Gain Capital Holdings Inc Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the Fiscal Year Ended December 31, 2012OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the Transition Period from to .Commission File Number 001-35008 GAIN CAPITAL HOLDINGS, INC.(Exact name of registrant as specified in its charter) Delaware 20-4568600(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)Bedminster One135 Route 202/206Bedminster, New Jersey 07921(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (908) 731-0700Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.00001 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None.Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes  NoIndicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes  NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes ¨ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files)  Yes ¨ NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the bestof the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to thisForm 10-K. 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 thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer  Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smaller reporting company)Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2). ¨ Yes  NoThe aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2012, was approximately $89.0 million.As of March 12, 2013, the registrant had 35,525,453 shares of Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCECertain information contained in the registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscalyear is incorporated by reference into Part III of this Form 10-K. Table of ContentsGAIN Capital Holdings, Inc.Table of Contents PART I Item 1. Business 1 Item 1A. Risk Factors 15 Item 1B. Unresolved Staff Comments 33 Item 2. Properties 33 Item 3. Legal Proceedings 33 Item 4. Mine Safety Disclosures 34 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 6. Selected Financial Data 38 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 65 Item 8. Financial Statements and Supplementary Data 67 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 67 Item 9A. Controls and Procedures 67 Item 9B. Other Information 69 PART III Item 10. Directors, Executive Officers and Corporate Governance 70 Item 11. Executive Compensation 70 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 70 Item 13. Certain Relationships and Related Transactions, and Director Independence 70 Item 14. Principal Accountant Fees and Services 70 PART IV Item 15. Exhibits and Financial Statement Schedules 71 LIST OF EXHIBITS 72 SIGNATURES 76 Table of ContentsFORWARD-LOOKING INFORMATIONIn this Annual Report on Form 10-K, the words “GAIN,” the “Company,” “our,” “we” and “us” refer to GAIN Capital Holdings, Inc. and, exceptas otherwise specified herein, to GAIN’s subsidiaries. GAIN’s fiscal year ended on December 31, 2012.This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of1934 as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets inwhich GAIN operates and management’s current beliefs and assumptions. Any statements contained herein (including without limitation statements to theeffect that management or GAIN “believes,” “expects,” “anticipates,” “plans” and similar expressions) that are not statements of historical fact should beconsidered forward-looking statements and should be read in conjunction with the consolidated financial statements and notes to consolidated financialstatements included in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Thesestatements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a numberof important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include,without limitation, those set forth in the section entitled “Item 1A – Risk Factors” below and discussed elsewhere herein. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, mayalso impair our business. We expressly disclaim any obligation to update any forward-looking statements, except as may be required by law.PART I ITEM 1.BUSINESSOverviewWe are a global provider of trading services and solutions, specializing in global over-the-counter, or OTC, markets, including spot foreign exchange, or forex,and precious metals, “contracts-for-difference”, or CFDs, which are investment products with returns linked to the performance of an underlying commodity,index or security, and exchange-traded products, including futures and options on futures. We have customers in more than 140 countries worldwide andconduct business from our offices in New York, New York, Bedminster, New Jersey; Powell, Ohio; Cleveland, Ohio; London, England; Tokyo, Japan;Sydney, Australia; Beijing, China; Hong Kong and Singapore.Our retail trading business, which has historically made up the majority of our business, allows customers to trade through our FOREX.com brand. We alsooffer retail customers the ability to trade exchange-traded products through our Open E Cry, or OEC brand, which offers futures products, and our wholly-owned subsidiary, GAIN Securities, which principally offers equities products. Our institutional trading business, GTX, launched in March 2010 to serveinstitutional market participants, including hedge funds, banks and high-frequency trading firms.We have invested considerable resources in developing our retail and institutional trading platforms and tools to allow our customers to trade and manage theiraccounts. While our retail and institutional trading businesses use separate platforms, we are able to leverage our combined scale and trading volume in ourrelationships with our wholesale trading partners, bank liquidity providers and other service providers. In addition, we believe that our platforms complementeach other, which allows us to cross-sell our services and to leverage our facilities and the technologies we develop. Our customers can trade through web-based, downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research, automated trading and accountmanagement. 1Table of ContentsThe following table sets forth key financial data and operating metrics for our business: Key Financial Data(in millions)Year Ended December 31, 2012 2011 2010 2009 2008 Net Revenue $151.4 $181.5 $189.1 $153.3 $188.1 Net income $2.6 $15.7 $37.8 $28.0 $231.4 Adjusted net income $5.5 $21.7 $33.9 $26.3 $49.6 Key Operating Metrics(Unaudited)Year Ended December 31, 2012 2011 2010 2009 2008 Retail Funded Accounts 85,099 76,485 85,562 60,168 49,740 Active OTC Accounts 60,219 63,435 64,313 52,755 52,555 Futures DARTs 13,581 — — — — OTC Trading Volume (billions) $1,303.4 $1,574.0 $1,324.8 $1,246.7 $1,498.6 Average Daily Volume (billions) $5.0 $6.0 $5.1 $4.8 $5.8 Client Assets (millions) $446.3 $310.4 $256.7 $199.8 $124.0 Institutional Trading Volume (billions) $1,952.6 $853.9 $239.3 $— $— Average Daily Volume (billions) $7.5 $3.3 $0.9 $— $— (1)For the periods prior to the closing of our initial public offering in December 2010, our net income/(loss) was affected by the changes in our embeddedderivative liability attributable to the redemption feature of our previously outstanding preferred stock. This redemption feature and the associatedembedded derivative liability was no longer required to be recognized following the conversion of all of our preferred stock into common stock inconnection with the completion of our initial public offering in December 2010.(2)Adjusted net income is a non-GAAP financial measure which represents our net income excluding the historical change in fair value of the embeddedderivative in preferred stock and the amortization of purchased intangibles. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Key Income Statement Line Items and Key Operating Metrics” and “– Reconciliation of Non-GAAP Financial Metrics,” fordiscussion and reconciliation of non-GAAP financial metrics.(3)Represents accounts which executed a transaction over the last 12 months.(4)Daily average revenue trades, or DARTs, represent the number of futures or options on futures trades in a given period over the number of trading daysin that period.(5)Our institutional channel includes our GTX business which was launched in March 2010, as well as additional institutional customers that tradethrough our other platforms.Growth StrategiesWe intend to grow our business and increase our profitability principally by employing the following growth strategies: • Continue to enhance our proprietary trading platforms and innovative trading tools in order to attract customers and increase our market share; • Strategically expand our operations and customer base through business acquisitions, investments and partnerships; • Expand our product offerings to include other financial products to enable our customers to access an expanding range of products and to executetrading strategies across various products, potentially leading to more revenue per customer; 2(1)(2)(3)(4)(5)Table of Contents • Identify and enter high-growth markets in order to expand our presence globally in markets where we believe there are large revenue opportunities;and • Capture additional market share by taking advantage of consolidation within the forex industry and by capitalizing on increasing confidence inretail forex as an asset class.The following achievements demonstrate our focus on our growth strategies during 2012: • The acquisition of Open E Cry, LLC, or OEC, an internet based futures business, from optionsXpress, a subsidiary of The Charles SchwabCorporation, which enables us to offer futures products and connections to dozens of exchanges around the world; • The acquisition of all retail forex customer accounts held at the U.S. regulated subsidiary of Global Futures & Forex, Ltd., or GFT; • The introduction of TRADE, a new retail platform featuring an expanded portfolio of forex and CFD products that includes innovative tools formarket monitoring, technical trading and strategy building; • The launch of the FOREX.com service in Canada; and • The hiring of the 14 person execution desk from Peregrine Financial Group to bolster GTX’s specialty execution desk.Our Retail BusinessOur retail business offers customers OTC trading through our FOREX.com brand, as well as the ability to trade futures and futures options through our OpenE Cry and OEC brands, and equity products through our wholly-owned subsidiary, GAIN Securities. Our retail businesses represented 88.2% of ourconsolidated net revenue for the year ended December 31, 2012.FOREX.comThrough FOREX.com, we provide our retail customers around the world with access to a variety of global OTC financial markets, including forex, preciousmetals and CFDs on commodities and indices. Because of U.S. regulations, neither we nor our subsidiaries offer CFDs in the United States or toU.S. residents. We provide our customers with what we believe to be one of the most robust online forex and CFD trading services in the industry, allowingcustomers to monitor multiple markets around the world simultaneously and to execute trades quickly and at a low cost from a single trading account. As ofMarch 12, 2013 we provided liquidity in over 400 OTC markets, including 300 currency pairs, 40 equity indices, and 65 commodities. Since our retailproducts are offered OTC, we act as the counterparty for our customers’ transactions.We have been developing our FOREX.com retail offering for more than a decade. Due to the global nature of our business, we have invested considerableresources to make our products and services available in multiple languages, which today includes English, German, Chinese, Japanese, Russian and Arabicand to allow our customers to fund their accounts in six different currencies.In December 2012, we continued to grow our retail business through the acquisition of all retail forex customer accounts held at the U.S. regulated subsidiaryof GFT. GFT’s customer accounts were transferred to us after the close of trading on December 7, 2012.Futures and Equity ProductsDuring 2012, we purchased OEC, an internet based futures business, for a purchase price of $12.0 million ($9.5 million net of working capital). InNovember 2012, OEC merged with and into Gain Capital Group, LLC, which 3Table of Contentshas continued OEC’s futures business under our Open E Cry and OEC brands. Through our proprietary OEC Trader platform, we are able to offer our retailclients access to the futures, futures option and forex markets in a single interface.In addition to the futures and futures options offered through our OEC brand, we also offer our customers the ability to trade other exchange-traded productsthrough our wholly-owned subsidiary, GAIN Securities. A broker-dealer registered with the SEC and a member of the Financial Industry RegulatoryAuthority, Inc., or FINRA, GAIN Securities offers direct access to listed U.S. equity securities, including stocks, exchange traded funds, or ETFs, options,mutual funds and bonds.The following are the key components of our retail business:Innovative trading toolsWe have made significant investment in the development and support of our proprietary trading technology in order to provide our customers with an enhancedcustomer experience and multiple ways to trade and manage their accounts, tailored to their level of experience and preferred mode of access. In addition, wealso selectively offer third party trading tools we believe complement our proprietary offerings. Our current suite of available trading tools includes: • FOREXTrader PRO, our proprietary trading platform, which provides active traders with a highly customizable trading environment, fullyintegrated decision support tools and automated trading capabilities. FOREXTrader PRO is available in both a downloadable desktop edition anda web-based version that is compatible with various operating systems. • FOREXTrader Mobile, our suite of fully functional mobile trading solutions, which includes native iPhone and Android apps, as well as an iPadapp. • Website Trading, our web-based trading platform, provides streamlined trading, research and account management features in a secureenvironment and is an important tool that attracts a more diverse customer base, including novice traders, who prefer easy-to-use trading toolsaccessed through a customer-friendly website. • MetaTrader 4, a popular third-party trading platform, that allows users to develop and automate their own custom trading strategies or use tradingsystems developed by third parties. MetaTrader 4 is available in 31 languages, and is especially popular outside the United States. • OEC Trader, a proprietary trading platform that offers users access to the futures, futures options and forex markets in a single interface.We believe that our proprietary trading technology has and will continue to provide us with a significant competitive advantage because we have the ability toadapt quickly to our customers’ changing needs, rapidly incorporate new products and features and offer our customers multiple ways to engage with us.Competitive pricing and fast, accurate trade executionWe have leveraged our extensive experience in the global OTC markets to develop highly automated processes, which allows us to deliver tight bid/offerspreads generally reflective of currently available pricing in the markets in which we offer and to execute our customers’ trades quickly and efficiently.We have relationships with a large number of the most prominent forex liquidity providers, which we believe allows us to offer our customers more competitivepricing with tighter bid/offer spreads than many of our competitors. In addition, we have developed a proprietary pricing engine that electronically aggregatesquotes from our liquidity sources based on the midpoint price between the available “best bid” and “best offer.” Our pricing engine allows us to provide ourcustomers with real-time quotes without reliance on third-party pricing providers. 4Table of ContentsOur trading processes enable us to execute most trades in under a second. We have established a set of standards we use to measure execution quality forFOREX.com, and we publish execution statistics on a quarterly basis. The FOREX.com execution scorecard, which is available on our website, demonstratesour ability to provide fast, accurate trade executions, as well as our commitment to transparency in our business. In 2012, we handled over 34 million traderequests through FOREX.com and executed 99.7% of trades in less than one second, with an average execution speed of .06 seconds. We believe we are theonly firm in our industry to voluntarily publish a monthly execution scorecard with the level of detail that we provide.Sophisticated risk managementBecause we are exposed to market and credit risk in connection with our retail trading activities, developing and maintaining robust risk managementcapabilities is a high priority.When a retail customer executes a trade with us, the trade may be naturally hedged against an offsetting trade from another customer, hedged through anoffsetting trade with one of our wholesale trading partners or may become part of our net exposure portfolio. For naturally hedged trades, we receive the entirebid/offer spread we offer our customers on the two offsetting transactions. For immediately offset trades, we earn the difference between the retail bid/offerspread we offer our customers and the wholesale bid/offer spread we receive from our wholesale trading partners. Customer trades in our net exposure portfolioare managed pursuant to our risk-management policies and procedures, including risk limits established by the Risk Committee of our Board of Directors,and we receive the net gains or losses generated through the management of our net exposure.Our risk management policies and procedures have been developed to enable us to effectively manage our exposure to market risk, particularly in connectionwith the management of our net exposure. Our net exposure is evaluated each second and is continuously rebalanced throughout the trading day, therebyminimizing the risk we will be adversely affected by changes in the market prices of the products we hold. This real-time rebalancing of our portfolio enablesus to curtail risk and to be profitable in both up and down market scenarios.In our exchange traded futures business, we are exposed to debit/deficit risk with our clients. If an adverse market move relative to a client’s position(s) occursand we are unable to collect a margin call in a timely manner, the client account may incur a loss, resulting in a debit balance. If a client account were to incura loss resulting in a debit balance and we were unable to collect such debit balance from our client, we would incur debit/deficit expense, which could have amaterial adverse effect on our results of operations. In recognition of this risk, we monitor all client accounts in near real time and have employed multiple riskmitigation measures to help ensure that our client accounts are properly margined at all times.Our risk management policies and procedures are established and reviewed regularly by the Risk Committee of our Board of Directors. Our risk-managementprocedures require our team of senior traders to monitor risk exposure continuously and update senior management both informally over the course of thetrading day and formally through real-time, intraday and end of day reporting. We do not take proprietary directional market positions and therefore do notinitiate market positions for our own account in anticipation of future movements in the relative prices of products we offer.Because we allow our customers to trade notional amounts greater than the funds they have on deposit with us through the use of leverage, management ofcredit risk is a key focus for us. The maximum leverage available to retail traders is set by the regulator in each jurisdiction. For example, the standardleverage available to retail accounts in the United States is 50-to-1 (e.g. the initial margin requirement would be approximately $2,000 in order to execute anotional trade amount of $100,000 for the Euro/Dollar (EUR/USD) currency pair), 25-to-1 in Japan and up to 200-to-1 in the United Kingdom and Australia.We manage customer credit risk through a combination of providing trading tools that allow our customers to avoid taking on excessive risk and automaticprocesses that close customer positions in accordance with our policies, in the event they exceed their credit limits. For example, our customer tradingplatforms provide a real-time margin monitoring tool to enable 5Table of Contentscustomers to know when they are approaching their margin limits. Customers also have the option of employing lower leverage. If a customer’s equity fallsbelow what is required to support that position, we will automatically liquidate positions to bring the customer’s account into margin compliance.Demonstrated White Label CapabilitiesWe have significant experience in successfully negotiating and maintaining white label partnerships. White label partners are firms that enter into anarrangement with us whereby we provide all of the front- and back-office services necessary for them to provide online retail forex trading to their customersunder their own brands. Our typical white label partner is a either a financial services firm seeking to provide their retail customers with online forex tradingservices quickly and cost-effectively or an online broker, such as a broker-dealer or Futures Commission Merchant, or FCM, seeking to expand the numberof financial products they offer to their customers. We enter into white label partnerships in order to expand into new markets where we have not obtained theregulatory authorizations necessary to provide our trading services directly to retail customers or to gain access to a partner’s existing client base. Wecompensate our white label partners with either a commission based on the trading volume generated by their customers or a share of net revenue generated bytheir customers. These relationships allow us to take advantage of market opportunities that would be costly and time-consuming to access by other means.Through our white label partners, we generated 10% of our retail trading volume for the year ended December 31, 2012. We believe we are well-positioned tocapture new partnership opportunities given our successful track record of supporting partners globally.CustomersOur retail customers consist of self-directed traders, who execute trades on their own behalf, and managed account customers who have engaged anintermediary to make trading decisions on their behalf.The majority of our retail customers are self-directed traders. The typical self-directed customer is generally comfortable making trading decisions and hasprior experience trading online, typically in more traditional asset classes, such as equities. Generally, our self-directed customers seek a high return on capitaland are interested in investing in alternative asset classes, which typically have a higher risk/reward profile, but can serve as a diversification tool. For theyear ended December 31, 2012, self-directed customers represented approximately 96.5% of our retail trading volume.Our managed account customers make up a smaller portion of our retail customer base. The intermediaries engaged by our managed account customers,which we refer to as authorized traders, include professional money managers, which trade a significant amount of aggregated customer funds, andindividuals that trade for a small number of customer accounts. For the year ended December 31, 2012, authorized traders collectively representedapproximately 3.5% of our retail trading volume.Sales and MarketingIn connection with our retail business, we employ a mixture of online and traditional marketing programs, such as advertising on third-party websites, searchengine marketing, email marketing and television advertising. In addition, senior members of our research team have appeared regularly on major financialnews outlets as industry experts.Our principal lead-generation tool is to offer prospective customers access to free registered practice trading accounts for a 30-day trial period. From aprospective customer’s point of view, we believe the registered practice trading account serves two important functions. First, it serves as an educational tool,providing the prospective customers with the opportunity to try trading in a risk-free environment, without committing any capital. Second, it allows theprospective customer to evaluate our trading platform, tools and services. During this trial period, our customer service team is available to assist and educatethe prospective customers. 6Table of ContentsWe also attract customers by building awareness of our company, and the self-directed trading industry in general, through various education initiatives. Oureducational resources currently include a variety of video tutorials, articles and other materials, along with interactive webinars and a comprehensive web-based training course coupled with access to experienced instructors.We also actively forge partnerships with introducing brokers in order to expand our customer base. We work with a variety of different types of introducingbrokers, ranging from small, specialized firms that specifically identify and solicit customers interested in forex trading, to larger, more established financialservices firms seeking to enhance their customer base by offering a broader array of financial products. Introducing brokers direct customers to us in returnfor either a commission on each referred customer’s trading volume or a share of net revenue generated by each referred customer’s trading activity.CompetitionThe market for our services is rapidly evolving and highly competitive. Our competitors in the U.S. are different than our competitors in other parts of theworld and vary in terms of regulatory status, breadth of product offering, size and geographic scope of operations. We have established a leading position inthe U.S. retail forex market and over the past several years have made significant progress expanding our operations globally. Our main competitors can becategorized as follows: • Large U.S. Regulated Forex Firms, including firms regulated by the Commodity Futures Trading Commission, or CFTC, and National FuturesAssociation, or NFA, with a principal offering in the U.S. of retail forex, such as Forex Capital Markets LLC and OANDA Corporation. Likeus, these firms have also expanded globally over the past several years, and we also consider them to be competitors in several of our keyinternational markets. • U.S. Online Broker-Dealers, including online broker dealer firms such as OptionsXpress Holdings, Inc., a division of The Charles SchwabCorporation, and TDAMERITRADE, among others. These traditional online brokers offer a broad set of asset classes to retail traders, includingforex and futures products. The retail forex businesses of these competitors generally constitute a relatively insignificant portion of their overallbusinesses. • Global Multi-Product OTC Trading Firms, including firms such as Saxo Bank, CMC Group and IG Group Holdings plc. These firms generallyoffer a broad set of asset classes and earn a significant percentage of their revenue from non-forex products, including CFD trading on equityindices and commodities.Our Institutional BusinessWe offer institutional customers access to forex trading, primarily through our GTX offering, which we launched in 2010. GTX utilizes a highly innovative,next generation electronic communications network, or ECN, which provides deep liquidity and true peer-to-peer trading capabilities through our uniquecentrally-cleared prime brokerage model, along with advanced algorithmic trading capabilities. We have made a significant investment in the development ofproprietary enhancements to the GTX platform to provide our customers with innovative trading tools, such as basket trading, highly-customized reportingand custom margin monitoring. In 2011, we launched a specialty execution desk within our GTX business to facilitate the execution of more complextransactions for our clients covering all aspects of the forex markets, including swaps, NDFs and options. For the year ended December 31, 2012, net revenuefrom our institutional business represented 10% of our total consolidated revenue.Through GTX we provide institutional customers fully anonymous and equal access to the same executable pricing across all major currency pairs. GTXclients use their existing credit line with a prime broker to trade on the liquidity of other participants, including banks, hedge funds and other clients. GTXprovides a marketplace where participants, including banks, market makers and individual traders, trade against each other by sending 7Table of Contentscompeting bids and offers into the trading platform. Participants interact inside the trading platform and get the best offers for their trades available at thattime. All trading orders are matched between counterparties in real time. We act as an agent for the trades executed on the GTX platform and, therefore, do notassume any market or credit risk. We generate revenue by charging a commission on trades executed on the platform.For professional traders who meet certain qualifications but do not have a credit line with a prime broker, our GTX Direct offering allows access to theliquidity of the GTX marketplace. Through GTX Direct, we agree to act as counterparty to trades executed through the GTX trading platform on our clients’behalf and earn a commission for each trade.GTX is powered by software and services that we license from a third party. Pursuant to our agreements, we have obtained, subject to certain excludedcustomers and geographic regions, exclusive rights to use the software in the field of forex trading and non-exclusive rights to use such trading services in thefields of precious metals and hydrocarbon-related products trading.CustomersOur institutional customer base includes financial institutions, hedge fund and asset managers, commodity trading, high frequency traders and broker/dealersand high net-worth individuals.Sales and MarketingWe have a direct sales team that is dedicated to building relationships with potential institutional customers and expanding our GTX business. Since itsinception in 2010, our institutional business has quickly expanded to include customers throughout the United States, Europe and Asia.CompetitionGTX competes with other firms offering electronic trading platforms, such as ICAP, through its EBS offering; Reuters; FX Connect and Currenex, bothowned by State Street Bank; BGC partners, through its eSpeed offering; Knight Capital, through its Hotspot offering; 360T Trading Networks; IntegralDevelopment Corp.; and others.Intellectual PropertyWe rely on a combination of trademark, copyright, trade secret and unfair competition laws in the United States and other jurisdictions to protect ourproprietary technology, intellectual property rights and our brands (e.g., Forex.com, GAIN Capital, GTX, Open E Cry and OEC). We also enter intoconfidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. Werigorously control access to our proprietary technology. Currently, we do not have any pending or issued patents.We use the following service marks that have been registered with the U.S. Patent and Trademark Office: GAIN Capital (registered service mark),FOREX.com GAIN Capital Group (registered service mark), Trade Real-Time (registered service mark), ForexPro (registered service mark), ForexPremier(registered service mark), Forex Insider (registered service mark), ForexTrader (registered service mark), FOREX.com (registered service mark), ForexPlus(registered service mark), It’s Your World. Trade It. (registered service mark), OEC (registered service mark), OEC One Link (registered service mark) andOpen E Cry (registered service mark). We also use the trademark Open E Cry (registered trademark), which has been registered with the U.S. Patent andTrademark Office. 8Table of ContentsRegulationOverviewOur business and industry are highly regulated. Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the UnitedKingdom (through which we have accessed regulatory passport rights to operate in a number of European Economic Area jurisdictions), Japan, Australia,Hong Kong, Canada and the Cayman Islands. Government regulators and self-regulatory organizations oversee the conduct of our business in many ways,and several perform regular examinations to monitor our compliance with applicable statutes, regulations and rules. These statutes, regulations and rules coverall aspects of our business, including: • sales and marketing activities, including our interaction with, and solicitation of, customers; • trading practices, including the types of products and services we may offer; • treatment of customer assets, including custody, control, safekeeping and, in certain countries, segregation of our customer funds and securities; • maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries; • continuing education requirements for our employees; • anti-money laundering practices; • recordkeeping and reporting; and • supervision regarding the conduct of directors, officers and employees.In some jurisdictions in which we offer our products and services, regulation is not required as a result of the nature of the market or the manner in which weconduct our business. We consult with legal counsel in jurisdictions in which we operate on a regular basis as to whether we have the required authorizations,licenses or approvals or whether we may conduct our business cross-border with residents in that jurisdiction without obtaining local regulatory authorization,approval or consent. In addition, on an on-going basis we proactively evaluate our activities in jurisdictions in which we are not currently licensed orregistered. To the extent that we serve customers in a jurisdiction in which we determine licensing or registration is required, we may also elect to direct suchcustomers to a licensed white label or other partner, rather than pursuing licensing or registration.Though we conduct our business in a manner which we believe complies with applicable local law, regulators may assert jurisdiction over activities that theydeem to take place within the jurisdiction they regulate, and new laws, rules or regulations may be enacted that change the regulatory landscape and result innew, or clarify preexisting, registration or licensing requirements.The primary responsibility for ensuring that we maintain compliance with all applicable regulatory requirements is vested in our legal and compliancedepartments. In addition, our legal and compliance departments are responsible for our ongoing training and education programs, supervision of our personnelrequired to be licensed by one or more of our regulators, review of sales, marketing and other communications and other related functions. In addition, all ofour sales employees are licensed pursuant to applicable regulation.U.S. RegulationIn the United States, the CFTC and the NFA regulate our forex trading activities. Historically, the principal legislation covering our U.S. forex business wasthe Commodity Exchange Act, which provides for federal regulation of all commodities and futures trading activities and requires all futures and commodityoptions to be traded on organized exchanges. In recent years, as in the case of other companies in the financial services industry, our forex business has beensubject to increasing regulatory oversight. Specifically, in 2008, the Congress passed the CFTC Reauthorization Act, which amended the CommodityExchange Act to grant the 9Table of ContentsCFTC express authority to regulate the retail forex industry. On October 18, 2010, the CFTC adopted a series of rules which regulate various aspects of ourbusiness, including: • creating “retail foreign exchange dealers,” or RFEDs, a new regulated category of forex brokers focused on retail investors that are permitted to actas counterparty to retail forex transactions; • imposing an initial minimum security deposit amount of 2.0% of the notional value for retail forex transactions in “major currency” pairs and5.0% of the notional value for all other retail forex transactions; • providing that introducing brokers must either (i) register with the CFTC and become members of the NFA or apply for an exemption fromregistration and (ii) meet the minimum net capital requirements applicable to futures and commodity options introducing brokers or enter into aguarantee agreement with a CFTC-regulated forex dealer member and permitting only one such guarantee agreement per introducing broker; • requiring that a risk disclosure statement be provided to every retail forex customer, including disclosure of the number of profitable andunprofitable non-discretionary accounts maintained by the forex broker during the four most recent calendar quarters; • prohibiting RFEDs, FCMs and introducing brokers from including statements in sales and marketing materials that would appear to convey topotential retail forex customers that there is a guaranty against loss, and requiring that FCMs, RFEDs and introducing brokers provide retail forexcustomers with enhanced written disclosure statements that, among other things, inform customers of the risk of loss; and • requiring RFEDs to maintain net capital of at least $20.0 million, plus 5.0% of the RFED’s customer obligations in excess of $10.0 million. Inaddition, in the event an RFED’s net capital position falls below 110.0% of the minimum net capital requirement, the RFED would be subject toadditional reporting requirements.Our exchange-traded futures business, which is carried on by our subsidiary Gain Capital Group, LLC, under the OEC brand, is subject to the CFTC NetCapital Rule (Regulation 1.17). Our OTC foreign exchange business carried on by our subsidiary Gain Capital Group, LLC under the Forex.com brand, isalso subject to the CFTC Net Capital Rule (Regulation 5.7). Under applicable provisions of these regulations, Gain Capital Group, LLC is required tomaintain adjusted net capital of the greater of $1.0 million or 8% of Customer and Non-Customer Maintenance Margin or $20,000,000 plus 5 % of allliabilities owed to customers exceeding $10,000,000. At December 31, 2012, Gain Capital Group, LLC maintained $21.5 million more than the requiredminimum regulatory capital for a total of 1.87 times the required capital and at all times maintained compliance with all applicable regulations.In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. A number of significant provisionscontained in the law affect, or will affect once implementing regulations are adopted by the appropriate federal agencies, our business. Specifically, the Dodd-Frank Act includes: • rules that, beginning in October 2010, require us to ensure that our customers residing in the United States have accounts open only with ourNFA-member operating entity, GAIN Capital Group, LLC; • amendments to the Commodity Exchange Act that, beginning on July 15, 2011, required essentially all retail transactions in any commodity otherthan foreign currency to be executed on an exchange, rather than OTC; • a requirement that federal banking regulators adopt new rules regarding the conduct and operation of retail forex businesses by banks; and • a requirement that the SEC adopt rules regarding the conduct and operation of retail forex businesses by broker-dealers. 