##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549







FORM 10-K



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
|- |  | --------------------------------------------------------------------------------------------------------------------------------



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



001-14223

Commission File Number



KNIGHT CAPITAL
GROUP, INC.

(Exact name of registrant as specified in its charter)



DELAWARE

(State or other
jurisdiction of incorporation or organization)



22-3689303

(I.R.S. Employer Identification Number)



545 Washington Boulevard, Jersey City, NJ 07310

(Address
of principal executive offices and zip code)



Registrants
telephone number, including area code: (201) 222-9400







Securities registered pursuant to Section 12(b) of the Act:

Class A Common Stock, $0.01
par value



Securities registered pursuant to Section 12(g) of the
Act:

None.



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No   ̈



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



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No   ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer  x    Accelerated filer   ̈    Non-accelerated filer   ̈ Smaller reporting company   ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x



The aggregate market value of the Class A Common Stock held by nonaffiliates of
the Registrant was approximately $1.32 billion at June 30, 2008 based upon the closing price for shares of the Registrants Class A Common Stock as reported by the Nasdaq Global Select Market on that date. For purposes of this
calculation, affiliates are considered to be officers, directors and holders of 10% or more of the outstanding common stock of the Registrant.



At February 27, 2009 the number of shares outstanding of the Registrants Class A Common Stock was 92,880,705 and there were no shares outstanding of
the Registrants Class B Common Stock as of such date.



DOCUMENTS
INCORPORATED BY REFERENCE



Definitive Proxy Statement relating to
the Companys 2009 Annual Meeting of Stockholders to be filed hereafter (incorporated, in part, into Part III hereof).









---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



FORM 10-K ANNUAL REPORT



For the Year Ended December 31, 2008



TABLE OF CONTENTS



|               |  |                                                                                                              |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|               |  |                                                                                                              |  | Page
|PART I         |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 1.        |  | Business                                                                                                     |  | 4   
|Item 1A.       |  | Risk Factors                                                                                                 |  | 16  
|Item 1B.       |  | Unresolved Staff Comments                                                                                    |  | 24  
|Item 2.        |  | Properties                                                                                                   |  | 24  
|Item 3.        |  | Legal Proceedings                                                                                            |  | 25  
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                          |  | 27  
|               |  |                                                                                                             
|PART II        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 5.        |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities |  | 28  
|Item 6.        |  | Selected Financial Data                                                                                      |  | 32  
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 34  
|Item 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 60  
|Item 8.        |  | Financial Statements and Supplementary Data                                                                  |  | 64  
|Item 9.        |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosures                        |  | 107 
|Item 9A.       |  | Controls and Procedures                                                                                      |  | 107 
|Item 9B.       |  | Other Information                                                                                            |  | 107 
|               |  |                                                                                                             
|PART III       |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 10.       |  | Directors, Executive Officers and Corporate Governance                                                       |  | 107 
|Item 11.       |  | Executive Compensation                                                                                       |  | 107 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 107 
|Item 13.       |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 107 
|Item 14.       |  | Principal Accountant Fees and Services                                                                       |  | 107 
|               |  |                                                                                                             
|PART IV        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 15.       |  | Exhibits and Financial Statement Schedules                                                                   |  | 108 
|Signatures     |  | 112                                                                                                         
|Certifications |  |                                                                                                             
|Exhibit Index  |  |                                                                                                             



2



---

##### Table of Contents

FORWARD LOOKING STATEMENTS



Certain statements contained in this Annual Report on Form 10-K, including without limitation, those under Legal
Proceedings in Part I, Item 3, Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 (MD&A), and Quantitative and Qualitative Disclosures About
Market Risk in Part II, Item 7A, and the documents incorporated by reference herein may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not
historical facts and are based on current expectations, estimates and projections about the Companys industry, managements beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and
beyond our control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without
limitation, risks associated with (i) the costs, integration, performance and operation of businesses recently acquired, or that may be acquired in the future, by the Company, (ii) the unprecedented current market conditions and the
resulting volatility, credit tightening and counterparty risk, as well as the negative effect on performance and assets under management in our Asset Management business and the suspension of redemptions and withdrawals of certain funds announced in
the Form 8-K filed by the Company on October 30, 2008, (iii) the announcement that the assets of the Asset Management business will be sold as described in the Form 8-K furnished by the Company on January 27, 2009, and (iv) the
announcement regarding estimated costs associated with the Companys exit from the Asset Management business as described in the Form 8-K filed by the Company on February 26, 2009. Since such statements involve risks and uncertainties, the
actual results and performance of the Company may turn out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made
in this report. Readers should carefully review the risks and uncertainties disclosed in the Companys reports with the U.S. Securities and Exchange Commission (SEC), including those detailed under Certain Factors Affecting
Results of Operations in MD&A and in Risk Factors in Part I, Item 1A herein, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time. This discussion should be read in
conjunction with the Companys Consolidated Financial Statements and the Notes thereto contained in this report.



3



---

##### Table of Contents

PART I



Item 1.Business



Overview



Knight Capital Group, Inc., a Delaware corporation (collectively with its subsidiaries, Knight or the Company), is a leading financial
services firm that provides electronic and voice access to the capital markets across multiple asset classes for buy-side, sell-side and corporate clients, and asset management for institutions and private clients.



The Company was organized in January 2000 as the successor to the business of
Knight/Trimark Group, Inc. (the Predecessor). The Predecessor was organized in April 1998 as the successor to the business of Roundtable Partners, LLC, which was formed in March 1995. In May 2000, the Company changed its name from
Knight/Trimark Group, Inc. to Knight Trading Group, Inc., and in May 2005 the Company further changed its name to Knight Capital Group, Inc. Our corporate headquarters are located at 545 Washington Boulevard, Jersey City, New Jersey 07310. Our
telephone number is (201) 222-9400.



Financial information
concerning our business segments for each of 2008, 2007 and 2006, respectively, is set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 (MD&A) and
the Consolidated Financial Statements and Notes thereto located in Part II, Item 8 entitled Financial Statements and Supplementary Data.



Available Information



Our Internet address is www.knight.com. We make available free of charge, on or through the Investor Relations section of our corporate website
under SEC Filings, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers, and any amendments to those reports filed or furnished
pursuant to the Securities Exchange Act of 1934, and our proxy statement as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. Also posted on our corporate website is our Code of Business
Conduct and Ethics (the Code) governing our directors, officers and employees. Within the time period required by the SEC, we will post on our corporate website any amendments and waivers to such Code applicable to our executive officers
and directors, as defined in the Code.



Our Board of Directors (the
Board) has standing Finance and Audit, Compensation and Nominating and Corporate Governance committees. Each of these Board committees has a written charter approved by the Board. Our Board has also adopted a set of Corporate Governance
Guidelines. Copies of each committee charter, along with the Corporate Governance Guidelines, are posted on the Companys website. None of the information on our corporate website is incorporated by reference into this report.



All of the above materials are also available in print, without charge, to any person
who requests them by writing or telephoning:



Knight
Capital Group, Inc.

Communications, Marketing and Investor Relations

545 Washington Boulevard, 3rdFloor

Jersey City, NJ 07310

(201) 222-9400



Unless otherwise indicated, references to the Company, Knight, We, Us, or Our shall mean Knight Capital
Group, Inc. and its subsidiaries.



