of our company. We further discuss the accounting for the embedded derivative in “— Critical Accounting Policies and Estimates — Fair Value of Derivative Liabilities”.
 
To reconcile between our net income/(loss) and adjusted net income, we use a financial measure not calculated in accordance with Generally Accepted Accounting Principles in the United States, or GAAP. Adjusted net income is a non-GAAP financial measure and represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock. Because the embedded derivative in our preferred stock will no longer be applicable following conversion of our preferred stock in connection with this offering, there will be no further accounting adjustment required for change in fair value of the embedded derivative in our preferred stock following this offering. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and, thus, our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it may be more difficult to compare our financial performance to that of other companies.
 
                                         
          Nine Months
 
    Year Ended December 31,     Ended September 30,  
    2007     2008     2009     2009     2010  
    (in thousands unless otherwise stated)  
 
Net (loss)/income applicable to GAIN Capital Holdings, Inc. 
  $ (134,651 )   $ 231,426     $ 27,994     $ (20,519 )   $ (18,931 )
Change in fair value of convertible, redeemable preferred stock embedded derivative
    165,280       (181,782 )     (1,687 )     40,820       48,936  
                                         
Adjusted net income
  $ 30,629     $ 49,644     $ 26,307     $ 20,301     $ 30,005  
                                         
Adjusted earnings per common share
                                       
Basic
  $ 16.13     $ 38.56     $ 20.12     $ 15.54     $ 22.61  
                                         
Diluted
  $ 2.05     $ 3.31     $ 1.76     $ 1.36     $ 2.01  
                                         
Net revenue
  $ 119,338     $ 188,100     $ 153,319     $ 113,831     $ 148,148  
Total expenses
    232,374       (78,496 )     113,090       122,942       149,289  
                                         
(Loss)/income before income tax expense and equity in earnings of equity method investment
    (113,036 )     266,596       40,229       (9,111 )     (1,141 )
Change in fair value of convertible, redeemable preferred stock embedded derivative
    165,280       (181,782 )     (1,687 )     40,820       48,936  
                                         
Adjusted income before income tax expense and equity in earnings of equity method investment
  $ 52,244     $ 84,814     $ 38,542     $ 31,709     $ 47,795  
                                         
Income tax expense
  $ 21,615     $ 34,977     $ 12,556     $ 11,423     $ 18,192  
                                         
Adjusted effective tax rate
    41.4 %     41.2 %     32.6 %     36.0 %     38.1 %


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We believe our reporting of adjusted net income and adjusted earnings per common share better assists investors in evaluating our operating performance. We also believe adjusted net income and adjusted earnings per common share give investors a presentation of our operating performance in prior periods that more accurately reflects how we will be reporting our operating performance in future periods. However, adjusted net income and adjusted earnings per common share are not a measure of financial performance under GAAP and such measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net income/(loss) and earnings/(loss) per common share.
 
Write-off of Initial Public Offering Costs
 
In December 2008, we wrote off $1.9 million of legal, audit, tax, and other professional fees that were previously capitalized in anticipation of an initial public offering in 2008. As of December 31, 2009, we have capitalized $1.7 million in anticipation of our initial public offering in 2010.
 
Public Company Expense
 
As a public company we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the other rules and regulations of the SEC, as well as the requirements of the Sarbanes-Oxley Act of 2002. We expect these rules and regulations to increase our legal, accounting, auditing and other financial compliance costs and to make some of our activities more time consuming and costly. As such, we expect to incur significant expenditures in the near term to expand our systems and hire and train personnel to assist us in complying with these requirements.
 
General Market and Economic Conditions
 
In the past three years, the global market and general economic conditions have experienced a significant downturn. In the United States, market and economic conditions remain challenged as credit remains contracted. U.S. equity markets were adversely impacted by lower corporate earnings, the challenging conditions in the credit markets and continued general uncertainty. In addition, U.S. economic activity was negatively impacted by declines in consumer spending, business investment and the downturn in the commercial and residential real estate markets. In Europe and Asia, market and economic conditions continued to be challenged by adverse economic developments. We believe that these conditions, together with deterioration in the overall economy and increased unemployment rates, impacted overall retail consumer spending, including the discretionary funds and trading patterns of our customer base during the year ended December 31, 2009. We believe that forex trading prices and volumes have been impacted by the volatility created across the global markets. Over the past twelve months (through September 30, 2010), we have experienced periods of low and high volatility in reaction to various market conditions. For example, the recent fiscal crisis in Greece and other European Union nations has resulted in elevated forex volatility levels across multiple markets, resulting in fluctuating prices and an increase in our customer trading activity during the period ended September 30, 2010. We are unable to predict the degree and duration of the impact of the current global market and general economic conditions on currency prices and on our business.