10Table of ContentsAs a result of the Dodd-Frank Act’s requirement that essentially all transactions in commodities be executed on an exchange, after July 15, 2011, we were nolonger permitted to offer leveraged spot metal transactions in the United States. For the period from January 1, 2011 through July 15, 2011, our leveraged spotmetals business with U.S. customers generated approximately $20.7 million in revenue. In addition, new regulations regarding banks’ participation in theforex business could significantly affect our wholesale forex trading partners’ ability to do business with us, which could affect the structure, size, depth andliquidity of forex markets generally.The Dodd-Frank Act also provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metalsderivatives in which we engage. The Dodd-Frank Act requires the registration of swap dealers with the CFTC and imposes significant regulatory requirementson swap dealers. Certain of our subsidiaries may be required to register, or may register voluntarily, as swap dealers. Effective February 27, 2013, GAINGTX, LLC, became registered with the CFTC and NFA as a swap dealer.Swap dealers are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherenceto risk management policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capitalrequirements. Swap dealers also are subject to additional duties, including internal and external business conduct and documentation standards with respect totheir swap counterparties. Swap dealers also will be subject to new rules under the Dodd-Frank Act regarding segregation of customer collateral for clearedtransactions, position limits, large trader reporting regimes, compensation requirements and anti-fraud and anti-manipulation requirements related to activitiesin swaps.The specific parameters of these swap dealer requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAINGTX and any other of our subsidiaries that register as a swap dealer remains unclear. It is likely, however, that these entities will face increased costs due tothe registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers could require us to restructure ourbusinesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance withswap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, andthe changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition. Theextraterritorial impact of the swap dealer rules also remains unclear.U.S. Patriot Act and Anti-Money LaunderingLike other companies in the financial services industry, we are subject to a variety of statutory and regulatory requirements concerning our relationships withcustomers and the review and monitoring of their transactions. Specifically, we are subject to the Uniting and Strengthening America by Providing AppropriateTools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, which requires that we maintain a comprehensive anti-money laundering,or AML, program, a customer identification program, or CIP, designate an AML compliance officer, provide specified employee training and conduct anannual independent audit of our AML program. Consistent with the Patriot Act, our CIP includes both documentary and non-documentary review andanalysis of potential customers. Under our CIP, we review each prospective customer’s identity internally and also contract with third-party firms that performextensive background checks on each prospective customer, including through review of the U.S. Treasury Department’s Office of Foreign Assets andControl, Specially Designated Nationals and Blocked Persons lists. These procedures and tools, coupled with our periodic training, assist us in complyingwith the Patriot Act, as well as the CFTC’s and NFA’s applicable AML and CIP requirements.International RegulationWe have provided below a brief description of the key regulatory aspects governing our operations in the jurisdictions in which we have registered with, orobtained a license from, the local regulator, as well as material 11Table of Contentsregulatory developments affecting our business in other jurisdictions important to our business, including developments that have presented risks oruncertainties for our operations.United KingdomGAIN Capital Forex.com UK Limited, or GCUK, is registered in the UK and regulated by the Financial Services Authority, or FSA, as a full scope €730kBIPRU Investment Firm. GCUK is required to maintain the greater of $1.0 million (€730,000) or the Financial Resources Requirement, which is calculated asthe sum of the firm’s operational, credit, counterparty, concentration, market and forex risk. The regulatory capital held is required to be in excess of 110% ofits requirements at all times. At December 31, 2012, GCUK maintained $21 million more than the required minimum regulatory capital for a total of 2.5times the required capital and at all times maintained compliance with all applicable regulations.In the European Union, Commission officials have announced the intention to propose new laws to regulate OTC derivatives. The new laws would, amongother things, require mandatory central clearing of some derivatives, higher collateral requirements and higher capital charges for certain OTC derivatives.Details for many aspects of the legislative proposals have not yet been published. If the products that we offer are subjected to mandatory central clearing,exchange trading, higher collateral requirements or higher capital charges, our business, financial condition and results of operations could be materiallyadversely affected.JapanForex.com Japan Co., Ltd., or GC Japan, is a registered Type I financial instruments business firm regulated by the Financial Services Agency of Japan inaccordance with Financial Instruments and Exchange Law (Law No. 25 of 1948, as amended). GC Japan is a member of the Financial Futures Association ofJapan. GC Japan is subject to a minimum capital adequacy ratio of 120%, which is derived by dividing Net Capital (as defined in Law No. 25) by the sumof GC Japan’s market, counterparty credit risk and operational risk. At December 31, 2012, GC Japan maintained $7.5 million more than the requiredminimum regulatory capital for a total of 3.1 times the required capital and at all times maintained compliance with all applicable regulations.GC Japan is also regulated by the Japan Ministry of Economy, Trade and Industry, or the JETI, and the Japan Ministry of Agriculture, Forestry andFisheries, or the JAFF, and is a member of the Financial Futures Association of Japan. As required under applicable law, on January 1, 2011, we obtained alicense from the JETI and JAFF.The regulation of forex trading in Japan has recently undergone significant regulatory changes. In particular, pursuant to a new rule which became effectiveAugust 1, 2011, the maximum permitted leverage ratio for forex products is 25-to-1 and a new maximum leverage ratio of 20-to-1 for spot gold and spot silverproducts took effect on July 1, 2011. These regulatory changes may have a material adverse effect on our forex and metals business with Japanese customers.AustraliaGAIN Capital Forex.com Australia, Pty. Ltd., or GCAU, is regulated under the laws of Australia, including the Corporations Act 2001 (Commonwealth ofAustralia). The Australian Securities and Investments Commission, or the ASIC, is the corporate, markets and financial services regulator in Australiaresponsible for administering aspects of the Corporations Act 2001. GCAU holds an Australian Financial Services License that has been issued by theASIC. GCAU is required to maintain a minimum capital requirement of $0.04 million (0.04 million AUD) plus 5% of adjusted liabilities between $1.02million (1 million AUD) and $101.6 million (100 million AUD). At December 31, 2012, GCAU maintained $2.2 million more than the required minimumregulatory capital for a total of 6.7 times the required capital and at all times maintained compliance with all applicable regulations. 12Table of ContentsThe ASIC has released guidance to assist compliance with regulation applicable to advertising materials issued by promoters of financial products andservices in Australia and by OTC CFD providers advertising such products to retail clients. The ASIC has also released disclosure benchmarks for OTCCFD providers which include a benchmark requiring OTC CFD providers to adopt written customer suitability policies.Hong KongOur Hong Kong subsidiary, GAIN Capital Forex.com Hong Kong Limited, or GCHK, is a Type 3 leveraged foreign exchange trading firm registered with theSecurities and Futures Commission, or SFC, and operates as an approved introducing agent. During the third quarter of 2011, GCHK received approval tobegin offering forex and CFD trading directly to customers in Hong Kong. GCHK is subject to the requirements of section 145 of the Securities and FuturesOrdinance (Cap.571). Under this rule, GCHK is required to maintain a minimum liquid capital requirement of the higher of $1.9 million or the sum of 1.5%of its aggregate gross foreign currency position and 5% of its adjusted liabilities and clients’ margin calculated in accordance with applicable rules. AtDecember 31, 2012, GCHK maintained $1.8 million more than the required minimum regulatory capital for a total of 1.9 times the required capital and at alltimes maintained compliance with all applicable regulations.Cayman IslandsGAIN Global Markets, Inc., or GGMI, our Cayman Island subsidiary, is a registered securities arranger with the Cayman Islands Monetary Authority. GGMIis required to maintain a capital level that is the greater of one quarter of relevant annual expenditure, or $100,000. At December 31, 2012, GGMI maintained$0.3 million more than the required minimum regulatory capital for a total of 3.8 times the required capital and at all times maintained compliance with allapplicable regulations.CanadaGAIN Capital - Forex.com Canada, Ltd., or GCCA, is a Dealer Member of the Investment Industry Regulatory Organization of Canada and regulated underthe laws of Canada, including the Canadian Investor Protection Fund. In Canada, the securities industry is governed by provincial or territorial legislation,and there is no national regulator. Local legislation differs from province to province and territory to territory but, generally requires that forex dealingrepresentatives register with applicable regulators and self-regulatory organizations in order to offer forex and/or CFD products to retail clients. GCCA’sprincipal provincial regulator is the Ontario Securities Commission, or OSC. GCCA is required to maintain risk adjusted capital in excess of the minimumcapital requirement. At December 31, 2012, GCCA maintained $1.3 million more than the required minimum regulatory capital for a total of 6.4 times therequired capital and at all times maintained compliance with all applicable regulations.KoreaWe have a number of partners that provide retail forex trading to customers in Korea. We are not currently licensed to offer forex trading services directly toretail customers in Korea. The regulation of forex trading in Korea has recently undergone changes. In particular, the Korean Financial Supervisory Serviceannounced a policy effective March 5, 2012, pursuant to which the maximum permitted leverage was reduced to 10-to-1. In addition, the Korean regulatoryauthority has announced that it may consider measures to further limit the ability of Korean general investors to enter into forex margin trading for speculativepurposes. These regulatory changes may have a material adverse effect on our business with Korean customers.Global Anti-Money LaunderingOur anti-money laundering and customer identification programs are designed to comply with applicable rules and regulations on a global basis. In addition,we have developed proprietary methods for risk-management and continue to add specialized processes, queries and automated reports designed to identifypotential money laundering, fraud and other suspicious activities. 13Table of ContentsEmployeesAs of December 31, 2012, we had 363 employees. None of our employees are covered by collective bargaining agreements.Corporate InformationWe were incorporated in Delaware in October 1999 as GAIN Capital, Inc. Our principal executive offices are located at Bedminster One, 135 Route 202/206,Bedminster, New Jersey 07921. We operate our trading risk management and most administrative services out of our New York, New York; Bedminster,New Jersey; Powell, Ohio; Cleveland, Ohio; Chicago, Illinois; London, England; Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong, Seoul,South Korea and Singapore offices. A complete list of our subsidiaries can be found in Exhibit 21.1.Available InformationGAIN maintains a corporate website with the address www.gaincapital.com. Its intended use is as a regular means of disclosing material public informationand for complying with disclosure obligations under Regulation FD promulgated by the SEC. Such disclosures are included on the website under the heading“Investor Relations.” Accordingly, investors should monitor such portions of the website, in addition to following our press releases, SEC filings and publicconference calls and webcasts.We are not incorporating information contained in the website by reference into this Annual Report on Form 10-K. We will make available, free of chargethrough the website under the heading “Investor Relations,” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports onForm 8-K, and any amendments to these reports as soon as reasonably practicable after electronically filing such material with, or furnishing such materialto, the SEC. In addition, we make available on our website (i) our Proxy Statements and reports filed by officers and directors under Section 16(a) of theExchange Act, (ii) the charters for the committees of our Board of Directors, including the Audit Committee, Compensation Committee, Nominating andCorporate Governance Committee and Risk Committee and (iii) our Code of Business Conduct and Ethics governing our directors, officers and employees.We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosedpursuant to the rules of the SEC and the New York Stock Exchange.Materials filed with the SEC can also be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call theSEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC also maintains a website, www.sec.gov, containing the reports,proxy statements and other information that we file with the SEC. 14Table of ContentsITEM 1A.RISK FACTORSRisks Related to Our BusinessOur Revenue and Profitability Are Influenced by Trading Volume and Currency Volatility, Which Are Directly Impacted by Domestic andInternational Market and Economic Conditions That Are Beyond Our Control.During recent years, there has been significant disruption and volatility in the global financial markets. Many countries, including the United States and somemember countries of the European Union, have recently experienced recessionary conditions. Our revenue is influenced by the general level of trading activityin the forex market. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’scurrency markets and to fluctuations in trading levels. We have generally experienced greater trading volume in periods of volatile currency markets. In theevent we experience lower levels of currency volatility, our revenue and profitability will likely be negatively affected as occurred during the first, third andfourth quarters of 2012, when currency volatility levels were at or below previous four year lows. In addition, our customer base is primarily comprised ofindividual retail customers who view foreign exchange trading as an alternative investment class. If global economic conditions limit the disposable income ofour customers, our business could be materially adversely affected as our customers may choose to curtail their trading in the forex market which could resultin reduced customer trading volume and trading revenueLike other financial services firms, our business and profitability are directly affected by elements that are beyond our control, such as economic and politicalconditions, 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 inwhich such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one ormore 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 thecurrent economic slowdown causing a reduction in trading volume in U.S. or foreign securities and derivatives, could result in reduced trading activity in theforex 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 ordeclines.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 toidentify, 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 arebased on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods maynot adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in themarket. Our risk-management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are noteffective in preventing software or hardware failures. In addition, we may elect to adjust our risk-management policies to allow for an increase in risktolerance, which could expose us to the risk of greater losses. Our risk-management methods rely on a combination of technical and human controls andsupervision 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 ourbusiness, financial condition and results of operations and cash flows may be materially adversely affected. 15Table of ContentsWe May Incur Material Trading Losses From Our Forex Trading Activities.A significant portion of our revenue and operating profits have historically been derived from our retail and institutional foreign exchange trading business.Through our forex trading activities, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, foreigncurrencies. 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 ouroutstanding 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 thatwe have purchased or repurchase foreign currencies that we have sold.In addition, competitive forces often require us to match the breadth of quotes our competitors display and to hold varying amounts and types of foreigncurrencies 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 managesuch risk successfully and may experience significant losses from such activities, which could have a material adverse effect on our business, financialcondition and results of operations and cash flows.The Expansion of Our Trading Activities Into Other Financial Products, Including Futures, Futures Options, Listed Securities, Contracts forDifference, or CFDs, Over-the-Counter, or OTC, Currency Derivatives and Gold and Silver Spot Trading Entails Significant Risk, andUnforeseen Events in Such Business Could Have An Adverse Effect on Our Business, Financial Condition and Results of Operations and CashFlows.All of the risks that pertain to our trading activities in the forex market also apply to our futures, futures options, listed securities, CFDs, OTC currencyderivatives and gold and silver spot trading products and any other products we may offer in the future. These risks include market risk, counterparty risk,liquidity risk, technology risk, third-party risk and risk of human error. In addition, we have limited experience outside of the forex market and unexpectedevents can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our existing trading platform orour failure to properly manage the market risks associated with making markets for new products. The profit margins for these new products may not besimilar to the profit margins we have realized with respect to forex trading. In addition, if we further expand our listed securities offerings, we would movefrom what is primarily a business model focused on OTC trading 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 wouldpose a risk that our risk-management policies, procedures and practices, and the technology that supports such activities, will be unable to effectively managethese new risks to our business. In addition we would be subject to local securities laws for all of these offerings.In our exchange traded futures business, we are exposed to debit/deficit risk with our clients. If an adverse market move relative to a client’s position(s) occursand we are unable to collect a margin call in a timely manner, the client account may incur a loss, resulting in a debit balance.Our non-U.S. operating subsidiaries offer and sell CFDs outside the United States to non-U.S. persons. CFDs are not and may not be offered in the UnitedStates by us, including by any of our U.S. and non-U.S. subsidiaries, and are not eligible for resale to U.S. persons. They are not currently registered withthe SEC or any other U.S. regulator. To the extent our current CFD product offerings constitute an offer or sale of securities under the 16Table of ContentsU.S. federal securities laws, we will need to comply with those U.S. federal securities laws. To the extent our CFD offerings constitute OTC futures contractsor other financial derivative instruments, they are prohibited under the provisions of the U.S. Commodity Exchange Act. To the extent our CFD offerings aredetermined to constitute swaps or security-based swaps under the Dodd-Frank Act, the Commodity Exchange Act or the federal securities laws, we would berequired to comply with such U.S. laws with respect to such offerings. Failure to effectively manage these risks or properly comply with local laws orregulations relating to our product offerings, including U.S. federal securities laws, may expose us to fines, penalties or other sanctions that could have amaterial adverse effect upon our business, financial condition and results of operations and cash flows.Any Future Acquisitions May Result in Significant Transaction Expenses, Integration and Consolidation Risks and Risks Associated WithEntering New Markets, and We May Be Unable to Profitably Operate Our Consolidated Company.We intend to continue to selectively pursue acquisitions. Any future acquisitions may result in significant transaction expenses and present new risksassociated with entering additional markets or offering new products and integrating the acquired companies. Other areas where we may face risks include: •diversion of management time and focus from operating our business to address challenges that may arise in integrating the acquired business; •transition of operations, users and customers onto our existing platforms; •failure to successfully further develop the acquired business; and •integration of the acquired business’ accounting, human resource and other administrative systems, and coordination of trading and sales andmarketing functions.Our failure to address these risks or other problems encountered in connection with our future acquisitions could cause us to fail to realize theanticipated benefits of such acquisitions, incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutiveissuances of our equity securities or the incurrence of debt. Additionally, any new businesses that we may acquire, once integrated with our existingoperations, may not produce expected or intended results.Any Disruption or Corruption of Our Proprietary Technology Could Have a Material Adverse Effect on Our Business, Financial Condition andResults of Operations and Cash Flows.We rely on our proprietary technology to receive and properly process internal and external data. Any disruption in the proper functioning or any corruption ofour software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the properlicenses, authorizations or permits or require us to suspend our services, any of which could have a material adverse effect on our business, financialcondition and results of operations and cash flows.Systems Failures Could Cause Interruptions in Our Services or Decreases in the Responsiveness of Our Services, Which Could Harm OurBusiness.If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer satisfaction. Our ability to facilitatetransactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer andcommunications hardware and software systems. These systems have in the past experienced periodic interruptions and disruptions in operations, which webelieve 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 redundantcapabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, ourDRP may not work effectively during an emergency. Any systems 17Table of Contentsfailure that causes an interruption in our services or decreases the responsiveness of our services could impair our reputation, damage our brand name andmaterially adversely affect our business, financial condition and results of operations and cash flows.We May Not Be Able to Develop and Adopt New Technologies in a Timely Fashion, Which Could Adversely Impact Our Ability to Compete in theMarkets in Which We Operate.Our success in the past has largely been attributable to our proprietary technology that has taken many years to develop. If our competitors develop moreadvanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. Ourindustry is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may notbe able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies orremain competitive in the future.We May Not Be Able to Protect Our Intellectual Property Rights or May Be Prevented From Using Intellectual Property Necessary for OurBusiness.We rely on a combination of trademark, copyright, trade secret and unfair competition laws in the United States and other jurisdictions to protect ourproprietary technology, intellectual property rights and our brands. We do not have any patents. While we rigorously control access to our proprietarytechnology and enter into confidentiality and invention assignment agreements with our employees, consultants and other third parties, it is possible that thirdparties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. Such unauthorized use andinfringement would undermine the competitive benefits offered by our proprietary technology and could adversely impact our business and results ofoperations.We also license or are permitted to use intellectual property or technologies owned by others, such as the trading platform used by our GTX business. In theevent such intellectual property or technology becomes material to our business, the loss of our license or our inability to otherwise continue use of suchtechnologies would have a material adverse effect on our business. We may also face claims of infringement that could interfere with our ability to usetechnology that is material to our business operations.Attrition of Customer Accounts and Failure to Attract New Accounts in a Cost-Effective Manner Could Have a Material Adverse Effect on OurBusiness, Financial Condition and Results of Operations and Cash Flows.Our customer base is primarily comprised of individual retail customers who generally trade with us for short periods. Although we offer products andtailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customersmay not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. Although we have spentsignificant financial resources on sales and marketing expenses and related expenses and plan to continue to do so, these efforts may not be cost-effective atattracting new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print andtelevision advertising, are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand ormaintain our advertising and marketing commitments. Additionally, our sales and marketing methods are subject to regulation by the Commodity FuturesTrading Commission, or CFTC, and National Futures Association, or NFA, in the United States and other regulators in non-US jurisdictions. The rules andregulations 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. 18Table of ContentsWe Are Subject to Litigation Risk Which Could Adversely Affect Our Reputation, Business, Financial Condition and Results of Operations andCash Flows.Many aspects of our business involve risks that expose us to potential liability under U.S. federal and state laws, as well as the rules and enforcement effortsof our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other marketparticipants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, madematerially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcementactions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed tohave violated applicable rules and regulations in one or more jurisdictions.The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms has beenincreasing and may continue to increase. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can resultin potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers, regulators or self-regulatory organizations may makeclaims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as ourbusiness expands.Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts and collateral. Although our customer agreementsgenerally provide that we may exercise such rights with respect to customer accounts and collateral as we deem reasonably necessary for our protection, ourexercise of these rights may lead to claims by customers that we did so improperly.We may also have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietaryrights of others or defend against claims of infringement or invalidity. Even if we prevail in any litigation or enforcement proceedings against us, we couldincur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage ourreputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding orinvestigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition andresults 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 EmployeeMisconduct 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. Ouremployees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activitieson behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as improperly record orotherwise 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 thatcustomers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are unwoundor reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errorsmay be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems. Misconduct by ouremployees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to detector deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commitgood 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 employeesknew or should have known that an employee of our 19Table of Contentscustomer 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 personsor 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, FinancialCondition and Results of Operations and Cash Flows.We currently allow our customers to use credit cards to fund their accounts with us. For the year ended December 31, 2012, approximately 10% of the notionalvalue of our U.S. customer deposits were funded in this manner. The National Futures Association, or NFA, has recently requested comments from itsmembers, including our company, about a proposed prohibition on the use of credit cards to fund retail trading accounts. If the NFA’s proposed prohibitions,or other similar regulations, are adopted, or if credit card issuing institutions restrict the use of credit and debit cards as a means to fund retail accounts, thenthe elimination or reduction in the availability of credit cards as a means to fund customer accounts, or any increase in the fees associated with such use,would deprive our customers of a secure and convenient method of funding their accounts, particularly during non-banking hours. If customers are unable orunwilling to utilize alternative methods of funding their accounts, the resulting reduction in trading volume by our customers could have a material adverseeffect 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 towork with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. When there is unauthorizedaccess to credit card data that results in financial loss, there is the potential that we could experience reputational damage and parties could seek damages fromus.If Our Reputation is Harmed, or the Reputation of the Online Financial Services Industry as a Whole Is Harmed, Our Business, FinancialCondition 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 withissues that may give rise to reputation risk, our business prospects could be materially adversely affected. These issues include, but are not limited to,appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, client data protection,record keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, and market risks inherent in our business. Failure toappropriately 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 damagesasserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanctions could materially adversely affect our reputation,thereby reducing our ability to attract and retain customers and employees.In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or theforex industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicizedincidents that in turn resulted in significant and in some cases irreparable harm to their business. A perception of instability within the online financialservices industry also could materially adversely affect our ability to attract and retain customers.The Loss of Our Key Employees Could Materially Adversely Affect Our Business, Including Our Ability to Grow Our Business.Our key employees, including Glenn Stevens, our chief executive officer, have significant experience in the forex industry and have made significantcontributions to our business. In addition, other senior employees have made 20Table of Contentssignificant contributions to our business. Our continued success is dependent upon the retention of these and other key executive officers and employees, aswell 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 togrow our business is dependent, to a large degree, on our ability to retain such employees.The Industries In Which We Operate Are Highly Competitive and We May Be Adversely Affected if We Are Unable to Compete Effectively.The forex market has only recently become accessible to retail investors and is a rapidly evolving business industry characterized by intense competition andevolving domestic and global regulatory oversight and rules. Tighter spreads and increased competition could make our business 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 retailforex brokers, which could result in reduced revenue for us. Our prospects may be materially adversely affected by our ability to adapt to these changes andeffectively manage the risks, expenses and difficulties frequently encountered in the operation of a business in a rapidly evolving industry. We face similarcompetitive pressure in the other industries in which we operate, including with regard to our institutional and exchange traded futures products.In addition, our competitors include sophisticated institutions which have larger customer bases, more established name recognition and substantially greaterfinancial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to: • develop products and services that are similar to ours, or that are more attractive to customers than ours in one or more of our markets; • provide products and services we do not offer; • provide execution and clearing services that are more rapid, reliable, efficient or less expensive than ours; • offer products and services at prices below ours to gain market share and to promote other businesses, such as forex options, futures, listedsecurities, CFDs, precious metals and OTC derivatives; • adapt at a faster rate to market conditions, new technologies and customer demands; • offer better, faster and more reliable technology; • outbid us for desirable acquisition targets; • more efficiently engage in and expand existing relationships with strategic alliances; • market, promote and sell their products and services more effectively; and • develop stronger relationships with customers.These competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do, and,therefore, may be better able to respond to changes in the industries in which we operate, to compete for skilled professionals, to finance acquisitions, to fundinternal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidityrequirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair ourability to attract customer assets. Access to capital also determines the degree to which we can expand our operations. Therefore, if we are unable to maintain orincrease our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue andearnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share orincrease it in desirable markets. Increased competition could also result in narrowing bid/offer spreads, which could materially adversely affect our business,financial condition and results of operations and cash flows. Any reduction in 21Table of Contentsrevenues 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 resultsof operations and cash flows.We May Be Unable to Effectively Manage Our Growth.As we continue to seek to grow our business, both organically and by selectively pursuing acquisitions, we may need to expand and upgrade the reliabilityand scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expandand upgrade our technology systems and infrastructure to accommodate increases in our business activity in a timely manner, which could lead to operationalbreakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigationor customer claims, regulatory sanctions or increased regulatory scrutiny. In addition, we will need to continue to attract, hire and retain highly skilled andmotivated executives and employees. We may not be able to attract or retain the executives and employees necessary to manage our growth effectively.We May Be Unable to Respond to Customers’ Demands for New Services and Products and Our Business, Financial Condition And Results ofOperations 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, inpart, 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 theincreasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing ormarketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part toanticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction oravailability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and resultsof operations and cash flows.Our International Operations Present Special Challenges and Our Failure to Adequately Address Such Challenges or Compete in TheseMarkets, Either Directly or Through Joint Ventures With Local Firms, Could Have a Material Adverse Effect on Our Business, FinancialCondition and Results of Operations and Cash Flows.In 2012, we generated approximately 79.4% of our retail trading volume from customers outside the United States. Expanding our business in new markets isan important part of our growth strategy. Due to certain cultural, regulatory and other challenges relevant to those markets, however, we may be at acompetitive 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 oraccessible in emerging markets; • difficulty in complying with the diverse regulatory requirements of multiple jurisdictions, which may be more burdensome, not clearly definedand 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; 22Table of Contents • reduced protection of intellectual property rights; • inability to enforce contracts; • difficulties and costs associated with staffing and managing foreign operations, including reliance on newly hired local personnel; • tariffs and other trade barriers; • currency and tax laws that may prevent or restrict the transfer of capital and profits among our various operations around the world; and • time zone, language and cultural differences among personnel in different areas of the world.In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to do business locally, wemay seek to operate through joint ventures with local firms. Doing business through joint ventures may limit our ability to control the conduct of the businessand could expose us to reputational and greater operational risks. We may also face intense competition from other international firms over relatively scarceopportunities for market entry. Given the intense competition from other international brokers that are also seeking to enter these new markets, we may havedifficulty finding suitable local firms willing to enter into the kinds of relationships with us that we may need to gain access to these markets. Thiscompetition could make it difficult for us to expand our business internationally as planned.If Our Operating Subsidiaries Are Unable to Pay Us Dividends When Needed, We May Be Unable to Satisfy Our Obligations When They Arise.As a holding company with no material assets other than the stock of our operating subsidiaries, nearly all of our funds generated from operations aregenerated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. Some of oursubsidiaries are subject to regulation and requirements of various regulatory bodies, including the CFTC and NFA in the United States, the Financial ServicesAuthority in the United Kingdom, the Financial Services Agency, or FSA, the Japan Ministry of Economy, Trade and Industry, or JETI, the Japan Ministryof Agriculture, Forestry and Fisheries in Japan, or JAFF, the Securities and Futures Commission in Hong Kong, the Investment Industry RegulatoryOrganization of Canada, or IIROC, in Canada and the Cayman Islands Monetary Authority in the Cayman Islands, relating to liquidity and capitalstandards, which may have the effect of limiting funds available for the payment of dividends to the holding company. Accordingly, if our operatingsubsidiaries are unable to pay us dividends and make other payments to us when needed, due to regulatory restrictions or otherwise, we may be unable tosatisfy our obligations when they arise.Risks Related to RegulationFailure to Comply With the Rapidly Evolving Laws and Regulations Governing Our Businesses May Result in Regulatory Agencies Taking ActionAgainst Us, Which Could Significantly Harm Our Business.Substantially all of our operations involving the execution and clearing of transactions in foreign currencies, CFDs, gold and silver and securities areconducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations, including in the United States, the UnitedKingdom, Japan, Australia, Hong Kong, Canada and the Cayman Islands. Many of the regulations we are governed by are intended to protect the public, ourcustomers and the integrity of the markets, and not necessarily our shareholders.Among other things, we are subject to regulation with regard to: • sales and marketing activities, including our interaction with, and solicitation of, customers; • trading practices, including the types of investment products we may offer; 23Table of Contents • treatment of customer assets, including custody, control, safekeeping and, in certain countries, segregation of our customer funds and securities; • maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries; • continuing education requirements for our employees; • anti-money laundering practices; • recordkeeping and reporting; and • supervision regarding the conduct of directors, officers and employees.Compliance with these regulations is complicated, time consuming and expensive. Our ability to comply with all applicable laws and regulations is dependentin large part on our internal legal and compliance functions, as well as our ability to attract and retain qualified personnel, which we may not be able to do.Regulators and self-regulatory organizations broadly oversee the conduct of our business and several perform regular examinations of our operations to monitorour compliance with applicable laws and regulations. If a regulator finds that we have failed to comply with applicable rules and regulations, we may besubject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in somecases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. In addition, we could incursignificant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies. An adverse resolution of anyfuture actions or investigations by such regulatory agencies against us could result in a negative perception of our company and cause the market price of ourcommon stock to decline or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.As a Result of Recent Regulatory Changes in Certain Jurisdictions, Our Operations and Profitability May Be Disrupted and We May Be Subjectto Regulatory Action Taken Against Us if a Regulatory Authority Determines that Our Operations Are Out of Compliance, or Requires Us toComply With Additional Regulatory Requirements.Recently, the legislative and regulatory environment in which we operate has undergone significant changes and there may be future regulatory changesaffecting our industry. Our ability to expand our presence in various jurisdictions throughout the world will depend on the nature of future changes to theregulatory environment and our ability to continue to comply with evolving requirements. To the extent one or more regulators determines that our currentactivities do not comply with applicable law or regulations in a given jurisdiction, our services may be disrupted, we may elect to shift our services to a whitelabel partner or we may be required to withdraw or modify our service offering.In August 2010, the CFTC released new rules, effective as of October 18, 2010, relating to the retail forex industry regarding, among other things, increasedinitial minimum security deposits, registration of introducing brokers, money managers and fund managers, increased risk disclosures, includingdisclosures relating to customer profits and losses, record keeping, financial reporting, minimum capital and other operational standards. In addition, therules established 50-to-1 as the maximum leverage permitted to be provided to U.S. customers in major currency pairs, and 20-to-1 in all other currency pairs.We can provide no assurance that maximum leverage limits in the United States, or elsewhere, will not be decreased further, which could materially adverselyaffect our business, results of operations and financial condition.The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010, has had and is expected to continue to have asignificant effect on our U.S. retail business. For example, the Dodd-Frank Act further amended the Commodity Exchange Act to prohibit essentially all OTCretail transactions in any commodity other than foreign currency after July 15, 2011. As a result, after such date, we are 24Table of Contentsnot permitted to offer our U.S. retail customers leveraged spot metals trading or any product other than forex. The Dodd-Frank Act also includes a requirementthat federal banking regulators and the SEC adopt new rules regarding the conduct and operation of forex businesses by banks and broker-dealers,respectively. As a result of these new regulations, the ability of our wholesale forex trading partners, many of which are regulated banks and/or broker-dealers,to do business with us could be significantly curtailed, which could materially adversely affect our ability to provide liquidity to our customers. In addition,the new rules could adversely affect the structure, size, depth and liquidity of forex markets generally. The Dodd-Frank Act also provides for additionalregulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. Swap dealers are requiredto register with the CFTC and are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered,including, among other things, new capital requirements, a new margin regime for uncleared swaps and a new segregation regime for collateral ofcounterparties to uncleared swaps. While the specific parameters of these swap dealer requirements are still being developed by the relevant regulators, it islikely that any of our subsidiaries that are required to register as swap dealers (such as GAIN GTX, LLC, which has registered with the CFTC and NFA as aswap dealer) will face increased costs due to the registration and regulatory requirements listed above. Any of these new regulatory developments, alone or incombination, could have a material adverse effect on our business and profitability.In the European Union, government officials have announced the intention to propose new laws to regulate OTC derivatives. The new laws would, amongother things, require mandatory central clearing of some derivatives, higher collateral requirements and higher capital charges for certain OTC derivatives.These initiatives are still at the consultation stage and details for many aspects of the legislative proposals have not yet been published. If the products that weoffer are subjected to mandatory central clearing, exchange trading, higher collateral requirements or higher capital charges, our business, financial conditionand results of operations could be materially adversely affected. In Japan, new regulations, which became effective in August 2011, prohibit our ability to offerJapanese residents leverage for forex products in excess of 25-to-1. For spot gold that we offer in Japan, beginning July 1, 2011, the maximum allowableleverage became 20-to-1. These changes may result in a decrease in Japanese customer trading volume, which may in turn materially adversely affect ourfinancial condition, results of operations and cash flows.The Australian Securities and Investments Commission has proposed its intention to issue new guidance on advertising materials, to introduce disclosurebenchmarks for OTC CFD providers and to require OTC CFD providers to adopt written customer suitability policies.In Korea, the Financial Supervisory Service introduced guidelines, effective March 5, 2012, pursuant to which the maximum leverage ratio for retail forextrading was reduced to 10-to-1. In addition, the Korean regulatory authority has announced that it may consider measures to further limit the ability of Koreangeneral investors to enter into forex margin trading for speculative purposes. These regulatory changes may have a material adverse effect on our business withKorean customers.In addition, the changing regulatory environment may create uncertainty with respect to certain practices or types of transactions that, in the past, may havebeen considered permissible and appropriate among financial services firms. Certain established practices may be called into question or become subject toadditional regulatory requirements. These legal or regulatory uncertainties and additional regulatory requirements could result in a loss of, or increase in thecost of, business and could materially adversely affect our revenue, profitability and results of operations. Finally, because of changes in regulation,regulatory interpretations, enforcement practices or for other reasons, we may be found to have violated local regulation and, as a result, we may be subject toenforcement actions and penalties or customer claims in those local jurisdictions. 