4



---

##### Table of Contents

Operating Segments



The Company has three operating segments, Global Markets, Asset Management and Corporate.



| |  |  | Global MarketsOur Global Markets segment provides market access and trade execution services in nearly every U.S. equity security and a large number of
international securities, fixed income, foreign exchange, futures and options. Our approach to trading combines deep liquidity with robust trading technology and capital facilitation, when necessary, to deliver high quality trade executions
consistent with client-defined measures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Asset ManagementOur Asset Management segment, which we are currently in the process of preparing to exit, consists of our 51% ownership of Deephaven Capital
Management Holdings LLC (Deephaven Holdings), the parent company of Deephaven Capital Management LLC and its subsidiaries (collectively, Deephaven), a global, multi-strategy alternative investment manager. Assets under
management were $2.0 billion as of December 31, 2008, down from $3.9 billion as of December 31, 2007. For information regarding our plan to exit from our Asset Management segment, refer to the Deephaven and Subsequent
Events sections in MD&A.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CorporateOur Corporate segment includes investment income earned on strategic investments and our corporate investment as a limited partner or non-managing
member in funds managed by Deephaven and all corporate overhead expenses. Corporate overhead expenses primarily consist of compensation for certain senior executives and other individuals employed at the corporate holding company, legal and other
professional expenses related to corporate matters, directors fees, investor and public relations expenses and directors and officers insurance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth: (i) Revenues, (ii) Expenses, (iii) Minority interest expense, (iv) Other income
and (v) Pre-tax earnings (loss) after minority interest expense of our segments and on a consolidated basis (in millions):



|                                                        |  |                                  |         |   |      |   |       |  |   |      
|------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ----- |  | - | -----
|                                                        |  | For the years ended December 31,
|                                                        |  | 2008                             |         |   | 2007 |   | 2006 
|Global Markets                                          |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  | $                                | 998.5   |   |      | $ | 739.9 |  | $ | 657.6
|Expenses                                                |  |                                  | 641.1   |   |      |   | 559.6 |  |   | 507.3
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings                                        |  |                                  | 357.5   |   |      |   | 180.4 |  |   | 150.3
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Asset Management                                        |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 33.3    |   |      |   | 118.2 |  |   | 214.9
|Expenses                                                |  |                                  | 52.6    |   |      |   | 101.7 |  |   | 140.1
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings                                 |  |                                  | (19.4   | ) |      |   | 16.5  |  |   | 74.8 
|Minority interest expense                               |  |                                  | 6.2     |   |      |   |      |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings after minority interest expense |  |                                  | (25.5   | ) |      |   | 16.5  |  |   | 74.8 
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Corporate                                               |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 1.1     |   |      |   | 27.1  |  |   | 66.9 
|Expenses                                                |  |                                  | 40.9    |   |      |   | 31.5  |  |   | 35.5 
|Other income                                            |  |                                  | 15.9    |   |      |   | 8.8   |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings                                 |  |                                  | (23.8   | ) |      |   | 4.3   |  |   | 31.4 
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Consolidated                                            |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 1,032.9 |   |      |   | 885.2 |  |   | 939.5
|Expenses                                                |  |                                  | 734.6   |   |      |   | 692.7 |  |   | 682.9
|Other income                                            |  |                                  | 15.9    |   |      |   | 8.8   |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings                                        |  |                                  | 314.3   |   |      |   | 201.2 |  |   | 256.5
|Minority interest expense                               |  |                                  | 6.2     |   |      |   |      |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings after minority interest expense        |  | $                                | 308.1   |   |      | $ | 201.2 |  | $ | 256.5
|                                                        |  |                                  |         |   |      |   |       |  |   |      



|* |  | Totals may not add due to rounding.
|- |  | -----------------------------------



5



---

##### Table of Contents

Global Markets Segment



Business Segment Overview



We provide market access and trade execution services in nearly every U.S. equity security and a large number of international securities, fixed income, foreign
exchange, futures and options. Our approach to trading combines deep liquidity with robust trading technology and capital facilitation, when necessary, to deliver high quality trade executions consistent with client-defined measures. Our hybrid
market model features an array of electronic and voice services that allow buyand sell-side clients to interact with the market based on their specific needs and preferences. This model allows us to attract a larger base of clients with
diverse investment styles and strategies, while at the same time, capture a greater share of client order flow. To do so, our model requires that we manage risk and deploy capital effectively as well as maintain efficient and reliable trading
technology. Substantially all of our Global Markets revenues and profitability come from our operations in the U.S.



The majority of our Global Markets revenue is derived from trade executions, making markets and providing market access services in U.S. equities. Generally,
market-makers display the prices at which they are willing to bid, meaning buy, or offer, meaning sell, securities and adjust their bid and offer prices in response to the forces of supply and demand for each security. As a market-maker operating in
Nasdaq, the over-the-counter (OTC) market for New York Stock Exchange (NYSE), NYSE Alternext and NYSE Arca listed securities, the OTC Bulletin Board, and the Pink Sheets, we provide trade executions by offering to buy
securities from, or sell securities to, institutions and broker-dealers. When acting as principal, we commit our own capital and derive revenues from the difference between the price paid when securities are bought and the price received when those
securities are sold. We conduct the vast majority of market making activity as principal, through the use of automated quantitative models. Our traders offer execution services for complex trades and a variety of order types. We also provide trade
executions for institutions on an agency or riskless principal basis, generating commissions or commission equivalents, respectively. Also, our trading strategy employs the use of high velocity algorithmic trading models which interact with street
flow.



Our domestic Global Markets activities are primarily transacted
out of the following subsidiaries: Knight Equity Markets, L.P. (KEM), Knight Capital Markets LLC (KCM), Knight Direct LLC (Knight Direct), Hotspot FX, Inc. and its subsidiaries (collectively, Hotspot),
Knight BondPoint, Inc. (Knight BondPoint) and Knight Libertas Holdings LLC (formerly known as Libertas Holdings LLC) and its subsidiaries (collectively, Knight Libertas). KEM, KCM, Knight Direct, Knight BondPoint and one
Knight Libertas subsidiary are broker-dealers registered with the SEC and members of the Financial Industry Regulatory Authority (FINRA). Knight BondPoint and Knight Libertas domestic subsidiary are also registered with the
Municipal Securities Rulemaking Board (MSRB). One Hotspot subsidiary is a Futures Commission Merchant (FCM) registered with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures
Association (NFA).



Our international Global Markets
activities are primarily operated through Knight Equity Markets International Limited (KEMIL), a U.K. registered broker-dealer authorized and regulated by the U.K. Financial Services Authority (FSA). KEMIL provides execution
services for institutional and broker-dealer clients in U.S., European and international equities. Each of Hotspot and Knight Libertas has a U.K. subsidiary which is regulated by the FSA. Knight Libertas also has a Hong Kong registered broker-dealer
that is regulated by the Securities and Futures Commission (SFC). We recently received regulatory approval for a newly-formed broker-dealer in Hong Kong that will focus on equity execution services for buy-side clients. We intend to
continue to expand our business and product offerings in Europe and Asia in 2009.