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Results of Operations
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
The following table sets forth our Results of Operations for the nine months ended September 30, 2010 and nine months ended September 30, 2009.
 
                                                 
    Nine Months
          Nine Months
                   
    Ended
          Ended
          Increase/
 
    September 30,
    % of Net
    September 30,
    % of Net
    (Decrease)  
    2009     Revenue     2010     Revenue     Amount     %  
    (dollars in thousands)  
 
REVENUE:
                                               
Trading revenue
    114,332       100.4 %     147,667       99.7 %     33,335       29.2 %
Other revenue
    1,119       0.1 %     1,914       1.3 %     795       7.1 %
                                                 
Total non-interest revenue
    115,451       101.4 %     149,581       101.0 %     34,130       29.6 %
Interest revenue
    228       0.2 %     243       0.2 %     15       6.6 %
Interest expense
    (1,848 )     (1.6 )%     (1,676 )     (1.1 )%     172       (9.3 )%
                                                 
Total net interest revenue/(expense)
    (1,620 )     (1.4 )%     (1,433 )     (1.0 )%     187       (11.5 )%
                                                 
Net revenue
    113,831       100.0 %     148,148       100.0 %     34,317       30.1 %
                                                 
EXPENSES:
                                               
Employee compensation and benefits
    29,621       26.0 %     34,031       23.0 %     4,410       14.9 %
Selling and marketing
    26,791       23.5 %     28,192       19.0 %     1,401       5.2 %
Trading expenses and commissions
    10,431       9.2 %     18,601       12.6 %     8,170       78.3 %
Bank fees
    3,415       3.0 %     3,170       2.1 %     (245 )     (7.2 )%
Depreciation and amortization
    2,013       1.8 %     2,568       1.7 %     555       27.6 %
Communications and data processing
    1,950       1.7 %     2,209       1.5 %     259       13.3 %
Occupancy and equipment
    2,391       2.1 %     2,963       2.0 %     572       23.9 %
Bad debt provision/(recovery)
    593       0.5 %     514       0.3 %     (79 )     (13.3 )%
Professional fees
    2,549       2.2 %     2,623       1.8 %     74       2.9 %
Software expense
    712       0.6 %     1,431       1.0 %     719       101.0 %
Professional dues and memberships
    565       0.5 %     205       0.1 %     (360 )     (63.7 )%
Change in fair value of convertible, redeemable preferred stock embedded derivative
    40,820       35.9 %     48,936       33.0 %     8,116       19.9 %
Other
    1,091       1.0 %     3,846       2.6 %     2,755       252.5 %
                                                 
Total
    122,942       108.0 %     149,289       100.8 %     26,347       21.4 %
                                                 
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    (9,111 )     (8.0 )%     (1,141 )     (0.8 )%     7,970       (87.5 )%
Income tax expense
    11,423       10.0 %     18,192       12.3 %     6,769       59.3 %
Equity in earnings of equity method investment
          0.0 %           0.0 %           0.0 %
                                                 
NET INCOME/(LOSS)
    (20,534 )     (18.0 )%     (19,333 )     (13.0 )%     1,201       (5.8 )%
                                                 
Net income/(loss) applicable to noncontrolling interest
    (15 )     (0.0 )%     (402 )     (0.3 )%     (387 )     2,580.0 %
                                                 
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
    (20,519 )     (18.0 )%     (18,931 )     (12.8 )%     1,588       (7.7 )%
                                                 
 
Overview
 
Our total net revenue increased $34.3 million, or 30.1%, to $148.1 million for the nine months ended September 30, 2010 compared to $113.8 million for the nine months ended September 30, 2009. Our total net loss decreased by $1.6 million to $18.9 million for the nine months ended September 30, 2010 compared to a net loss of $20.5 million for the nine months ended September 30, 2009. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) increased $9.7 million, or approximately 47.8%, to


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$30.0 million for the nine months ended September 30, 2010 compared to $20.3 million for the nine months ended September 30, 2009. Our results for the nine months ended September 30, 2010 reflect the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume increased by $165.6 billion to $1,093.9 billion, or 17.8%;
 
  •  retail trading revenue per million traded increased by $31.5 to $154.1, or 25.7%;
 
  •  net deposits received from retail customers increased by $18.3 million to $205.2 million, or 9.8%; and
 
  •  traded retail accounts increased from 43,565 to 52,486, or 20.5%.
 