25Table of ContentsAs We Operate in Many Jurisdictions Without Local Registration, Licensing or Authorization, We May Be Subject to Possible Enforcement Actionand Sanction for Our Operations in Such Jurisdictions if Our Operations Are Determined 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 Subjectto Regulation by Local Government Bodies.For the year ended December 31, 2012, approximately 60.1% of our trading volume was attributable to customers resident in a jurisdiction where we or ourwhite label partners are licensed, regulated or deal with customers cross-border in a manner that we believe does not require us to be regulated in thatjurisdiction. The remaining 39.9% of our retail trading volume was attributable to customers in jurisdictions in which we or our white label partners are notcurrently licensed or authorized by the local government or applicable self-regulatory organization. We determine the nature and extent of services we can offerand the manner in which we conduct our business in the various jurisdictions in which we serve customers based on a variety of factors, including legaladvice received from local counsel, our review of applicable U.S. and local laws and regulations and, in some cases, our discussions with local regulators. Incases in which we operate in jurisdictions based on local legal advice, we are exposed to the risk that our legal and regulatory analysis is subsequentlydetermined by a local regulatory agency or other authority to be incorrect and that we have not been in compliance with local laws or regulations, includinglocal licensing or authorization requirements, and to the risk that the regulatory environment in a jurisdiction may change, including in a circumstance wherelaws or regulations or licensing or authorization requirements that previously were not enforced become subject to enforcement.In jurisdictions in which we are not licensed or authorized, we may be subject to a variety of restrictions regarding the manner in which we conduct ourbusiness or serve customers, including restrictions on: • our sales and marketing activities; • the use of a website specifically targeted to potential customers in a particular country; • the minimum income level or financial sophistication of potential customers we may contact; • our ability to have a physical presence in a particular country; or • the types of services we may offer customers physically present in each country.These restrictions may limit our ability to grow our business in any such jurisdiction or may result in increased overhead costs or degradation in our servicesin that jurisdiction. We currently have only a limited presence in a number of important markets and because of these and other regulatory restrictions, wemay not be able to gain a significant presence there unless and until the regulatory landscape in these markets is modified. Consequently, we cannot assureyou that our international expansion plans will be achieved.We may be subject to possible enforcement action and penalties if we are determined to have previously offered, or currently offer, our services in violation ofapplicable laws and regulations in any of the markets in which we serve customers. In any such case, we may be required to cease the conduct of our businesswith customers in one or more jurisdictions. We may also determine that compliance with the laws or licensing, authorization or other regulatory requirementsfor continuing the business in one or more jurisdictions are too onerous to justify making the necessary changes. In addition, any such event could negativelyimpact our relationship with the regulators or self-regulatory organizations in the jurisdictions where we are subject to regulation.We Are Required to Maintain High Levels of Capital, Which Could Constrain Our Growth and Subject Us to Regulatory Sanctions.Our regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries that conduct our spotforeign exchange, CFDs, gold and silver spot trading and securities businesses. In the United States, as a Futures Commission Merchant, or FCM, and aRetail Forex Exchange Dealer, or RFED, we are required to maintain adjusted net capital of $20.0 million plus 5.0% of the 26Table of Contentsamount of customer liabilities over $10.0 million. On a worldwide basis, as of December 31, 2012, we were required to maintain approximately $45.6 millionminimum capital in the aggregate across all jurisdictions, representing a $9.8 million, or 27.4% increase from our minimum regulatory capital requirement atDecember 31, 2011. Regulators continue to evaluate and modify regulatory capital requirements from time to time in response to market events and to improvethe stability of the international financial system. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed andultimately 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 ofthe business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increaseour 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 towithdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate ourcapital resources most efficiently throughout our global operations. In particular, these restrictions could adversely affect our ability to withdraw funds neededto satisfy our ongoing operating expenses, debt service and other cash needs and could affect any future decision by our Board of Directors regarding thepayment of our quarterly dividends. Regulators monitor our levels of capital closely. We are required to report the amount of regulatory capital we maintain toour regulators on a regular basis, and we must report any deficiencies or material declines promptly. While we expect that our current amount of regulatorycapital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to reportany capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct businessand 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 moreof our subsidiaries.Servicing Customers Via the Internet May Require Us to Comply With the Laws and Regulations of Each Country in Which We Are Deemed toConduct 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 usto qualify to do business in their country. We believe that the number of our customers residing outside of the United States will continue to increase over time.We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place orwhich may be enacted related to Internet services available to the residents of each country from service providers located elsewhere. Any failure to developeffective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on ourbusiness, financial condition and results of operations and cash flows.Procedures and Requirements of the Patriot Act and other Anti-Money Laundering and Know Your Customer Regulations May Expose Us toSignificant Costs or Penalties.As participants in the financial services industry, we are, and our subsidiaries are, subject to numerous laws and regulations, including the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, that require that we knowour customers and monitor transactions for suspicious financial activities. The cost of complying with the Patriot Act and similar laws and regulations issignificant. We face the risk that our policies, procedures, technology and personnel directed toward complying with these laws and regulations are insufficientand that we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on ourbusiness, financial condition and results of operations and cash flows. In addition, as an online financial services provider with customers worldwide, wemay face particular difficulties in identifying our customers and monitoring their activities. 27Table of ContentsRisks Related to Third PartiesIf We Lose Access to the Wholesale Forex Trading Partners That Provide Us With Forex Market Liquidity, We May Be Unable to ProvideCompetitive Forex Trading Services, Which Will Materially Adversely Affect Our Business, Financial Condition And Results of Operations andCash Flows.We rely on third-party financial institutions to provide us with forex market liquidity. We maintain relationships with three established global prime brokers,Deutsche Bank AG, or Deutsche Bank, UBS AG, or UBS, and the Royal Bank of Scotland plc, or RBS, as well as relationships with a number ofadditional wholesale forex trading partners, and we have access to liquidity through third-party trading platforms. We depend on these relationships for ouraccess to a pool of forex liquidity to ensure that we are able to execute our customers’ trades in any of the currency pairs, equity indices and commodityproducts we offer and in the notional amount our customers request. These prime brokers and wholesale forex trading partners, although under contract withus, 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 ofliquidity that we currently have, we may be unable to provide competitive forex trading services, which would materially adversely affect our business,financial condition and results of operations and cash flows.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 provide us access to liquidity through our wholesale forex trading partners. The prime brokers act as centralhubs through which we are able to deal with our existing wholesale forex trading partners. Although we have relationships with wholesale forex trading partnersthat could provide clearing services as a back-up for our prime brokers, 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 weare 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, wemight 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 profitssince 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 OurBusiness, Financial Condition and Results of Operations and Cash Flows.We interact with various third parties through our relationships with our prime brokers, wholesale forex trading partners, white label partners and introducingbrokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may notbe 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 thefinancial 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 CFTC and NFA regulations for our U.S.-regulated subsidiaries, we arenot permitted to segregate customer funds from our own funds. As such, we aggregate our customers’ funds and our funds and hold them in collateral anddeposit accounts at various financial institutions. In the event of insolvency of one or more of the financial institutions with which we have deposited thesefunds, both we and our customers may not be able to recover our funds. Because our customers’ funds are aggregated with our own, the extent to which theywill be entitled to insurance by the Federal Deposit Insurance Corporation is uncertain. In any such insolvency we and our customers would rank as 28Table of Contentsunsecured 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 tothe loss of their funds and our business could be materially adversely affected 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 Affect on Our Business,Financial Condition and Results of Operations and Cash Flows.Our operations require a commitment of capital and involve risks of losses due to the potential failure of our customers to perform their obligations under theirtransactions with us. Our margin policy allows customers to leverage their account balances by trading notional amounts that may be significantly larger thantheir cash balances. We mark our customers’ accounts to market each time a currency price in their portfolio changes. While this allows us to closely monitoreach customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change. Althoughwe have the ability to alter our margin requirements without prior notice to our customers, this may not eliminate the risk that our access to liquidity becomeslimited or market conditions, including currency price volatility and liquidity constraints, change faster than our ability to modify our margin requirements. Ifour customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, since the value ofour customers’ forex positions is subject to fluctuation as market prices change, we are subject to market risk in the liquidation of customer collateral tosatisfy such obligations. In light of the current turbulence in the global economy, we face increased risk of default by our customers and other counterparties.Any default by our counterparties or partners could have a material adverse effect on our business, financial condition and results of operations and cashflows.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, Internetservice providers and communications facilities. For example, for the year ended December 31, 2012, 43.9% of our retail trading volume was derived fromtrades utilizing the MetaTrader platform, a third-party trading platform we license that is particularly popular in the international retail trading community andoffers our customers a choice in trading interfaces. Additionally, we also rely on an agreement with a third party that provides us with investment research thatwe distribute to our customers. Any interruption in these third-party services, or deterioration in their performance or quality, could adversely affect ourbusiness. 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 oncommercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.Security Breaches in Our Computer Infrastructure May Jeopardize Confidential Information Transmitted Over the Internet, CauseInterruptions 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 securitybreaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt ouroperations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize theconfidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions andthe safeguarding of confidential personal information could also inhibit our customers’ use of our systems to conduct forex transactions over the Internet. Tothe extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could exposeus 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 ofthese events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition andresults of operations and cash flows. 29Table of ContentsFailure to Maintain Relationships With Introducing Brokers Who Direct New Customers to Us Could Have a Material Adverse Effect on OurBusiness, 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 certainjurisdictions, we are only able to provide our services through introducing brokers. For the year ended December 31, 2012, approximately 30.5% of our retailtrading volume was derived from introducing brokers. Many of our relationships with introducing brokers are nonexclusive or may be terminated by thebrokers on short notice. In addition, under our agreements with introducing brokers, they have no obligation to provide us with new customers or minimumlevels of transaction volume. Our failure to maintain our relationships with these introducing brokers, the failure of the introducing brokers to provide us withcustomers or our failure to create new relationships with introducing brokers would result in a loss of revenue, which could have a material adverse effect onour business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms toone or more of our introducing brokers, we could lose the brokers’ services or be required to increase the compensation we pay to retain the brokers. Inaddition, we may agree to set the compensation for one or more introducing brokers at a level where, based on the transaction volume generated by customersdirected to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the introducingbroker.Our Business or Reputation Could Be Harmed by Introducing Broker Misconduct or Errors That Are Difficult to Detect and Deter.It may be perceived that we are responsible for any improper conduct by our introducing brokers, even though we do not control their activities. Many of ourintroducing 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 oftheir websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. Anydisciplinary action taken against any of our introducing brokers in the United States and abroad could have a material adverse effect on our reputation,damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.Failure to Develop or Maintain Relationships With White Label Partners Who Direct Customer Trading Volume to Us Could Have a MaterialAdverse 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 year ended December 31, 2012, approximately 10% of our retail trading volume was derived fromwhite 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 whitelabel partners have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white labelpartners, the failure of these white label partners to continue to offer online forex trading services to their customers using our trading platform, the loss ofrequisite 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, whichcould have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offersmore attractive compensation terms to one or more of our white label partners, we could lose the white label partnerships or be required to increase thecompensation we pay to retain the white label partners.Our Relationships With Our White Label Partners Also May Expose Us to Significant Regulatory, Reputational and Other Risks As We Could BeHarmed by White Label Partner Misconduct or Errors That Are Difficult to Detect and Deter.If any of our white label partners provided unsatisfactory service to their customers or were deemed to have failed to comply with applicable laws orregulations, our reputation may be harmed as a result of our affiliation 30Table of Contentswith such white label partner. Any such harm to our reputation could have a material adverse effect on our business, financial condition and results ofoperations and cash flows.The Terms of Certain of Our Agreements With Our White Label Partners May Require Us to Pay for Increased Trading Volume That Does NotIncrease Our Trade Revenue.We pay certain white label partners and introducing brokers based on the volume of trading activity of the customers they introduce to us, regardless ofwhether the order flow from such trading volume is profitable to us. Certain market conditions may be conducive to high trading volume by these customersbut not to trading activity by such customers that allows us to generate significant revenue. As such, we may incur losses from these arrangements in the eventthat we are required to pay for increased trading volume but do not generate corresponding increased revenue from the related trade flow. These losses couldhave a material adverse effect on our results of operations, particularly our EBITDA and net revenue.Risks Related to our Common StockThe Market Price of Our Common Stock May Be Volatile.Our results of operations and cash flows have fluctuated significantly from period to period in the past based on a variety of factors, including some of whichare beyond our control, such as currency volatility and fluctuations in trading volume. These variations, along with any failure to achieve operating resultsthat meet or exceed the expectations of our investors and the market as a whole, could result in significant price and volume fluctuations in our common stock.Other factors that, could affect the market price of our common stock include: • future announcements concerning us or our competitors, including the announcement of acquisitions; • changes in government regulations or in the status of our regulatory approvals or licensure; • public perceptions of risks associated with our services or operations; • developments in our industry; and • general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operatingperformance of our competitors.If Securities or Industry Analysts Do Not Publish Research or Reports About Our Business, if They Change Their Recommendations RegardingOur Common Stock Adversely, or if We Fail to Achieve Analysts’ Earnings Estimates, the Market Price and Trading Volume of Our CommonStock 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 ourcommon 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 inthe 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, even if as a result of factors beyond our control, the market price of our common stock would also likely decline.Certain Provisions in Our Amended and Restated Certificate of Incorporation May Prevent Efforts By Our Stockholders to Effect a Change ofControl of Our Company or a Change in Our 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 somight be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our Board of Directors to determine therights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series ofpreferred stock that could impede the completion of a merger, tender offer or other 31Table of Contentstakeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, includingthrough solicited transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable.We May Be Unable to Obtain Capital When We Need it, 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 satisfiedthese needs from internally generated funds and from our preferred equity securities financings. While we currently anticipate that our available cash resourceswill be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months, we may need to raiseadditional 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 or at all.Our Management and Other Affiliates Have Significant Control of Our Common Stock and Could Control Our Actions in a Manner ThatConflicts With Our Interests and the Interests of Other Stockholders.As of December 31, 2012, our executive officers, directors and other affiliates together beneficially owned over 50% of our outstanding capital stock.VantagePoint Venture Partners IV(Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint Venture Partners IV Principals Fund, L.P., VP New YorkVenture Partners, L.P., referred to herein as the VPVP Funds, and Edison Venture Fund IV SBIC, L.P., together beneficially owned over 50% of ouroutstanding capital stock as of December 31, 2012. Two of our directors, Messrs. Sugden and Bevilacqua, are affiliated with the Edison and VPVP Funds,respectively. As a result, these stockholders, acting together, are 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 ofdelaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over thencurrent market prices.Pursuant to our amended and restated certificate of incorporation and amended and restated bylaws, until the earlier of (i) such time that the VPVP Funds ownless than 50% of all shares of our common stock that the VPVP Funds owned upon the completion of our initial public offering, (ii) immediately prior to our2014 annual meeting of stockholders and (iii) such time that the VPVP Funds notify our board of directors that they no longer require that an individualdesignated by them serve on our Board of Directors, the VPVP Funds have the right to nominate one individual in the slate of director nominees for election atour annual meeting of stockholders and have such designee serve on our Board of Directors.The Limited Liquidity For Our Common Stock Could Affect Your Ability To Sell Your Shares At A Satisfactory Price.Our common stock is relatively illiquid. As of March 12, 2013, we had 35,525,453 shares of common stock outstanding. The average daily tradingvolume in our common stock during the 60 calendar days ended March 1, 2013 was approximately 0.7 million shares. A more active public market for ourcommon stock may not develop, which could continue to adversely affect the liquidity of our common stock and adversely affect the trading price of ourcommon stock. Moreover, without a large public float, our common stock is less liquid than the stock of 32Table of Contentscompanies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile than that of other companies or themarket as a whole. In addition, in the absence of an active public trading market, you may be unable to liquidate your investment in us at a satisfactory price.The Obligations Associated With Being a Public Company Require Significant Resources and Management Attention.As a public company, we are subject to the rules and regulations promulgated by the SEC and the New York Stock Exchange. For example, theSecurities Exchange Act of 1934, as amended, requires that we file annual, quarterly and current reports with respect to our business and financial conditionsand the Sarbanes Oxley Act of 2002 requires, among other things, that we establish and maintain effective internal controls and procedures for financialreporting. Our efforts to comply with these rules and regulations have resulted in, and are likely to continue to result in, an increase in expenses and adiversion of management’s time from other business activities.Shareholders May Be Diluted by the Future Issuance of Additional Common Stock in Connection With Our Incentive Plans, Acquisitions orOtherwise.As of December 31, 2012, we had approximately 23.5 million shares of common stock authorized but unissued. Our certificate of incorporation authorizes usto issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the termsand conditions established by our Board of Directors in its sole discretion, whether in connection with acquisitions, in future common stock offerings orotherwise. As of December 31, 2012, we have reserved an aggregate of 7.1 million shares for issuance under our equity incentive compensation plans0.9 million to be issued pursuant to future awards and grants under the 2010 Omnibus Incentive Compensation Plan, or the 2010 plan, 5.8 million sharesthat are subject to outstanding grants under our Amended and Restated 2006 Equity Compensation Plan and the 2010 Plan, and 0.4 million shares to be issuedpursuant to the 2011 Employee Stock Purchase Plan). Any common stock that we issue, including under our 2010 Omnibus Incentive Compensation Plan,2011 Employee Stock Purchase Plan or other equity incentive plans that we may adopt in the future, will dilute the percentage ownership held by investorswho own our common stock. ITEM 1B.UNRESOLVED STAFF COMMENTSThere are no unresolved staff comments. ITEM 2.PROPERTIESWe are a global provider of trading services and solutions, specializing in global over-the-counter, or OTC, markets, including spot foreign exchange, or forex,and precious metals, “contracts-for-difference,” or CFDs, which are investment products with returns linked to the performance of an underlying commodity,index or security, and exchange-traded products, including futures and options on futures. We have customers in more than 140 countries worldwide andconduct business from our offices in New York, New York; Bedminster, New Jersey; Powell, Ohio; Cleveland, Ohio; Chicago, Illinois; London, England;Tokyo, Japan; Sydney, Australia; Beijing, China; Hong Kong, and Singapore. All of our office space was leased as of December 31, 2012.While we believe that these facilities are adequate to meet our current needs, it may become necessary to secure additional space in the future to accommodateany future growth. We believe that such additional space will be available as needed in the future on commercially reasonable terms ITEM 3.LEGAL PROCEEDINGSWe are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of such claimsand legal actions, if decided adversely, is not expected to have a material adverse effect on our quarterly or annual operating results, cash flows or consolidatedfinancial position. 33Table of ContentsAs previously disclosed, on March 31, 2011, Shari Streit Jansen, as Chapter 7 Trustee for the bankruptcy estate of Beau Diamond, brought an adversaryproceeding against us, as well as several other forex trading firms, in the U.S. Bankruptcy Court in the Middle District of Florida. The complaint seeks torecover certain funds transferred to us by Mr. Diamond through an entity for which he acted as managing member, Diamond Ventures, LLC, under federaland state fraudulent transfer laws. On June 16, 2011, we moved to dismiss the complaint. The parties agreed to mediate their dispute before the Trusteeresponded to the motion to dismiss and participated in a mediation on September 14, 2011, which resulted in an agreement in principal for settlement of thematter for a sum that is not material to our financial condition. The adversary proceeding was dismissed on July 20, 2012.On February 16, 2012, we received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by a third-partymoney management firm, incorporated in the United Kingdom, that has since been closed down by the United Kingdom’s Financial Services Authority. Theinvestment firm, Cameron Farley Ltd, had opened a corporate account with us and invested the individuals’ money, representing such funds as its own,while operating a fraudulent scheme. Though a complaint has been filed and served on us, the claimants requested, and we agreed, to follow the UnitedKingdom’s Pre-Action Protocol, a pre-litigation process intended to resolve matters without the need to engage in formal litigation. We submitted a Response tothe Letter Before Claim on July 4, 2012. On July 5, 2012 we received a substantially similar Letter of Claim on behalf of further individuals. Subsequently,the parties agreed to consolidate claims by those other similarly situated individuals with the pending Pre-Action Protocol process. We can provide noassurances that this matter will be successfully resolved through the Pre-Action Protocol and will not result in formal litigation, and no assurances can beprovided regarding the outcome of any such potential litigation. This matter is currently pending. At this time, a potential loss or a potential range of losscannot be reasonably estimated.Through our acquisition of OEC, we became the subject of a patent infringement lawsuit originally filed against OEC on February 9, 2010 in the U.S.District Court for the Northern District of Illinois by Trading Technologies International, Inc. seeking injunctive relief and unspecified damages. As reflectedin a Second Amended Complaint filed on June 15, 2011, plaintiff alleges infringement of 12 patents relating to real-time display of price quotes and marketdepth on the OEC’s electronic trading interfaces. The case was consolidated with 11 related cases in February 2011, and the parties have exchangedinfringement, non-infringement and invalidity contentions for several of the disputed patents. In June 2011 the court stayed discovery to allow summaryjudgment briefing on the ramifications of a recent Federal Circuit decision. On February 9, 2012, the court issued an order, which granted OEC’s motions forsummary judgment, resulting in a substantial narrowing of the scope of plaintiff’s claims. Plaintiff filed a motion for reconsideration of that ruling onMarch 8, 2012. Plaintiff also filed a motion for certification of judgment for interlocutory appeal. The court denied plaintiff’s motion for reconsideration butgranted plaintiff’s motion for certification of judgments of patent invalidity with respect to four of the asserted patents. Since that ruling, the court hascontinued its stay of discovery. On October 7, 2012, plaintiff filed its opening appeal brief with the United States Court of Appeals for the Federal Circuit.Oral argument on plaintiffs’ appeal is expected to occur in mid to late 2013. Plaintiff’s complaint does not specify the amount of damages sought. At this time,a potential loss or a potential range of loss cannot be reasonably estimated. ITEM 4.MINE SAFETY DISCLOSURESNot Applicable. 34Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESMARKET FOR GAIN COMMON STOCKOur common stock began trading on the New York Stock Exchange under the symbol “GCAP” on December 15, 2010. Prior to that date, there was noestablished trading market for our common stock. As of March 12, 2013, we estimate that we had approximately 112 stockholders of record andapproximately 1,410 beneficial holders of our common stock.The following table details the high and low sales prices for the common stock as reported by the New York Stock Exchange for the periods indicated. 2012 2011 Quarter High Low High Low First Quarter $6.04 $5.87 $9.98 $7.38 Second Quarter $5.11 $4.93 $7.43 $5.99 Third Quarter $4.80 $4.65 $6.80 $5.11 Fourth Quarter $4.48 $4.35 $7.46 $5.90 DIVIDEND POLICYPrior to the fourth quarter of 2011, we retained all earnings for investment in our business. In October 2011, our Board of Directors approved a policy ofpaying quarterly dividends, subject to available cash flow from operations, other considerations and the determination by our Board of Directors of theamount. Each quarter since, the Company has paid a $0.05 per share dividend to holders of the Company’s common stock. The latest dividend was declaredon March 6, 2013, payable on March 21, 2013 to stockholders of record on March 12, 2013.Any declaration and payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings,financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations thatour Board of Directors deems relevant. The Board’s ability to declare a dividend is also subject to limits imposed by Delaware corporate law. In addition, oursubsidiaries are permitted to pay dividends to us subject to (i) certain regulatory restrictions related to the maintenance of minimum net capital in those of oursubsidiaries that are subject to net capital requirements imposed by applicable law or regulation and (ii) general restrictions imposed on dividend paymentsunder the jurisdiction of incorporation or organization of each subsidiary.RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIESNone. 35Table of ContentsREPURCHASES OF COMMON STOCKDuring the year ended December 31, 2012, we repurchased approximately 0.7 million shares of our common stock pursuant to the terms of our approvedstock repurchase plan. Period Total Numberof SharesPurchased Average PricePaid per Share TotalNumber of SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms Maximum Number(or ApproximateDollar Value) ofShares that MayYet Be PurchasedUnder the Plans orPrograms January 2012 — — — $4,982,999 February 2012 — — — $4,982,999 March 2012 7,216 $4.96 7,216 $4,947,055 April 2012 18,112 $4.99 18,112 $4,856,173 May 2012 150,371 $4.80 150,371 $4,130,905 June 2012 — — — $4,130,905 July 2012 20,051 $4.50 20,051 $4,040,328 August 2012 3,514 $4.47 3,514 $4,024,552 September 2012 102,876 $4.65 102,876 $3,544,209 October 2012 134,680 $4.79 134,680 $2,897,040 November 2012 124,449 $4.19 124,449 $2,372,091 December 2012 150,551 $4.31 150,551 $1,720,092 (1)On May 16, 2011, the Company announced that its Board of Directors approved a share repurchase plan, which authorizes the expenditure of up to$10.0 million for the purchase of the Company’s common stock.(2)Transaction fees related to the share purchases are deducted from the total remaining allowable expenditure amount.STOCK PERFORMANCE GRAPHThe following performance chart assumes an investment of $100 on December 15, 2010 (the date the Company’s shares began trading on the NYSE) andcompares the change through December 31, 2012 in the market price for our common stock with the Russell 2000 Index, the NASDAQ Composite Index, anda peer group identified by the Company (the “Selected Peer Group Index”). The Selected Peer Group Index was selected to include publicly-traded companiesengaging in one or more of the Company’s lines of business.The Selected Peer Group Index is weighted according to the respective issuer’s stock market capitalization and is comprised of the following companies:Advent Software, Inc., BGC Partners, Inc., DST Systems, E*Trade Financial Corporation, FactSet Research Systems, Inc., FXCM, Inc., GFIG Group,Inc., INTL FCStone Inc., Investment Technology Group, Inc., Knight Capital Group, Inc., Market Axcess Holdings, Inc., MSCI, Inc., and SWS Group,Inc. 36(1)(1)(1)(1)(1)(2)Table of ContentsThe comparisons in the graphs below are based on historical data and are not intended to forecast the possible future performance of our common stock. EQUITY COMPENSATION PLAN INFORMATIONThe following table provides information with respect to our compensation plans under which equity compensation is authorized as of December 31, 2012. Plan category Number ofsecurities to beissued upon exerciseof outstandingoptions, warrantsand rights(a) Weighted-averageexercisepriceofoutstandingoptions,warrantsand rights(b) Number ofsecurities remainingavailable for futureissuance underequity compensationplans (excludingsecurities reflectedin column (a))(c) Equity compensation plans approved by security holders 5,837,680 $3.18 905,518 (1)In accordance with the 2010 Omnibus Incentive Compensation Plan, an additional 1.2 million shares were made available for issuance on the firsttrading day of 2013; these shares are excluded from this calculation. 37(1)Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our audited consolidated financial statements as of December 31, 2012 and December 31, 2011 and for the years ended December 31,2012, December 31, 2011 and December 31, 2010, included in this annual report on Form 10-K. The selected Consolidated Statement of Operations data forthe years ended December 31, 2009 and 2008 and the selected Consolidated Balance Sheet data as of December 31, 2010, 2009 and 2008 are derived from ouraudited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results of operations are not necessarily indicativeof future results.Selected Consolidated Statement of Operations (in thousands, except share and per share data) Year Ended December 31, 2012 2011 2010 2009 2008 Consolidated Statement of Operations Data: Net revenue $151,360 $181,465 $189,098 $153,319 $188,100 Total expenses $150,218 $158,221 $131,646 $113,090 $(78,496) Income/(loss) before income tax expense and equityin earnings of equity method investment $1,142 $23,244 $57,452 $40,229 $266,596 Net income/(loss) applicable to GAIN CapitalHoldings, Inc. $2,621 $15,698 $37,845 $27,994 $231,426 Earnings/(loss) per common share: Basic $0.08 $0.46 $8.62 $9.47 $57.54 Diluted $0.07 $0.40 $1.00 $0.75 $4.94 Weighted average common shares outstanding usedin computing earnings/(loss) per commonshare: Basic 34,940,800 34,286,840 4,392,798 2,956,377 2,911,107 Diluted 37,880,208 38,981,792 37,742,902 37,282,069 33,924,649 Cash dividends per share $0.20 $0.05 $— $— $— 38(1)(1)(1)(2)(2) (3)Table of ContentsSelected Consolidated Balance Sheet ($ in thousands unless otherwise stated) As of December 31, 2012 2011 2010 2009 2008 Consolidated Balance Sheet Data: Cash and cash equivalents $36,820 $60,221 $27,536 $22,770 $52,459 Cash and securities held for customers $446,311 $310,447 $256,674 $199,754 $123,972 Receivables from banks brokers $89,916 $85,401 $98,135 $76,391 $50,817 Total assets $629,913 $505,581 $443,071 $351,940 $264,816 Payables to customers, brokers, dealers, futures commission merchants, andother regulated entities $446,311 $310,447 $256,674 $199,754 $123,972 Convertible, redeemable preferred stock embedded derivative $— $— $— $81,098 $82,785 Notes payable $— $7,875 $18,375 $28,875 $39,375 Total shareholders’ equity/(deficit) $163,687 $164,830 $149,849 $(139,890) $(172,154) (1)For each of the periods indicated, in accordance with ASC 815, Derivatives and Hedging, we accounted for an embedded derivative liabilityattributable to the redemption feature of our then outstanding preferred stock. This redemption feature and the associated embedded derivative liability isno longer required to be recognized due to the conversion of all of our outstanding preferred stock in connection with the completion of our initial publicoffering of common stock in December 2010.