Over the past four years, we have completed the following acquisitions (and subsequent sales of equity interests) of complementary businesses to strengthen our Global Markets business segment and expand and diversify our products and
services:



6



---

##### Table of Contents

| |  |  | In June 2005, we acquired the business of Direct Trading Institutional, now operating as Knight Direct. The acquired business was a privately held firm specializing in
providing institutions with direct market access trading through an advanced electronic platform, now known as Knight Direct EMS. Upon the close of the transaction, the Company made a $40 million initial cash payment. The transaction also
contained a two-year contingency from the date of closing for the payment of additional consideration based on the profitability of the business. In the third quarters of 2007 and 2006, the Company paid $10.4 million and $12.7 million, respectively,
in additional cash consideration based on the profitability of the business during each of the first two years of operation after the closing of the acquisition.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2005, we acquired the business of the ATTAIN ECN (now operating as Direct Edge ECN), an alternative trading system that operates an electronic communications
network (ECN). The Direct Edge ECN provides a liquidity destination with the ability to match and route trades in Nasdaq, NYSE, NYSE Alternext and NYSE Arca listed securities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



After the close of business on July 23, 2007 and September 28, 2007, Direct
Edge Holdings LLC (Direct Edge Holdings), the parent company of Direct Edge ECN, issued equity interests to Citadel Derivatives Group LLC (Citadel) in exchange for cash. Immediately following the September 28, 2007
issuance to Citadel, the Company and Citadel sold a portion of their equity interests in Direct Edge Holdings to The Goldman Sachs Group, Inc. for cash. At the close of business on September 28, 2007 (the Deconsolidation Date) the
Company deconsolidated Direct Edge Holdings as it no longer controlled Direct Edge Holdings as of that date. The results of Direct Edge ECN operations have been included in the Consolidated Statements of Operations for all periods presented from the
original acquisition date through the Deconsolidation Date. The Company accounts for its interest in Direct Edge Holdings under the equity method for periods subsequent to the Deconsolidation Date. In December 2008, we sold part of our remaining
interest in Direct Edge Holdings and as a result, as of December 31, 2008, we own 19.9% of Direct Edge Holdings.



| |  |  | In April 2006, we acquired, for $77.5 million in cash, Hotspot, an electronic foreign exchange marketplace that provides access to electronic foreign exchange spot trade
executions through an advanced ECN-based platform.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2006, we acquired, for $18.2 million in cash, Knight BondPoint, a firm that provides electronic access and trade execution products for the fixed income market.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2008, we acquired EdgeTrade Inc. (EdgeTrade) for $58.2 million comprising $28.2 million of cash and approximately 2.3 million shares of
unregistered Knight common stock. EdgeTrade was an agency-only trade execution and algorithmic software firm that allowed buy- and sell-side clients to more effectively source liquidity and manage the trading process as well as maintain anonymity,
reduce market impact and lower transaction costs. EdgeTrade merged into Knight Direct in August 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2008, we acquired Knight Libertas, for an upfront payment of $50.3 million in cash and approximately 1.5 million shares of unregistered Knight common stock
valued at $25.0 million. The transaction also has a three-year contingency from the date of closing for the payment of additional consideration based on the profitability of the business. Knight Libertas is a riskless principal fixed income
broker-dealer specializing in high-yield and high-grade corporate bonds, distressed debt, asset- and mortgage-backed securities, convertible bonds and syndicated loans.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Clients and Products



Clients



Within Global Markets, we offer products and provide services via electronic and voice access points primarily to two main client groups: sell-side (also referred
to as broker-dealers) and buy-side



7



---

##### Table of Contents

(also referred to as institutions). Our sell-side clients include global, national and regional broker- dealers and on-line brokers. Our buy-side clients include
mutual funds, pension plans, plan sponsors, hedge funds, trusts and endowments. Based on our internal allocation methodologies, our institutional clients (which include our direct market access, soft dollar and commission recapture clients) and our
broker-dealer clients each generated approximately 50% of our Global Markets revenues in 2008.



In 2008, our Global Markets business did not have any client that accounted for more than 10% of our U.S. equity dollar value traded.



Products and Services



Our strategy for our Global Markets segment is to continue to differentiate ourselves
from competitors by providing high quality and competitive trade execution services with superior client service. Over the past several years, we have worked to expand our products and services.



For our buy-side clients, we offer comprehensive, unbundled trade execution services
covering the depth and breadth of the market. We handle large, complex trades, accessing liquidity from our order flow as well as other sources. When liquidity is not naturally present in the equities market, we offer capital facilitation, when
necessary, to complete our clients trades. Our institutional products include equity, fixed income, futures, options and foreign currency trade execution solutions, block trading, program trading, international equities, special
situations/risk arbitrage, soft dollar and commission recapture programs through Donaldson & Co. (Donaldson), corporate access services, direct market access through Knight Direct EMS, EdgeTrade algorithms and internal
crossing networks through our Knight Match product. The majority of our revenues from institutional clients are commissions on agency transactions or commission-equivalents on riskless principal transactions.



We seek to provide sell-side clients with high quality and competitive trade executions
that enable them to satisfy their fiduciary obligations to their customers to seek and obtain the best execution reasonably available in the marketplace. Most of our equity order flow comes from providing market-making and trade execution services
to our broker-dealer clients through our electronic trading platform, which includes access to our off-exchange liquidity through Knight Link. Our traders offer execution services for complex trades and a variety of order types. We execute the
majority of the order flow with these clients as principal through the use of our automated quantitative models. The majority of the revenues we earn from broker-dealer clients are net trading revenues, generated from the difference between the
price paid when we buy securities and the price received when we sell securities. We also provide fixed income trade executions to our broker-dealer clients. Additionally, we interact with street flow through our high velocity algorithmic trading
models.



Global Markets Competition



During 2008, the securities markets endured unprecedented market conditions with high
volatility, dramatic credit tightening and increased counterparty risk. These difficult conditions have continued into 2009, requiring us to continue to adapt to our clients needs amidst a changing landscape and competition. Our client
offerings, including our trade execution services, compete primarily with similar products offered by domestic and international broker-dealers, exchanges, alternative trading systems, crossing networks, ECNs and dark liquidity pools. We also
experience significant competition from various market participants with highly automated, electronic trading models. Another source of competition is broker-dealers who execute portions of their client flow through internal market-making desks
rather than sending the client flow to third party execution destinations, such as Knight.



We compete primarily on the basis of our execution standards (including price, liquidity, speed and other client-defined measures), client relationships, client service, payments for order flow and technology. Over the past
several years, regulatory changes, competition and the continued focus by



8



---

##### Table of Contents

regulators and investors on execution quality and overall transaction costs have resulted in a market environment characterized by narrowed spreads and reduced revenue
capture metrics. Consequently, maintaining profitability has become extremely difficult for many firms similarly situated to Knight. Generally, improvements in execution quality, such as faster execution speed and greater price improvement,
negatively impact the ability to derive revenues from executing client order flow. For example, we have made, and continue to make, changes to our execution protocols and quantitative models, which have had, or could have, a significant impact on
our profitability. To remain profitable, some competitors have limited or ceased activity in illiquid or marginally profitable securities or, conversely, have sought to execute a greater volume of trades at a lower cost by increasing the automation
and efficiency of their operations. Beginning in the second quarter of 2005, we significantly increased the amount of automation in our trade execution business by employing quantitative models and we now execute the vast majority of our trades on
an automated basis through these models.