Revenue
 
Our total net revenue increased $34.3 million, or 30.1%, to $148.1 million for the nine months ended September 30, 2010 compared to $113.8 million for the nine months ended September 30, 2009. Trading revenue increased $33.3 million to $147.7 million for the nine months ended September 30, 2010 compared to $114.3 million for the nine months ended September 30, 2009. The increase in trading revenue was primarily due to an increase in retail trading revenue per million for the nine months ended September 30, 2010 of $31.5, or 25.7%, to $154.1, compared to $122.6 for the nine months ended September 30, 2009. We believe our revenue growth was primarily the result of increased currency volatility in 2010 which increased our customer trading volumes and our trading revenue, our increased marketing efforts which resulted in increased enrollment in our registered practice trading accounts and increased the number of tradable accounts, and our continued international expansion, which resulted in increased customers and customer trading volume.
 
Retail trading revenue per million traded increased by $31.5, or 25.7%, to $154.1 and net deposits received from retail customers increased for the nine months ended September 30, 2010 by $18.3 million, or 9.8%, to $205.2 million compared to $186.9 million for the nine months ended September 30, 2009. We believe the increase in retail trading revenue per million traded was primarily due to increased currency volatility.
 
Our other revenue increased $0.8 million to $1.9 million for the nine months ended September 30, 2010 from $1.1 million for the nine months ended September 30, 2009.
 
Our net interest expense for the nine months ended September 30, 2010 decreased $0.2 million to $1.4 million compared to the nine months ended September 30, 2009 as the average effective interest rate earned on our deposits and investments remained consistent at approximately 0.1%.
 
Interest expense on notes payable has been reclassified to interest expense in the net interest revenue (expense) category on the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Operating expenses
 
Our total expenses increased $26.4 million to $149.3 million for the nine months ended September 30, 2010, including a loss of $48.9 million relating to the change in fair value of our preferred stock embedded derivative, compared to $122.9 million, including expense of $40.8 million relating to the change in fair value of our preferred stock embedded derivative, for the nine months ended September 30, 2009. Other changes in our expenses were primarily due to a $4.4 million increase in employee compensation and benefits, a $8.2 million increase in trading expenses and commissions, a $1.4 million increase in selling and marketing expense, and a $2.8 million increase in other expenses. The remaining decrease was due to changes in each of our remaining expense categories with no individual category increasing or decreasing more than $0.8 million. We have estimated the fair market value of our preferred stock embedded derivative based principally on the results of a valuation model. The estimated fair value of the derivative embedded within our preferred stock is based on the value of our common stock. As our common stock price increases, the liability to settle the embedded derivative within our preferred stock increases, which results in a higher expense related to the embedded derivative. Conversely, as our common stock fair value decreases, the liability to settle the embedded derivative within our preferred stock decreases, resulting in a reversal of expense related to the embedded derivative. The change in total expenses therefore relates to the change in fair value of our preferred stock embedded derivative for the period.


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Employee Compensation and Benefits
 
Employee compensation and benefits expenses increased $4.4 million, or 14.9%, to $34.0 million for the nine months ended September 30, 2010, from $29.6 million for the nine months ended September 30, 2009. Salaries and benefits (excluding bonus and stock compensation) increased $1.8 million primarily due to increases in salaries. Stock compensation expense increased $0.8 million due to grants distributed in 2009. Bonus expense increased $1.8 million primarily due to the increase in operating results of our business for the nine months ended September 30, 2010 as compared to September 30, 2009.
 
Selling and Marketing
 
Selling and marketing expenses increased $1.4 million, or 5.2%, to $28.2 million for the nine months ended September 30, 2010 from $26.8 million for the nine months ended September 30, 2009. Increased sales and marketing expenses were primarily due to increased online, search engine, consulting, print and television advertising. This is in connection with the continued strategy of growing our global brand.
 
Trading Expense and Commissions
 
Trading expenses and commissions increased $8.2 million to $18.6 million for the nine months ended September 30, 2010 compared to $10.4 million for the nine months ended September 30, 2009, primarily due to an increase in customer trading volume directed to us from our white label partners and introducing brokers of $97.3 billion to $407.7 billion for the nine months ended September 30, 2010, compared to $310.4 billion for the nine months ended September 30, 2009. This expense is largely variable and is directly associated with customer trading volume directed to us from our white label partners and introducing brokers.
 
Other Expenses
 
Other expense increased $2.8 million to $3.8 million for the nine months ended September 30, 2010 compared to $1.0 million for the nine months ended September 30, 2009, primarily due to increases in litigation, fines and penalties of $1.1 million and regulatory assessment fees of $0.2 million.
 
Bad Debt Expense
 
The Company’s bad debt provision decreased $0.1 million to $0.5 million for the nine months ended September 30, 2010.
 