(2)In connection with the completion of our IPO, our board of directors approved a 2.29-for-1 stock split of our common stock to be effective immediatelyprior to the completion of the IPO. The 2.29-for-1 stock split, after giving effect to the receipt by us of 407,692 shares of common stock from all of ourpre-IPO common stockholders (on a pro-rata basis) in satisfaction of previously outstanding obligations owed by such stockholders to us, resulted in aneffective stock split of 2.26-for-1. Accordingly, all references to share and per share data for periods prior to our IPO have been retroactively restated toreflect the effective 2.26-for-1 stock split.(3)For the year ended December 31, 2008 through the year ended December 31, 2010, all outstanding preferred stock is assumed to be converted for thecalculation of diluted shares outstanding. 39Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying notes theretoprovided pursuant to “Item 8. Financial Statements and Supplementary Data” contained within this Annual Report on Form 10-K.OverviewWe are a global provider of trading services and solutions, specializing in global over-the-counter, or OTC, markets, including spot foreign exchange, or forex,and precious metals, “contracts-for-difference,” or CFDs, which are investment products with returns linked to the performance of an underlying commodity,index or security, and exchange-traded products, including futures and options on futures. We have customers in more than 140 countries worldwide andconduct business from our offices in New York, New York; Bedminster, New Jersey; Powell, Ohio; Cleveland, Ohio; London, England; Tokyo, Japan;Sydney, Australia; Beijing, China; Hong Kong and Singapore.Our retail foreign exchange trading business, which has historically made up the majority of our business, allows customers to trade through our FOREX.combrand. We also offer retail customers the ability to trade exchange-traded products through our Open E Cry, LLC, or OEC brand, which offers futuresproducts, and through our wholly-owned subsidiary GAIN Securities, which principally offers equities products. Our institutional trading business, GAINGTX, which we launched in March 2010, serves institutional market participants, including hedge funds, banks and high-frequency trading firms. Ourinstitutional trading business also includes our specialty execution desk, which we launched in September 2011 to facilitate the execution of more complextransactions.We have invested considerable resources in developing our retail and institutional trading platforms and tools to allow our customers to trade and manage theiraccounts. While our retail and institutional trading businesses use separate platforms, we are able to leverage our combined scale and trading volume in ourrelationships with our wholesale trading partners, bank liquidity providers, and other service providers. In addition, we believe that our platforms complementeach other, which allows us to cross-sell our services and to leverage our facilities and the technology we develop. Our customers can trade through web-based,downloadable and mobile trading platforms and have access to innovative trading tools to assist them with research, automated trading and accountmanagement.We have also recently taken several significant steps to diversify our product portfolio and add new revenue sources, including measures designed to grow ourinstitutional and futures businesses, which generate commission revenues rather than the trading revenue generated by our retail foreign exchange tradingbusiness. During the year ended December 31, 2012, we introduced TRADE, a new retail platform featuring an expanded portfolio of forex and CFDproducts. The TRADE platform features innovative tools for market monitoring, technical trading and strategy building and expands our retail productoffering to over 400 tradeable markets, including indices, commodities and forex. We also expanded our GTX specialty execution desk through the addition ofa new fourteen member team in August 2012. In addition, our acquisition of OEC, from optionsXpress, a subsidiary of The Charles Schwab Corporation,which closed on August 31, 2012, enables us to offer futures products and connections to dozens of exchanges around the world. In November 2012, OECmerged with and into GAIN Capital Group, LLC, which has continued OEC’s futures business under our Open E Cry and OEC brands. We believe thatexecuting on our strategy to diversify our product portfolio and add new revenue sources will allow us to continue to grow our business in both favorable andchallenging market conditions.As a global provider of online trading services, our results of operations are impacted by a number of external market factors, including market volatility andtransaction volumes, competition, the regulatory environment in the various jurisdictions and markets in which we operate and the financial condition of theretail and institutional customers to whom we provide our services. These factors are not the only factors that impacted our results of operations for the mostrecent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods. 40Table of ContentsMarket Environment and Trading VolatilityDuring the past few years, there has been significant disruption and volatility in the global financial markets. Our revenue and operating results may varysignificantly from period to period due primarily to movements and trends in the world’s currency markets and to fluctuations in trading levels. As a generalrule, our businesses typically benefit from volatility in the markets that we serve, as periods of increased volatility often coincide with higher levels of tradingby our clients and a higher volume of transactions. However, periods of extreme volatility may result in significant market dislocations that can also leadclients to reduce their trading activity. In addition, volatility that results in trading within a relatively narrow band of currency prices may lead to lessprofitable trading activity. Also, market volatility can adversely affect our ability to profitably manage our net exposure, which represents the unhedged portionof the trading positions we enter into with our customers.Market volatility is driven by a range of external factors, some of which are market specific and some of which are correlated to general macroeconomicconditions. Weakness in equity markets, which occurred in much of 2011 and several of the previous years, can result in reduced trading activity in the forexmarket. The European sovereign debt crisis, which arose in the second quarter of 2010 and continued throughout 2011 and 2012, created economicuncertainty, adversely affecting the equities and other securities markets for much of this period, leading investors to, at times, reduce their forex tradingactivity, and also resulted in anomalous and challenging market conditions over several significant periods during 2011 and 2012.In the year ended December 31, 2012, trading conditions were generally challenging, principally due to low overall currency volatility. After a modest increasein the second quarter of 2012, the third quarter of 2012 saw volatility levels and trading ranges of the most widely traded foreign currencies dip back down tothe four year lows reached in the first quarter of 2012, with currency volatility in the fourth quarter reaching lows not seen since 2007. As a result of thesechallenging trading conditions, during the year ended December 31, 2012, trading volume in our retail forex trading business declined by 17.2%, adverselyaffecting our revenue and operating results for the year, despite increased trading volume in our institutional business.CompetitionThe forex market has been accessible to retail investors for a significantly shorter period than many other securities markets, such as equities, and is a rapidlyevolving industry characterized by intense competition. Entering new markets often requires us to narrow our spreads in order to attract customers andcompete with other companies who have established customer bases in such markets. In addition, in existing markets, on occasion we make short-termdecisions to be more aggressive regarding the spreads we offer our customers, or we may decide to offer additional services at reduced rates, or free of charge,in order to attract customers and take market share from our competitors.Regulatory EnvironmentIn recent years, the financial markets have experienced the beginning of a major global regulatory overhaul, as regulators and legislators in the U.S. and abroadhave proposed and, in some instances, adopted, a wide range of regulatory changes that have had a significant effect on the manner in which we operate ourbusiness. In particular, as a result of the Dodd-Frank Act’s requirement that essentially all transactions in commodities be executed on an exchange, afterJuly 15, 2011, we were no longer permitted to offer leveraged spot metal transactions in the United States. For the period from January 1, 2011 through July15, 2011, our leveraged spot metals trading business with U.S. customers generated approximately $20.7 million in net revenue.Part of our growth strategy is to enter new markets, and as we do so we will become subject to regulation in those markets. Complying with different regulatoryregimes in multiple markets is expensive, and in many markets the regulatory environment is unclear and evolving. Changes in regulatory requirements andchanges in the interpretation of existing regulatory requirements may force us to alter our business practices. 41Table of ContentsKey Income Statement Line Items and Key Operating MetricsThe following section briefly describes the key components of our revenues and expenses, our use of non-GAAP financial metrics, and key operating metricswe use to evaluate the performance of our business.RevenueWe generate revenue from trading revenue, commission revenue, other revenue and interest income.Trading RevenueTrading revenue is our largest source of revenue and is generated in our retail forex business. Trading revenue represented 84.2% of our total net revenue for theyear ended December 31, 2012, and 96.9% of our total net revenue for the year ended December 31, 2011.We generate trading revenue as follows: • for trades that are naturally hedged against an offsetting trade from another customer, we receive the entire retail bid/offer spread we offer ourcustomers on the two offsetting transactions; • for trades that are hedged with one of our wholesale forex trading partners, we receive the difference between the retail bid/offer spread we offer ourcustomers and the wholesale bid/offer spread we receive from the wholesale forex trading partners; and • with respect to the remaining customer trades, which we refer to as our net exposure, we receive the net gains or losses generated through changesin the market value of the currencies held in our net exposure.For the year ended December 31, 2012, approximately 95.9% of our average daily retail trading volume was either naturally hedged or hedged by us with oneof our wholesale forex trading partners, and the remaining 4.1% of our average daily retail trading volume consisted of our net exposure, compared to averagedaily retail trading volume hedged of 97.1% and 98.0% in 2011 and 2010, respectively.We manage our net exposure by applying position and exposure limits established under our risk-management policies and by continuous, active monitoringby our traders. Based on our risk management policies and procedures, over time a portion of our net exposure may be hedged with our wholesale forex tradingpartners. Although we do not actively initiate proprietary directional market positions in anticipation of future movements in the relative prices of the productswe offer, through our net exposure we are likely to have open positions in various currencies at any given time. In the event of unfavorable market movements,we may take a loss on such positions. See “Sophisticated Risk Management” in Item 1. Business, in this Form 10-K for further details regarding our riskmanagement policies.Commission RevenueCommission revenue is comprised of revenue from our GTX institutional business, revenue from our futures business, OEC, and revenue from GAINSecurities, our securities business.GTX, OEC, and GAIN Securities generate revenue by earning a commission on each transaction, which is recorded under commission revenue. We act as anagent for the trades executed on the GTX platform and, therefore, do not assume any market or credit risk. Commission revenue received through GTX, OECand GAIN Securities generally generates a lower profit margin than that which we have historically experienced in our retail forex trading business. 42Table of ContentsOther RevenueOther revenue is comprised of account management, transaction and performance fees related to customers who have assigned trading authority to oursubsidiary Gain Capital Asset Management, or GCAM; inactivity and training fees charged to customer accounts; and other miscellaneous items from each ofour businesses.For the year ended December 31, 2012, other revenue was $2.3 million, compared to $1.8 million for the year ended December 31, 2011Net Interest Revenue / ExpenseNet interest revenue/expense consists primarily of the revenue generated by our cash and customer cash held by us at banks, in money market funds, intreasury bills and on deposit as collateral with our wholesale forex trading partners, less interest expense on our term loan and contractual payments foracquired assets. A customer’s net 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 or treasury bills.Such deposits and investments earned interest at an average effective rate of approximately 0.1% for the year ended December 31, 2012 and 2011. Interest paidto customers varies among customer accounts primarily due to the net value of a customer account. From time to time, we also make available interestpromotions pursuant to which we may pay certain customers higher levels of interest than that which is paid to other customers. Interest income and interestexpense are recorded when earned and incurred, respectively. Net interest revenue was $0.1 million for the year ended December 31, 2012, compared to netinterest expense of $0.9 million for the year ended 2011.ExpensesOur expenses are principally comprised of employee compensation and benefits, selling and marketing, trading expenses and commissions, purchasedintangible amortization and other expenses.Employee Compensation and BenefitsEmployee compensation and benefits includes salaries, bonuses, stock-based compensation, contributions to benefit programs and other related employeecosts.Selling and MarketingOur marketing strategy employs a combination of direct online marketing and focused branding programs, with the goal of raising awareness of our retailforex trading Internet website, FOREX.com, and attracting customers in a cost-efficient manner. For the year ended December 31, 2012, selling and marketingexpense was $27.0 million, compared to $36.2 million for the year ended December 31, 2011. The decrease in sales and marketing expense was primarily dueto a decrease in advertising expenses in response to market conditions, particularly in the fourth quarter of 2012.Trading Expense and CommissionsTrading expense and commissions consists primarily of compensation paid to our white label partners and introducing brokers. We generally provide whitelabel partners with the platform, systems and back-office services necessary for them to offer forex trading services to their customers. Introducing brokersidentify and direct potential forex trading customers to us. White label partners and introducing brokers generally handle marketing and the other expensesassociated with attracting customers. Accordingly, we do not incur any incremental sales and marketing expense in connection with trading revenue generatedby customers provided 43Table of Contentsthrough our white label partners and introducing brokers. We do, however, pay a portion of this trading revenue to our white label partners and introducingbroker partners and record this payment under trading expense and commissions. This expense is largely variable and changes principally based on the levelof customer trading volume directed to us from our white label partners and introducing brokers, the specific terms of our agreements with the white labelpartners and introducing brokers, which vary on a partner-by-partner and regional basis, and the relative percentage of trading volume generated fromparticular relationships in any given period. The majority of our white label and introducing broker partners are paid based on the trading volume generated bythe customers they introduce, directly or indirectly, to us. As such, during periods in which their customers’ trading activity is not profitable for us, if theassociated trading volume remains high, we may be required to make larger payments to these partners despite the fact that we are generating lower revenuefrom their customers. This situation occurred in 2011, in particular in the fourth quarter of the year, which resulted in an increase in trading expense despite adecrease in trading revenue generated by our white label and introducing broker clients. Our indirect business accounted for 42.5%, 38.9% and 37.8% of retailtrading volume in the years ended December 31, 2010, 2011 and 2012, respectively.General and AdministrativeGeneral and administrative expenses consists of bank fees, professional fees, occupancy and equipment and other miscellaneous expenses.Depreciation and amortizationDepreciation and amortization consists of the recognition of expense for physical assets and software purchased for use over a period of several years and ofthe amortization for internally developed software.Purchased Intangible AmortizationPurchased intangible amortization consists of amortization related to intangible assets we acquired in 2012, 2011 and 2010 in connection with our acquisitionof customer accounts in several transactions we executed during these periods. The principal intangible assets acquired were customer assets and a non-compete agreement. These intangible assets have useful lives ranging from one year to six years.Communications and TechnologyCommunications and technology consists of communications fees, data fees, product development, software and maintenance expenses.Bad debt provisionBad debt provision represents the amounts estimated for the uncollectibility of certain outstanding balances during the period.RestructuringWe incurred restructuring expenses in 2012, which reflect severance payments arising from headcount reductions implemented in the first half of 2012.Change in Fair Value of Convertible Preferred Stock Embedded DerivativeIn 2010, in accordance with ASC 815, Derivatives and Hedging, we accounted for an embedded derivative liability attributable to the redemption feature ofour then outstanding preferred stock. This redemption feature and the associated embedded derivative liability is no longer required to be recognized due to theconversion of all of our outstanding preferred stock in connection with the completion of our initial public offering of common stock in December 2010. 44Table of ContentsNon-GAAP Financial MetricsWe use adjusted net income, adjusted earnings per common share and adjusted effective tax rate, each of which is a non-GAAP financial metric, to evaluateour business. We believe our reporting of adjusted net income and adjusted earnings per share assists investors in evaluating our operating performance. Wealso believe adjusted net income and adjusted earnings per common share allow investors to appropriately compare our results for periods before and after ourIPO, because these metrics eliminate the effect of the embedded derivative in our preferred stock, which was extinguished at the time of our IPO, as discussedin more detail below. Additionally, we believe adjusted effective tax rate assists investors in evaluating our tax rate applicable to our operating performance byremoving the impact of the embedded derivative liability. However, adjusted net income, adjusted earnings per common share and adjusted effective tax rate arenot measures of financial performance calculated in accordance with GAAP and such measures should be considered in addition to, but not as a substitutefor, other measures of our financial performance reported in accordance with GAAP, such as net income and earnings per common share. Below is adiscussion and reconciliation of these non-GAAP financial metrics.Adjusted Net IncomeAdjusted net income is a non-GAAP financial measure and represents our net income/(loss) excluding (i) for periods prior to 2011 (x) the change in fair valueof the embedded derivative in our preferred stock and (y) the after-tax impact of amortization of purchased intangibles; and (ii) for 2011 and future periods,the after tax impact of amortization of purchased intangibles. Purchased intangible assets are not operating assets; we therefore believe it is appropriate toexclude the associated amortization in presenting our adjusted net income. We believe this will assist our investors in evaluating our operating performance. Asdiscussed below, the embedded derivative in our preferred stock was extinguished at the time of our IPO. Accordingly, beginning in 2011, we no longer includean adjustment for changes in fair value of the embedded derivative and adjusted net income for 2011 and future periods represents our net income excludingonly the after-tax impact of amortization of purchased intangibles. We believe our reporting of adjusted net income assists investors in evaluating our operatingperformance because this measure excludes certain non-operating expenses and non-recurring items. This non-GAAP financial measure has certain limitations,including that it does not have a standardized meaning and, therefore, our definition may be different from similar non-GAAP financial measures used byother companies or analysts. Therefore, it may be more difficult to compare our financial performance to that of other companies.Our previously outstanding Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D, and Series E contained a redemption feature thatallowed the holders of our preferred stock at any time on or after March 31, 2011 to require us to repurchase such securities. We had determined that thisredemption feature effectively provided such holders with an embedded option derivative meeting the definition of an “embedded derivative” pursuant to FASBASC 815, Derivatives and Hedging. Consequently, the embedded derivative was required to be bifurcated and accounted for separately. As discussed above,this redemption feature and related accounting treatment is no longer required to be recognized following conversion of all of our then outstanding preferredstock into common stock in connection with our IPO. Historically, in accordance with FASB ASC 815, we adjusted the carrying value of the embeddedderivative to the fair value of our company at each reporting date, based upon the Black-Scholes options pricing model, and reported the preferred stockembedded derivative liability on the Consolidated Financial Statements, with changes in fair value recorded in our Consolidated Statements of Operations andComprehensive Income. Historically, this impacted our net income, but did not affect our cash flow generation or operating performance. The embeddedderivative caused our earnings to fluctuate, but in our view was not indicative of our historical or expected future operating performance.Adjusted Earnings Per ShareAdjusted earnings per share is a non-GAAP financial measure and represents our net income/(loss) per share excluding (i) for periods prior to 2011 (x) thechange in fair value of the embedded derivative in our preferred 45Table of Contentsstock and (y) the after-tax impact of amortization of purchased intangibles; and (ii) for 2011 and future periods, the after tax impact of amortization ofpurchased intangibles. As noted above, the embedded derivative in our preferred stock was extinguished at the time of our IPO. Accordingly, beginning in2011, we no longer include an adjustment for changes in fair value of the embedded derivative and adjusted earnings per share for 2011 and future periodsrepresents our earnings per share excluding only the after-tax impact of amortization of purchased intangibles. We believe our reporting of adjusted earnings pershare assists investors in evaluating our operating performance because this measure excludes certain non-operating expenses and non-recurring items. Thisnon-GAAP financial measure has certain limitations, including that it does not have a standardized meaning and, therefore, our definition may be differentfrom similar non-GAAP financial measures used by other companies and/or analysts. Thus, it may be more difficult to compare our financial performance tothat of other companies.Adjusted Effective Tax RateAdjusted effective tax rate is a non-GAAP financial measure and represents our effective tax rate excluding the change in fair value of the embedded derivativein our preferred stock, for periods prior to 2011.Reconciliation of Non-GAAP Financial MetricsThe following table provides a reconciliation of GAAP net income to adjusted net income and adjusted earnings per common share (amounts in thousandsexcept per share amounts): Year Ended December 31, 2012 2011 2010 Net income applicable to GAIN Capital Holdings, Inc. $2,621 $15,698 $37,845 Change in fair value of convertible, redeemable preferred stock embedded derivative — — (4,691) Add back of purchased intangible amortization, net of tax 2,851 6,005 749 Adjusted net income $5,472 $21,703 $33,903 Adjusted earnings per common share: Basic $0.16 $0.63 $7.72 Diluted $0.14 $0.56 $0.90 (1)In connection with the completion of our IPO, our Board of Directors approved a 2.29-for-1 stock split of our common stock to be effective immediatelyprior to the completion of the IPO. The 2.29-for-1 stock split, after giving effect to the receipt by us of 407,692 shares of common stock from all of ourpre-IPO common stockholders (on a pro-rata basis) in satisfaction of previously outstanding obligations owed by such stockholders to us, resulted in aneffective stock split of 2.26-for-1. Accordingly, all references to share and per share data for periods prior to our IPO have been retroactively restated toreflect the effective 2.26-for-1 stock split. 46(1)Table of ContentsThe following table provides a reconciliation of our effective tax rate to our adjusted effective tax rate (amounts in thousands except percentages): Year Ended December 31, 2012 2011 2010 Income before income tax expense and equity in earnings of equity method investment $1,142 $23,244 $57,452 Change in fair value of convertible, redeemable preferred stock embedded derivative — — (4,691) Adjusted income before income tax expense and equity in earnings of equity method investment $1,142 $23,244 $52,761 Income tax expense $(1,479) $7,546 $20,009 Adjusted earnings per common share: Effective tax rate (129.4)% 32.5% 34.8% Adjusted effective tax rate (129.4)% 32.5% 37.9% (1)In connection with the completion of our IPO, our Board of Directors approved a 2.29-for-1 stock split of our common stock to be effective immediatelyprior to the completion of the IPO. The 2.29-for-1 stock split, after giving effect to the receipt by us of 407,692 shares of common stock from all of ourpre-IPO common stockholders (on a pro-rata basis) in satisfaction of previously outstanding obligations owed by such stockholders to us, resulted in aneffective stock split of 2.26-for-1. Accordingly, all references to share and per share data for periods prior to our IPO have been retroactively restated toreflect the effective 2.26-for-1 stock split.(2)Income tax expense as a percentage of income before income tax expense and equity in earnings of equity method investment.(3)Income tax expense as a percentage of adjusted income before income tax expense and equity in earnings of equity method investment.Other Financial MetricsIn addition to the financial metrics discussed above, we review various key operating metrics, which are described below, to evaluate the performance of ourbusiness. Key Operating Metrics(Unaudited)Year Ended December 31, 2012 2011 2010 2009 2008 Retail Funded Accounts 85,099 76,485 85,562 60,168 49,740 Active OTC Accounts 60,219 63,435 64,313 52,755 52,555 Futures DARTs 13,581 — — — — OTC Trading Volume (billions) $1,303.4 $1,574.0 $1,324.8 $1,246.7 $1,498.6 Average Daily Volume (billions) $5.0 $6.0 $5.1 $4.8 $5.8 Client Assets (millions) $446.3 $310.4 $256.7 $199.8 $124.0 InstitutionalTrading Volume (billions) $1,952.6 $853.9 $239.3 $— $— Average Daily Volume (billions) $7.5 $3.3 $0.9 $— $— 47(1)(2)(3)Table of ContentsWe believe that our customer trading volumes are driven by ten main factors. Six of these factors are broad external factors outside of our control that generallyimpact the market for forex trading, as well as 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; • legislative changes; and • regulatory changes.Many of the above factors impact the volatility of foreign currency rates, which has generally been positively correlated with forex trading volume. Ourcustomer trading volume is also affected by the following additional factors: • the effectiveness of our sales activities; • the competitiveness of our various offerings; • 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 andincreasing overall customer trading activity.For the year ended December 31, 2012 and December 31, 2011, no single customer accounted for more than 1.0% and 5.0% of our trading volume for theperiod, respectively.Funded AccountsFunded accounts represent retail customers who maintain cash balances with us. We believe the number of funded retail accounts is an important indicator ofour ability to attract new retail customers that can potentially lead to trading volume and revenue in the future; however, it does not represent actual tradesexecuted.Active OTC AccountsActive OTC accounts represents customers who executed at least one trade during the relevant period. We believe active OTC accounts is an importantoperating metric because it correlates to our trading volume and revenue.Futures DART’s, or Daily Average Revenue TradesDARTs represents the number of futures or options on futures trades in a given period over the number of trading days in the given period.OTC Trading VolumeOTC trading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our retail customers. Approximately 40.0% of ourcustomer trading volume for the year ended December 31, 2012 was generated by our retail businesses, compared to 64.8% for the year ended December 31,2011.Average Daily VolumeAverage daily volume is the U.S. dollar equivalent of the aggregate notional value of trades executed by our customers in a given period over the number oftrading days in the given period. 48Table of ContentsClient AssetsClient assets represent amounts due to clients, including customer deposits and unrealized gains or losses arising from open positions.Trading VolumeTrading volume is the U.S. dollar equivalent of the aggregate notional value of OTC trades executed by our institutional customers. Approximately 60.0% and35.2% of our customer trading volume for the years ended December 31, 2012 and 2011, respectively, was generated by our institutional trading business.Results of OperationsYear Ended December 31, 2012 Compared to Year Ended December 31, 2011Revenue Year Ended December 31, 2012 2011 REVENUE: Trading revenue $127,520 $175,854 Commission revenue 21,373 4,691 Other revenue 2,331 1,790 Total non-interest revenue 151,224 182,335 Interest revenue 627 544 Interest expense (491) (1,414) Total net interest revenue / (expense) 136 (870) Net revenue $151,360 $181,465 Our total net revenue decreased $30.1 million, or 16.6%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. Tradingrevenue decreased $48.3 million, or 27.5%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. Retail trading volumesdecreased for the year ended December 31, 2012, compared to the year ended December 31, 2011, as a result of challenging trading conditions, principally dueto low overall market volatility and tight trading ranges of the most widely traded foreign currencies. In particular, the average true range and intraday tradingvolatility of the major currencies that we offer were both at multi-year lows during the year ended December 31, 2012, which adversely affected retail tradingvolume during such periods. As a result, our ability to generate retail trading revenue was also adversely affected.Our commission revenue increased $16.7 million for the year ended December 31, 2012, compared to the year ended December 31, 2011, including anincrease of $11.1 million from our institutional business, and an additional $5.6 million of revenue generated by our newly acquired futures business, OEC,from the acquisition date of August 31, 2012 through the end of the year. Our other revenue increased $0.5 million for the year ended December 31, 2012,compared to the year ended December 31, 2011, primarily due to an increase of $2.3 million in data fees, which was partially offset by a decrease in foreignexchange translation revenue of $1.5 million and a decrease in managed account fees of $0.2 million.Our net interest revenue/(expense) increased from $0.9 million of expense for the year ended December 31, 2011 to $0.1 million of revenue for the year endedDecember 31, 2012, primarily due to a lower average outstanding term loan balance, a decrease in interest paid to customers and an increased focus on cashmanagement strategies to increase the yield on our cash holdings. 49Table of ContentsExpenses Year Ended December 31, 2012 2011 Total expenses (amounts in thousands) $150,218 $158,221 As a percentage of net revenue 99.2% 87.2% Our total expenses decreased $8.0 million, or 5.1%, for the year ended December 31, 2012, compared to the year ending December 31, 2011. The decreasewas due to a decrease of $9.2 million of selling and marketing expense, a decrease of $4.8 million of purchased intangible amortization, a decrease of $2.0million of general and administrative expenses and a decrease of $0.5 million in the bad debt provision. These decreases were partially offset by an increase intrading expense of $5.0 million, an increase in employee compensation and benefits of $1.1 million, an increase in depreciation and amortization of $1.0million, restructuring charges of $0.6 million and an increase in communications and technology of $0.6 million.The changes in key operating expense items are described further below.Employee Compensation and Benefits Year Ended December 31, 2012 2011 Employee compensation and benefits (amounts in thousands) $47,469 $46,362 As a percentage of net revenue 31.4% 25.5% Employee compensation and benefits expenses increased $1.1 million, or 2.4%, for the year ended December 31, 2012, compared to the year endedDecember 31, 2011. Salary and benefits (excluding bonus and stock compensation) increased $2.9 million, primarily due to the hiring of members of seniormanagement, additional institutional sales employees and employees related to the acquisition of OEC. The increase in compensation and benefits waspartially offset by a decrease in bonus expense of $1.2 million, due to the decrease in operating results of our business for the year ended December 31, 2012,compared to the prior year, a decrease in stock compensation expense of $0.7 million, principally due to a decrease in the value of more recent grants comparedto the value of historical grants and a decrease in our retirement plan expenses of $0.1 million.Selling and Marketing Expenses Year Ended December 31, 2012 2011 Selling and marketing (amounts in thousands) $26,969 $36,195 As a percentage of net revenue 17.8% 19.9% Selling and marketing expenses decreased $9.2 million, or 25.5%, for the year ended December 31, 2012, compared to the year ended December 31, 2011.This was primarily due to a realignment of marketing expense to regions which we believe will provide higher growth potential and lower customer acquisitioncosts. Additionally, decreased sales and marketing expenses were primarily due to a decrease in advertising expenses in response to market conditions,particularly in the fourth quarter of 2012. 50Table of ContentsTrading Expenses and Commissions Year Ended December 31, 2012 2011 Trading expenses and commissions (amounts in thousands) $38,047 $33,040 As a percentage of net revenue 25.1% 18.2% Trading expenses and commissions increased $5.0 million, or 15.2%, for the year ended December 31, 2012, compared to the year ended December 31,2011, primarily due to the increase in volumes in our institutional business and the acquisition of OEC. This was partially offset by the decrease in tradingvolumes in our retail trading business. This expense is largely variable and is directly associated with the levels of customer trading volume directed to usfrom our white label partners and introducing brokers.General and administrative Year Ended December 31, 2012 2011 General and administrative (amounts in thousands) $19,950 $21,842 As a percentage of net revenue 13.2% 12.0% General and administrative expense decreased $1.9 million, or 8.7%, for the year ended December 31, 2012, compared to the year ended December 31, 2011.This decrease was primarily due to a decrease of $0.9 million in professional fees, a decrease of $0.9 million in bank fees and a decrease in othermiscellaneous expenses of $0.3 million. These decreases were partially offset by a $0.1 million increase in occupancy and equipment expenses.Depreciation and amortization Year Ended December 31, 2012 2011 Depreciation and amortization (amounts in thousands) $4,921 $3,898 As a percentage of net revenue 3.3% 2.1% Depreciation and amortization increased by $1.0 million, or 26.2%, for the year ended December 31, 2012, compared to the year ended December 31, 2011.This increase was primarily due to an increase in the amortization of software purchased or developed internally, which was placed into service at the end of2011 or during 2012, including the company’s new trading platform, TRADE, which was launched in September 2012.Purchased Intangible Amortization Year Ended December 31, 2012 2011 Purchased intangible amortization (amounts in thousands) $4,134 $8,893 As a percentage of net revenue 2.7% 4.9% Purchased intangible amortization decreased $4.8 million, or 53.5%, for the year ended December 31, 2012, compared to the year ended December 31, 2011.The decrease was due to the purchased intangible assets 51Table of Contentsacquired from Capital Market Services, LLC in October 2010 becoming fully amortized during the second quarter of 2012, partially offset by additionalamortization in the second half of 2012 related to the acquisition of OEC.Communications and technology Year Ended December 31, 2012 2011 Communications and technology (amounts in thousands) $7,736 $7,139 As a percentage of net revenue 5.1% 3.9% Communications and technology expenses increased $0.6 million, or 8.4%, for the year ended December 31, 2012, compared to the year ended December 31,2011. The increase was primarily due to higher costs incurred in 2012 in connection with development efforts associated with our new TRADE platform andan increase of $0.2 million in data processing costs.Income Taxes Year Ended December 31, 2012 2011 Income tax (benefit) / expense (amounts in thousands) $(1,479) $7,546 As a percentage of net revenue (1.0)% 4.2% Income tax expense decreased $9.0 million resulting in a tax benefit of $1.5 million for the year ended December 31, 2012, compared to income tax expense of$7.5 million for the year ended December 31, 2011. Our consolidated effective tax rate is impacted by the statutory income tax rates applicable to each of thejurisdictions in which we operate. The decrease in our effective tax rate for fiscal 2012 was primarily attributable to the foreign rate differential from ourinternational operations, where tax rates for these operations are generally lower than the U.S. statutory rate, as well as the reversal of previously establishedvaluation allowances of approximately $0.6 million in the aggregate due to an increase in reported income in certain foreign jurisdictions. The increased taxbenefit from foreign operations was due primarily to an increase in foreign earnings, reducing our effective tax rate by 121.1%. Please see Note 16 to ouraudited consolidated financial statements for more information on our effective tax rate. As our foreign earnings are generally taxed at lower statutory rates thanour 35% U.S. statutory rate, changes in the proportion of our consolidated taxable earnings originating in foreign jurisdictions will impact our consolidated taxrate. As of the date of this Annual Report, we have determined that our foreign earnings were reinvested indefinitely outside the U.S. and are not subject tocurrent U.S. income tax. At the end of 2012 we completed a reorganization of our domestic and international corporate structure and plan on moving certainpersonnel and operational functions between affiliates. We anticipate the restructuring will impact amounts subject to future taxation in the U.S. and foreignjurisdictions. We anticipate the changes in our international structure may have a favorable impact, which could be significant, on our effective tax rate for2013 and beyond. 