Competition for order flow in
the U.S. equity markets continues to be intense and evolving rapidly as reflected in publicly disclosed execution metrics; i.e., SEC Rules 605 and 606. These rules, applicable to broker-dealers, add greater disclosure to execution quality and
order-routing practices. Rule 605 requires market centers that trade national market system securities to make available to the public monthly electronic reports that include uniform statistical measures of execution quality on a
security-by-security basis. Rule 606 requires broker-dealers that route equity and option orders on behalf of their customers to make publicly available quarterly reports that describe their order routing practices and disclose the venues to which
customer orders are routed for execution. These statistics on execution quality vary by order sender based on their mix of business. This rule also requires the disclosure of payment for order flow arrangements as well as internalization practices.
The intent of this rule is to encourage routing of order flow to destinations based primarily on the demonstrable quality of executions at those destinations, supported by the order entry firms fiduciary obligations to seek to obtain best
execution for their customers orders.



Commission rates have been
under pressure for a number of years, and the ability to execute trades electronically through various competitive trading venues (including both domestic and international broker-dealers, exchanges, alternative trading systems, crossing networks,
ECNs and dark liquidity pools) has placed increased pressure on trading commissions. We believe the trend toward increased competition and the growth of these and other alternative trading venues will continue. We may experience competitive
pressures in these and other areas in the future as some of our competitors seek to obtain greater market share by reducing prices. Competition for business with institutional clients is based on a variety of factors, including execution quality,
research, reputation, soft dollar and commission recapture services, technology, market access (including direct market access and execution algorithms), client relationships, client service, cost and capital facilitation.



Also, other factors contributing to increasing competition for order flow are the
significant mergers among U.S. market centers over the past several years and the launch of independent ECNs, dark liquidity pools and joint ventures with regional stock exchanges. The impact of these mergers and the launch of new competition and
liquidity sources, as well as the expected consolidation of certain U.S. and international stock exchanges, will be seen in the coming years.



Global Markets Infrastructure



We have invested significant resources to expand our execution capacity and upgrade our trading systems and infrastructure and plan to make additional investments
in technology and infrastructure in the future. Our ability to identify and deploy emerging technologies that facilitate the execution of trades, including developing and enhancing our quantitative models, is key to the successful execution of our
business model. Technology has enhanced our capacity and ability to handle order flow faster and also has been an important component of our strategy to comply with government and industry regulations, achieve competitive execution standards,
increase trading automation and provide



9



---

##### Table of Contents

superior client service. We continually enhance our use of technology and quantitative models to further refine our execution services. We also continue to develop and
enhance our high velocity algorithmic trading models.



We use our
proprietary technology and technology licensed from third parties to execute trades, monitor the performance of our traders, assess our inventory positions, manage risk and provide ongoing information to our clients. We are electronically linked to
institutions and broker-dealers to provide immediate access to our trading operations and to facilitate the handling of client orders. Our business-to-business portal, along with our Knight Link, Knight BondPoint, Hotspot, and Knight Direct
EMS platforms, provide our clients with an array of tools to interact with our Global Markets trading systems, marketplaces, and most U.S. equity, futures and options market centers. In addition, we clear the majority of our trade
executions through unaffiliated clearing brokers with whom we are electronically linked.



Alternative trading and data center facilities are in place for our primary domestic Global Markets operations. These facilities have been designed to allow us to continue a substantial portion of our operations if we are
prevented from accessing or utilizing our primary office locations for an extended period of time. While we employ significant steps to develop, implement and maintain reasonable business continuity plans, we cannot guarantee our alternative systems
and facilities will provide full continuity of operations after a significant business disruption.



Asset Management Segment



Business Segment
Overview



As of February 2009, we are in the process of preparing to
exit our Asset Management segment. Due to unprecedented market conditions, pending redemptions and industry-wide changes in margin and finance requirements, and after evaluation of a number of strategic options, the Company concluded that it was in
the best interests of investors of Deephaven and the Company to exit our Asset Management segment. For information regarding our plan to exit from our Asset Management segment, refer to the Deephaven and Subsequent Events
sections in MD&A.



We have operated our Asset Management business
through our 51% ownership in Deephaven Holdings, which owns Deephaven. Deephaven is the registered investment manager and sponsor of certain private, unregistered funds commonly referred to as hedge funds (the Deephaven Funds).
Generally, hedge funds are defined as pools of capital that may invest in any asset class, including derivatives, and may use long and short positions, derivative instruments, and leverage in order to generate returns for investors. Deephaven is
based in Minnetonka, MN, and also has offices in London and Hong Kong.



Below is a summary of assets under management at December 31, 2008, 2007 and 2006, and the blended fund returns for each of the years then ended:



|                                            |  |      |       |   |      |   |     |      |  |   |      |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | --- | ---- |  | - | ---- | -
|                                            |  | 2008 |       |   | 2007 |   |     | 2006 | 
|Year-end assets under management (billions) |  | $    | 2.0   |   |      | $ | 3.9 |      |  | $ | 4.2  |  
|Annual fund return to investors*            |  |      | -32.6 | % |      |   | 6.8 | %    |  |   | 22.8 | %



|* |  | Annual fund return represents the blended annual return across all assets under management.
|- |  | -------------------------------------------------------------------------------------------



We earn fees from managing the Deephaven Funds, which consist of management fees, calculated as fixed percentages of assets under
management, and incentive allocation fees, which, in general, are calculated as a percentage of the funds annual profits, if any.



10



---

##### Table of Contents

Business Segment Structure



In 2003, the Company entered into long-term employment contracts with certain senior managers of Deephaven. These employment agreements, which became effective on
January 1, 2004, had a three-year term which expired on December 31, 2006. The agreements provided for profit sharing bonuses based on the financial performance of Deephaven, which, for 2006, represented 50% of pre-tax earnings prior to
the profit-sharing bonuses. The employment agreements also included an option for renewal by the Deephaven managers through 2009 under identical financial terms; however, the renewal option was not exercised.



In December 2006, the Company entered into new long-term employment agreements (the
2006 Employment Agreements) with three senior managers of Deephaven (the Deephaven Managers), two of whom were parties to the agreements entered into in 2003. The 2006 Employment Agreements, which became effective on
January 1, 2007, were for three-year terms and included a right of renewal by the Deephaven Managers through 2012 under certain circumstances. The 2006 Employment Agreements provided profit-sharing bonuses based on the financial performance of
Deephaven. According to the terms of the 2006 Employment Agreements, the Deephaven Managers were entitled to receive 50% of the first $60 million, and 75% thereafter, of pre-tax earnings prior to the profit-sharing bonuses. Upon entering the 2006
Employment Agreements, the Deephaven Managers received one million shares of Knight restricted common stock, which vest ratably over three years.



In connection with entering into the 2006 Employment Agreements, the Deephaven Managers were granted an option (the Option) to obtain a 49% interest in
Deephaven Holdings to which our interests in Deephaven would be contributed. The Option became exercisable after January 1, 2008 upon Deephaven having met certain requirements regarding minimum assets under management and employee retention. On
January 10, 2008, Deephaven Managing Partners, LLC (Deephaven Partners), an entity owned and controlled by the Deephaven Managers, provided notice to the Company that it was exercising the Option.



On February 1, 2008, after regulatory and contractual approvals were received, the
Company completed the transaction whereby the Company contributed its interest in Deephaven to Deephaven Holdings and Deephaven Partners acquired a 49% interest in Deephaven Holdings in exchange for the termination of the Deephaven Managers
2006 Employment Agreements and associated profit sharing bonuses and an equity contribution of $1 million to Deephaven Holdings by Deephaven Partners (the Deephaven Transaction). The Deephaven Transaction did not affect or result in any
change to Deephavens role as investment manager to the funds it managed at that time or to the manner in which Deephaven carried out its duties as investment manager to those funds.