Income Taxes
 
Income taxes increased $6.8 million to $18.2 million for the nine months ended September 30, 2010 from $11.4 million for the nine months ended September 30, 2009. Our effective tax rate was (1,594.4%) for nine months ended September 30, 2010 and 125.4% for the nine months ended September 30, 2009. Our adjusted effective tax rate was 38.1% for the nine months ended September 30, 2010 compared to 36.0% for the nine months ended September 30, 2009. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and, thus, our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it may be more difficult to compare our financial performance to that of other companies. The difference between our effective tax rate and adjusted effective tax rate is due to the fact that our income tax expense is not affected by the change in fair value of our preferred stock embedded derivative from prior periods.


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Year End Results
 
The following table sets forth our Results of Operations for the three years ended December 31, 2009
 
                                                                 
    Year Ended
          Year Ended
          Year Ended
          Increase/(Decrease)  
    December 31,
    % of Net
    December 31,
    % of Net
    December 31,
    % of Net
    2008 Over
    2009 Over
 
    2007     Revenue     2008     Revenue     2009     Revenue     2007     2008  
    (dollars in thousands)  
 
REVENUE:
                                                               
Trading revenue
  $ 118,176       99.0 %   $ 186,004       98.9 %   $ 153,375       100.0 %     57.4 %     (17.5 )%
Other revenue
    437       0.4 %     2,366       1.3 %     2,108       1.4 %     441.4 %     (10.9 )%
                                                                 
Total non-interest revenue
    118,613       99.4 %     188,370       100.1 %     155,483       101.4 %     58.8 %     (28.4 )%
Interest revenue
    5,024       4.2 %     3,635       1.9 %     292       0.2 %     (27.6 )%     (92.0 )%
Interest expense
    (4,299 )     (3.6 )%     (3,905 )     (2.1 )%     (2,456 )     (1.6 )%     (9.2 )%     (37.1 )%
                                                                 
Total net interest revenue
    725       0.6 %     (270 )     (0.1 )%     (2,164 )     (1.4 )%     (137.2 )%     701.5 %
                                                                 
Net revenue
    119,338       100.0 %     188,100       100.0 %     153,319       100.0 %     57.6 %     (18.5 )%
                                                                 
EXPENSES:
                                                               
Employee compensation and benefits
    25,093       21.0 %     37,024       19.7 %     41,503       27.1 %     47.5 %     12.1 %
Sellings and marketing
    21,836       18.3 %     29,312       15.6 %     36,875       24.1 %     34.2 %     25.8 %
Trading expenses and commissions
    10,436       8.7 %     16,310       8.7 %     14,955       9.8 %     56.3 %     (8.3 )%
Bank fees
    2,316       1.9 %     3,754       2.0 %     4,466       2.9 %     62.1 %     19.0 %
Depreciation and amortization
    1,911       1.6 %     2,496       1.3 %     2,689       1.8 %     30.6 %     7.7 %
Communications and data processing
    1,659       1.4 %     2,467       1.3 %     2,676       1.7 %     48.7 %     8.5 %
Occupancy and equipment
    1,616       1.4 %     2,419       1.3 %     3,548       2.3 %     49.7 %     46.7 %
Bad debt provision/(recovery)
    1,164       1.0 %     1,418       0.8 %     760       0.5 %     21.8 %     (46.4 )%
Professional fees
    1,380       1.2 %     3,104       1.7 %     3,729       2.4 %     124.9 %     20.1 %
Software expense
    123       0.1 %     888       0.5 %     1,132       0.7 %     622.0 %     27.5 %
Professional dues and memberships
    187       0.2 %     773       0.4 %     698       0.5 %     313.4 %     (9.7 )%
Write-off of deferred initial public offering costs
          0.0 %     1,897       1.0 %           0.0 %     0.0 %     (100.0 )%
Change in fair value of convertible preferred stock embedded derivative
    165,280       138.5 %     (181,782 )     (96.6 )%     (1,687 )     (1.1 )%     (210.0 )%     (99.1 )%
Other
    (627 )     (0.5 )%     1,424       0.8 %     1,746       1.1 %     (327.1 )%     22.6 %
                                                                 
Total
  $ 232,374       194.7 %   $ (78,496 )     (41.7 )%   $ 113,090       73.8 %     (133.8 )%     (244.1 )%
                                                                 
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
  $ (113,036 )     (94.7 )%   $ 266,596       141.7 %   $ 40,229       26.2 %     (335.9 )%     (84.9 )%
Income tax expense
    21,615       18.1 %     34,977       18.6 %     12,556       8.2 %     61.8 %     (64.1 )%
Equity in earnings of equity method investment
          0.0 %     (214 )     (0.1 )%           0.0 %     0       (100.0 )%
                                                                 