52Table of ContentsYear Ended December 31, 2011 Compared to Year Ended December 31, 2010Revenue Year Ended December 31, 2011 2010 REVENUE: Trading revenue $175,854 $187,356 Commission revenue 4,691 2,227 Other revenue 1,790 1,190 Total non-interest revenue 182,335 190,773 Interest revenue 544 364 Interest expense (1,414) (2,039) Total net interest revenue / (expense) (870) (1,675) Net revenue $181,465 $189,098 Our total net revenue decreased $7.6 million, or 4.0%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. Tradingrevenue decreased $11.5 million, or 6.1%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease in tradingrevenue was primarily due to changes in the mix of our customers’ retail trading volume that impacted our ability to optimize spread capture, generalmacroeconomic and market instability for much of 2011 and periods in which major currencies traded in narrow ranges, which decreased our ability togenerate revenue, particularly in the fourth quarter of 2011.Our commission revenue increased $2.5 million, due to an increase in institutional trading volume from $239 billion for the year ended December 31, 2010 to$854 billion for the year ended December 31, 2011.Our other revenue increased $0.6 million for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to an increasein foreign exchange translation gains of $0.4 million and an increase in managed account fees of $0.1 million.Our net interest expense decreased $0.8 million, or 48.1%, for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarilydue to a lower average outstanding term loan balance.Expenses Year Ended December 31, 2011 2010 Total expenses (amounts in thousands) $158,221 $131,646 As a percentage of net revenue 87.2% 69.6% Our total expenses increased $26.6 million, or 20.2%, for the year ended December 31, 2011, compared to the year ending December 31, 2010. Total expensesfor 2010 included a gain of $4.7 million relating to the change in fair value of our preferred stock embedded derivative; there was no similar gain in 2011 dueto the settlement of our preferred stock embedded derivative in connection with the completion of our IPO in December 2010. The remainder of the increase inoperating expenses was primarily due to a $7.7 million increase in purchased intangible amortization, a $7.4 million increase in trading expenses andcommissions, a $6.0 million increase in general and administrative, a $0.9 million increase in employee compensation and benefits, a $0.7 million increase incommunications and technology, a $0.5 million increase in depreciation and amortization and a $0.3 million increase in bad debt provision, partially offset bya decrease in selling and marketing expenses of $1.5 million. 53Table of ContentsThe changes in key operating expense items are described further below.Employee Compensation and Benefits Year Ended December 31, 2011 2010 Employee compensation and benefits (amounts in thousands) $46,362 $45,439 As a percentage of net revenue 25.5% 24.0% Employee compensation and benefits expenses increased $0.9 million, or 2.0%, for the year ended December 31, 2011, compared to the year endedDecember 31, 2010. Salary and benefits (excluding bonus and stock compensation) increased $4.0 million primarily due to the hiring of members of seniormanagement and an increase in headcount in our international locations to support our international expansion during 2011. The increase in salary andbenefits was partially offset by a decrease in bonus expense of $1.6 million, primarily due to the decrease in operating results of our business for the yearended December 31, 2011, compared to December 31, 2010, and a decrease in stock compensation expense of $1.4 million, principally due to a decrease in thevalue of more recent grants compared to the value of historical grants.Selling and Marketing Expenses Year Ended December 31, 2011 2010 Selling and marketing (amounts in thousands) $36,195 $37,721 As a percentage of net revenue 19.9% 19.9% Selling and marketing expenses decreased $1.5 million, or 4.0%, for the year ended December 31, 2011, compared to the year ended December 31, 2010.Decreased sales and marketing expenses were primarily due to a decrease in advertising expenses in response to market conditions, particularly in the fourthquarter of 2011.Trading Expenses and Commissions Year Ended December 31, 2011 2010 Trading expenses and commissions (amounts in thousands) $33,040 $25,658 As a percentage of net revenue 18.2% 13.6% Trading expenses and commissions increased $7.4 million, or 28.8%, for the year ended December 31, 2011, compared to the year ended December 31, 2010,primarily due to an increase in white label and introducing broker commissions. The increase in introducing broker commissions was due to an increase incustomer trading volume directed to us from our white label partners and introducing brokers of $49.9 billion, to $612.4 billion for the year endedDecember 31, 2011, compared to $562.5 billion for the year ended December 31, 2010. This expense is largely variable and is directly associated with thelevels of customer trading volume directed to us from our white label partners and introducing brokers. 54Table of ContentsGeneral and administrative Year Ended December 31, 2011 2010 General and administrative (amounts in thousands) $21,842 $15,826 As a percentage of net revenue 12.0% 8.4% General and administrative expenses increased $6.0 million, or 38.0%, for the year ended December 31, 2011, compared to the year ended December 31, 2010.The increase was primarily due to an increase in professional fees of $3.3 million, an increase of $2.1 million in travel, insurance, memberships and duesand an increase of $0.6 million in occupancy and equipment.Depreciation and amortization Year Ended December 31, 2011 2010 Depreciation and amortization (amounts in thousands) $3,898 $3,439 As a percentage of net revenue 2.1% 1.8% Depreciation and amortization increased $0.5 million, or 13.3%, for the year ended December 31, 2011, compared to the year ended December 31, 2011,primarily due to an increase in the amortization of software purchased or developed internally, which was placed into service at the end of 2010 or during2011.Purchased Intangible Amortization Year Ended December 31, 2011 2010 Purchased intangible amortization (amounts in thousands) $8,893 $1,208 As a percentage of net revenue 4.9% 0.6% Purchased intangible amortization increased $7.7 million for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increasewas due to the amortization of the intangible assets acquired from Deutsche Bank AG’s retail foreign exchange business (“dbFX”) in April 2011, as well as afull year of amortization expense of the intangible assets acquired from CMS in October 2010. Purchased intangible amortization for the year endedDecember 31, 2010 included only four months of expense related to the intangible assets acquired from MG Financial LLC and two months of expense relatedto the intangible assets acquired from CMS. In addition, during 2011, there was additional amortization expense of $0.9 million due to increases in the fairvalue of contingent liabilities associated with the CMS and dbFX intangible assets.Communications and Technology Year Ended December 31, 2011 2010 Communications and technology (amounts in thousands) $7,139 $6,449 As a percentage of net revenue 3.9% 3.4% 55Table of ContentsCommunications and technology expenses increased $0.7 million, or 10.7%, for the year ended December 31, 2011, compared to the year ended December 31,2010. This increase was primarily due to the continued development and enhancement of our trading platforms, product offerings, websites and tools tosupport our retail and institutional customers.Change in Fair Value of Convertible Preferred Stock Embedded Derivative Year Ended December 31, 2011 2010 Change in fair value of convertible preferred stock embedded derivative (amounts inthousands) $ — $(4,691) As a percentage of net revenue — (2.5)% The change in the fair value of the preferred stock embedded derivative resulted in a decrease to our total expenses of $4.7 million for the year endedDecember 31, 2010. As the preferred stock embedded derivative was settled in December 2010 in connection with our IPO, there was no impact for the yearended December 31, 2011.Income Taxes Year Ended December 31, 2011 2010 Income tax expense / (benefit) (amounts in thousands) $7,546 $20,009 As a percentage of net revenue 4.2% 10.6% Income tax expense decreased $12.5 million to $7.5 million for the year ended December 31, 2011, compared to $20.0 million for the year endedDecember 31, 2010. Our effective tax rate was 32.5% for the year ended December 31, 2011 and 34.8% for the year ended December 31, 2010.Liquidity and Capital ResourcesWe have historically financed our liquidity and capital needs primarily through the use of funds generated from operations, the issuance of preferred stockand access to secured lines of credit for general corporate purposes. We plan to finance our future operating liquidity and regulatory capital needs from ouroperations. Although we have no current plans to do so, we may issue equity or debt securities from time to time. We expect that our capital expenditures for thenext 12 months will be consistent with our historical annual spend.We primarily hold and invest our cash at various financial institutions and in various investments, including cash held at banks, deposits at our wholesaleforex trading partners and money market funds which invest in short-term U.S. government securities. In general, we believe all of our investments anddeposits are of high credit quality and we have more than adequate liquidity to conduct our businesses. 56Table of ContentsAs a holding company, nearly all of our funds generated from operations are generated by our operating subsidiaries. Historically, we have accessed thesefunds through receipt of dividends from these subsidiaries. The following table shows the amount of cash held by the subsidiaries and the level ofundistributed earnings (amounts in thousands) at December 31, 2012: Entity Name Cash Held UndistributedEarnings GAIN Capital-Forex.com U.K., Ltd. $158,616 $33,437 Forex.com Japan Co., Ltd. $72,481 $(5,608) GAIN Capital Forex.com Australia, Pty. Ltd. $10,808 $(1,117) GAIN Capital-Forex.com Hong Kong, Ltd. $3,860 $(1,038) GAIN Global Markets, Inc. $97 $(951) GAIN Capital-Forex.com Canada Ltd. $1,524 $(397) GAIN Capital-Forex.com Singapore Ltd. $378 $(651) GAIN GTX Singapore Pte. Ltd. $286 $23 Island Traders (Cayman) Limited $— $(22) At December 31, 2012, as reflected in the table above, we had approximately $33.5 million of undistributed earnings of our foreign subsidiaries indefinitelyinvested outside the United States. These earnings are expected to be reinvested in the working capital and other business needs of the foreign subsidiaries. Noprovision has been made for foreign taxes associated with these earnings. If these earnings had been repatriated into the United States as of December 31, 2012,in the form of dividends or otherwise, the Company would have been subject to additional income taxes of approximately $4.0 million.Some of our operating subsidiaries are subject to requirements of various regulatory bodies, including the CFTC and NFA in the United States, the FinancialServices Authority in the United Kingdom, the Japan Ministry of Economy, Trade and Industry, the Financial Services Agency and the Japan Ministry ofAgriculture, Forestry and Fisheries in Japan, or the Securities and Futures Commission in Hong Kong, the Australian Securities and InvestmentsCommission in Australia, and the Cayman Islands Monetary Authority in the Cayman Islands, relating to liquidity and capital standards, which limit fundsavailable for the payment of dividends to GAIN Capital Holdings, Inc. As a result, we may be unable to access funds which are generated by our operatingsubsidiaries when we need them. In accordance with CFTC regulation 1.12 and NFA Financial Requirements Section 1, a 20.0% decrease in GAIN CapitalGroup, LLC’s net capital and a 30.0% decrease in excess net capital due to a planned equity withdrawal requires regulatory notification and/or approval.The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of December 31, 2012 and the actual amounts ofcapital that were maintained on that date (amounts in millions): Entity Name Minimum RegulatoryCapital Requirements Capital LevelsMaintained Excess NetCapital GAIN Capital Group, LLC $24.8 $46.3 $21.5 GAIN Capital Securities, Inc. $0.1 $0.5 $0.4 GAIN Capital-Forex.com U.K., Ltd. $14.5 $35.5 $21.0 Forex.com Japan Co., Ltd. $3.5 $11.0 $7.5 GAIN Capital Forex.com Australia, Pty. Ltd. $0.4 $2.5 $2.2 GAIN Capital-Forex.com Hong Kong, Ltd. $1.9 $3.8 $1.8 GAIN Global Markets, Inc. $0.1 $0.4 $0.3 GAIN Capital-Forex.com Canada Ltd. $0.3 $1.6 $1.3 $45.6 $101.6 $56.0 Our futures commission merchant and forex dealer subsidiary, GAIN Capital Group, LLC, is subject to the Commodity Futures Trading Commission NetCapital Rule (Rule 1.17) and NFA Financial Requirements 57Table of ContentsSections 11 and 12. Under applicable provisions of these regulations, Gain Capital Group, LLC is required to maintain adjusted net capital of the greater of$1.0 million or 8% of Customer and Non-Customer Maintenance Margin or $20,000,000 plus 5 % of all liabilities owed to customers exceeding $10,000,000.Net capital represents our current assets less total liabilities as defined by CFTC Rule 1.17. Our current assets primarily consist of cash and cash equivalentsreported on our balance sheet as cash, receivables from brokers and trading securities, which are generally short-term U.S. government securities. Our totalliabilities include payables to customers, accrued expenses, accounts payable, sales and marketing expense payable, introducing broker fees payable and otherliabilities. From net capital we take certain percentage deductions against assets held based on factors required by the Commodity Exchange Act to calculateadjusted net capital. Our net capital and adjusted net capital changes from day to day. As of December 31, 2012, GAIN Capital Group, LLC had net capitalof approximately $59.7 million, adjusted net capital of $46.3 million and net capital requirements of $24.8 million. As of December 31, 2012, GAIN CapitalGroup’s excess net capital was $21.5 million. We believe that we currently have sufficient capital to satisfy these on-going minimum net capital requirements.We are required to maintain cash on deposit with our wholesale forex trading partners in order to conduct our hedging activities. As of December 31, 2012, weposted $89.9 million in cash with wholesale forex trading partners, of which $47.6 million was required as collateral pursuant to our agreements for holdingspot foreign exchange positions with such institutions, and the remaining $42.3 million represented available cash in excess of required collateral. As ofDecember 31, 2012, total client assets were $446.3 million. Total client assets represent amounts due to clients, including deposits and unrealized gains orlosses arising from open positions.We have incurred increased costs as a result of having publicly traded common stock. Prior to our initial public offering in December 2010, we were notsubject to the reporting requirements of the Exchange Act, or the other rules and regulations of the SEC or any securities exchange. We have and continue toinvest to enhance our financial and management control systems, including our corporate control, internal audit, disclosure controls and procedures andfinancial reporting and accounting systems, to manage our growth as a public company. We also incurred costs associated with corporate governancerequirements, including requirements under the Sarbanes-Oxley Act of 2002, as amended, as well as rules implemented by the SEC and the New York StockExchange, or NYSE.The table set forth below provides information regarding our total available liquidity as of December 31, 2012 and as of December 31, 2011. We use this non-GAAP measure to evaluate our business operations and our ability to continue to grow through acquisitions (amounts in millions): As ofDecember 31,2012 As ofDecember 31,2011 Cash & cash equivalents $36.8 $60.2 Cash & securities held for customers 446.3 310.4 Short term investments 1.4 0.1 Receivable from banks & brokers 89.9 85.4 Total operating cash 574.4 456.1 Less: Cash & securities held for customers (446.3) (310.4) Net operating cash 128.1 145.7 Less: minimum regulatory capital requirements (45.6) (35.8) Note payable — (7.9) Free cash available 82.5 102.0 Add: Available credit facility 17.0 50.0 Available Liquidity $99.5 $152.0 (1)Reflects cash that would be received upon the liquidation of short term investments. We estimate that all short term investments as of the date indicatedcould be liquidated within 1 to 2 business days. 58(1)(2)(3)(4)Table of Contents(2)Reflects cash that would be received from brokers following the close-out of all open positions. We estimate that liquidation of all open positions as of thedate indicated could be completed within 1 to 2 business days.(3)Excludes current liabilities of $19.9 million and capital charges associated with open positions.(4)The Company has a $50.0 million revolving line of credit. The amount available varies from time to time due to the terms of financial covenantscontained in the credit facility agreement. As of December 31, 2012, $17.0 million was available.Credit FacilityAs of December 31, 2012, we had a $50.0 million revolving line of credit through a loan and security agreement with Silicon Valley Bank and JPMorganChase Bank. Interest on amounts that may be outstanding under the revolving line of credit from time to time is paid monthly and is based upon the prime rateof interest plus 0.5%. The revolving line of credit is secured by certain of our assets, a pledge of our membership interests in our wholly-owned subsidiaryGAIN Holdings, LLC and a guarantee by GAIN Holdings, LLC. There were no outstanding borrowings under the revolving line of credit as of December 31,2012. On March 30, 2012, we paid off the balance of a $52.5 million term loan from Silicon Valley Bank and JPMorgan Chase Bank in advance of theJuly 1, 2012 maturity date. The term loan was payable in 20 quarterly installments of principal and the payments commenced on October 1, 2007. The otherterms of the term loan were substantially the same as those of the revolving line of credit.In accordance with the provisions of the revolving line of credit as outlined in the amended and restated loan and security agreement, we are required to adhereto various financial, regulatory, operational and reporting covenants. As of December 31, 2012, and during the entire term of the loan and security agreement,we were and have been in compliance with such covenants.Cash FlowThe following table sets forth a summary of our cash flow for the three years ended December 31, 2012 (amounts in thousands): Year Ended December 31, 2012 2011 2010 Cash provided by operating activities $12,149 $59,596 $27,148 Cash used for investing activities (19,217) (7,065) (12,421) Cash used for financing activities (17,983) (17,616) (8,880) Effect of exchange rate changes on cash and cash equivalents 1,650 (2,229) (1,081) Net increase / (decrease) in cash and cash equivalents $(23,401) $32,686 $4,766 (1)Revised to separate cash and securities held for customers from cash and cash equivalents as previously presented, see footnote 2 in theconsolidated financial statements below for further details.The primary drivers of our cash flow provided by operating activities are net income, amounts posted as collateral with wholesale forex trading partners andamounts paid to fund our operations.Amounts posted as collateral with wholesale foreign exchange trading partners are classified on our balance sheet as receivables from brokers and representcollateral required to be deposited with our wholesale forex trading partners in order for us to hold spot foreign exchange positions, as well as the cash postedwith wholesale forex trading partners in excess of required collateral. We post cash with wholesale forex trading partners in excess of required collateral to allowfor adverse currency price moves relative to our positions, which would raise our level of required collateral. We receive interest on amounts we have posted ascollateral with wholesale forex trading partners. The amount of collateral required by our wholesale forex trading partners in the future will be commensuratewith the amount of spot foreign exchange positions that they hold on our behalf. The 59(1)(1)Table of Contentsamount of cash posted with wholesale forex trading partners in excess of required collateral is discretionary and may increase or decrease in future periods aswe determine the most efficient uses of our cash.Our largest operating expenses are employee compensation and benefits, selling and marketing expenses, trading expenses and commissions. Employeecompensation and benefits include salaries, bonuses and other employee related costs. Selling and marketing expenses include online and search engineadvertising and print and television advertising. Trading expenses and commissions consist primarily of compensation paid to our white label partners andintroducing brokers.Unrealized gains and losses on cash positions revalued at prevailing foreign currency exchange rates are included in trading revenue but have no direct impacton cash flow from operations. Gains and losses become realized and impact cash flow from operations when customer transactions are liquidated. To someextent, our net deposit activity is influenced by unrealized gains and losses because our customers’ trading positions are impacted by unrealized gains andlosses and our customers may be required to post additional funds to maintain open positions or may choose to withdraw excess funds on open positions.Year Ended December 31, 2012 Compared to Year Ended December 31, 2011Cash provided by operating activities was $12.1 million for the year ended December 31, 2012, compared to $59.6 million for the year ended December 31,2011. The primary reasons for the decrease in cash provided by operating activities were a decrease of $20.0 million in trading securities, a decrease of $18.1million in receivables from banks and brokers, a decrease of $21.5 million in payables to customers, brokers, dealers, FCMs and other regulated entities anda decrease in net income of $13.0 million. These decreases were partially offset by an increase in cash and securities held for customers of $22.3 million.Cash used in investing activities was $19.2 million for the year ended December 31, 2012, compared to $7.0 million for the year ended December 31, 2011.The increase in cash used in investing activities was principally due to $9.5 million related to the acquisition of OEC, an increase of $4.3 million in thepurchase of property and equipment and the purchase of treasury bills of $1.4 million, partially offset by a decrease in the purchase of intangible assets of$2.5 million.Cash used for financing activities was $17.9 million for the year ended December 31, 2012, compared to $17.6 million for the year ended December 31,2011. The increase in cash used for financing activities was principally due to an increase in dividend payments of $5.2 million, partially offset by adecrease in payments of notes payable of $2.6 million and a decrease in the purchase of treasury stock of $1.7 million.Capital ExpendituresCapital expenditures were $8.4 million for the year ended December 31, 2012, compared to $4.0 million for the year ended December 31, 2011. Capitalexpenditures for the years ended December 31, 2012 and 2011 were primarily related to the development of our trading platforms and websites. Such capitalexpenditures accelerated in 2012 as we approached the launch of our new TRADE platform in September of 2012.Year Ended December 31, 2011 Compared to Year Ended December 31, 2010Cash provided by operating activities was $59.6 million for the year ended December 31, 2011, compared to $27.1 million for the year ended December 31,2010. The primary reasons for the increase in cash provided by operating activities were a $34.6 million increase in receivables from banks and brokers, a$10.8 million increase in trading securities, an increase of $8.5 in cash and securities held for customers, a $8.8 million increase in payable to customers,brokers, dealers, FCMs and other regulated entities. This is partially offset by a decrease in net income of $21.7 million, an increase in prepaid assets of $7.9million, an increase in depreciation and amortization of $8.1 million and an increase in other assets of $6.3 million. 60Table of ContentsCash used in investing activities was $7.1 million for the year ended December 31, 2011, compared to $12.4 million for the year ended December 31, 2010.The decrease in cash used in investing activities was principally due to the decrease of $6.0 million in payments made for the acquisition of intangible assets.Cash used for financing activities was $17.6 million for the year ended December 31, 2011, compared to $8.9 million for the year ended December 31, 2010.The increase in cash used for financing activities was principally due to dividend payments of $5.0 million and contractual payments for acquired assets of$3.1 million.Capital ExpendituresCapital expenditures were $4.0 million for the year ended December 31, 2011, compared to $3.9 million for the year ended December 31, 2010. Capitalexpenditures for the years ended December 31, 2011 and 2010 were primarily related to the development of our trading platforms and websites.Off-Balance-Sheet ArrangementsAt December 31, 2012 and 2011 we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes.Contractual ObligationsThe following table sets forth our contractual obligations as of December 31, 2012 (amounts in thousands): Total Less than1 Year 1-3Years 3-5Years More than5 Years Purchase Obligations $6,252 $3,057 $2,322 $873 $— Operating Leases 18,638 2,583 3,596 2,957 9,502 Total $24,890 $5,640 $5,918 $3,830 $9,502 Critical Accounting PoliciesOur consolidated financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparationof these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Weevaluate these estimates and assumptions on an ongoing basis. We base our estimates on the information currently available to us and on various otherassumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions orconditions.An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain atthe time the estimate is made; if different estimates reasonably could have been used; or if changes in the estimate that are reasonably likely to occurperiodically could materially impact the financial statements. While our significant accounting policies are described in more detail in the notes to ourconsolidated financial statements included in this annual report, we believe the following accounting policies to be critical to the estimates and assumptionsused in the preparation of our consolidated financial statements. 61Table of ContentsRevenue RecognitionForeign exchange contracts generally involve the exchange of two currencies at market rates on a specified date; spot contracts usually require the exchange ofcurrencies to occur within two business days of the contract date. Customer transactions and related revenue and expenses are recorded on a trade-date basis.Gains or losses are realized when customer transactions are liquidated. Unrealized gains or losses on cash positions revalued at prevailing foreign currencyexchange rates (the difference between contract price and market price) at the date of the balance sheet are included in Receivables from brokers and Payablesto customers, brokers, dealers, FCMs and other regulated entities on the Consolidated Balance Sheet. Changes in net unrealized gains or losses arerecorded in Trading revenue on the Consolidated Statements of Operations and Comprehensive Income.Allowance for Doubtful AccountsWe must make estimates of the uncollectibility of accounts receivable. The allowance for doubtful accounts, which is netted against other assets on ourConsolidated Balance Sheets, totaled approximately $0.1 million at December 31, 2012, December 31, 2011 and December 31, 2010. We record an increase inthe allowance for doubtful accounts when the prospect of collecting a specific account balance becomes doubtful. Management specifically analyzes accountsreceivable and historical bad debt experience when evaluating the adequacy of the allowance for doubtful accounts. Should any of these factors change, theestimates made by management will also change, which could affect the level of our future provision for doubtful accounts.Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtfulaccounts may be required, and such provision may be material.Income TaxesWe account for income taxes in accordance with Financial Accounting Standards Board Accounting Standards Codification, or ASC, 740-10, Income Taxes.Income tax expenses are provided using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporarydifferences between the consolidated financial statements and the income tax basis, using currently enacted tax rates. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in our Consolidated Statements of Operations and Comprehensive Income in the period of enactment. Weroutinely evaluate all deferred tax assets to determine the likelihood of their realization.We use estimates in determining income tax positions under ASC 740-10-25, Income Taxes. Although we believe that our tax estimates are reasonable, theultimate tax determination involves significant judgment and is subject to audit by tax authorities in the ordinary course of business.To the extent we are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materiallyaffected. An unfavorable tax settlement could require use of our cash and result in an increase in our effective income tax rate in the period of resolution.Impairment of Long-Lived AssetsIn accordance with ASC 360-10, Property, Plant and Equipment, we periodically evaluate the carrying value of long-lived assets when events andcircumstances warrant such review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from suchan asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized in the amount by which the carrying value exceeds thefair market value of the long-lived asset.Goodwill and Intangible AssetsASC 350-30, General Intangibles, requires purchased intangible assets other than goodwill to be amortized over their useful lives unless the useful lives aredetermined to be indefinite. If the assets are determined to have a 62Table of Contentsfinite life in the future, we will amortize the carrying value over the remaining useful life at that time. In accordance with ASC 350-30, our URLs(foreignexchange.com and forex.com) are indefinite life intangible assets and are, therefore, not amortized. We compare the recorded value of the indefinite lifeintangible assets to their fair value on an annual basis and whenever circumstances arise that indicate that an impairment may have occurred. In accordancewith ASC 350, we test goodwill for impairment on an annual basis during the fourth quarter and on an interim basis when conditions indicate impairmentmay have occurred. Goodwill impairment is determined by comparing the estimated fair value of the reporting unit with its respective book value. Weperformed its annual test for goodwill impairment in the fourth quarter of 2012 and noted there was no impairment. At periods during 2012, our commonshares traded below book value, as such, we performed additional impairment testing, which did not result in any goodwill impairment. Adverse market oreconomic events could result in impairment charges in future periods.Accrued CompensationWe make estimates in determining our quarterly and annual accrued non-share-based compensation. A significant portion of our employee incentivecompensation programs are discretionary. Each quarter and year-end we determine the amount of discretionary cash bonus pools. We also reviewcompensation throughout the year to determine how overall performance compares to management’s expectations. We take these and other factors, includinghistorical performance and our performance relative to budget, into account in reviewing accrued discretionary cash compensation estimates quarterly andadjusting accrual rates as appropriate. Changes to these factors could cause a material increase or decrease in the amount of compensation expense that wereport in a particular period.Fair Value of Derivative LiabilitiesASC 815-10, Derivatives and Hedging Activities, as amended, establishes accounting and reporting standards for derivative instruments. We determinedthat the redemption feature contained in our preferred stock, which allowed the holders of our preferred stock at any time on or after March 31, 2011, upon thewritten request 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 ofpreferred stock then outstanding, was an embedded derivative required to be bifurcated and accounted for separately.The embedded derivative was recorded at fair value and reported in convertible preferred stock embedded derivative on the Consolidated Balance Sheets withchanges in fair value recorded in our Consolidated Statements of Operations and Comprehensive Income. As a result of the successful completion of our IPO,all shares of the redeemable, convertible preferred stock were converted to common stock, and as of December 31, 2010, we were no longer required to record aliability relating to the embedded derivative.Share Based PaymentsASC 718-10, Compensation – Stock Compensation, requires measurement of share based payment arrangements at fair value and recognition ofcompensation cost over the service period, net of estimated forfeitures. The fair value of restricted stock units is determined based on the number of unitsgranted and the grant date fair value of GAIN Capital Holding, Inc.’s common stock.We measure the fair value of stock options on the date of grant using the Black-Scholes option pricing model which requires the use of several estimates,including: • The volatility of our stock price; • The expected life of the option; • Risk free interest rates; and • Expected dividend yield. 63Table of ContentsThe use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense. Furthermore, ifdifferent assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.The expected volatility was calculated based upon the volatility of public financial services companies, or companies in similar industries. The average riskfree rate is based upon the five year bond rate converted to a continuously compounded interest rate.Treasury SharesIn accordance with ASC 505-30, Equity – Treasury Stock, we treat the cost of acquired shares purchased as a deduction from shareholders’ equity and as areduction of the total shares outstanding when calculating adjusted earnings per share.Recent Accounting PronouncementsIn July 2012, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwilland Other” (“ASU No. 2012-02”). ASU No. 2012-02 is intended to reduce the cost and complexity of performing an impairment test for indefinite-livedintangible assets by permitting an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-livedintangible asset is less than its carrying amount. ASU No. 2012-02 is effective for interim and annual impairment tests performed for fiscal years beginningafter September 15, 2012, with early adoption permitted. The Company does not expect it to have a material impact on our consolidated financial statements.In December 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2011-11 Balance Sheet:Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements mandate that entities disclose both gross and net information aboutinstruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar toa master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements orsimilar arrangements. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Companydoes not expect the adoption of ASU 2011-11 to have a material impact on our consolidated financial statements.In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. This new standard amends theprocedures for testing goodwill for impairment, simplifying how to test goodwill for impairment by permitting an entity to first assess qualitative factors todetermine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary toperform the two-step goodwill impairment test previously required. This new standard is effective for fiscal years and quarters beginning after December 15,2011; however, early adoption is permitted. The adoption of ASU 2011-08 did not have a material impact on our consolidated financial statements.In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. This new standard impacts thepresentation requirements relating to Comprehensive Income. This new standard is effective for fiscal years and quarters beginning after December 15, 2011;however, early adoption is permitted. The adoption of ASU 2011-05 did not have a material impact on our consolidated financial statements.In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and DisclosureRequirements in U.S. GAAP and IFRSs. This new standard amends the wording used to describe many of the requirements in U.S. GAAP for measuringfair value and for disclosing information about fair value measurements. This new standard is effective for fiscal years and quarters beginning afterDecember 15, 2011.The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements. 64Table of ContentsITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKInterest Rate RiskInterest rate risk arises from the possibility that changes in interest rates will impact our consolidated financial statements. Our net interest revenue is directlyaffected by the short-term interest rates we earn from re-investing our cash and our customer’s cash. As a result, a portion of our interest income will decline ifinterest rates fall. Short-term interest rates are highly sensitive to factors that are beyond our control, including general economic conditions and the policies ofvarious governmental and regulatory authorities. Our cash and cash equivalents and customer cash and cash equivalents is held in cash and cash equivalentsincluding cash at banks, deposits at wholesale forex trading partners, in money market funds that invest in short-term U.S. government securities and inUnited States and Canadian Imperial Bank of Commerce treasury bills. The interest rates earned on these deposits and investments affects our interestrevenue. We estimate that as of December 31, 2012, an immediate 100 basis point increase in short-term interest rates would result in approximately$5.0 million more in annual pretax income.Foreign Currency RiskCurrency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of our assets denominated in foreign currencies, aswell as our earnings due to the translation of our balance sheet and income statement from local currencies to United States dollars. We currently have limitedexposure to currency risk and as of December 31, 2012, 80.0% of our assets, 75.4% of our liabilities, 88.2% of our net revenue, and 78.9% of our expenseswere denominated in U.S. dollars. We do not take proprietary directional market positions and therefore do not initiate market positions for our own account inanticipation of future movements in the relative prices of products we offer. However, as a result of our activities, we are likely to have open positions invarious currencies at any given time. For the year ended December 31, 2012, approximately 95.9% 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 athird-party financial institution. Our exposure to foreign currency exchange rates may increase in the future and we may consider entering into hedgingtransactions to mitigate our exposure to foreign currency exchange rates. These hedging transactions may not be successful.Credit RiskOur trading operations require a commitment of our capital and involve risk of loss because of the potential that a customer’s losses may exceed the amount ofcash in their account. As a result, we require that each trade must be collateralized in accordance with our margin policies described below. Each customer isrequired to have minimum funds in their account for opening positions, which we refer to as the initial margin, and for maintaining positions, which we referto as maintenance margin, depending on the product being traded. Margin requirements are expressed as a percentage of the customer’s total position in thatproduct, and the customer’s total margin requirement is based on the aggregate margin requirement across all of the positions that a customer holds at any onemoment in time. Each net position in a particular product is margined separately. Accordingly, we do not net across different positions, thereby following afairly conservative margin policy. Our systems automatically monitor each customer’s margin requirements in real time, and we confirm that each of ourcustomers has sufficient cash collateral in his or her account before we execute their trades. If at any point in time a customer has “negative equity” because hisor her trading position does not comply with the applicable margin requirement, the position may be automatically liquidated, partially or entirely, inaccordance with our margin policies and procedures. This policy protects both us and the customer. The incidence of negative equity in customer accounts hasbeen immaterial to our operations in the three years ended December 31, 2012, which we believe was attributable to our real-time margining and liquidationpolicies and procedures. Our margin and liquidation policies are set forth in our customer agreements.We are also exposed to potential credit risk relating to the counterparties with which we hedge our trades and the financial institutions with which we depositcash. We mitigate these risks by transacting with several of the 65Table of Contentslargest financial institutions in the world. In the event that our access to one or more financial institutions becomes limited, our ability to hedge may beimpaired.Market RiskWe are exposed to market risk in connection with our retail trading activities. Because we act as counterparty to our retail customers’ transactions, we areexposed to risk on each trade that the market price of our position will decline. Accordingly, accurate and efficient management of our net exposure is a highpriority, and as such we have developed both automated and manual policies and procedures to manage our exposure. These risk-management policies andprocedures are established and reviewed regularly by the Risk Committee of our Board of Directors. Our risk-management policies require quantitativeanalyses by currency pair, as well as assessment of a range of market inputs, including trade size, dealing rate, customer margin and market liquidity. Ourrisk-management procedures require our team of senior traders to monitor risk exposure on a continuous basis and update senior management both informallyover the course of the trading day and formally through intraday and end of day reporting. A key component of our approach to managing market risk is thatwe do not initiate market positions for our own account in anticipation of future movements in the relative prices of products we offer. To facilitate our risk-management activities, we maintain levels of capital in excess of those currently required under applicable regulations. As of December 31, 2012, wemaintained capital levels of $101.6 million, which represented approximately 2.2 times the capital we were required to hold under applicable regulations.Cash Liquidity RiskIn normal conditions, our market making business of providing online forex trading and related services is self financing as we generate sufficient cash flowsto pay our expenses as they become due. As a result, we generally do not face the risk that we will be unable to raise cash quickly enough to meet our paymentobligations as they arise. Our cash flows, however, are influenced by customer trading volume, currency volatility and liquidity in foreign currencies pairs inwhich we have positions. These factors are directly impacted by domestic and international market and economic conditions that are beyond our control. In aneffort to manage this risk, we have secured a substantial liquidity pool by establishing trading relationships with nine financial institutions. Theserelationships provide us with sufficient access to liquidity to allow us to consistently execute significant trades in varying market conditions at the notionalamounts our customers desire by providing us with as much as 50:1 leverage on the notional amounts of our available collateral we have on deposit with suchfinancial institutions. We generally maintain collateral on deposit, which includes our funds and our customers’ funds. Collateral on deposit ranged from$92.1 million to $127.4 million in the aggregate, during the year ended December 31, 2012.In addition, our trading operations involve the risk of losses due to the potential failure of our customers to perform their obligations under the transactions weenter into with them, which increases our exposure to cash liquidity risk. To reduce this risk, our margin policy requires that we mark our customers’accounts to market each time the market price of a position in their portfolio changes and provides for automatic liquidation of positions, as described above.Operational RiskOur operations are subject to broad and various risks resulting from technological interruptions, failures or capacity constraints in addition to risks involvinghuman error or misconduct. Regarding technological risks, we are heavily dependent on the capacity and reliability of the computer and communicationssystems supporting our operations. We have established a program to monitor our computer systems, platforms and related technologies and to promptlyaddress issues that arise. We have also established disaster recovery facilities in strategic locations to ensure that we can continue to operate with limitedinterruptions in the event that our primary systems are damaged. As with our technological systems, we have established policies and procedures designed tomonitor and prevent both human errors, such as clerical mistakes or incorrectly placed trades, as well as human misconduct, such as unauthorized trading,fraud or negligence. In addition, we seek to mitigate the impact of any operational issues by maintaining insurance coverage for various contingencies. 