As part of the Deephaven Transaction, the Company and Deephaven Partners entered into a new Limited Liability Company Agreement (the
New LLC Agreement) for Deephaven Holdings. In addition, the 2006 Employment Agreements terminated and were replaced by new long-term employment agreements between Deephaven Holdings and each of the Deephaven Managers (the New
Employment Agreements). The New Employment Agreements did not include the profit-sharing bonuses provided for under the 2006 Employment Agreements; however, the Deephaven Managers continue to be entitled to participate in certain profit pools
relating to specific Deephaven funds. Following the Deephaven Transaction, pre-tax earnings are allocated between the Company and, through Deephaven Partners, the Deephaven Managers in a similar manner as under the 2006 Employment Agreements.
Profit-sharing bonuses under the 2006 Employment Agreements had been reported in Employee compensation and benefits on our Consolidated Statements of Operations. As a result of the Deephaven Transaction, beginning in February 2008, profits or losses
that are allocated to the Deephaven Managers are instead reported as Minority interest expense on our Consolidated Statements of Operations and included as Minority interest on our Consolidated Statements of Financial Condition.



11



---

##### Table of Contents

Under the New LLC Agreement, we own 51% of the shares in Deephaven Holdings, and Deephaven Partners owns 49% of the
shares. We are entitled to appoint a majority of the Board of Managers of Deephaven Holdings. Certain corporate actions require approval of a super-majority of members of the Board of Managers, including representatives of both Deephaven
Partners and Knight. Neither party is permitted to transfer any of its interests in Deephaven Holdings to any unaffiliated third person without the consent of the other party. Any sale of Deephaven Holdings requires either (x) the consent of
the holders of 75% of the shares or (y) if the aggregate consideration is in excess of $450 million, the approval of only Deephaven Partners (subject to a right of first refusal for the benefit of the Company). Pursuant to the New LLC
Agreement, proceeds from any sale or liquidation of Deephaven or Deephaven Holdings will be allocated among the Company and Deephaven Partners based upon a formula that takes into account their capital accounts at the time of such sale or
liquidation and relative profit sharing percentages over a defined period of time.



Clients and Products



Investors in the Deephaven Funds
include banks, insurance companies, funds-of-hedge funds, corporate and public pension plan sponsors, trusts, endowments and private clients. Included within Deephavens $2.0 billion of assets under management as of December 31, 2008 is a
corporate investment as a limited partner or non-managing member of $47.2 million held by the Company and $35.8 million in the deferred compensation plans relating to certain employees and directors. Separately, certain officers, directors and
employees of the Company held direct investments aggregating approximately $47.1 million as limited partners or non-managing members in the Deephaven Funds. As of December 31, 2008, two investors each accounted for more than 10% of the
Deephaven Funds assets under management.



As of December 31,
2008, approximately 61% of the Deephaven Funds assets under management were in the Global Multi-Strategy Fund (GMS Fund), formerly known as the Deephaven Market Neutral Fund. The investment philosophy for the GMS Fund is to seek to
produce returns for its investors using various investment strategies focusing on delivering attractive risk-adjusted rates of return. The performance of the GMS Fund is intended to be substantially non-correlated with the general debt and equity
markets, as well as with a number of other non-traditional investment strategies. Within the GMS Fund, Deephaven generally employs a variety of investment strategies, including volatility-driven, fundamental equity, event-driven, credit-driven and
global relative value macro/fixed income strategies, among others. The unprecedented market conditions, pending redemptions and industry-wide changes in margin and finance requirements led Deephaven to announce the suspension of redemptions in the
GMS Fund and International Volatility Strategies Fund on October 30, 2008.



On January 31, 2008, Deephaven announced that it had concluded that it was in the best interests of investors in the Deephaven Event Fund (Event Fund) that the Event Fund return investors capital. As a result,
redemptions in the Event Fund were suspended, and Deephaven began an orderly process to reduce trading positions to cash and return investors capital as promptly as reasonably practicable. Beginning February 1, 2008, and through the
period of time Deephaven is returning investors capital, no management or incentive allocation fee will be charged to investors in the Event Fund. As of December 31, 2008, the Event Fund held approximately $86 million in assets under
management, or approximately 4% of the Deephaven Funds assets under management.



Deephaven also manages other single-strategy funds as well as several separately managed accounts for institutional investors. As of December 31, 2008, these single-strategy funds and all separately managed accounts had,
in aggregate, approximately $689.2 million, or approximately 35%, of the Deephaven Funds assets under management as of such date.



12



---

##### Table of Contents

Asset Management Competition



Historically, Deephaven competed primarily with other asset management companies that manage and sponsor multi-strategy, credit-driven, long short equity,
event-driven and volatility-driven portfolios. As Deephaven launched single strategy funds, it competed with other asset management companies with similar investment strategies. Competition was primarily based on reputation, client relationships,
the experience of the management team, investment strategies, risk profile, global presence, fee structures and historical fund returns.



Until 2008, there had been an on-going trend among fund management companies and institutions to allocate more of their assets to hedge fund investments. Due to the
illiquidity in the credit market, steep decline in hedge fund performance and the unprecedented redemptions by investors in 2008, the hedge fund industry declined, as shown in the table below.



|     |  |                                |  |                                                   |          
|---- |  | ------------------------------ |  | ------------------------------------------------- | ---------
|     |  | Estimated number ofhedge funds |  | Estimated total assets undermanagement (millions)
|1990 |  | 610                            |  | $                                                 | 38,910   
|1995 |  | 2,383                          |  |                                                   | 185,750  
|2000 |  | 3,873                          |  |                                                   | 490,580  
|2005 |  | 8,661                          |  |                                                   | 1,105,385
|2006 |  | 9,462                          |  |                                                   | 1,464,526
|2007 |  | 10,096                         |  |                                                   | 1,868,419
|2008 |  | 9,176                          |  |                                                   | 1,407,095



Source:
Hedge Fund Research, Inc. 2008 Industry Report



Asset Management Infrastructure



In managing the Deephaven Funds, Deephaven uses both an in-house
developed proprietary order management system and a third-party portfolio management system. Deephaven has business continuity capabilities in place in the event it is unable to access or operate in its current locations. While Deephaven employs
significant steps to develop, implement and maintain reasonable business continuity plans, we cannot guarantee its alternative systems and facilities will provide full continuity of operations after a significant business disruption.



Corporate Segment



Our Corporate segment includes the investment income earned on our strategic investments, our corporate investment as a limited
partner or non-managing member in the Deephaven Funds and costs not associated with our other operating business segments, primarily corporate overhead expenses. Corporate overhead expenses primarily consist of compensation for certain senior
executives and other individuals employed at the corporate holding company, legal and other professional expenses relating to corporate matters, directors fees, investor and public relations expenses and directors and officers
insurance. The results from our Corporate segment for 2006 were positively impacted by realized gains from the sales of our strategic equity investments in the International Securities Exchange, Inc. (ISE) and the Nasdaq Stock Market,
Inc., and for 2007 and 2008 by gains resulting from the partial sales of equity interests in Direct Edge ECN.



Intellectual Property and Other Proprietary Rights



Our success and ability to compete are dependent to a degree on our intellectual property, which includes our proprietary trading and execution technology, trade secrets and client base. We rely primarily on trade secret,
trademark, domain name, patent and contract law to protect our intellectual property. It is our policy to enter into confidentiality, intellectual property ownership and/or



13



---

##### Table of Contents

non-competition agreements with our employees, independent contractors and business partners, and to control access to and distribution of our intellectual property.