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    Year Ended
          Year Ended
          Year Ended
          Increase/(Decrease)  
    December 31,
    % of Net
    December 31,
    % of Net
    December 31,
    % of Net
    2008 Over
    2009 Over
 
    2007     Revenue     2008     Revenue     2009     Revenue     2007     2008  
    (dollars in thousands)  
 
NET INCOME/(LOSS)
    (134,651 )     (112.8 )%     231,405       123.0 %     27,673       18.0 %     (271.9 )%     (88.0 )%
                                                                 
Net income/(loss) applicable to noncontrolling interest
          0.0 %     (21 )     0.0 %     (321 )     (0.2 )%     0.0 %     1428.6 %
                                                                 
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ (134,651 )     (112.8 )%   $ 231,426       123.0 %   $ 27,994       18.3 %     (271.9 )%     (87.9 )%
                                                                 
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Overview
 
Our total net revenue decreased $34.8 million, or 18.5%, to $153.3 million for the year ended December 31, 2009, compared to $188.1 million for the year ended December 31, 2008. Our total net income decreased by $203.4 million to $28.0 million for the year ended December 31, 2009, compared to $231.4 million for the year ended December 31, 2008. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) decreased $23.3 million, or approximately 47.0%, to $26.3 million for the year ended December 31, 2009, compared to $49.6 million for the year ended December 31, 2008. Except where specifically stated, our results for the year ended December 31, 2009 reflect the termination of our trading services to customers residing in China as of December 31, 2008, the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume decreased by $251.9 billion to $1,246.7 billion, or 16.8% ($0.4 million of trading volume was attributable to customers residing in China for the year ended December 31, 2009 compared to $172.4 billion for the year ended December 31, 2008);
 
  •  retail trading revenue per million traded decreased by $1.1 to $123.0, or 0.9%;
 
  •  net deposits received from retail customers decreased by $20.2 million to net deposits of $257.1 million, or 7.3% ($1.4 million of withdrawals were attributable to customers residing in China for the year ended December 31, 2009 compared to $25.3 million of net deposits during the year ended December 31, 2008); and
 
  •  traded retail accounts increased from 52,555 to 52,755 (seven traded retail accounts were attributable to customers residing in China for year ended December 31, 2009 compared to 11,647 traded retail accounts for the year ended December 31, 2008).
 
Revenue
 
Our total net revenue decreased $34.8 million, or 18.5%, to $153.3 million for the year ended December 31, 2009, compared to $188.1 million for the year ended December 31, 2008. Trading revenue decreased $32.6 million to $153.4 million for the year ended December 31, 2009, compared to $186.0 million for the year ended December 31, 2008. The decrease in trading revenue was primarily due to a decrease in customer trading volume for the year ended December 31, 2009 of $251.9 billion, or 16.8%, to $1,246.7 billion, compared to $1,498.6 billion for the year ended December 31, 2008. We believe our net revenue and trading revenue declines were primarily the result of our termination of our service offerings and trading services in China as of December 31, 2008 and global economic conditions. For the year ended December 31, 2009 net revenue associated with customers residing in China was immaterial compared to $24.4 million for the year ended December 31, 2008.
 
Retail trading revenue per million traded decreased by $1.1, or 0.9%, to $123.0 and net deposits received from customers decreased for the year ended December 31, 2009 by $20.2 million, or 7.3%, to $257.1 million compared to $277.3 million for the year ended December 31, 2008. We do not believe that our retail trading revenue per million traded results were materially impacted by our termination of our business with customers residing in China.

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Our other revenue decreased $0.3 million to $2.1 million for the year ended December 31, 2009 from $2.4 million for the year ended December 31, 2008.
 
Our net interest expense increased $1.9 million to $2.2 million for the year ended December 31, 2009 compared to $0.3 million for the year ended December 31, 2008 due to a decrease in the average effective interest rate earned on our deposits and investments which was 0.1% for the year ended December 31, 2009 compared to 1.5% for the year ended December 31, 2008.
 