66Table of ContentsRegulatory Capital RiskVarious domestic and foreign government bodies and self-regulatory organizations responsible for overseeing our business activities require that we maintainspecified minimum levels of regulatory capital in our operating subsidiaries. If not properly monitored or adjusted, our regulatory capital levels could fallbelow the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to imposing partial orcomplete restrictions on our ability to conduct business. To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our operatingsubsidiaries and adjust the amounts of regulatory capital in each operating subsidiary as necessary to ensure compliance with all regulatory capitalrequirements. These requirements may increase or decrease from time to time as required by regulatory authorities. We also maintain excess regulatory capitalto provide liquidity during periods of unusual or unforeseen market volatility, and we intend to continue to follow this policy. In addition, we monitorregulatory developments regarding capital requirements so that we may be prepared for increases in the required minimum levels of regulatory capital that mayoccur from time to time in the future.Regulatory RiskWe operate in a highly regulated industry and are subject to the risk of sanctions from U.S., federal and state, and international authorities if we fail to complyadequately with regulatory requirements. Failure to comply with applicable regulations could result in financial, operational and other penalties. Our authorityto conduct business could be suspended or revoked. In addition, efforts to comply with applicable regulations may increase our costs or limit our ability topursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which we may engage. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur consolidated financial statements are included in pages F-1 to F-39 of this annual report on Form 10-K. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURES(a) Evaluation of Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reportsunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.Management of the Company, with the participation of its CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures.Based on their evaluation, as of the end of the period covered by this Form 10-K, the Company’s CEO and CFO have concluded that the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective.(b) Management’s Report On Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting isdefined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executiveand principal 67Table of Contentsfinancial officers and is affected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles(“GAAP”) and includes those policies and procedures that: • Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance withGAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors of theCompany; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could havea material effect on the financial statements.Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detectmisstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system containsself-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the criteria described in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment, management, including the Company’s CEO and CFO, concluded that our internal control over financial reporting was effective asof December 31, 2012.Our independent registered public accounting firm has audited and issued a report on the effectiveness of our internal control over financial reporting as ofDecember 31, 2012, which appears below.(c) Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thequarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. TheCompany has strengthened its controls in connection with the changes to its financial reporting reflected in Note 2 of the Consolidated Financial Statements.(d) Report of Independent Registered Accounting FirmTo the Board of Directors and Shareholders ofGAIN Capital Holdings, Inc.Bedminster, New JerseyWe have audited the internal control over financial reporting of GAIN Capital Holdings, Inc. and subsidiaries (the “Company”) as of December 31,2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance 68Table of Contentsabout whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based onthe criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheet of the Company as of December 31, 2012 and the related consolidated statements of operations and comprehensive income, shareholders’ equity, andcash flows for the year then ended and our report dated March 18, 2013 expressed an unqualified opinion on those financial statements./s/ Deloitte & Touche LLPNew York, New YorkMarch 18, 2013 ITEM 9B.OTHER INFORMATIONNone. 69Table of ContentsPART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation required to be included in this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A, which weintend to file within 120 days of the end of our fiscal year.Our Code of Business Conduct and Ethics (the “Code”) applies to all of our employees, directors and officers, including our principal executive officer,principal financial officer and principal accounting officer, or persons performing similar functions. We make the Code available free of charge through ourwebsite which is located at www.gaincapital.com. We intend to disclose any amendments to, or waivers from, the Code that are required to be publiclydisclosed pursuant to rules of the SEC and the New York Stock Exchange in filings with the SEC and by posting such information on our website. ITEM 11.EXECUTIVE COMPENSATIONInformation required to be included in this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A, which weintend to file within 120 days of the end of our fiscal year. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSInformation required to be included in this item is incorporated by reference to our proxy statement to be filed pursuant to Regulation 14A, which we intend tofile within 120 days of the end of our fiscal year. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEInformation required to be included in this item is incorporated by reference to our proxy statement to be filed pursuant to Regulation 14A, which we intend tofile within 120 days of the end of our fiscal year. ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESInformation to be included in this item is incorporated by reference to our proxy statement to be filed pursuant to Regulation 14A, which we intend to filewithin 120 days of the end of our fiscal year. 70Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULESFinancial Statements and Schedules:1. Financial StatementsThe following financial statements and reports of independent registered public accounting firm are included herein: Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2012 and 2011 (revised) F-3 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2012, 2011 and2010 F-4 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 (revised) and 2010(revised) F-6 Notes to Consolidated Financial Statements F-8 2. Financial Statement SchedulesThe following supplemental schedule is filed herewith: Financial Statement Schedule: Schedule I — Condensed Financial Information of GAIN Capital Holdings, Inc. (Parent Company Only)as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31,2012 F-36 Schedules other than those listed above have been omitted because they are not applicable or the required information is included in the financialstatements or notes thereto. 71Table of Contents3. List of Exhibits ExhibitNo. Description 2.1† Asset Purchase Agreement dated as of April 20, 2011 by and among GAIN Capital Group, LLC and Deutsche Bank AG, acting through isLondon Branch (Incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-Q for the quarter ended March 31, 2011, filed on May 16,2011, No. 001-35008). 3.1 Third Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.3 of the Registrant’s Registration Statement onForm S-1, as amended, No. 333-161632). 3.2 Amended and Restated By-laws (Incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-1, as amended,No. 333-161632). 4.1 Specimen Certificate evidencing shares of common stock (Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement onForm S-1, as amended, No. 333-161632). 4.2 Investor Rights Agreement, dated January 11, 2008, by and among the Company, the Investors and the Founding Stockholder, as definedtherein (Incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.1 2010 Omnibus Incentive Compensation Plan (Incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1,as amended, No. 333-161632).**10.2 2011 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1, asamended, No. 333-161632).**10.3 Nonqualified Deferred Compensation Plan (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-K for the year ended December31, 2010, filed on March 30, 2011, No. 001-35008).**10.4 Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1, asamended, No. 333-161632). **10.5 Form of Nonqualified Stock Option Agreement (Incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632). **10.6 Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-1, asamended, No. 333-161632). **10.7 Form of Restricted Stock Unit Agreement (Time Vesting) (Incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement onForm S-1, as amended, No. 333-161632).**10.8 Form of Restricted Stock Unit Agreement (Performance Vesting) (Incorporated by reference to Exhibit 10.8 of the Registrant’s RegistrationStatement on Form S-1, as amended, No. 333-161632).**10.9 Form of Indemnification Agreement with the Company’s Non-Employee Directors (Incorporated by reference to Exhibit 10.10 of the Registrant’sRegistration Statement on Form S-1, as amended, No. 333-161632).**10.10 Amended and Restated 2006 Equity Compensation Plan, effective December 31, 2006 (Incorporated by reference to Exhibit 10.60 of theRegistrant’s Registration Statement on Form S-1, as amended, No. 333-161632).**10.11 Amendment No. 2007-1 to the GAIN Capital Holdings, Inc. 2006 Equity Compensation Plan (Incorporated by reference to Exhibit 10.61 of theRegistrant’s Registration Statement on Form S-1, as amended, No. 333-161632).**10.12 Amendment No. 2008-1 to the GAIN Capital Holdings, Inc. 2006 Equity Compensation Plan (Incorporated by reference to Exhibit 10.62 of theRegistrant’s Registration Statement on Form S-1, as amended, No. 333-161632).** 72Table of ContentsExhibitNo. Description10.13 Amendment No. 2010-1 to the GAIN Capital Holdings, Inc. 2006 Equity Compensation Plan (Incorporated by reference to Exhibit 10.63 of theRegistrant’s Registration Statement on Form S-1, as amended, No. 333-161632).**10.14 Unconditional Guaranty, dated as of March 29, 2006, by and among GAIN Holdings, LLC, Silicon Valley Bank and JPMorgan ChaseBank, N.A. (Incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.15 Separation Agreement, dated as of January 11, 2008, by and between Mark Galant and GAIN Capital Holdings, Inc. (Incorporated byreference to Exhibit 10.23 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.16† FX Prime Brokerage Master Agreement, dated as of December 6, 2006, by and between GAIN Capital Group, LLC and The Royal Bank ofScotland, plc. (Incorporated by reference to Exhibit 10.24 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.17† FX Prime Brokerage Agreement, dated as of July 8, 2005, by and between UBS AG and GAIN Capital, Inc. (Incorporated by reference toExhibit 10.25 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.18† Foreign Exchange Prime Brokerage Agency Agreement, dated as of July 12, 2006, by and between GAIN Capital Group, LLC and The RoyalBank of Scotland, plc. (Incorporated by reference to Exhibit 10.26 of the Registrant’s Registration Statement on Form S-1, as amended, No.333-161632).10.19† Foreign Exchange Prime Brokerage Agreement, dated October 18, 2005, by and between Deutsche Bank AG, London Branch and GCAM,LLC (Incorporated by reference to Exhibit 10.27 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.20 Amendment to Foreign Exchange Prime Brokerage Agreement, dated January 26, 2006, by and between Deutsche Bank AG, London Branchand GCAM, LLC (Incorporated by reference to Exhibit 10.28 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.21 Form of ISDA Master Agreement, 1992 edition (Incorporated by reference to Exhibit 10.29 of the Registrant’s Registration Statement on FormS-1, as amended, No. 333-161632).10.22 Form of Introducing Broker Agreement (Incorporated by reference to Exhibit 10.30 of the Registrant’s Registration Statement on Form S-1, asamended, No. 333-161632).10.23 Form of Agreement for White Label Services (Incorporated by reference to Exhibit 10.31 of the Registrant’s Registration Statement on Form S-1,as amended, No. 333-161632).10.24 Lease and Lease Agreement, dated August 18, 2009, by and between S/K Bed One Associates LLC and GAIN Capital Holdings, Inc.(Incorporated by reference to Exhibit 10.37 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.25† License Agreement, dated August 9, 2007, by and between GAIN Capital Group, LLC and MetaQuotes Software Corp. (Incorporated byreference to Exhibit 10.43 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.26† Agreement, dated November 22, 2004, by and between esignal, a division of Interactive Data Corporation, and GAIN Capital, Inc.(Incorporated by reference to Exhibit 10.44 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).10.27 Form of ISDA Master Agreement, 2002 edition (Incorporated by reference to Exhibit 10.49 of the Registrant’s Registration Statement on FormS-1, as amended, No. 333-161632). 73Table of ContentsExhibitNo. Description10.28 Executive Employment Agreement, dated April 14, 2012, by and between GAIN Capital Holdings, Inc. and Glenn Stevens (Incorporated byreference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 10, 2012, No.001-35008).**10.29 Executive Employment Agreement, dated April 14, 2012, by and between GAIN Capital Holdings, Inc. and Timothy O’ Sullivan (Incorporatedby reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 10, 2012,No. 001-35008).**10.30 Executive Employment Agreement, dated April 14, 2012, by and between GAIN Capital Holdings, Inc. and Jeffrey A. Scott (Incorporated byreference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 10, 2012, No.001-35008).**10.31 Executive Employment Agreement, dated April 14, 2012, by and between GAIN Capital Holdings, Inc. and Diego Rotsztain (Incorporated byreference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 10, 2012, No.001-35008).**10.32 Executive Employment Agreement, dated as of November 23, 2010, by and between GAIN Capital Holdings, Inc. and Samantha Roady(Incorporated by reference to Exhibit 10.56 of the Registrant’s Registration Statement on Form S-1, as amended, No. 333-161632).**10.33 Letter Agreement, dated November 10, 2009, by and between GAIN Capital Holdings, Inc. and Daryl Carlough.**10.34 Asset Purchase Agreement, dated as of October 5, 2010, by and among GAIN Capital Group, LLC, GAIN Capital-Forex.com U.K., andGAIN Capital Forex.com Japan, Co. Ltd., and Capital Market Services, LLC, Capital Market Services UK Ltd., Capital Market ServicesInternational — BM, Ltd., and CMS Japan K.K. (Incorporated by reference to Exhibit 10.64 of the Registrant’s Registration Statement on FormS-1, as amended, No. 333-161632).10.35 Amendment No. 1 to Asset Purchase Agreement, dated as of November 23, 2010, by and among GAIN Capital Group, LLC, GAIN Capital-Forex.com U.K., and GAIN Capital Forex.com Japan, Co. Ltd., and Capital Market Services, LLC, Capital Market Services UK Ltd.,Capital Market Services International — BM, Ltd., and CMS Japan K.K. (Incorporated by reference to Exhibit 10.65 of the Registrant’sRegistration Statement on Form S-1, as amended, No. 333-161632).10.36 Amended and Restated Loan and Security Agreement, dated as of September 16, 2011, by and among the Company, Silicon Valley Bank, ascollateral agent for the lenders listed on Schedule 1.1 of the Agreement and as administrative agent for the Lenders, including, without limitation,SVB and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 of the Registrant’s 8-K report filed on September 22, 2011,No. 001-35008).10.37 First Amendment to Unconditional Guaranty, dated as of September 16, 2011, by and among Gain Holdings, LLC, the Company, SiliconValley Bank and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.3 of the Registrant’s 8-K report filed on September 22,2011, No. 001-35008).10.38 Stock Purchase Agreement between optionsXpress Holdings, Inc. and GAIN Capital Group, LLC dated as of June 27, 2012 (Incorporated byreference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed August 9, 2012, No. 001-35008). 21.1 Subsidiaries of the Registrant.* 23.1 Consent of Deloitte & Touche LLP.* 74Table of ContentsExhibitNo. Description 31.1 Certification of Chief Executive Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.* 31.2 Certification of Chief Financial Officer pursuant to rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.* 32.1 Certification of Chief Executive Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification of Chief Financial Officer as required by section 906 of the Sarbanes-Oxley Act of 2002.*101.INS+ XBRL Instance101.SCH+ XBRL Taxonomy Extension Schema101.CAL+ XBRL Taxonomy Extension Calculation101.DEF+ XBRL Taxonomy Extension Definition101.LAB+ XBRL Taxonomy Extension Labels101.PRE+ XBRL Taxonomy Extension Presentation *Filed herewith.**Compensation related contract. †Confidential treatment requested. Confidential materials omitted and filed separately with the Securities and Exchange Commission. +XBRL (Extensible Business Reporting Language) information is furnished and not filed, and is not a part of a registration statement or prospectus forpurposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Actof 1934, as amended, and otherwise is not subject to liability under these sections. 75Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized on the 18th day of March, 2013. GAIN CAPITAL HOLDINGS, INC.By: /s/ Glenn H. Stevens Glenn H. StevensPresident and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant andin the capacities indicated. Signature Title Date/s/ Glenn H. StevensGlenn H. Stevens President and Chief Executive Officer (PrincipalExecutive Officer) March 18, 2013/s/ Daryl J. CarloughDaryl J. Carlough Interim Chief Financial Officer, Treasurer, ChiefAccounting Officer and Corporate Controller(Principal Financial and Accounting Officer) March 18, 2013/s/ Peter QuickPeter Quick Chairman of the Board of Directors March 18, 2013/s/ Susanne D. LyonsSusanne D. Lyons Director March 18, 2013/s/ Joseph A. SchenkJoseph A. Schenk Director March 18, 2013/s/ Thomas BevilacquaThomas Bevilacqua Director March 18, 2013/s/ Mark E. GalantMark E. Galant Director March 18, 2013/s/ Christopher W. CalhounChristopher W. Calhoun Director March 18, 2013/s/ Christopher S. SugdenChristopher S. Sugden Director March 18, 2013 76Table of ContentsINDEX TOCONSOLIDATED FINANCIAL STATEMENTS ANDFINANCIAL STATEMENT SCHEDULE Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2012 and 2011 (revised) F-3 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010 F-4 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 (revised) and 2010 (revised) F-6 Notes to Consolidated Financial Statements F-8 Financial Statement Schedule: Schedule I — Condensed Financial Information of GAIN Capital Holdings, Inc. (Parent Company Only) as of December 31, 2012 and 2011 andfor each of the three years in the period ended December 31, 2012 F-36 F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofGAIN Capital Holdings, Inc.Bedminster, New JerseyWe have audited the accompanying consolidated balance sheets of GAIN Capital Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2012and 2011, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financialstatements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on theconsolidated financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of GAIN Capital Holdings, Inc. andsubsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.As discussed in Note 2, the accompanying 2011 consolidated balance sheet, and 2011 and 2010 consolidated statements of cash flows have been revised tocorrect a misstatement.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 18, 2013 expressed an unqualified opinion on the Company’s internalcontrol over financial reporting./s/ Deloitte & Touche LLPNew York, New YorkMarch 18, 2013 F-2Table of ContentsGAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands except share data) As of December 31, 2012 Revised(See Note 2)2011 ASSETS: Cash and cash equivalents $36,820 $60,221 Cash and securities held for customers 446,311 310,447 Short term investments at fair value 1,437 82 Receivables from banks and brokers ($810 at fair value) 89,916 85,401 Property and equipment, net of accumulated depreciation 11,023 7,531 Prepaid assets 7,704 9,899 Goodwill 9,030 3,092 Intangible assets, net 9,868 10,771 Other assets 17,804 18,137 Total assets $629,913 $505,581 LIABILITIES AND SHAREHOLDERS’ EQUITY: Liabilities Payables to customers, brokers, dealers, FCMs and other regulated entities $446,311 $310,447 Accrued compensation and benefits 6,055 4,966 Accrued expenses and other liabilities 12,585 14,885 Income tax payable 1,275 2,578 Notes payable — 7,875 Total liabilities 466,226 340,751 GAIN Capital Holdings, Inc. Shareholders’ Equity Common Stock; ($0.00001 par value; 60 million shares authorized; 36,486,036 shares issued and 34,924,095 sharesoutstanding as of December 31, 2012 and 35,132,365 shares issued and 34,282,244 shares outstanding as ofDecember 31, 2011) — — Accumulated other comprehensive income 1,249 316 Additional paid-in capital 85,089 79,551 Treasury stock, at cost (1,561,941 shares at December 31, 2012 and 850,121 shares at December 31, 2011) (8,280) (5,017) Retained earnings 85,629 89,980 Total GAIN Capital Holdings, Inc. shareholders’ equity 163,687 164,830 Total liabilities and shareholders’ equity $629,913 $505,581 See Notes to Consolidated Financial Statements F-3Table of ContentsGAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(in thousands except share and per share data) For the Fiscal Year Ended December 31, 2012 2011 2010 REVENUE: Trading revenue $127,520 $175,854 $187,356 Commission revenue 21,373 4,691 2,227 Other revenue 2,331 1,790 1,190 Total non-interest revenue 151,224 182,335 190,773 Interest revenue 627 544 364 Interest expense (491) (1,414) (2,039) Total net interest revenue / (expense) 136 (870) (1,675) Net revenue 151,360 181,465 189,098 EXPENSES: Employee compensation and benefits 47,469 46,362 45,439 Selling and marketing 26,969 36,195 37,721 Trading expenses and commissions 38,047 33,040 25,658 General and administrative 19,950 21,842 15,826 Depreciation and amortization 4,921 3,898 3,439 Purchased intangible amortization 4,134 8,893 1,208 Communications and technology 7,736 7,139 6,449 Bad debt provision 358 852 597 Restructuring 634 — — Change in fair value of convertible, redeemable preferred stock embedded derivative — — (4,691) Total 150,218 158,221 131,646 INCOME BEFORE INCOME TAX EXPENSE 1,142 23,244 57,452 Income tax (benefit) / expense (1,479) 7,546 20,009 NET INCOME 2,621 15,698 37,443 Net loss applicable to noncontrolling interest — — (402) NET INCOME APPLICABLE TO GAIN CAPITAL HOLDINGS, INC. 2,621 15,698 37,845 Other comprehensive income / (expense), net of tax: Foreign currency translation adjustment 933 (112) 112 NET COMPREHENSIVE INCOME APPLICABLE TO GAIN CAPITALHOLDINGS, INC. $3,554 $15,586 $37,957 Earnings per common share: Basic $0.08 $0.46 $8.62 Diluted $0.07 $0.40 $1.00 Weighted average common shares outstanding used in computing earnings per commonshare: Basic 34,940,800 34,286,840 4,392,798 Diluted 37,880,208 38,981,792 37,742,902 (1)In connection with the completion of the Company’s initial public offering in December 2010 (the “IPO”), the Company’s board of directors approved a2.29-for-1 stock split of the Company’s common stock to be effective immediately prior to the completion of the IPO. The 2.29-for-1 stock split, aftergiving effect to the receipt by the Company of 407,692 shares of common stock from all of the Company’s pre-IPO common stockholders (on a pro-ratabasis) in satisfaction of previously outstanding obligations owed by such stockholders to the Company, resulted in an effective stock split of 2.26-for-1. Accordingly, all references to share and per share data have been retroactively restated for the year ended December 31, 2010 to reflect the effective2.26-for-1 stock split.See Notes to Consolidated Financial Statements F-4(1)(1)Table of ContentsGAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(in thousands, except share and per share data) Common Stock TreasuryStock AdditionalPaid inCapital AccumulatedRetainedEarnings AccumulatedOtherComprehensiveIncome NoncontrollingInterest Total Shares Amount BALANCE — December 31, 2009 2,966,034 $— $— $(178,409) $38,195 $348 $(24) $(139,890) Exercise of options 75,448 — — 107 — — — 107 Conversion of restricted stock units into common stock 67,988 — — — — — — — Conversion of preferred stock 27,757,770 — — 169,390 — — — 169,390 Settlement of preferred stock embedded derivative — — — 76,407 — — — 76,407 Net proceeds from initial public offering after underwriting discounts,commissions, and expenses 407,692 — — 208 — — — 208 Series E indemnification (100,281) — — 835 — — — 835 Stock compensation expense — — — 5,457 — — — 5,457 Foreign currency translation adjustment — — — — — 80 32 112 Increase in noncontrolling interest related to acquisition of subsidiary — — — (614) — — 394 (220) Net income — — — — 37,845 — (402) 37,443 BALANCE — December 31, 2010 31,174,651 $— $— $73,381 $76,040 $428 $— $149,849 Exercise of options 452,881 — — 853 — — — 853 Exercise of warrants 3,261,575 — — 1,270 — — — 1,270 Conversion of restricted stock units into common stock 214,800 — — — — — — — Shares issued under employee stock purchase plan 28,458 — — 165 — — — 165 Repurchase of shares (850,121) — (5,017) — — — — (5,017) Stock compensation expense — — — 4,018 — — — 4,018 Tax benefit of stock option exercises — — — (136) — — — (136) Dividend payment ($0.05 dividend per share in the fourth quarter of 2011) — — — — (1,758) — — (1,758) Foreign currency translation adjustment — — — — — (112) — (112) Net income — — — — 15,698 — — 15,698 BALANCE — December 31, 2011 34,282,244 $— $(5,017) $79,551 $89,980 $316 $— $164,830 Exercise of options 1,032,096 — — 1,969 — — — 1,969 Conversion of restricted stock units into common stock 276,387 — — — — — — — Shares issued under employee stock purchase plan 45,188 — — 216 — — — 216 Repurchase of shares (711,820) — (3,263) — — — — (3,263) Stock compensation expense — — — 3,325 — — — 3,325 Tax benefit of stock option exercises — — — 28 — — — 28 Dividend payment ($0.05 dividend per share for each respective quarter in2012) — — — — (6,972) — — (6,972) Foreign currency translation adjustment — — — — — 933 — 933 Net income — — — — 2,621 — — 2,621 BALANCE — December 31, 2012 34,924,095 $— $(8,280) $85,089 $85,629 $1,249 $— $163,687 See Notes to Consolidated Financial Statements F-5Table of ContentsGAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) For the Fiscal Year EndedDecember 31, 2012 Revised(See Note 2)2011 Revised(See Note 2)2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,621 $15,698 $37,443 Adjustments to reconcile net income to cash provided by operating activities (Gain)/loss on foreign currency exchange rates 1,315 (145) 239 Depreciation and amortization 9,055 12,791 4,647 Deferred taxes (1,013) (2,107) (1,227) Net interest income — 60 (46) Amortization of deferred financing costs 51 87 87 Bad debt provision 358 852 597 Loss on disposal of fixed assets 33 3 37 Stock compensation expense 3,325 4,018 5,457 Change in fair value of preferred stock embedded derivative — — (4,691) Changes in operating assets and liabilities: Cash and securities held for customers (31,285) (53,617) (62,156) Trading securities — 19,993 9,226 Receivables from banks and brokers (5,333) 12,734 (21,826) Prepaid assets 2,372 39 (7,894) Other assets 1,065 (5,428) 831 Accrued compensation and benefits 1,047 (151) 1,077 Payables to customers, brokers, dealers, FCMs and other regulated entities 31,285 52,765 61,599 Accrued expenses and other liabilities (1,444) 1,976 1,198 Income tax payable (1,303) 28 2,550 Cash provided by operating activities 12,149 59,596 27,148 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (8,358) (4,018) (3,873) Purchase of treasury bills (1,355) Business acquisition, net of cash acquired (9,504) — — Purchase of intangible assets — (2,547) (8,548) Purchase of cost method investment — (500) — Cash used for investing activities (19,217) (7,065) (12,421) CASH FLOWS FROM FINANCING ACTIVITIES: Contractual payments for acquired assets (2,030) (3,050) — Proceeds from initial public offering of common stock, net of underwriting discounts and other directcosts of $3.8 million — — 208 Deferred initial public offering costs — — 1,732 Principal payment on notes payable (7,875) (10,500) (10,500) Proceeds from exercise of stock options 1,969 853 107 Proceeds from exercise of warrants — 1,270 — Proceeds from ESPP purchase 216 165 — Purchase of treasury stock (3,263) (5,017) — Tax benefit from employee stock option exercises (28) 421 — Dividend payments (6,972) (1,758) — Purchase of subsidiary shares from noncontrolling interest — — (427) Cash used for financing activities (17,983) (17,616) (8,880) F-6Table of Contents For the Fiscal Year EndedDecember 31, 2012 Revised(See Note 2)2011 Revised(See Note 2)2010 Effect of exchange rate changes on cash and cash equivalents $1,650 $(2,229) $(1,081) (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (23,401) 32,686 4,766 CASH AND CASH EQUIVALENTS — Beginning of year 60,221 27,535 22,769 CASH AND CASH EQUIVALENTS — End of year $36,820 $60,221 $27,535 SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $230 $1,037 $1,799 Taxes, net of refunds $(260) $14,090 $15,674 Non-cash investing activities: Purchase of fixed assets in accrued expense and other liabilities $95 $121 $54 Non-cash financing activities: Accrued initial public offering costs $— $— $1,305 Series E indemnification $— $— $835 Settlement of Preferred Stock embedded derivative $— $— $76,407 Settlement of Convertible, Redeemable preferred stock $— $— $169,390 See Notes to Consolidated Financial Statements F-7Table of ContentsGAIN CAPITAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Nature of Operations and Significant Accounting PoliciesNature of OperationsGAIN Capital Holdings, Inc., together with its subsidiaries (the “Company”) is a Delaware corporation formed and incorporated on March 24, 2006. GAINHoldings, LLC is a wholly-owned subsidiary of GAIN Capital Holdings, Inc., and owns all outstanding membership units in GAIN Capital Group, LLC(“Group, LLC”), the primary regulated entity in the United States of America.Group, LLC is a retail foreign exchange dealer (“RFED”) and a registered Futures Commission Merchant (“FCM”) with the Commodity Futures TradingCommission (“CFTC”). As such, it is subject to the regulations of the CFTC, an agency of the U.S. Government, and the rules of the National FuturesAssociation (“NFA”), an industry self-regulatory organization.The following list includes each of the Company’s significant U.S. and international regulated subsidiaries:GAIN Capital Group, LLC.GAIN Capital-Forex.com U.K., Ltd.Forex.com Japan Co., Ltd.GAIN Capital Forex.com Australia Pty. Ltd.GAIN Capital-Forex.com Hong Kong Ltd.GAIN Capital-Forex.com Canada, Ltd.GAIN GTX, LLCGCAM, LLCDuring 2012, the Company purchased all of the outstanding shares of capital stock of Paragon Futures Group, Inc., a Delaware corporation. Paragon owns allof the membership interests of Open E Cry, LLC (together “OEC”), an internet based futures business which is subject to the regulations of the CFTC. InNovember 2012, OEC was merged into Group, LLC.In addition, in 2011, as part of the development of its international corporate holding structure, the Company added the following entities:GAIN Capital Holdings International, BVGAIN Capital Holdings International Finance Company, BVGAIN Capital GTX International, BVGAIN Capital-Forex.com International, BVInitial Public OfferingOn December 20, 2010 the Company closed its initial public offering of common stock (“IPO”) of 9,000,000 shares of common stock at an offering price of$9.00 per share, of which 407,692 shares were sold by the Company and 8,592,308 shares were sold by selling stockholders, resulting in net proceeds tothe Company of $4.0 million, after deducting underwriting discounts (which included a $0.6 million reimbursement by the underwriters for the Company’sout-of-pocket expenses incurred during the offering). Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock wereautomatically converted into 27,757,770 shares of common stock, in accordance with the Company’s Second Amended and Restated Certificate ofIncorporation.Costs directly associated with the Company’s IPO of $3.8 million were capitalized and recorded as deferred initial public offering costs prior to the closing ofthe IPO. Once the IPO was closed, these costs were recorded as a reduction of the net proceeds received. F-8Table of Contents2. Summary of Significant Accounting PoliciesBasis of AccountingThe Company and its subsidiaries’ consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UnitedStates of America (“generally accepted accounting principles”).In 2010 and 2011, the Company presented certain revenue related to its institutional business and its securities business in “Other revenue” on theConsolidated Statement of Operations and Comprehensive Income. However, due to the expansion of the Company’s institutional business in recent periods,and the addition of our exchange based business, OEC, the Company has reclassified revenue from these businesses from “Other Revenue” to “CommissionRevenue” in the Statement of Operations and Comprehensive Income presented herein. The change in presentation had no effect on the total non-interestrevenue or total net revenue.Previously, the Company presented separately certain administrative expense related items. In an effort to align the presentation of expenses with competitors inthe industry in order to enable easier comparisons, the Company has consolidated certain captions. The Company has presented amounts previouslypresented in “Bank fees”, “Occupancy and equipment”, “Professional fees” and “Other” under the new caption of “General and administrative”.Additionally, the Company has presented amounts previously presented in “Communications and data processing” and “Product development, softwareand maintenance” under the new caption “Communications and technology”. The change in presentation had no effect on the total expenses.Previously the Company presented all of its cash and cash equivalents in “Cash and cash equivalents” on the Consolidated Balance Sheet. However, in aneffort to improve clarity of presentation and reflect the separation between the cash on hand which correlates to amounts held on behalf of customers and freecash, the Company has separated all cash and cash equivalents into “Cash and cash equivalents” and “Cash and securities held for customers”. Cashand securities held for customers represents cash held to fund customer liabilities in connection with funds deposited by customers and funds accruing tocustomers as a result of trades or contracts. Cash and cash equivalents represents all cash and highly liquid investments with an original maturity of 90days or less at the time of acquisition, less amounts in Cash and securities held for customers.The table below reflects the impact on the Consolidated Balance Sheet of the changes in the presentation of cash and cash equivalents described above: As of December 31, Revised2011 As reported2011 Cash and cash equivalents $60,221 $370,668 Cash and securities held for customers 310,447 — In connection with the preparation of this Annual Report on Form 10-K, the Company determined that it was not appropriate to include amounts included onthe Consolidated Balance Sheet under Cash and securities held for customers in Cash and cash equivalents — beginning of period and Cash and cashequivalents — end of period on the Consolidated Statements of Cash Flows. Instead it was determined that amounts included in Cash and cash equivalents— beginning of period and Cash and cash equivalents — end of period on the Consolidated Statements of Cash Flows should reflect only amountsincluded in the Consolidated Balance Sheet under Cash and cash equivalents, as adjusted by changes in Cash and securities held for customers reflectedin the Consolidated Statements of Cash Flows during the period.In April 2011, the Company acquired customer account balances and effective customer agreements from Deutsche Bank AG, relating to Deutsche Bank’s“dbFX” business, for an upfront payment and additional contractual future payments to be made to Deutsche Bank based upon volume generated from theacquired customers over a two-year period following the closing of the acquisition. Previously, the Company included these contractual future paymentamounts in Cash provided by operating activities on the Consolidated Statements of Cash Flows. The Company has determined that these amounts shouldbe reflected in Cash used for financing activities as they are in nature a form of borrowing. F-9Table of ContentsThe table below reflects the impact on the Consolidated Statements of Cash Flows of the changes above: For the Fiscal Year EndedDecember 31, Revised2011 As reported2011 Revised2010 As reported2010 Changes in operating assets and liabilities: Cash and securities held for customers $(53,617) $— $(62,156) $— Accrued expenses and other liabilities 1,976 (1,074) 1,198 1,198 Cash provided by operating activities 59,596 110,163 27,148 89,304 Cash flows from financing activities: Contractual payments for acquired assets (3,050) — — — Cash used for financing activities (17,616) (14,566) (8,880) (8,880) Effect of exchange rate changes on cash and cash equivalents (2,229) (2,074) (1,081) (6,317) INCREASE IN CASH AND CASH EQUIVALENTS 32,686 86,458 4,766 61,686 CASH AND CASH EQUIVALENTS — Beginning of year 27,535 284,210 22,769 222,524 CASH AND CASH EQUIVALENTS — End of year $60,221 $370,668 $27,535 $284,210 Stock SplitOn November 23, 2010, the Company’s board of directors approved a 2.29-for-1 stock split of the Company’s common stock effective immediately prior tothe completion of the IPO as well as the settlement of the primary share offering which was allocated to all common shareholders on a pro-rata basis resultingin an effective stock split of 2.26-for-1. All references to common shares, preferred shares, additional paid-in capital, retained earnings, share and per sharedata for prior periods have been retroactively restated to reflect the stock split as if it had occurred at the beginning of the earliest period presented.ConsolidationThe Company applies Accounting Standards Codification (“ASC”) 810-10, Consolidation, in its principles of consolidation. The consolidated financialstatements include the accounts of the Company and its wholly-owned subsidiaries. The Consolidated Statements of Operations and Comprehensive Incomerecords the ownership interest of minority investors as a noncontrolling interest. All intercompany transactions and balances are eliminated in consolidation.