Government Regulation and Market Structure



Most aspects of the Companys business are subject to extensive securities
regulation under federal, state and international laws. The SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA, other self-regulatory organizations (commonly known as SROs), and other regulatory bodies, such as state securities commissions, promulgate
numerous rules and regulations that may impact our business. As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors in
those markets. Regulated entities are subject to regulations concerning all aspects of their business, including trade practices, best execution practices, capital structure, record retention and the conduct of officers, supervisors and registered
employees. Failure to comply with any of these laws, rules or regulations could result in administrative or court proceedings, censures, fines, the issuance of cease-and-desist orders or injunctions, or the suspension or disqualification of the
entity and/or its officers, supervisors or registered employees. We, and certain of our past and present officers, directors and employees, have in the past been subject to claims alleging the violation of such laws, rules and regulations. We are
currently subject to several of these matters as further described in Part I, Item 3 Legal Proceedings herein. Certain aspects of the Companys public disclosure, corporate governance principles, internal control environment
and the roles of auditors and counsel are subject to the Sarbanes-Oxley Act of 2002 and related regulations and rules of the SEC and Nasdaq.



Rule-making by the SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA, other SROs and corresponding market structure changes has an impact on the Companys regulated
subsidiaries by directly affecting our method of operation and, at times, our profitability. Legislation can impose, and has imposed, significant obligations on broker-dealers, including those of our regulated subsidiaries. These increased
obligations require the implementation and maintenance of internal practices, procedures and controls which have increased our costs and may subject us to regulatory inquiries, claims or penalties.



The regulatory environment in which we operate our Global Markets business is subject
to constant change. Our business, financial condition and operating results may be adversely affected as a result of new or revised legislation or regulations imposed by the U.S. Congress, SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA, other SROs,
other United States or foreign governmental regulatory authorities, and other regulatory bodies. Additional regulations, changes in existing laws and rules, or changes in interpretations or enforcement of existing laws and rules often directly
affect the method of operation and profitability of regulated broker-dealers. We cannot predict what effect, if any, such changes might have. However, there were, and could be, significant technological and compliance costs associated with the
obligations which derive from compliance with such regulations.



The
market structure in which the Global Markets business operates is rapidly changing. The recent expansion of many regional exchanges, in which several exchanges have created their own alternative trading systems (e.g., ECNs) and now compete in the
OTC and listed trading venues, as well as the consolidation of exchanges (e.g., Nasdaqs acquisition of the Boston and Philadelphia Stock Exchanges, as well as the NYSEs acquisition of the American Stock Exchange) and the global expansion
of exchanges (e.g., Nasdaq and the OMX, and NYSE and Euronext), have altered the landscape of the marketplace and intensified competition.



We have foreign based subsidiaries and plan to continue to expand our international presence. The brokerage industry in many foreign countries is heavily regulated,
much like the U.S. The varying compliance requirements of these different regulatory jurisdictions and other factors may limit our



14



---

##### Table of Contents

ability to conduct business or expand internationally. For example, the Markets in Financial Instruments Directive (MiFID) adopted by the European
Commission was implemented in November 2007. MiFID represents one of the more significant changes to take place in the operation of European capital markets. There were, and could be, significant technological and compliance costs associated with
the obligations which derive from compliance with this regulation.



Deephaven became registered as an investment adviser with the SEC in 2006. Registration as an investment adviser has resulted in additional regulatory responsibilities and obligations on Deephavens business. Deephaven is also
registered with the CFTC and is a member of the NFA as a commodity pool operator and a commodity trading adviser. Due to the nature of Deephavens client base, however, Deephaven is exempt from many of the CFTC and NFA
regulations. Deephavens U.K. subsidiary is regulated by the FSA and Deephavens Hong Kong subsidiary is regulated by the SFC.



The Company believes that it is currently in material compliance with applicable regulations.



Net Capital Requirements



Certain of our subsidiaries are subject to the SECs Net Capital Rule. This rule, which specifies minimum net capital requirements for registered
broker-dealers, is designed to measure the general financial integrity and liquidity of a broker-dealer and requires that at least a minimum part of its assets be kept in relatively liquid form. In general, net capital is defined as net worth
(assets minus liabilities), plus qualifying subordinated borrowings and certain discretionary liabilities, less certain mandatory deductions that result from excluding assets that are not readily convertible into cash and from valuing conservatively
certain other assets. Among these deductions are adjustments, commonly called haircuts, which reflect the possibility of a decline in the market value of an asset before disposition, and non-allowable assets.



Failure to maintain the required net capital may subject a firm to suspension or
revocation of registration by the SEC, and suspension or expulsion by FINRA and other regulatory bodies, and ultimately could require the relevant entitys liquidation. The Net Capital Rule prohibits payments of dividends, redemption of stock,
the prepayment of subordinated indebtedness and the making of any unsecured advance or loan to a stockholder, employee or affiliate, if such payment would reduce the firms net capital below required levels.



A change in the Net Capital Rule, the imposition of new rules or any unusually large
charges against net capital could limit those operations that require the intensive use of capital and also could restrict our ability to withdraw capital from our broker-dealer subsidiaries. A significant operating loss or any unusually large
charge against net capital could adversely affect our ability to expand or even maintain our present levels of business.



Certain of our foreign subsidiaries are subject to capital adequacy requirements set by their respective regulators.



During 2008, all of our broker-dealer subsidiaries were in compliance with their
capital adequacy requirements. For additional discussion related to net capital, see Footnote 21 Net Capital Requirements included in Part II, Item 8 Financial Statements and Supplementary Data of this document.



Employees



At December 31, 2008, our headcount was 1,045 full-time employees, compared to 868 full-time employees at December 31, 2007.
The increase in headcount is primarily related to the acquisitions of Knight Libertas and EdgeTrade, as well as the overall expansion of our Global Markets offerings in 2008. Of our 1,045 full-time employees at December 31, 2008, 924 were
employed in the U.S. and 121



15



---

##### Table of Contents

outside the U.S., primarily in London. None of our employees is subject to a collective bargaining agreement. We believe that our relations with our employees are
good.



Item 1A.Risks
Factors



We face a number of risks that may adversely
affect our business, financial condition and operating results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.



RISKS RELATED TO GLOBAL MARKETS BUSINESS



| |  | Conditions in the financial services industry and the securities markets may adversely affect our trading volumes and market liquidity
|- |  | --------------------------------------------------------------------------------------------------------------------------------------



Our Global Markets operating segment is primarily transaction-based, and declines in
trading volumes, prices and market liquidity would adversely affect our business and profitability. Declines in the volume of securities transactions and in market liquidity generally result in lower revenues from transaction execution activities.
Lower price levels of securities and other instruments may also result in reduced revenue capture, and thereby reduced revenues from trade executions. Declines in market values of securities or other instruments can result in illiquid markets,
losses on securities or other instruments held in inventory, the failure of buyers and sellers to fulfill their obligations and settle their trades, and increases in claims and litigation.