Interest expense on notes payable has been reclassified to interest expense in the net interest revenue (expense) category on the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Operating Expenses
 
Our total expenses increased $191.6 million to a net expense of $113.1 million for the year ended December 31, 2009, including a gain of $1.7 million relating to the change in fair value of our preferred stock embedded derivative, compared to a net gain of $78.5 million, including a net gain of $181.8 million relating to the change in fair value of our preferred stock embedded derivative, for the year ended December 31, 2008. Other changes in our expenses were primarily due to a $4.5 million increase in employee compensation and benefits, a $7.6 million increase in selling and marketing, a $1.1 million increase in occupancy and equipment offset by a $1.9 million decrease in write-off of deferred public offering costs, and a $1.3 million decrease in trading expenses. The remaining increase of $0.6 million was due to changes in each of our remaining expense categories with no individual category increasing or decreasing more than $0.7 million. For the year ended December 31, 2009, there were no material direct expenses associated with our operations in China compared to $5.9 million for the year ended December 31, 2008.
 
Employee Compensation and Benefits
 
Employee compensation and benefits expenses increased $4.5 million, or 12.2%, to $41.5 million for the year ended December 31, 2009, from $37.0 million for the year ended December 31, 2008. Salaries and benefits (excluding bonus and stock compensation) increased $5.6 million primarily due to increases in head count from 319 at December 31, 2008 to 378 at December 31, 2009. The increase in the head count was required to support the overall growth in our business and continued international expansion. Stock compensation expense increased $1.1 million due to grants distributed in 2009. Bonus expense decreased $2.3 million primarily due to the decrease in operating results of our business for the year ended December 31, 2009 as compared to December 31, 2008. For the year ended December 31, 2009, there were no material direct employee compensation and benefits expenses associated with our operations in China compared to $1.4 million for the year ended December 31, 2008.
 
Selling and Marketing Expense
 
Selling and marketing expenses increased $7.6 million, or 26.0%, to $36.9 million for the year ended December 31, 2009 from $29.3 million for the year ended December 31, 2008. Increased sales and marketing expenses were primarily due to increased online, search engine, consulting, print and television advertising. For the year ended December 31, 2009, there were no direct selling and marketing expenses associated with our operations in China compared to $3.1 million for the year ended December 31, 2008.
 
Trading Expense and Commissions
 
Trading expenses and commissions decreased $1.3 million to $15.0 million for the year ended December 31, 2009 compared to $16.3 million for the year ended December 31, 2008, primarily due to an decrease in customer trading volume directed to us from our white label partners and introducing brokers of $58.0 billion to $431.4 billion for the year ended December 31, 2009, compared to $489.4 billion for the year ended December 31, 2008. This expense is largely variable and is directly associated with customer trading volume directed to us from our white label partners and introducing brokers. For the year ended December 31, 2009, there were no direct trading expenses and commissions from our operations in China compared to $0.7 million for the year ended December 31, 2008.


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Other Expenses
 
Other expense increased $0.3 million to $1.7 million for the year ended December 31, 2009 compared to $1.4 million for the year ended December 31, 2008, primarily due to an increase on the loss on disposal of property and equipment of $0.3 million, an increase in litigation expenses of $0.2 million, and an increase in office supplies expense of $0.1 million. These increases were offset by a decrease in travel expenses of $0.3 million. These increased expenses were required to support the overall growth of our business.
 
Professional fee expense increased $0.6 million to $3.7 million for the year ended December 31, 2009 compared to $3.1 million for the year ended December 31, 2008 due to a $0.3 million increase in professional fees, $0.3 million in tax services, $0.9 million increase in consulting expense and $0.2 million increase in audit fees, offset by a decrease in legal expenses of $1.1 million. These increased expenses were required to support the overall growth of our business.
 
Bank fees increased $0.7 million to $4.5 million for the year ended December 31, 2009 from $3.8 million for the year ended December 31, 2008. Increased bank fees were primarily due to an increase in credit card processing fees as a result of an increase of $30.1 million in the total net deposits received from customers funded through the use of customer credit cards.
 
Communications and data processing expenses increased $0.2 million, occupancy and equipment expenses increased $1.1 million, and depreciation and amortization expense increased $0.2 million. These increased expenses were required to support the overall growth of our business.
 
The change in fair value of the preferred stock embedded derivative amounted to a gain of $1.7 million for the year ended December 31, 2009 compared to a gain of $181.8 million for the year ended December 31, 2008. We have determined that the convertible feature in our preferred stock meets the definition of an “embedded derivative” in accordance with FASB ASC 815. Based on the Black-Scholes options pricing model, the embedded derivative is recorded at fair value and reported in the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded to our Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Income Taxes
 
Income taxes decreased $22.4 million to $12.6 million for the year ended December 31, 2009 from $35.0 million for the year ended December 31, 2008. Our effective tax rate was 31.2% for year ended December 31, 2009 and 13.1% for the year ended December 31, 2008. Our adjusted effective tax rate was 32.6% for the year ended December 31, 2009 compared to 41.2% for the year ended December 31, 2008. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and, thus, our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it may be more difficult to compare our financial performance to that of other companies. For the year ended December 31, 2009, there was no income tax expense related to our operations in China compared to $7.5 million for the year ended December 31, 2008. The difference between our effective tax rate and adjusted effective tax rate is due to the fact that our income tax expense is not affected by the change in fair value of our preferred stock embedded derivative from prior periods.
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Overview
 