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. In presenting the consolidated financial statements, management makes estimates regarding: • Valuation of assets and liabilities requiring fair value estimates; • The allowance for doubtful accounts; • The realization of deferred taxes; • The carrying amount of goodwill and other intangible assets; F-10Table of Contents • The amortization period of intangible assets with finite lives; • Incentive based compensation accruals and valuation of share-based payment arrangements; and • Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements.Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have amaterial impact on the consolidated financial statements, and it is possible that such changes could occur in the near term.Revenue RecognitionRevenue is recognized in accordance with ASC 605-10-S99, Revenue Recognition. The Company generates revenue from forex trading, futures trading andContracts-for-difference (“CFDs”) in markets which do not prohibit such transactions. The Company categorizes revenue as Trading revenue, Commissionrevenue, Other revenue and Interest revenue.Trading revenue is generated from the bid/offer spread the Company offers its customers and any net gains and losses generated through changes in themarket value of the currencies held in the Company’s net exposure.Commission revenue consists of institutional and exchanged based revenues that are primarily generated from commissions.Foreign exchange contracts generally involve the exchange of two currencies at market rates on a specified date; spot contracts usually require the exchange ofcurrencies to occur within two business days of the contract date. Customer transactions and related revenue and expenses are recorded on a trade date basis.Gains or losses are realized when customer transactions are liquidated. Unrealized gains or losses on cash positions revalued at prevailing foreign currencyexchange rates (the difference between contract price and market price) at the date of the balance sheet are included in Receivables from banks and brokers,Payables to customers, brokers, dealers, FCMs and other regulated entities on the Consolidated Balance Sheets. Changes in net unrealized gains or lossesare recorded in Trading revenue on the Consolidated Statements of Operations and Comprehensive Income.Other revenue, on the Consolidated Statements of Operations and Comprehensive Income, is comprised of account management, transaction andperformance fees related to customers who have assigned trading authority to the Company’s subsidiary Gain Capital Asset Management, (“GCAM”);inactivity and training fees charged to customer accounts; foreign currency transaction gains and losses and other miscellaneous items.Interest revenue and interest expense are recorded when earned and incurred, respectively. Net interest revenue (expense) consists primarily of the revenuegenerated by Company cash and customer cash held and invested at banks, money market funds, in U.S. treasury bills, in Canadian Imperial Bank ofCommerce (“CIBC”) treasury bills and on deposit as collateral with the Company’s wholesale forex trading partners, less interest paid to customers on theirbalances, interest expense on our term loan and revolver and interest expense on the amounts payable to dbFX per the terms of the asset acquisition.AdvertisingAdvertising costs are incurred for the production and communication of advertising, as well as other marketing activities. The Company expenses the cost ofadvertising as incurred, except for costs related to the production of broadcast advertising, which are expensed when the first broadcast occurs. The Companydid not capitalize any F-11Table of Contentsproduction costs associated with broadcast advertising for 2012, 2011, or 2010. The total amount charged to advertising expense was $27.0 million, $36.2million and $37.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.Introducing broker feesIntroducing brokers direct customers to the Company in return for a commission on each referred customer’s trading volume or a share of net revenuegenerated by each referred customer’s trading activity. Such fees are referred to as introducing broker fees and are recorded in Trading expenses andcommissions in the Consolidated Statements of Operations and Comprehensive Income.Share Based PaymentsIn accordance with ASC 718, Stock Compensation, the Company recognizes all share-based payments to employees, including grants of employee stockoptions, in the Statements of Operations and Comprehensive Income based on their fair values.ASC 718-10 requires measurement of share based payment arrangements at fair value and recognition of compensation cost over the service period, net ofestimated forfeitures. The fair value of restricted stock units and restricted stock awards is determined based on the number of units granted and the grant datefair value of GAIN Capital Holding, Inc.’s common stock.See Note 15 for additional share based payment disclosure.RestructuringThe Company incurred restructuring expenses in 2012, which reflected the costs arising from headcount reductions implemented in the first half of 2012.Convertible, Redeemable Preferred Stock Embedded DerivativeASC 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative instruments. The Company has determined that it mustbifurcate and account for the conversion feature in its Series A, Series B, Series C, Series D, and Series E preferred stock for periods prior to 2011. Theembedded derivative is recorded at fair value and changes in the fair value are reflected in earnings for periods prior to 2011. The conversion feature and theassociated embedded derivative liability is no longer required to be recognized for 2011 and future periods due to the conversion of all outstanding preferredstock to common stock in connection with the IPO in December 2010.Foreign CurrenciesThe Company has determined that its functional currency is U.S. dollars (“USD”).In accordance with ASC 830-10, Foreign Currency Matters, monetary assets and liabilities denominated in foreign currencies are converted into USD atrates of exchange in effect at the date of the Consolidated Balance Sheets. The Company recorded foreign currency transaction gains and losses in Otherrevenue on the Consolidated Statements of Operations and Comprehensive Income. The Company recorded a loss of $1.3 million for the year endedDecember 31, 2012, a gain of $0.2 million for the year ended December 31, 2011 and a loss of $0.2 million for the year ended December 31, 2010.Income TaxesIncome tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon thetemporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. F-12Table of ContentsCash and Cash EquivalentsThe Company considers all highly liquid investments with an original maturity of 90 days or less at the time of acquisition to be cash equivalents. AtDecember 31, 2012 and 2011, the Company’s cash and cash equivalents consisted of money market accounts and U.S. Treasury Bills with a maturity of90 days or less. Cash equivalents are recorded at fair value.Cash and securities held for customersCash and securities held for customers represents cash held to fund customer liabilities. The balance arises primarily from cash deposited by customersand customer margin balances. The Company records a corresponding liability in Payables to customers, brokers, dealers, FCMs and other regulatedentities in the Consolidated Balance Sheets. A portion of the balance is not available for general use due to legal restrictions in accordance with certainjurisdictional regulatory requirements.Short Term InvestmentsThe Company considers all investments with an original maturity of less than one year short term investments. Short term investments consist of short-termcertificates of deposit and CIBC treasury bills. All income from the certificates of deposit and treasury bills is recorded as interest income when earned.Cost Method InvestmentIn accordance with ASC 325-20, Cost Method Investments, the Company recognizes an investment in the stock of an investee as an asset, in Other assets,on the Consolidated Balance Sheets. Under the cost method of accounting for investments in common stock, dividends are the basis for recognition by theCompany of earnings from the investment. The net accumulated earnings of an investee subsequent to the date of investment are recognized by the Companyonly to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a returnof investment and are recorded as reductions of cost of the investment.Fair ValueThe Company records certain financial assets and liabilities at fair value; certain other financial assets and liabilities are not measured at fair value on arecurring basis but nevertheless are recorded at amounts that approximate fair value due to the short term maturities. These include: cash, receivables frombanks and brokers, and payables to customers, brokers, dealers, FCMs and other regulated entities. The fair value spot foreign exchange positions aredetermined based on the estimated amounts that such positions could be settled at the Company’s exit price with the counterparty at the balance sheet date.DerivativesCFDs allow for the exchange of the difference in value of a particular asset such as stock index or oil or gold contracts, between the time at which a contract isopened and the time at which it is closed. The customer CFD derivative contracts are accounted for at fair value in accordance with FASB ASC 815,Derivatives and Hedging and are included in Payables to customers, brokers, dealers, FCMs and other regulated entities in the consolidated balancesheets.Concentrations of Credit RiskThe Company credit risk primarily relates to receivables from banks and brokers. As of each of December 31, 2012 and 2011, 37.2% and 52%, respectively,of the Company’s Receivables from banks and brokers balance, included in the Consolidated Balance Sheet, was from one large, global financial institution. F-13Table of ContentsThe Company has additional credit risk from cash equivalents and securities held for customers. This credit risk is managed by investing cash and cashequivalents and cash and securities held for customers primarily in high-quality money market and U.S. and Canadian Government instruments. Themajority of the Company’s cash and cash equivalents and cash and securities held for customers are held at ten financial institutions.Prepaid AssetsThe Company records goods and services paid for but not to be received until a future date as prepaid assets. These include payments for advertising,insurance and software licensing.Receivables from Banks and BrokersThe Company has posted funds with brokers as collateral as required by agreements for holding spot foreign exchange positions. In addition, the Companyhas cash in excess of required collateral. These amounts are reflected as Receivables from banks and brokers on the Consolidated Balance Sheet and includegains or losses realized on liquidated contracts, as well as unrealized gains or losses on open positions. The balance also reflects unrealized gains or lossesarising from open positions in the Company’s accounts.Property and EquipmentProperty and equipment are recorded at cost, net of accumulated depreciation. Identifiable significant improvements are capitalized and expenditures formaintenance and repairs are charged to expense as incurred.Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows: Software 3 years Computer equipment 3 years Furniture and fixtures 3 years Leasehold improvements Shorter of lease term or estimated useful life Telephone equipment 3 years Office equipment 3 years Website development 3 years The Company accounts for costs incurred to develop its trading platform and related software in accordance with ASC 350-40, Intangible-Goodwill andOther-Internal-Use Software. ASC 350-40 requires that such technology be capitalized in the application and infrastructure development stages. Costs relatedto training, administration and non-value-added maintenance are charged to expense as incurred. Capitalized software development costs are being amortizedover the useful life, which the Company has estimated at three years.Long-Lived AssetsIn accordance with ASC 360-10, Property, Plant and Equipment, the Company periodically evaluates the carrying value of long-lived assets when events andcircumstances warrant such review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from suchan asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized in the amount by which the carrying value exceeds thefair market value of the long-lived asset. The Company has identified no such impairment losses.Intangible AssetsASC 350, Intangibles — Goodwill and Other (“ASC 350”), requires purchased intangible assets other than goodwill to be amortized over their useful livesunless their lives are determined to be indefinite. If the assets are determined to have a finite life in the future, the Company will amortize the carrying valueover the remaining useful life at that time. F-14Table of ContentsThe Company compares the recorded value of its indefinite life intangible assets to their fair value on an annual basis and whenever circumstances arise thatindicate that an impairment may have occurred. See Note 7 for additional information.GoodwillIn accordance with ASC 350, the Company tests goodwill for impairment on an annual basis during the fourth quarter and on an interim basis whenconditions indicate impairment may have occurred. Goodwill impairment is determined by comparing the estimated fair value of the reporting unit with itsrespective book value. The Company performed its annual test for goodwill impairment in the fourth quarter of 2012 and noted there was no impairment. Atperiods during 2012, the Company’s common shares traded below book value, the Company performed additional impairment testing, which did not result inany goodwill impairment. Adverse market or economic events could result in impairment charges in future periods. No amount of goodwill is expected to bedeductible for tax purposes. See Note 9 for additional information.Other AssetsThe Company recorded receivables from vendors, security deposits, current and deferred tax assets, a cost basis investment and miscellaneous receivables inOther assets on the Consolidated Balance Sheets. See Note 10 for additional information.Allowance for Doubtful AccountsThe Company records an increase in the allowance for doubtful accounts when the prospect of collecting a specific customer account balance becomesdoubtful. Management specifically analyzes accounts receivable and historical bad debt experience when evaluating the adequacy of the allowance for doubtfulaccounts. Should any of these factors change, the estimates made by management will also change, which could affect the level of the Company’s futureprovision for doubtful accounts. The customer receivables, net of allowance for doubtful accounts, are included as part of the miscellaneous receivables inOther assets on the Consolidated Balance Sheets. Receivables from customers are reserved for and recorded in Bad debt provision on the ConsolidatedStatements of Operations and Comprehensive Income. The allowance for doubtful accounts consisted of the following (amounts in thousands): Balance as of January 1, 2010 $(332) Addition to provision (597) Amounts written off 855 Balance as of December 31, 2010 (74) Addition to provision (852) Amounts written off 871 Balance as of December 31, 2011 (55) Addition to provision (358) Amounts written off 265 Balance as of December 31, 2012 $(148) Accumulated Other Comprehensive IncomeThe Company’s Accumulated other comprehensive income, consists of foreign currency translation adjustments from their subsidiaries not using theU.S. dollar as their functional currency.Payables to Customers, Brokers, Dealers, FCMs and Other Regulated EntitiesPayables to customers, brokers, dealers, FCMs and other regulated entities included on the Consolidated Balance Sheets, include amounts due on cashand margin transactions. These transactions include deposits, commissions and gains or losses arising from settled trades. The balance also reflectsunrealized gains or losses arising from open positions in customer accounts. F-15Table of ContentsThe Company also engages in white label, or omnibus relationships, with other regulated financial institutions. The payables balance includes amountsdeposited by these financial institutions. The payables balance includes deposits from all NFA registered entities.Noncontrolling InterestNoncontrolling interest represents the portion of the Company’s operating profit that is attributable to the ownership interest of the noncontrolling interestowners in Forex.com Japan Co. Ltd. There was no longer a noncontrolling interest as of December 31, 2010 as the Company acquired the remainingoutstanding shares during 2010 to obtain 100% ownership.Treasury SharesIn accordance with ASC 505, Equity, the Company treats the cost of acquired shares purchased as a deduction from shareholders’ equity and as a reductionof the total shares outstanding when calculating adjusted earnings per share.Earnings Per Common ShareBasic earnings per common share is calculated using the weighted average common shares outstanding during the year. Common equivalent shares from stockoptions and restricted stock awards, using the treasury stock method, are also included in the diluted per share calculations unless their effect of inclusionwould be antidilutive.DividendsPrior to the fourth quarter of 2011, the Company retained all earnings for investment in its business. In October 2011, the Board of Directors approved apolicy of paying quarterly dividends, subject to available cash flow from operations, other considerations and the determination by the Company’s Board ofDirectors of the amount. Each quarter since, the Company has paid a $0.05 per share dividend to holders of the Company’s common stock.Any declaration and payment of dividends will be at the discretion of the Company’s Board of Directors and will depend upon, among other things, theCompany’s earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, andother considerations that the Company’s Board of Directors deems relevant. The Board’s ability to declare a dividend is also subject to limits imposed byDelaware corporate law. In addition, the Company’s subsidiaries are permitted to pay dividends to the Company subject to (i) certain regulatory restrictionsrelated to the maintenance of minimum net capital in those subsidiaries that are subject to net capital requirements imposed by applicable law or regulation,and (ii) general restrictions imposed on dividend payments under the jurisdiction of incorporation or organization of each subsidiary. See Note 12 and Note 22for additional information.LitigationThe Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, except for the mattersdescribed in Note 17, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on the Company’squarterly or annual operating results, cash flows or consolidated financial position.The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probablea liability had been incurred at the date of the consolidated financial statements and the Company can reasonably estimate the amount of that loss, theCompany accrues the estimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determine whether any loss is probableor even possible or to estimate the amount of any loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability alreadyaccrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss. F-16Table of ContentsFor certain legal proceedings, the Company can estimate possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amountsaccrued, but does not believe, based on current knowledge and after consultation with counsel, such losses will have a material adverse effect on theCompany’s results of operations, cash flows or financial condition. For certain other legal proceedings, the Company cannot reasonably estimate such losses,if any, since the Company cannot predict if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, ifany, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages.Numerous issues must be developed, including the need to discover and determine important factual matters and the need to address novel or unsettled legalquestions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any suchproceeding.Recent Accounting PronouncementsIn July 2012, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles — Goodwilland Other” (“ASU No. 2012-02”). ASU No. 2012-02 is intended to reduce the cost and complexity of performing an impairment test for indefinite-livedintangible assets by permitting an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-livedintangible asset is less than its carrying amount. ASU No. 2012-02 is effective for interim and annual impairment tests performed for fiscal years beginningafter September 15, 2012, with early adoption permitted. The Company does not expect it to have a material impact on the Company’s consolidated financialstatements.In December 2011, the FASB issued ASU 2011-11 Balance Sheet: Disclosures about Offsetting Assets and Liabilities. The new disclosure requirementsmandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, aswell as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateralreceived and posted in connection with master netting agreements or similar arrangements. This ASU is effective for fiscal years, and interim periods withinthose years, beginning on or after January 1, 2013. The Company is analyzing if the adoption of ASU 2011-11 will have a material impact on the Company’sconsolidated financial statements.In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. This new standard amends theprocedures for testing goodwill for impairment, simplifying how to test goodwill for impairment by permitting an entity to first assess qualitative factors todetermine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary toperform the two-step goodwill impairment test previously required. This new standard is effective for fiscal years and quarters beginning after December 15,2011. The adoption of ASU 2011-08 did not have a material impact on the Company’s consolidated financial statements.In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. This new standard impacts thepresentation requirements relating to Comprehensive Income. This new standard is effective for fiscal years and quarters beginning after December 15, 2011.The adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated financial statements.In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement — Amendments to Achieve Common Fair Value Measurement and DisclosureRequirements in U.S. GAAP and IFRSs. This new standard amends the wording used to describe many of the requirements in U.S. GAAP for measuringfair value and for disclosing information about fair value measurements. This new standard is effective for fiscal years and quarters beginning afterDecember 15, 2011. See Note 3. F-17Table of Contents3. Fair Value DisclosuresThe following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels (amounts in thousands): Fair Value Measurements on a Recurring Basisas of December 31, 2012 Level 1 Level 2 Level 3 Total Financial Assets: Money market accounts $12,064 — — $12,064 Open spot and other positions $810 — — $810 U.S. treasury bills $29,998 — — $29,998 CIBC treasury bills $1,355 — — $1,355 Certificates of deposit $82 — — $82 Futures contracts $40 — — $40 Investment in gold $168 — — $168 Customer and broker open spot and other positions $74,943 — — $74,943 Fair Value Measurements on a Recurring Basisas of December 31, 2011 Level 1 Level 2 Level 3 Total Financial Assets: Money market accounts $14,201 — — $14,201 Open spot and other positions $199 — — $199 Certificates of deposit $82 — — $82 Futures contracts $42 — — $42 Investment in gold $156 — — $156 Customer and broker open spot and other positions $51,470 — — $51,470 There were no transfers between levels for the years ended December 31, 2012 and December 31, 2011.Level 1 Financial AssetsThe Company has money market accounts, certificates of deposit, U.S. treasury securities, CIBC treasury securities, open spot and other positions, futurescontracts and an investment in gold that are Level 1 financial instruments that are recorded based upon listed or quoted market rates. The money marketaccounts are recorded in Cash and cash equivalents and Cash and securities held for customers, the treasury bills are recorded in Cash and cashequivalents and Short term investments, based upon their maturity, the certificates of deposit are recorded in Short term investments and the open spot andother positions, futures contracts and investment in gold are recorded in Receivables from banks and brokers. The Company has customer open spot andother positions that are Level 1 financial instruments that are recorded based upon listed or quoted market rates. The customer open spot and other positionsare recorded in Payable to customers, brokers, dealers, FCMs and other regulated entities.Financial Instruments Not Measured at Fair ValueThe table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value inthe Condensed Consolidated Balance Sheet (amounts in thousands). The carrying values of Receivables from banks and brokers not measured at fair valueapproximate fair value because of the relatively short period of time between their origination and expected maturity. The F-18Table of Contentscarrying values of Payables to customers brokers, dealers, FCMs, and other regulated entities includes amounts deposited by these financial institutionsin order for the Company to act as clearing broker. The carrying value of Payables to customers brokers, dealers, FCMs, and other regulated entities arebased on observable market prices and approximate fair value. In April 2011, the Company acquired customer account balances and effective customeragreements from Deutsche Bank AG, relating to Deutsche Bank’s “dbFX” business, for an upfront payment and additional contractual future payments to bemade to Deutsche Bank based upon volume generated from the acquired customers over a two-year period following the closing of the acquisition. Inaccordance with ASC 835-30, Interest, the Company is accounting for the payments due to dbFX as a note payable. As such, the total payments due to dbFXunder the agreement were discounted to their present value using an imputed rate of interest upon inception. The Company’s investment in Kapitall, Inc. iscarried at cost. Fair Value Measurements using: As of December 31, 2012 Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Carrying Value Fair Value Financial Assets: Receivables from banks and brokers $89,106 $89,106 — $89,106 — Investment in Kapitall, Inc. (1) $500 $500 — — $500 Financial Liabilities: Payables to customers, brokers, dealers, FCMs and otherregulated entities $371,368 $371,368 — $371,368 — Payable to dbFX $2,386 $2,392 — — $2,392 (1)The Company notes it is not practical to estimate fair value as Kapitall, Inc. is a privately held company and there is no available market transactiondata.4. Receivables From Banks and BrokersAmounts receivable from brokers consisted of the following at December 31 (amounts in thousands): 2012 2011 Required collateral $47,595 $26,411 Cash in excess of required collateral 41,511 58,791 Open positions 810 199 $89,916 $85,401 The Company has posted funds with banks and brokers as collateral pursuant to the terms of applicable agreements for holding spot foreign exchangepositions. In addition, the Company has deposited with such banks and brokers cash in excess of required collateral. Open foreign exchange positions includethe unrealized gains or losses due to the differences in exchange rates between the dates at which a trade was initiated compared to the exchange rates in effect atthe date of the consolidated financial statements. These amounts are reflected as Receivables from banks and brokers on the Consolidated Balance Sheet.5. DerivativesThe table below represents the fair values of the Company’s derivative instruments reported within Receivables from banks and brokers and Payables tocustomers, brokers, dealers, FCMs and other regulated entities on the accompanying consolidated balance sheet as of December 31 (amounts inthousands): 2012 Derivative Liabilities: Customer CFD contracts $95 F-19Table of ContentsThe Company did not designate any of its derivatives as hedging instruments. Net gains of $8.9 million with respect to derivative instruments are reflected inTrading revenue for the year ended December 31, 2012.6. Property and EquipmentProperty and equipment, including leasehold improvements and capitalized software development costs, consisted of the following as of December 31(amounts in thousands): 2012 2011 Software $19,757 $12,998 Computer equipment 5,248 4,897 Leasehold improvements 1,863 1,760 Telephone equipment 725 707 Office equipment 1,471 625 Furniture and fixtures 241 224 Web site development costs 654 655 29,959 21,866 Less: Accumulated depreciation and amortization (18,936) (14,335) Property and equipment, net $11,023 $7,531 Depreciation and amortization expense was $4.9 million, $3.9 million, and $3.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.7. Intangible AssetsIn 2003, the Company acquired the Forex.com domain name for $0.2 million, and in 2004, the foreignexchange.com domain name was purchased for$0.1 million. Based on the fact that the rights to use these domain names requires the payment of a nominal annual renewal fee, management determined thatthere was no legal or regulatory limitations on the useful life and furthermore that there is currently no technological limitation to their useful lives. Theseindefinite-lived assets are not amortized. In accordance with ASC 350-10, the Company tests intangible assets for impairment on an annual basis in the fourthquarter and on an interim basis when conditions indicate impairment may have occurred.In August 2012, the Company acquired OEC. Included in the acquisition were several intangible assets made up of a customer list, technology and atrademark which have been assigned values of $1.6 million, $1.6 million and $0.4 million, respectively. See Note 8 below for further details related to theacquisition. F-20Table of ContentsAs of December 31, 2012 and 2011, the accumulated amortization related to intangibles was $13.7 million and $9.2 million, respectively. Intangible assetsconsisted of the following (amounts in thousands): Balance at January 1, 2010 $320 Purchase of MG customer and marketing list 469 Purchase of CMS customer list 9,465 Purchase of indefinite life intangible assets 43 Amortization (1,208) Balance at December 31, 2010 $9,089 Purchase of dbFX Customer assets and non-compete 9,701 Amortization (8,019) Balance at December 31, 2011 $10,771 Customer list acquired in acquisition of OEC 1,580 Trademark acquired 430 Technology acquired 1,560 Amortization (4,473) Balance at December 31, 2012 $9,868 Future annual estimated amortization expense for the next five years is as follows (amounts in thousands): Years Ended December 31: 2013 $2,055 2014 1,707 2015 1,707 2016 1,707 2017 854 8. AcquisitionsOpen E CryOn June 27, 2012, Group, LLC and optionsXpress Holdings, Inc., a subsidiary of The Charles Schwab Corporation, entered into a Stock PurchaseAgreement whereby the Company acquired OEC for a purchase price of $12.0 million. This acquisition was made as part of the Company’s plan to offeradditional products to its customers and diversify its revenue. The transaction was completed on August 31, 2012. In addition to the $12.0 million paid at theclosing, the Company made an additional payment in the fourth quarter of 2012 of $2.7 million based on a contractual working capital adjustment.The purchase price of OEC was derived as follows (in thousands): Cash paid at closing date $12,000 Working capital adjustment 2,691 Total purchase price $14,691 F-21Table of ContentsThe purchase price of OEC was allocated to fair value of various assets and liabilities as follows (in thousands): Cash and cash equivalents acquired $5,187 Cash and securities held for customers acquired 109,042 Receivables from brokers acquired 815 Other assets acquired 98 Total tangible assets acquired 115,142 Total liabilities assumed (109,960) Identifiable intangible assets: Trademark 430 Technology 1,560 Customer relationships 1,580 Goodwill 5,939 $14,691 For the period from September 1, 2012 through December 31, 2012, revenues generated by OEC were $5.6 million and expenses were $5.9 million,generating a loss before taxes of $0.3 million.Pro Forma Information (unaudited):The following unaudited pro forma operating data are presented as if the acquisition of OEC had occurred at the beginning of each period presented. Theunaudited pro forma data is provided for informational purposes only and may not necessarily be indicative of future results of operations or what the resultsof operations would have been had the Company and OEC operated as a combined entity for the periods presented. Unaudited pro forma revenues, net incomeand net income per share information for the twelve months ended December 31, 2012 and 2011, were as follows (in thousands, except per share amounts): Pro Forma information Twelve months endedDecember 31, 2012 2011 Net revenue $158,900 $194,514 Net income $1,957 $15,249 9. GoodwillGoodwill is calculated as the difference between the cost of acquisition and the fair value of the net identifiable assets of an acquired business. As ofDecember 31, 2012 and December 31, 2011, the Company had recorded goodwill of $9.0 million and $3.1 million, respectively. Goodwill increased $5.9million as a result of the acquisition of OEC in August 2012.The Company performed its annual test for goodwill impairment in the fourth quarter of 2012 by comparing the estimated fair value of the reporting unit withits respective book value and noted there was no impairment. F-22Table of Contents10. Other AssetsOther assets consisted of the following at December 31 (amounts in thousands): 2012 2011 Vendor and security deposits $3,647 $3,774 Current tax receivable 5,548 6,762 Deferred tax assets 5,619 4,471 Investment in Kapitall, Inc. 500 500 Miscellaneous receivables 2,490 2,630 $17,804 $18,137 11. Term Loan and RevolverAs of December 31, 2012, the Company had a $50.0 million revolving line of credit through a loan and security agreement with Silicon Valley Bank andJPMorgan Chase Bank. The amount available for borrowing under the line of credit varies from time to time due to certain financial covenants that theCompany is required to comply with under the terms of the line of credit. As of December 31, 2012, approximately $17 million was available for borrowingunder the line of credit. Interest on amounts that may be outstanding under the revolving line of credit from time to time is paid monthly and is based upon theprime rate of interest plus 0.5%. The revolving line of credit is secured by certain of our assets, a pledge of our membership interests in our wholly-ownedsubsidiary GAIN Holdings, LLC and a guarantee by GAIN Holdings, LLC. On March 30, 2012, we paid off the balance of a $52.5 million term loan fromSilicon Valley Bank and JPMorgan Chase Bank in advance of the July 1, 2012 maturity date. The term loan was payable in 20 quarterly installments ofprincipal and the payments commenced on October 1, 2007. The other terms of the term loan were substantially the same as those of the revolving line ofcredit.As of December 31, 2012 and December 31, 2011, there were no amounts outstanding under the revolving line of credit.In accordance with the provisions of the loan and security agreement, the Company is required to adhere to various financial, regulatory, operational andreporting covenants. As of December 31, 2012 and during the entire term of the loan and security agreement, the Company was and has been in compliancewith such covenants.The carrying amount of notes payable approximates fair value. The Company had a balance of $7.9 million outstanding on the term loan as of December 31,2011.Loan fees were capitalized to deferred finance costs and were being amortized over the life of the term loan. Deferred financing costs amortized to interestexpense were immaterial for the years ended December 31, 2012 and December 31, 2011. The Company had deferred financing costs, recorded in Otherassets on the Consolidated Balance Sheets, were zero at December 31, 2012 and $0.05 million at December 31, 2012.12. Convertible, Redeemable Preferred StockAs a result of the Company’s IPO, all of the Company’s outstanding convertible, redeemable preferred stock was converted to common stock and there is nolonger any outstanding convertible, redeemable preferred stock.13. Shareholders’ EquityCommon Stock — At December 31, 2012 and 2011, the Company had authorized 60,000,000 shares of Common Stock (“Common Stock”), of which36,486,036 and 34,924,095 shares were issued and outstanding, respectively as of December 31, 2012 and 35,132,365 and 34,282,244 shares were issuedand outstanding, respectively as of December 31, 2011. F-23Table of ContentsTreasury Stock — As of December 31, 2012, the Company had repurchased 1.6 million shares of outstanding Common Stock for an aggregate cost of $8.3million reducing the number of shares outstanding.Dividends — In February, May, July and November 2012, the Company announced the payment of a $0.05 dividend per share of Common Stock. Thedividend payments announced in February, May, July and November were paid in March, June, September and December 2012, respectively, for anaggregate amount of $7.0 million, which was applied against Retained Earnings. In March 2013, the Company announced the payment of a $0.05 dividendper share of Common Stock payable in March 2013.14. Related Party TransactionsManagement has personal funds on deposit in customer accounts of Group, LLC, recorded in Payables to customers, brokers, dealers, FCMs and otherregulated entities on the Consolidated Balance Sheets. The balance was $2.4 million and $2.0 million at December 31, 2012 and 2011, respectively.Scivantage, Inc. provides hosting services to GAIN Capital Securities, Inc., (“GCSI”) under a one year agreement dated December 1, 2010, whichautomatically renews for successive one-year terms, in which Scivantage provides the technology infrastructure hosting facility for GCSI, who providesbrokerage securities services. Two of the Company’s board of directors members, Messrs. Galant and Sugden, are members of the board of directors ofScivantage.15. Share Based PaymentOn March 27, 2006, the Company’s shareholders approved the GAIN Capital Holdings, Inc. 2006 Equity Incentive Plan (the “2006 Plan”), under which12.5 million shares are available for awards to employees, consultants and directors. The 2006 Plan provides for the issuance of share based award whichinclude restricted stock units (“RSUs”), Incentive Stock Options (“ISOs”), and nonqualified stock options (“NQSOs”). ISOs are granted at fair market valueand are subject to the requirements of Section 422 of the Internal Revenue Code of 1986, as amended. All share based awards are granted at a price orconversion price determined by the Company’s board of directors. Grants of stock options usually vest over three or four years upon anniversary date. RSUsusually vest over four years with one-fourth vesting upon the grant anniversary. All options granted under the 2006 Plan expire ten years from the date of grant.On November 22, 2010, the Company’s board of directors adopted the GAIN Capital Holdings, Inc. 2010 Omnibus Incentive Compensation Plan, (the “2010Plan”), which became effective December 13, 2010 (the day immediately prior to the date the underwriting agreement was executed and the Common Stock waspriced for the IPO). In addition, on November 23, 2010 the Company’s board of directors approved a 2.29-for 1 stock split of the Company’s common stockeffective immediately prior to the completion of the IPO. Accordingly, all references to stock options, exercise prices and RSUs have been retroactively restatedto reflect the stock split as if it had occurred at the beginning of the earliest period presented. As of the effective date of the 2010 Plan, the 2006 Plan wasmerged with and into the 2010 Plan, and no additional grants will be made under the 2006 Plan. Initially, the 2010 Plan made available 8.5 million shares (1.4million to be issued pursuant to future awards and grants under the 2010 Omnibus Incentive Compensation plan, 6.6 million shares that are subject tooutstanding grants under the 2006 Plan as of the effective date of the 2010 Plan, and 0.5 million shares to be issued pursuant to the 2011 Employee StockPurchase Plan) for awards to employees, nonemployee directors and consultants and advisors in the form of incentive stock options, nonqualified stockoptions, stock awards, stock units, stock appreciation rights and other stock-based awards. In addition, as of the first trading day of January during the termof the 2010 Plan, beginning with calendar year 2012, an additional positive number of shares of the Company’s stock shall be added to the number of sharesof the Company stock authorized to be issued or transferred under the 2010 Plan equal to (1) three percent (3%) of the total number of shares of Companystock outstanding (on a fully diluted basis) as of the last trading day in December of the immediately preceding calendar year, or (2) such lesser number ofshares as the Company’s board of directors may determine. On January 1, 2012 the Company authorized an additional 1.2 million shares to be issued ortransferred under the F-24Table of Contents2010 Plan. As of December 31, 2012, 7.1 