During 2008, and particularly during the second half of the year, the global financial
services industry and securities markets experienced unprecedented and adverse conditions including substantially increased volatility, losses resulting from declining asset values, defaults on securities, and reduced liquidity. These events
resulted in the failure of certain financial services firms, have led other firms to seek mergers with commercial banks and forced other firms to become bank holding companies that are regulated by the Federal Reserve Bank. While uncertainty
surrounding the credit crisis and expectations for economic contraction has, in the short term, led to an increase in overall market volatility and increased trading volume in certain markets, this trend may not continue. If the levels of trading
volume decrease as a result of events stemming from the current financial and credit crisis, our transaction-based revenues will decrease. Accordingly, any reduction in trading volumes or market liquidity could adversely affect our business and
financial results in a material fashion.



| |  | Our future operating results may fluctuate significantly as a result of numerous factors, many of which are outside of our control
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



We may experience significant variation in our future results of operations. These
fluctuations may result from numerous factors, many of which are outside of our control. These factors include, among other things, market conditions and the resulting volatility and credit and counterparty risks that may result; introductions of,
or enhancements to, trade execution services by us or our competitors; the value of our securities positions and other instruments and our ability to manage the risks attendant thereto; the volume of our trade execution activities; the dollar value
of securities and other instruments traded; the composition of our order flow; our market share with institutional and broker-dealer clients; the performance and size of, and volatility in, our quantitative market-making and program trading
portfolios; the performance of our high velocity algorithmic trading models; the performance of our international operations and costs associated with international expansion; our ability to manage personnel, overhead and other expenses, including
our occupancy expenses under our office leases and expenses and charges relating to legal and regulatory proceedings; the strength of our client relationships; changes in payments for order flow and clearing, execution and regulatory transaction
costs; the addition or loss of executive management, sales, electronic and voice trading and



16



---

##### Table of Contents

technology professionals; legislative, legal and regulatory changes; legal and regulatory matters or proceedings; geopolitical risk; the amount and timing of capital
expenditures, acquisitions and divestitures; the integration, performance and operation of acquired businesses; the incurrence of costs associated with acquisitions and dispositions; investor sentiment; technological changes and events; seasonality;
competition; and market and economic conditions.



Such factors may also
have an impact on our ability to achieve our strategic objectives, including, without limitation, increases in our market share, growth and profitability in our Global Markets segment. If demand for our services declines in our Global Markets
business segment due to any of the above factors, and we are unable to adjust our cost structure on a timely basis, our operating results could be materially and adversely affected. As a result of the foregoing factors, period-to-period comparisons
of our revenues and operating results are not necessarily meaningful and such comparisons cannot be relied upon as indicators of future performance. There also can be no assurance that we will be able to continue the rates of revenue growth that we
have experienced in the past or that we will be able to improve our operating results.



| |  | The trading activities of our Global Markets business expose us to the risk of significant losses
|- |  | -------------------------------------------------------------------------------------------------



We conduct our trading activities predominantly as principal, which subjects our
capital to significant risks. These activities involve the purchase, sale or short sale of securities and other instruments for our own account and, accordingly, involve risks of price fluctuations and illiquidity, or rapid changes in the liquidity
of markets that may limit or restrict our ability to either resell securities or other instruments we purchase or to repurchase securities or other instruments we sell in such transactions. From time to time, we may have large position
concentrations in securities or other instruments of a single issuer or issuers engaged in a specific industry, which might result in higher trading losses than would occur if our positions and activities were less concentrated. The success of our
trading activities primarily depends upon our ability to attract order flow, the performance and size of, and volatility in, our quantitative market-making and program trading portfolios, the performance of our high velocity algorithmic trading
models, market interaction, the skill of our trading personnel, general market conditions, effective hedging strategies and risk management processes, the price volatility of specific securities or other instruments, and the availability and
allocation of capital. To attract order flow, we must be competitive on price, size of securities positions and other instruments traded, liquidity offerings, order execution speed, technology, reputation, and client relationships and service. In
our role as a market-maker, we attempt to derive a profit from the difference between the prices at which we buy and sell securities. However, competitive forces often require us to match the quotes other market-makers display and to hold varying
amounts of securities in inventory. By having to maintain inventory positions, we are subject to a high degree of risk. There can be no assurance that we will be able to manage such risk successfully or that we will not experience significant losses
from such activities. All of the above factors could have a material adverse effect on our business, financial condition and operating results.



| |  | Substantial competition could reduce our market share and harm our financial performance
|- |  | ----------------------------------------------------------------------------------------



We derive substantially all of our revenues from Global Markets activities. During 2008, the securities markets endured unprecedented
market conditions with high volatility, dramatic credit tightening and increased counterparty risk. These difficult conditions have continued into 2009, requiring us to continue to adapt to our clients needs amidst a changing landscape and
competition. We face direct competition in our Global Markets business primarily from global, national and regional broker-dealers, and also alternative trading systems, crossing networks, ECNs and dark liquidity pools. Competition is primarily on
the basis of our execution standards (including price, liquidity, speed and other client-defined measures), client relationships, reputation, market structure, product and service offerings, and technology. A number of our Global Markets competitors
have greater financial, technical, marketing and other resources than we do. Some of our competitors offer a wider range of services and financial products than we do and have greater name recognition and a more extensive



17



---

##### Table of Contents

client base. These competitors may be able to respond more quickly than we do to new or evolving opportunities and technologies, market changes, and client
requirements and may be able to undertake more extensive promotional activities and offer more attractive terms to clients. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or
with third parties or may consolidate to enhance their services and products. It is possible that new competitors, or alliances among competitors, may also emerge and they may acquire significant market share.



As a result of the above, there can be no assurance that we will be able to compete
effectively with current or future competitors, which could have a material adverse effect on our business, financial condition and operating results.



| |  | We could lose significant sources of revenues if we lose any of our significant clients
|- |  | ---------------------------------------------------------------------------------------



At times, a limited number of Global Markets clients have accounted for a significant portion of our order flow, revenues and
profitability, and we expect a large portion of the future demand for, and profitability from, our Global Markets trade execution services to remain concentrated within a limited number of clients. None of our clients is contractually obligated to
utilize us for trade execution services and, accordingly, these clients may direct their trade execution activities to other execution providers or market centers at any time. Some of these clients have purchased market-makers and specialist firms
to internalize order flow. There can be no assurance that we will be able to retain these major clients or that such clients will maintain or increase their demand for our trade execution services. The loss, or a significant reduction, of demand for
our services from any of these clients could have a material adverse effect on our business, financial condition and operating results.



| |  | The increased risk of defaults by counterparties may adversely affect our results of operations
|- |  | -----------------------------------------------------------------------------------------------



During 2008, the market experienced unprecedented levels of defaults and uncertainty
among participants in the financial services industry, with the failure of some firms and the bailout of other distressed institutions. We are at risk if issuers whose securities or other instruments we hold, customers, trading counterparties,
counterparties under derivative contracts, clearing agents, exchanges, clearing houses or other financial intermediaries or guarantors default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions,
operational failure, fraud or other reasons. Such defaults could have a material adverse effect on our results of operations, financial condition and cash flows.