Our total net revenue increased $68.8 million, or 57.6%, to $188.1 million for the year ended December 31, 2008, compared to $119.3 million for the year ended December 31, 2007. Our total net income increased by $366.1 million to $231.4 million for the year ended December 31, 2008, compared to a loss of $134.7 million for the year ended December 31, 2007. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) increased $19.0 million, or approximately 62.1%, to $49.6 million for the year ended December 31, 2008, compared to $30.6 million for the year ended December 31, 2007. Our results for the year


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ended December 31, 2008 reflect the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume increased by $824.0 billion to $1,498.6 billion, or 122.2% ($172.4 billion of trading volume was attributable to customers residing in China for the year ended December 31, 2008 compared to $103.4 million for the year ended December 31, 2007);
 
  •  retail trading revenue per million traded decreased by $51.1 to $124.1, or 29.2%;
 
  •  net deposits received from retail customers increased by $93.1 million to $277.3 million, or 50.5% ($25.3 million of net deposits received was attributable to customers residing in China for the year ended December 31, 2008 compared to $26.0 for the year ended December 31, 2007); and
 
  •  traded retail accounts increased from 43,139 to 52,555, or 21.8% (11,647 traded retail accounts were attributable to customers residing in China for the year ended December 31, 2008).
 
Revenue
 
Our total net revenue increased $68.8 million, or 57.6%, to $188.1 million for the year ended December 31, 2008, compared to $119.3 million for the year ended December 31, 2007. Trading revenue increased $67.8 million to $186.0 million for the year ended December 31, 2008, compared to $118.2 million for the year ended December 31, 2007. The increase in trading revenue was primarily due to an increase in customer trading volume for the year ended December 31, 2008 of $824.0 billion, or 122.2%, to $1,498.6 billion, compared to $674.5 billion for the year ended December 31, 2007. In addition, traded retail accounts for the year ended December 31, 2008, increased by 9,416 to 52,555, or 21.8%. We believe our revenue growth was primarily the result of increased currency volatility in 2008 which increased our customer trading volumes and our trading revenue, our increased marketing efforts which resulted in increased enrollment in our registered practice trading accounts and increased the number of tradable accounts, and our continued international expansion, which resulted in increased customers and customer trading volume.
 
For the year ended December 31, 2008 net revenue associated with customers residing in China was $24.4 million, compared to $20.6 million for the year ended December 31, 2007. For the year ended December 31, 2008 customers residing in China represented $172.4 billion of our customer trading volume, $25.3 million of our net deposits and 11,647 of our traded retail accounts, compared to $103.4 billion of our customer trading volume, $26.0 million of our net deposits and 11,568 of our traded retail accounts for the year ended December 31, 2007.
 
Retail trading revenue per million traded decreased by $51.1, or 29.2%, to $124.1 and net deposits received from retail customers increased for the year ended December 31, 2008 by $93.1 million, or 50.5%, to $277.3 million compared to $184.2 million for the year ended December 31, 2007. We believe the decline in retail trading revenue per million traded was primarily due to the reduction in the wholesale forex pricing spreads that we receive from our wholesale forex trading partners and our reaction to increased market pressure on pricing among our competitors during the year ended December 31, 2008 compared to the year ended December 31, 2007. We believe that the reduction during 2008 in the wholesale forex pricing spreads that we receive from our wholesale forex trading partners was a result of increased competition among financial institutions that supply wholesale forex pricing and an increase in the demand from retail forex traders. As a result of this increased competition among wholesale forex trading partners and increased demand from retail forex traders, we believe tighter forex pricing spreads were offered industry wide. In order to remain competitive, we in turn offered tighter forex pricing spreads to our customers. We do not believe that our trading revenue per million traded results were materially impacted by our termination of our business with customers residing in China.
 
Our other revenue increased $2.0 million to $2.4 million for the year ended December 31, 2008 from $0.4 million for the year ended December 31, 2007. The increase was primarily due to a $1.3 million increase in trading commissions related to the introduction in 2008 of our Forex Pro trading program which allows selected customers to receive tighter spreads on trades in return for a commission fee paid to us. The additional $0.7 million increase was the result of customer inactivity fees received by us from customers who maintain accounts that have not executed a trade and have not maintained the required minimum account balance during the year ended December 31, 2008. The increase in customer inactivity fees is primarily due to our increased customer base.