million shares are available to be issued under the 2010 Plan (0.9 million to be issued pursuant to future awards andgrants under the 2010 Omnibus Incentive Compensation plan, 5.8 million shares that are subject to outstanding grants under the 2006 Plan as of the effectivedate of the 2010 Plan, and 0.4 million shares to be issued pursuant to the 2011 Employee Stock Purchase Plan). On January 1, 2013, the Company authorizedan additional 1.2 million shares to be issued or transferred under the 2010 Plan pursuant to the terms of the 2010 Plan.Under the 2010 Plan, the committee will determine the exercise price of the options granted and may grant options to purchase shares of the Company’scommon stock in amounts as determined by the committee. The committee may grant options that are intended to qualify as ISOs under Section 422 of theInternal Revenue Code, or NQSOs which are not intended to so qualify. ISOs may only be granted to employees. Anyone eligible to participate in the 2010 Planmay receive a grant of NQSQs. The exercise price of a stock option granted under the 2010 Plan cannot be less than the fair market value of a share of theCompany’s common stock on the date the option is granted. All options granted under the 2010 Plan expire seven years from the date of grant.Stock OptionsThe following table summarizes the stock option activity under all plans from January 1, 2012 through December 31, 2012: Options Outstanding Number ofOptions WeightedAverageExercise Price WeightedAverageRemainingLife (Years) AggregateIntrinsic Value Outstanding, January 1, 2012 4,442,694 $2.32 1.09 Granted 333,000 $5.30 6.17 Exercised (1,032,096) $1.93 3.24 Forfeited (154,698) $4.21 5.01 Outstanding, December 31, 2012 3,588,900 $3.20 4.24 4,890,932 Vested and expected to vest options 3,519,514 $3.14 4.18 4,885,222 Exercisable, December 31, 2012 2,678,927 $2.43 3.45 4,795,897 Fair market value of common stock at exercise date $5,225,705 Cost to exercise 1,968,874 Net value of Stock Options exercised $3,256,831 F-25Table of ContentsThe following table summarizes information concerning outstanding and exercisable stock options as of December 31, 2012: Options Outstanding Options Exercisable Exercise Price NumberOutstanding WeightedAverageExercise Price WeightedAverageRemainingContractualLife (Years) Number ofOptionsExercisable WeightedAverageExercisePrice $0.77 339,195 $0.77 0.50 339,195 $0.77 $1.11 230,483 1.11 1.17 230,483 1.11 $1.55 260,800 1.55 2.09 260,800 1.55 $1.99 696,885 1.99 2.47 696,885 1.99 $2.43 372,792 2.43 2.99 372,792 2.43 $2.87 56,533 2.87 3.09 56,533 2.87 $3.32 791 3.32 3.15 791 3.32 $3.76 791 3.76 3.23 791 4.23 $3.83 998,024 3.83 7.58 628,553 3.83 $5.30 312,375 5.30 6.17 6,562 5.30 $8.02 320,231 8.02 5.23 85,542 8.02 3,588,900 $3.20 4.24 2,678,927 $2.43 The weighted-average remaining contractual life for the 3.6 million outstanding options as of December 31, 2012, is approximately 4.2 years. There were2.5 million stock options exercisable as of December 31, 2012. The total intrinsic value of stock options exercised during 2012, 2011 and 2010 respectivelywere $3.3 million, $2.0 million and $0.5 million. During 2012, the Company had 0.3 million stock options vest. The Company received $2.0 million,$0.9 million, and $0.1 million from stock option exercises in 2012, 2011 and 2010, respectively.In March 2012, the Company granted 0.3 million options to employees. In 2011, the Company granted 0.4 million options to employees. In 2010, 1.3 millionoptions were granted under the 2006 Plan, of which 1.0 million were granted to employees and 0.3 million were granted to board of director’s members, and nooptions were granted under the 2010 Plan.The fair market value of the options granted were estimated based on a Black-Scholes option pricing valuation model using the following assumptions asapproved by the Compensation Committee of the Company’s Board of Directors. For the Year Ended December 31, 2012 2011 2010Average risk-free interest rate 0.90% 2.30% 2.40%Expected volatility 48.50% 47.60% 33.5%Expected life 4.8 years 4.8 years 6.3 yearsExpected dividend yield — % — % — %The expected volatility was calculated based upon the volatility of public companies in similar industries or financial service companies. The average risk freerate is based upon the risk free rate of the U.S. Treasury bond rate with a maturity commensurate with the expected term. The options granted during 2012were granted on March 1, 2012. At such time, the Company deemed a pattern of paying dividends had not been established at the time of grant and as suchused a zero percent dividend yield in the Black-Scholes option pricing valuation model. For any future grants, the Company’s current history of paying cashdividends on a quarterly basis will be considered in assessing a market participant view of the appropriate expected dividend yield in the related option pricingvaluation model. F-26Table of ContentsThe Company recorded stock-based compensation expense related to options in accordance with ASC 718-10 of $0.8 million, $0.8 million and $0.3 million in2012, 2011 and 2010, respectively. The stock-based compensation expense is recorded in Employee compensation and benefits on the ConsolidatedStatements of Operations and Comprehensive Income.Restricted Stock Units and Restricted Stock AwardsThe 2010 Plan provides for the issuance of RSUs that are convertible on a 1:1 basis into shares of the Company’s common stock. The Company. maintains arestricted unit account for each grantee. Restrictions typically lapse over four years, with 25% lapsing on each anniversary date of the grant. After therestrictions lapse, the grantee shall receive payment in the form of cash, shares of the Company’s common stock, or in a combination of the two, asdetermined by the Company. Payment shall be made upon the date the restrictions lapse, upon a predetermined delivery date, upon a change in control of theCompany. or upon the employee leaving the Company. The Company may also issue performance grants which have restrictions lapsing immediately, butdelivery of the common stock deferred until a later date. RSUs are assigned the value of the Company’s common stock at date of grant issuance, and the grantdate fair value is amortized over a four year period. During 2012, 0.6 million RSUs were granted to employees and members of the Board of Directors. During2011, 0.04 million RSUs were granted to employees.The 2010 Plan also provides for the issuance of restricted stock awards, or RSAs, which represent shares of the Company’s common stock. The Companymaintains a restricted stock award account for each grantee. Restrictions typically lapse over four years, with 25% lapsing on each anniversary date of thegrant. After the restrictions lapse, or upon a change in control of the Company the grantee shall receive payment in the form of cash, shares of the Company’scommon stock, or in a combination of the two, as determined by the Company. The Company may also issue performance grants which have immediatevesting. There were no RSAs granted during 2012. During 2011, 0.4 million RSAs were granted to employees and members of the Board of Directors.The Company recorded $2.5 million, $3.2 million and $5.1 million in stock-based compensation expense related to restricted stock for the year endedDecember 31, 2012, 2011 and 2010, respectively.A summary of the status of the Company’s nonvested shares of restricted stock units and restricted stock awards as of December 31, 2012 and changesduring the year ended December 31, 2012, is presented below: Non-Vested Shares Numberof RSUs Weighted AverageGrant DateFair Value Numberof RSAs Weighted AverageGrant DateFair Value Non-vested at January 1, 2012 255,195 $11.12 317,092 $7.25 Granted 590,889 5.30 — — Vested (211,476) 10.90 (109,662) 7.40 Forfeited (48,512) 5.80 (25,542) 6.80 Non-vested at December 31, 2012 586,096 $5.80 181,888 $7.20 As of December 31, 2012 there was $3.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements grantedunder the 2010 Plan. The cost is expected to be recognized over a weighted-average period of approximately two years. The fair market value on the grant datefor RSUs and RSAs vested during the years ended December 31, 2012, 2011 and 2010 was $3.1 million, $3.9 million and $4.7 million, respectively. Thetotal intrinsic value of the RSUs and RSAs that became unrestricted during the year ended December 31, 2012 was $1.6 million at the date they becameunrestricted. RSUs and RSAs that were vested and outstanding as of December 31, 2012 had a value at grant date of $35.9 million. The Company grantedRSUs during the year ended December 31, 2012 which had a value of $3.1 million at grant date. The fair market value of RSUs and RSAs at the date ofgrant during the year ended December 31, 2011 was $3.0 million. The Company did not grant any RSAs or RSUs during the year ended December 31, 2010. F-27Table of ContentsEmployee Stock Purchase PlanThe 2011 Employee Stock Purchase Plan, or the ESPP, was adopted by the Company’s board of directors on November 22, 2010. The ESPP becameeffective on January 1, 2011. The ESPP permits eligible employees to purchase shares of the Company’s common stock at a 15% discount from the lesser ofthe fair market value per share of the Company’s common stock on the first day of the offering period or the fair market value of the Company’s commonstock on the interim purchase date through after-tax payroll deductions. Shares reserved for issuance under the ESPP was initially 500,000. It is intended thatthe ESPP meet the requirements for an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. For the year ended December 31,2012, 0.05 million shares were issued under the plan; an additional 0.02 million shares were issued on January 2, 2013 for the purchase interval from July 1,2012 through December 31, 2012. For the year ended December 31, 2011, 0.03 million shares were issued under the ESPP.16. Income TaxesThe following table presents the U.S. and non-U.S. components of income from continuing operations before income tax (benefit) / expense for the years endedDecember 31, 2012, 2011, and 2010 (amounts in thousands): For the Fiscal Year EndedDecember 31, 2012 2011 2010 U.S. $(10,795) $9,766 $47,818 Non-U.S. 11,937 13,478 9,634 $1,142 $23,244 $57,452 The provision for income tax (benefit) / expense consisted of (amounts in thousands): For the Fiscal Year EndedDecember 31, 2012 2011 2010 Current Federal $(2,880) $4,803 $13,881 State 34 1,453 2,526 UK 2,750 3,396 4,829 Japan 14 — — Other non U.S. 3 1 — (79) 9,653 21,236 Deferred Federal (865) (1,953) 114 State (1) (338) 100 UK — — — Japan 126 184 (1,274) Other non U.S. (30) — (239) Release of valuation allowance (630) — 72 (1,400) (2,107) (1,227) Total income tax (benefit) / expense $(1,479) $7,546 $20,009 F-28Table of ContentsDeferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities and are measuredusing the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company’s net deferred tax assets are included inOther assets on the Consolidated Balance Sheets. The net change in valuation allowance for the year ended December 31, 2012 was $0.6 million. Significantcomponents of the Company’s deferred tax assets and liabilities were as follows (amounts in thousands): December 31, 2012 2011 Deferred tax assets Net foreign operating losses $1,893 $1,988 Stock-based compensation expense 6,608 6,834 Intangible assets 3,414 3,129 Other 588 452 Total deferred tax assets 12,503 12,403 Valuation allowance (103) (733) Total deferred tax assets after valuation allowance $12,400 $11,670 Deferred tax liabilities Unrealized trading differences $(4,867) $(4,186) Unrealized foreign currency (152) (207) Basis difference in property and equipment (1,546) (2,280) State taxes (78) (160) Other (138) (366) Total deferred tax liabilities $(6,781) $(7,199) Net deferred tax assets $5,619 $4,471 The following table reconciles the provision to the U.S. federal statutory income tax rate: 2012 2011 2010 Federal income tax at statutory rate 35.00% 35.00% 35.00% Increase/(decrease) in taxes resulting from: State income tax 2.47% 3.06% 2.97% Embedded derivative — % — % (2.86)% Foreign rate differential (121.09)% (4.24)% (0.89)% Meals & entertainment 5.65% 0.40% 0.16% R&D credit 7.47% (0.70)% (0.81)% Release of valuation allowance (51.34)% — % 0.63% Uncertain tax positions (9.04)% — % — % Other permanent differences 1.46% (1.06)% 0.62% Effective Tax Rate (129.42)% 32.46% 34.82% The Company has $7.3 million in foreign net operating loss (“NOL”) carry forwards as of December 31, 2012, for which the Company has established fullvaluation allowance against $0.1 million. These NOLs begin to expire in 2013.At December 31, 2012, undistributed earnings of our foreign subsidiaries indefinitely invested outside the United States amounted to approximately $33.5million. No provision has been made for foreign taxes associated with the cumulative undistributed earnings of foreign subsidiaries, as these earnings areexpected to be reinvested in F-29Table of Contentsworking capital and other business needs. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject toincome taxes of approximately $4.0 million, subject to an adjustment for the participation exemption and foreign tax credits.The Company has recorded a liability of $0.1 million related to uncertain tax positions at December 31, 2012 in accordance with ASC 740-10, Income Taxes.The following table summarizes the activity to the gross unrecognized Tax benefits from uncertain tax positions (amounts in thousands): As of December 31, 2012 2011 2010 Beginning balance as of January 1 $190 $126 $126 Increases based on tax positions related to the current period 2 40 — Decreases based on tax positions related to prior periods (82) 56 — Decreases related to a lapse of applicable statute of limitations (32) (32) — Ending balance as of December 31 $78 $190 $126 The Company’s open tax years range from 2008 through 2010 for its U.S. federal returns, from 2008 through 2011 for the U.K., from 2011 through 2012 forJapan and from 2007 through 2010 for its major state jurisdictions.Included in the total unrecognized tax benefits at December 31, 2012, 2011, and 2010 is $0.1 million, $0.2 million, and $0.1 million, respectively, that ifrecognized would favorably affect the effective tax rate. It is reasonably possible that the amount of liability for unrecognized tax benefits could change duringthe next 12 months. An estimate of the range of the possible change cannot be made until issues are further developed or examinations closed.17. Commitments and ContingenciesCommitmentsLeases — The Company leases office space under non-cancelable operating lease agreements that expire on various dates through 2025. Such leases do notrequire any contingent rental payments or impose any financial restrictions. The majority of leases include renewal terms substantially the same as the currentterms. Future annual minimum lease payments, including maintenance and management fees, for non-cancellable operating leases, are as follows (amounts inthousands): Years Ended December 31: 2013 $2,583 2014 1,941 2015 1,655 2016 1,611 2017 and beyond 10,848 $18,638 Rent expense was $2.6 million, $2.5 million, and $2.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.In connection with the acquisition of the customer assets of dbFX, the Company was required to make certain future minimum payments as well as potentialcontingent payments, as discussed in Note 3 above. The associated liabilities are recorded in Accrued expenses and other liabilities on the ConsolidatedBalance Sheet. As of December 31, 2012, the minimum required remaining payment under this agreement was approximately $2.4 million and the Companyestimates that no additional contingent payments will need to be made based upon projected trading volumes. F-30Table of ContentsLitigationAs previously disclosed, on March 31, 2011, Shari Streit Jansen, as Chapter 7 Trustee for the bankruptcy estate of Beau Diamond, brought an adversaryproceeding against the Company, as well as several other forex trading firms, in the U.S. Bankruptcy Court in the Middle District of Florida. The complaintseeks to recover certain funds transferred to the Company by Mr. Diamond through an entity for which he acted as managing member, Diamond Ventures,LLC, under federal and state fraudulent transfer laws. On June 16, 2011, the Company moved to dismiss the complaint. The parties agreed to mediate theirdispute before the Trustee responded to the motion to dismiss and participated in a mediation on September 14, 2011, which resulted in an agreement inprincipal for settlement of the matter for a sum that is not material to the Company’s financial condition. The adversary proceeding was dismissed on July 20,2012.On February 16, 2012, the Company received a Letter of Claim on behalf of certain individuals who had lost money in an investment scheme operated by athird-party money management firm, incorporated in the United Kingdom, that has since been closed down by the United Kingdom’s Financial ServicesAuthority. The investment firm, Cameron Farley Ltd, had opened a corporate account with the Company and invested the individuals’ money, representingsuch funds as its own, while operating a fraudulent scheme. Though a complaint has been filed and served on the Company, the claimants requested, and theCompany agreed, to follow the United Kingdom’s Pre-Action Protocol, a pre-litigation process intended to resolve matters without the need to engage in formallitigation. The Company submitted a Response to the Letter Before Claim on July 4, 2012. On July 5, 2012 the Company received a substantially similarLetter of Claim on behalf of further individuals. Subsequently, the parties agreed to consolidate claims by those other similarly situated individuals with thepending Pre-Action Protocol process. The Company can provide no assurances that this matter will be successfully resolved through the Pre-Action Protocoland will not result in formal litigation, and no assurances can be provided regarding the outcome of any such potential litigation. This matter is currentlypending. At this time, a potential loss or a potential range of loss cannot be reasonably estimated.Through the Company’s acquisition of OEC, the Company became the subject of a patent infringement lawsuit originally filed against OEC on February 9,2010 in the U.S. District Court for the Northern District of Illinois by Trading Technologies International, Inc. seeking injunctive relief and unspecifieddamages. As reflected in a Second Amended Complaint filed on June 15, 2011, plaintiff alleges infringement of 12 patents relating to real-time display of pricequotes and market depth on OEC’s electronic trading interfaces. The case was consolidated with 11 related cases in February 2011, and the parties haveexchanged infringement, non-infringement and invalidity contentions for several of the disputed patents. In June 2011 the court stayed discovery to allowsummary judgment briefing on the ramifications of a recent Federal Circuit decision. On February 9, 2012, the court issued an order, which granted OEC’smotions for summary judgment, resulting in a substantial narrowing of the scope of plaintiff’s claims. Plaintiff filed a motion for reconsideration of thatruling on March 8, 2012. Plaintiff also filed a motion for certification of judgment for interlocutory appeal. The court denied plaintiff’s motion forreconsideration but granted plaintiff’s motion for certification of judgments of patent invalidity with respect to four of the asserted patents. Since that ruling,the court has continued its stay of discovery. On October 7, 2012, plaintiff filed its opening appeal brief with the United States Court of Appeals for theFederal Circuit. Oral argument on plaintiffs’ appeal is expected to occur in mid to late 2013. Plaintiff’s complaint does not specify the amount of damagessought. At this time, a potential loss or a potential range of loss cannot be reasonably estimated.18. Retirement PlansThe Company sponsors a “Safe Harbor” 401(k) retirement plan which was put into effect as of January 1, 2011. The plan provides for a 100% match byGAIN on the first 3% of the employee’s salary contributed to the plan and 50% on the next 2% with immediate vesting on all employer contributions, subject toIRS limitations. Substantially all of the Company’s employees are eligible to participate in the plan. F-31Table of ContentsPrior to 2011, the Company sponsored a 401(k) retirement plan, under the terms of which the Company was obligated to match 25% (50% for employees withthree years or more of service) of the employee’s salary contributed to the plan up to 15% of the employee’s compensation for each payroll period.The expense recorded to employee compensation and benefits on the Consolidated Statements of Operations and Comprehensive Income by the Company forits employees’ participation in the respective plans during the years ended December 31, 2012, 2011 and 2010 was $0.5 million, $0.7 million, and$0.5 million, respectively.19. Earnings per Common ShareBasic and diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that wouldoccur if securities or other contracts to issue common stock are exercised, vested or converted into common stock unless they are anti-dilutive. Dilutedweighted average common shares includes preferred stock, warrants, vested and unvested stock options and unvested restricted stock units. Approximately0.6 million and 0.4 million stock options were excluded from the calculation of diluted earnings per share for 2012 and 2011, respectively, as they were anti-dilutive. No stock options or restricted stock units were excluded from the calculation of diluted earnings per share for the year ended December 31, 2010.The following table sets forth the computation of earnings per share (amounts in thousands except share and per share data): For the Years Ended December 31, 2012 2011 2010 Net income applicable to GAIN Capital Holdings, Inc. common shareholders $2,621 $15,698 $37,845 Weighted average common shares outstanding: Basic weighted average common shares outstanding 34,940,800 34,286,840 4,392,798 Effect of dilutive securities: Preferred stock series A — — 1,645,213 Preferred stock series B — — 5,405,287 Preferred stock series C — — 2,835,920 Preferred stock series D — — 7,017,038 Preferred stock series E — — 9,561,484 Warrants — 160,529 3,075,314 Stock options 1,490,089 2,732,302 2,544,927 RSUs/RSAs 1,449,319 1,802,121 1,264,921 Diluted weighted average common shares outstanding 37,880,208 38,981,792 37,742,902 Earnings per common share Basic $0.08 $0.46 $8.62 Diluted $0.07 $0.40 $1.00 (1)The preferred stock dilutive securities were converted to common stock in connection with the Company’s initial public offering in December 2010. Thedilutive preferred stock represents the weighted average outstanding preferred stock for the year ended December 31, 2010. F-32(1)Table of Contents20. Regulatory RequirementsGroup, LLC, the Company’s FCM and RFED subsidiary, is subject to the CFTC Net Capital Rule (Rule 1.17) and NFA Financial Requirements Sections 11and 12. Under applicable provisions of these rules, Group, LLC is required to maintain adjusted net capital of $20.0 million plus 5.0% of the total payablesto customers over $10.0 million. At December 31, 2012, Group LLC maintained $21.5 million more than the minimum required regulatory capital for a totalof 1.9 times the required capital and at all times maintained compliance with all applicable regulations.GCSI is a broker-dealer registered with the SEC under the Securities Exchange Act of 1934, as amended. GCSI is a member of the Financial IndustryRegulatory Authority (“FINRA”), Municipal Securities Rulemaking Board (“MSRB”), and Securities Investor Protection Corporation (“SIPC”). Pursuant tothe SEC’s Uniform Net Capital Rule 15c3-1, GCSI is required to maintain a minimum net capital balance (as defined) of $0.05 million. GCSI must alsomaintain a ratio of aggregate indebtedness (as defined) to net capital of not more than 15 to 1. At December 31, 2012, GCSI maintained $0.4 million more thanthe minimum required regulatory capital for a total of 8.4 times the required capital and at all times maintained compliance with all applicable regulations.GAIN Capital Forex.com UK Limited (“GCUK”) is registered in the UK and regulated by the Financial Services Authority (“FSA”) as a full scope €730kBIPRU Investment Firm. GCUK is required to maintain the greater of $1.0 million (€730,000) or the Financial Resources Requirement, which is calculated asthe sum of the firm’s operational, credit, counterparty, concentration, market and forex risk. The regulatory capital held is required to be in excess of 110% ofits requirements at all times. At December 31, 2012, GCUK maintained $21.0 million more than the minimum required regulatory capital for a total of 2.5times the required capital and at all times maintained compliance with all applicable regulations.Forex.com Japan Co., Ltd. (“GC Japan”) is a registered Type I financial instruments business firm regulated by the Japan Financial Services Agency inaccordance with Financial Instruments and Exchange Law (Law No. 25 of 1948, as amended). GC Japan is a member of the Financial Futures Association ofJapan. GC Japan is subject to a minimum capital adequacy ratio of 120%, which is derived by dividing Net Capital (as defined) by the sum of GC Japan’smarket, counterparty credit risk and operational risk. At December 31, 2012, GC Japan maintained $7.5 million more than the minimum required regulatorycapital for a total of 3.1 times the required capital and at all times maintained compliance with all applicable regulations.GCAU holds an Australian Financial Services License issued by the Australian Securities & Investments Commission (“ASIC”). GCAU is required tomaintain a minimum capital requirement of $0.05 million (0.05 million AUD) plus 5% of adjusted liabilities between $1.02 million (1 million AUD) and$101.6 million (100 million AUD). At December 31, 2012, GCAU maintained $2.2 million more than the minimum required regulatory capital for a total of6.7 times the required capital and at all times maintained compliance with all applicable regulations.GCHK is licensed by the Securities and Futures Commission (“SFC”) to carry out Type 3 Regulated Activity, Leveraged Foreign Exchange Trading. GCHK issubject to the requirements of section 145 of the Securities and Futures Ordinance (Cap.571). Under this rule, GCHK is required to maintain a minimumliquid capital requirement of the higher of $1.925 million or the sum of 1.5% of its aggregate gross foreign currency position and 5% of its adjusted liabilitiesand clients’ margin calculated in accordance with applicable rules. At December 31, 2012, GCHK maintained $1.8 million more than the minimum requiredregulatory capital for a total of 1.9 times the required capital and at all times maintained compliance with all applicable regulations.GAIN Global Markets, Inc. (“GGMI”), the Company’s Cayman Island subsidiary, is a registered securities arranger with the Cayman Islands MonetaryAuthority (“CIMA”). GGMI is required to maintain a capital level that is the greater of one quarter of relevant annual expenditure, or $100,000. AtDecember 31, 2012, GGMI maintained $0.3 million more than the minimum required regulatory capital for a total of 3.8 times the required capital and at alltimes maintained compliance with all applicable regulations. F-33Table of ContentsGain Capital-Forex.com Canada Ltd (“GCC”) became registered as an investment dealer with the Investment Industry Regulatory Organization of Canada(“IIROC”) in May 2012. GCC is required to maintain a minimum capital requirement of $0.25 million (0.25 million CAD) and comply with applicablemargin and securities concentration charges. At December 31, 2012, GCC maintained $1.3 million more than the minimum required regulatory capital for atotal of 6.4 times the required capital and at all times maintained compliance with all applicable regulations.The following table illustrates the minimum regulatory capital our subsidiaries were required to maintain as of December 31, 2012 and the actual amounts ofcapital that were maintained (amounts in millions): Entity Name MinimumRegulatoryCapitalRequirements CapitalLevelsMaintained ExcessNetCapital Percent ofRequirementMaintained GAIN Capital Group, LLC $24.8 $46.3 $21.5 187% GAIN Capital Securities, Inc. $0.1 $0.5 $0.4 840% GAIN Capital-Forex.com U.K., Ltd. $14.5 $35.5 $21.0 245% Forex.com Japan Co., Ltd. $3.5 $11.0 $7.5 308% GAIN Capital Forex.com Australia, Pty. Ltd. $0.4 $2.5 $2.2 668% GAIN Capital-Forex.com Hong Kong, Ltd. $1.9 $3.8 $1.8 193% GAIN Global Markets, Inc. $0.1 $0.4 $0.3 380% GAIN Capital-Forex.com Canada Ltd. $0.3 $1.6 $1.3 636% $45.6 $101.6 $56.0 223% 21. Segment InformationASC 280, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operatingsegments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly bythe chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. Reportable segments aredefined as an operating segment that either (a) exceeds 10% of revenue, or (b) reported profit or loss in absolute amount exceeds 10% of profit of all operatingsegments that did not report a loss or (c) exceeds 10% of the combined assets of all operating segments. The Company’s operations relate to foreign exchangetrading and related services. Based on the Company’s management strategies, and common production, marketing, development and client coverage teams, theCompany has concluded that it operates in a single operating segment.For fiscal years ended December 31, 2012, 2011 and 2010, no single customer accounted for more than 10% of the Company’s trading revenue. TheCompany does not allocate revenues by geographic regions since the Company selectively hedges customer trades on an aggregate basis and does not have amethod to systematically attribute trading volume from a geographic region to associated trading revenue from a particular geographic region. F-34Table of Contents22. Quarterly Financial Data (Unaudited)The following table sets forth selected quarterly financial data for 2012 and 2011 (in thousands, except per share data): FirstQuarter SecondQuarter ThirdQuarter FourthQuarter For the Year Ended December 31, 2012 Gross revenue $33,309 $45,721 $39,908 $32,286 Net revenue $33,246 $45,684 $39,985 $32,445 Loss / (income) before income tax expense $(1,859) $5,988 $4,431 $(7,418) Net (loss) / income $(1,247) $4,435 $3,221 $(3,787) Basic net (loss) / income per share $(0.04) $0.13 $0.09 $(0.11) Diluted net (loss) / income per share $(0.04) $0.11 $0.08 $(0.11) For the Year Ended December 31, 2011 Gross revenue $40,755 $55,780 $54,169 $31,631 Net revenue $40,382 $55,590 $53,927 $31,566 Income before income tax expense $2,236 $16,002 $11,783 $(6,777) Net (loss) / income $1,403 $10,013 $7,618 $(3,336) Basic net income/(loss) per share $0.04 $0.29 $0.22 $(0.10) Diluted net income/(loss) per share $0.04 $0.26 $0.20 $(0.10) 23. Subsequent EventsIn February 2013, the Company reached an agreement to acquire the U.S.-based retail customer accounts of FX Solutions LLC. The customer accounts weretransferred to the Company effective March 1, 2013. The Company has continued to purchase shares of its Common Stock under our share buybackprogram. During 2013, through the date of this filing, the Company has repurchased 0.1 million shares at a cost of $0.5 million.The Company has evaluated its subsequent events through the filing date of this Form 10-K.****** F-35Table of ContentsGAIN CAPITAL HOLDINGS, INC.(PARENT COMPANY ONLY)CONDENSED BALANCE SHEETS(in thousands, except share and per share data) As of December 31, 2012 2011 ASSETS: Cash and cash equivalents $49 $1,019 Equity investments in subsidiaries 153,840 146,342 Receivables from affiliates 3,213 16,041 Current tax receivable 5,549 6,762 Other assets 4,061 3,632 Total assets $166,712 $173,796 LIABILITIES AND SHAREHOLDERS’ EQUITY: Liabilities Accrued expenses and other liabilities $3,025 $1,091 Notes payable — 7,875 Total liabilities 3,025 8,966 Shareholders’ Equity Common Stock; ($0.00001 par value; 60 million shares authorized and 36,486,036 and 34,924,095 shares issued andoutstanding as of December 31, 2012 and 35,132,365 and 34,282,244 shares issued and outstanding as ofDecember 31, 2011) — — Accumulated other comprehensive income 1,249 316 Additional paid-in capital 85,089 79,551 Treasury stock, at cost (1,561,941 shares at December 31, 2012 and 850,121 shares at December 31, 2011) (8,280) (5,017) Retained earnings 85,629 89,980 Total Shareholders’ Equity 163,687 164,830 Total liabilities and shareholders’ equity $166,712 $173,796 See Notes to Condensed Financial Statements F-36Table of ContentsGAIN CAPITAL HOLDINGS, INC.(PARENT COMPANY ONLY)CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(in thousands, except share and per share data) For the Fiscal Year EndedDecember 31, 2012 2011 2010 EXPENSES: Employee compensation and benefits $3,094 $779 $373 Change in fair value of convertible, redeemable preferred stock embedded derivative — — (4,691) General and administrative 2,913 3,579 882 Total 6,007 4,358 (3,436) (LOSS)/INCOME BEFORE INCOME TAX EXPENSE (6,007) (4,358) 3,436 Income tax (benefit) / expense (3,682) 4,150 16,621 NET (LOSS) BEFORE UNDISTRIBUTED EARNINGS OF SUBSIDIARIES (2,325) (8,508) (13,185) Earnings of subsidiaries 4,946 24,206 51,030 NET INCOME $2,621 $15,698 $37,845 Other comprehensive income, net of tax: Foreign currency translation adjustment 933 (112) (186) NET COMPREHENSIVE INCOME $3,554 $15,586 $37,659 Net income applicable to GAIN Capital Holdings, Inc. common shareholders $2,621 $15,698 $37,845 See Notes to Condensed Financial Statements F-37Table of ContentsGAIN CAPITAL HOLDINGS, INC.(PARENT COMPANY ONLY)CONDENSED STATEMENTS OF CASH FLOWS(in thousands) For the Fiscal Year EndedDecember 31, 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,621 $15,698 $37,659 Adjustments to reconcile net income to cash provided by operating activities Equity in income of subsidiaries 5,280 24,426 (52,133) Gain / (Loss) on foreign currency exchange rates 217 (285) 3 Deferred taxes 145 (2,291) 214 Amortization of deferred finance costs — 87 87 Stock compensation expense 3,325 491 198 Tax benefit from employee stock option exercises — — — Change in fair value of preferred stock embedded derivative — — (4,691) Changes in operating assets and liabilities: Receivables from affiliates 12,828 (6,100) 1,856 Other assets (657) 1,811 (736) Current tax receivable 1,213 (4,936) 2,792 Accrued expenses and other liabilities 1,934 (913) 709 Income tax payable — — — Cash provided by/(used for) operating activities 26,906 27,988 (14,042) CASH FLOWS FROM INVESTING ACTIVITIES: Investment and funding of subsidiaries (12,778) (12,304) 22,727 Purchase of cost method investment — (500) — Cash provided by/ (used for) investing activities (12,778) (12,804) 22,727 CASH FLOWS FROM FINANCING ACTIVITIES: Deferred initial public offering costs — — 1,732 Proceeds from initial public offering of common stock, net of underwriting discount and otherdirect costs of $3.8 million — — 208 Payment on notes payable (7,875) (10,500) (10,500) Proceeds from exercise of stock options 1,969 853 107 Proceeds from exercise of warrants — 1,270 — Proceeds from ESPP Purchase 216 165 — Repurchase of common shares (3,263) (5,017) — Tax benefit from employee stock option exercises (28) 421 — Dividends paid (6,972) (1,758) — Cash used for financing activities (15,953) (14,566) (8,453) Effect of exchange rate changes on cash and cash equivalents 854 86 — INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (971) 704 232 CASH AND CASH EQUIVALENTS — Beginning of year 1,019 315 83 CASH AND CASH EQUIVALENTS — End of year $48 $1,019 $315 SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $153 $460 $1,068 Taxes, net of refunds $(4,303) $10,714 $13,759 Non-cash financing activities: Accrued initial public offering costs $— $— $1,305 Series E indemnification $— $— $835 Settlement of Preferred Stock embedded derivative $— $— $76,407 Settlement of Convertible, Redeemable preferred stock $— $— $169,390 See Notes to Condensed Financial Statements F-38Table of ContentsSCHEDULE I —GAIN CAPITAL HOLDINGS, INC.(PARENT COMPANY ONLY)NOTES TO CONDENSED FINANCIAL STATEMENTS1. Basis of PresentationBasis of Financial Information — The accompanying financial statements of GAIN Capital Holdings, Inc. (“Parent Company”), including the notes thereto,should be read in conjunction with the consolidated financial statements of GAIN Capital Holdings, Inc. and Subsidiaries (the “Company”) and the notesthereto found on pages F-8 to F-30.The financial statements are prepared in accordance with accounting principles generally accepted in the U.S. which require the Company or Parent Companyto make estimates and assumptions regarding valuations of certain financial instruments and other matters that affect the Parent Company FinancialStatements and related disclosures. Actual results could differ from these estimates.The Parent Company on a stand-alone basis, has accounted for majority-owned subsidiaries using the equity method of accounting.2. Transactions with SubsidiariesThe Parent Company has transactions with its subsidiaries determined on an agreed upon basis. Cash dividends from its subsidiaries totaled $3.0 million,$38.4 million and $42.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.3. Income TaxesASC 740-10-65, Income Taxes, provides measurement and recognition guidance related to accounting for uncertainty in income taxes by prescribing arecognition threshold for tax positions. ASC 740-10-65 also requires extensive disclosures about uncertainties in the income tax positions taken.The Parent Company’s open tax years for its federal returns range from 2008 through 2011 and from 2007 through 2011 for its major state jurisdictions.The Parent Company classifies interest expense and potential penalties related to unrecognized tax benefits as a component of income tax expense.The following table reconciles the provision to the U.S. federal statutory income tax rate: 2012 Federal income tax at statutory rate 35.0% Increase/(decrease) in taxes resulting from: State income tax (0.5)% Embedded derivative Impact of pass through of earnings of subsidiaries 27.4% Meals & entertainment (1.2)% R&D credit (1.5)% Other permanent differences 2.1% Effective Tax Rate 61.3% 4. Commitments and ContingenciesFor a discussion of commitments and contingencies, see Note 17 to the Company’s consolidated financial statements. F-39Exhibit 21.1List of Subsidiaries Entity Name Jurisdiction of IncorporationGCAM, LLC DelawareGAIN Holdings, LLC DelawareGAIN Capital Group, LLC DelawareS.L. Bruce Financial Corporation OhioGAIN Capital Securities, Inc. DelawareGAIN Capital Holdings International, LLC DelawareGAIN Global Markets, Inc. Cayman IslandsIsland Traders (Cayman), Limited Cayman IslandsGAIN Capital-Forex.com Hong Kong, Ltd. Hong KongForex.com Japan Co., Ltd. JapanGAIN Capital Forex.com Australia Pty. Ltd. AustraliaGAIN Capital-Forex.com Singapore, Ltd. SingaporeGAIN Capital-Forex.com U.K., Ltd. England and WalesGAIN Capital-Forex.com Canada, Ltd. CanadaGAIN GTX, LLC DelawareGAIN GTX, Singapore Pte. Ltd. SingaporeGAIN Capital Service Company, LLC DelawareGAIN Capital Holdings International, B.V. The NetherlandsGAIN Capital Holdings International Finance Company, B.V. The NetherlandsGAIN Capital GTX International, B.V. The NetherlandsGAIN Capital – Forex.com International, B.V. The NetherlandsGAIN Global Markets International, B.V. The NetherlandsGAIN Capital – Forex.com Cyprus Ltd. CyprusExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-171841 on Form S-8 of our reports dated March 18, 2013, relating to theconsolidated financial statements and financial statement schedule of GAIN Capital Holdings, Inc. and subsidiaries (the “Company”) (which report expressesan unqualified opinion and includes an explanatory paragraph relating to the revision of the Company’s 2011 consolidated balance sheet, and 2011 and 2010consolidated statements of cash flows, to correct a misstatement) and the effectiveness of the Company’s internal control over financial reporting, appearing inthis Annual Report on Form 10-K of the Company for the year ended December 31, 2012./s/ Deloitte & Touche LLPNew York, New YorkMarch 18, 2013Exhibit 31.1CERTIFICATION PURSUANT TORULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDEDI, Glenn H. Stevens, certify that: 1.I have reviewed this annual report on Form 10-K of GAIN Capital Holdings, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 18, 2013 /s/ GLENN H. STEVENS Glenn H. Stevens President and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2CERTIFICATION PURSUANT TORULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDEDI, Daryl J. Carlough, certify that: 1.I have reviewed this annual report on Form 10-K of GAIN Capital Holdings, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 18, 2013 /s/ Daryl J. Carlough Interim Chief Financial Officer, Treasurer, Chief Accounting Officerand Corporate Controller(Principal Financial and Accounting Officer)Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER,AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Glenn H. Stevens, the undersigned Chief Executive Officer and President of GAIN Capital Holdings, Inc., a Delaware corporation (the “Company”) herebycertify pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge: 1.The accompanying annual report on Form 10-K for the fiscal year ended December 31, 2012 (the “Report”) fully complies with the requirementsof Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 18, 2013 /s/ Glenn H. StevensGlenn H. StevensChief Executive Officer and President(Principal Executive Officer)A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retainedby the Company and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICER,AS REQUIRED BY SECTION 906 THE SARBANES-OXLEY ACT OF 2002I, Daryl J. Carlough, the undersigned Chief Financial Officer and Treasurer of GAIN Capital Holdings, Inc. (“the Company”) hereby certify pursuant to18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge: 1.The accompanying annual report on Form 10-K for the fiscal year ended December 31, 2012 (the “Report”) fully complies with the requirementsof Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 18, 2013 /s/ Daryl J. CarloughInterim Chief Financial Officer, Treasurer,Chief Accounting Officer and Corporate Controller(Principal Financial and Accounting Officer)A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retainedby the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Continue reading text version or see original annual report in PDF format above