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Our net interest revenue decreased $1.0 million to interest expense of $0.3 million for the year ended December 31, 2008 compared to $0.7 million for the year ended December 31, 2007 due to a decrease in the average effective interest rate earned on our deposits and investments which was 1.5% for the year ended December 31, 2008 compared to 3.8% for the year ended December 31, 2007.
 
Certain balances have been reclassified to conform with the concepts of Regulation S-X, Rule 9.04. These include the reclassification of $3.7 million, $2.7 million, and $1.7 million for the year ended December 31, 2007, 2008 and 2009, respectively, from interest expense on notes payable to interest expense in the net interest revenue (expense) category on the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Operating Expenses
 
Our total expenses decreased $310.9 million, or 133.8%, to a net gain of $78.5 million for the year ended December 31, 2008, including a gain of $181.8 million relating to the change in fair value of our preferred stock embedded derivative and a $1.9 million loss relating to the write-off of our deferred initial public offering costs, compared to $232.4 million, including $165.3 million relating to the change in fair value of our preferred stock embedded derivative, for the year ended December 31, 2007. Other changes in our expenses were primarily due to an $11.9 million increase in employee compensation and benefits, a $7.5 million increase in selling and marketing, a $5.9 million increase in trading expenses, a $2.1 million increase in other expense, $1.7 million increase in professional fees and a $1.4 million increase in bank fees. The remaining increase of $3.8 million was due to spending increases in each of our remaining expense categories with no individual category increasing more than $0.8 million. For the year ended December 31, 2008, our total direct expenses associated with our operations in China were $5.9 million compared to $4.8 million for the year ended December 31, 2007.
 
Employee Compensation and Benefits
 
Employee compensation and benefits expenses increased $11.9 million, or 47.5%, to $37.0 million for the year ended December 31, 2008, from $25.1 million for the year ended December 31, 2007. Salaries and benefits (excluding bonus and stock compensation) increased $7.3 million primarily due to increases in head count from 299 at December 31, 2007 to 319 at December 31, 2008. The increase in the head count was primarily in the marketing and sales functions and was required to support the overall growth in our business. Stock compensation expense increased $2.8 million due to increased grants distributed in 2008. Bonus expense increased $1.8 million primarily due to the favorable operating results of our business. For the year ended December 31, 2008, our total direct employee compensation and benefits expenses associated with our operations in China were $1.4 million compared to $0.7 million for the year ended December 31, 2007.
 
Selling and Marketing
 
Selling and marketing expenses increased $7.5 million, or 34.2%, to $29.3 million for the year ended December 31, 2008 from $21.8 million for the year ended December 31, 2007. Increased sales and marketing expenses were primarily due to increased online, search engine, consulting, print and television advertising. For the year ended December 31, 2008, our total direct selling and marketing expenses associated with our operations in China were $3.1 million compared to $2.5 million for the year ended December 31, 2007, an increase of $0.6 million, or approximately 24.3%.
 
Trading Expense and Commissions
 
Trading expenses and commissions increased $5.9 million to $16.3 million for the year ended December 31, 2008 compared to $10.4 million for the year ended December 31, 2007, primarily due to an increase in customer trading volume directed to us from our white label partners and introducing brokers of $261.6 billion to $489.4 billion for the year ended December 31, 2008, compared to $227.8 billion for the year ended December 31, 2007. This expense is largely variable and is directly associated with customer trading volume directed to us from our white label partners and introducing brokers. For the year ended December 31, 2008, our total direct trading expenses and commissions from our operations in China were $0.7 million compared to $1.0 million for the year ended December 31, 2007.


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Other Expenses
 
Other expense increased $2.1 million to $1.5 million for the year ended December 31, 2008 compared to a gain of $0.6 million for the year ended December 31, 2007, primarily due to a $1.5 million recovery that was originally reserved in 2006 relating to the bankruptcy of one of our wholesale forex trading partners. We incurred $0.1 million in expense related to the closure of our China office. Software expense increased $0.8 million, professional dues and membership expense increased $0.6 million, and travel expense increased $0.2 million. These increased expenses were required to support the overall growth of our business. For the year ended December 31, 2008, our total other direct expense and commissions from our operations in China was $0.2 million compared to $0.2 million for the year ended December 31, 2007.
 
Professional fee expense increased $1.7 million to $3.1 million for the year ended December 31, 2008 compared to $1.4 million for the year ended December 31, 2007 due to a $1.0 million increase in legal expenses, $0.5 million increase in consulting expense and $0.2 million increase in audit fees. These increased expenses were required to support the overall growth of our business. For the years ended