We conduct the majority of our trade executions as principal with broker-dealers, financial services firms and institutional
counterparties located in the United States and abroad. We clear the majority of our trade executions through unaffiliated clearing brokers. Under the terms of the agreements between us and our clearing brokers, the clearing brokers have the right
to charge us for losses that result from a counterpartys failure to fulfill its contractual obligations. No assurance can be given that any such counterparty will not default on its obligations, which default could have a material adverse
effect on our business, financial condition and operating results. At any time, a substantial portion of our assets are held at one or more clearing brokers and, accordingly, we are subject to credit risk with respect to such clearing brokers. One
firm clears the majority of our trades and holds the majority of our assets within our Global Markets segment. Consequently, we are reliant on the ability of our clearing brokers to adequately discharge their obligations on a timely basis. We are
also dependent on the solvency of such clearing brokers. Any failure by the clearing brokers to adequately discharge their obligations on a timely basis, the insolvency of a clearing broker, or any event adversely affecting the clearing brokers
could have a material adverse effect on our business, financial condition and operating results.



| |  | We may not be able to keep up with rapid technological and other changes
|- |  | ------------------------------------------------------------------------



The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent new product
and service announcements, introductions and enhancements,



18



---

##### Table of Contents

and changing client demands. If we are not able to keep up with these rapid changes on a timely and cost-effective basis, we may be at a competitive disadvantage. The
widespread adoption of new internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure. Any failure by us to anticipate
or respond adequately to technological advancements, client requirements or changing industry standards, or any delays in the development, introduction or availability of new services, products or enhancements, could have a material adverse effect
on our business, financial condition and operating results.



| |  | Capacity constraints, systems failures and delays could harm our business
|- |  | -------------------------------------------------------------------------



Our business activities are heavily dependent on the integrity and performance of the computer and communications systems supporting them and the
services of certain third parties. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, computer viruses, intentional acts of vandalism, terrorism and other similar events.
Extraordinary trading volumes or other events could cause our computer systems to operate at an unacceptably low speed or even fail. While we have invested significant amounts of capital in the last few years to upgrade the capacity, reliability and
scalability of our systems, there can be no assurance that our systems will be sufficient to handle such extraordinary trading volumes. Many of our systems are, and much of our infrastructure is, designed to accommodate additional growth without
redesign or replacement; however, we may need to make significant investments in additional hardware and software to accommodate growth. Failure to make necessary expansions and upgrades to our systems and infrastructure could lead to failures and
delays. Such failures and delays could cause substantial losses for our clients and could subject us to claims from our clients for losses, including litigation claiming fraud or negligence. In the past, high trading volume has caused significant
delays in executing some trading orders, resulting in some clients orders being executed at prices they did not anticipate. From time to time, we have reimbursed our clients for losses incurred in connection with systems failures and delays.



Capacity constraints, systems failures and delays may occur again in the
future and could cause, among other things, unanticipated disruptions in service to our clients, slower system response times resulting in transactions not being processed as quickly as our clients desire, decreased levels of client service and
client satisfaction, and harm to our reputation. If any of these events were to occur, we could suffer a loss of clients, including our largest clients, or a reduction in the growth of our client base, increased operating expenses, financial losses,
litigation or other client claims, and regulatory sanctions or additional regulatory burdens.



We have developed business continuity capabilities that can be utilized in the event of a disaster or disruption. Since the timing and impact of disasters and disruptions are unpredictable, we have to be flexible in responding
to actual events as they occur. Significant business disruptions can vary in their scope. A disruption might only affect the Company, a building housing the Company, a business district in which the Company is located, a city in which the Company is
located or an entire region. Within each of these areas, the severity of the disruption can also vary from minimal to severe. The Companys business continuity facilities are designed to allow us to substantially continue operations if we are
prevented from accessing or utilizing our primary offices for an extended period of time. While the Company has employed significant effort to develop, implement and maintain reasonable business continuity plans, the Company cannot guarantee our
systems will fully recover after a significant business disruption in a timely fashion. If we are prevented from using any of our current trading operations or any third party services, or if our business continuity operations do not work
effectively, we may not have complete business continuity. This could have a material adverse effect on our business, financial condition and operating results.



19



---

##### Table of Contents

| |  | Regulatory and legal uncertainties could harm our business
|- |  | ----------------------------------------------------------



The capital markets industry in the United States is subject to extensive oversight under federal, state and applicable international laws as well as SRO rules.
Broker-dealers and financial services firms are subject to regulations concerning all aspects of their business, including trade practices, best execution practices, capital structure, record retention and the conduct of their officers, supervisors
and registered employees. Our operations and profitability may be directly affected by, among other things, additional legislation or regulation; changes in rules promulgated by the SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA and other regulatory
bodies or SROs; and changes in the interpretation or enforcement of existing laws, regulations and rules. Failure to comply with these laws, rules or regulations could result in, among other things, administrative or court proceedings, censure,
fines, the issuance of cease-and-desist orders or injunctions, loss of membership, or the suspension or disqualification of the market participant, broker-dealer or FCM, and/or their officers, supervisors or registered employees. Our ability to
comply with applicable laws, regulations and rules is largely dependent on our internal systems to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We are currently the subject of regulatory reviews and
investigations that may result in disciplinary actions in the future due to alleged noncompliance.



Various regulatory and enforcement agencies have been reviewing regulatory reporting obligations and best execution and trading practices as they relate to the
financial services and capital markets industries. These reviews could result in enforcement actions or new regulations which could adversely affect our operations.



The SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA and other regulatory bodies and SROs are constantly proposing, or enacting, new
regulations for the marketplace. For example, FINRA enacted rules in November 2008 regarding the OTC Bulletin Board markets which require that all non-Nasdaq securities be subject to limit order protection. It is difficult to assess what the market
structure implications will be from any such new regulations, but there could be significant technological and compliance costs associated with the obligations that derive from such new regulations.



Regulatory or legal actions or proceedings, changes in legislation or regulation, and
changes in market customs and practices could have a material adverse effect on the Companys business, financial condition and operating results.



| |  | Our business is subject to substantial risk from litigation, regulatory investigations and potential liability under federal, state and international laws, rules and
regulations
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Many aspects of our business involve
substantial risks of liability. We are exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA,
Department of Labor and other U.S. and non-U.S. regulatory bodies and SROs. We are also subject to the risk of litigation. From time to time, we, and certain of our past and present officers, directors and employees, have been named as parties in
legal actions, regulatory investigations and proceedings, arbitrations and administrative claims and have been subject to claims alleging the violation of such laws, rules and regulations, some of which have resulted in the payment of fines and
settlements. Moreover, we may be required to indemnify past and present officers, directors and employees in regards to these matters. We are subject to several of these matters as further described in Legal Proceedings in Part I,
Item 3 herein. Certain corporate events, such as a reduction in our workforce, could also result in additional litigation or arbitration.



As we intend to defend vigorously any such litigation or proceeding, we could incur significant legal expenses. An adverse resolution of any current or future
lawsuits, legal or regulatory proceedings



20



---

##### Table of Contents

or claims against us could have a material adverse effect on the Companys business, financial condition and operating results.



RISKS RELATED TO ASSET MANAGEMENT BUSINESS



| |  | The failure to close the sale of the Deephaven business could adversely affect our business
|- |  | -------------------------------------------------------------------------------------------



On January 27, 2009, Deephaven entered into an agreement pursuant to which it will sell substantially all of its assets to
Stark & Roth, Inc. (Stark) and Stark will assume certain limited liabilities of Deephaven (the Stark Sale). The closing of the Stark Sale is currently subject to a number of conditions including (i) approval of
GMS Fund investors, (ii) the absence of any material adverse effect on the business of Deephaven, and (iii) other customary conditions, including the absence of any law or government order prohibiting the transaction. If Deephaven is
unable to close the Stark Sale, it will have to explore other alternatives for the orderly exit from the Asset Management business which may result in increased costs. These efforts will be complicated by a number of factors including, without
limitation: claims that may arise as a result of the termination of the Stark Sale; the public announcement of the proposed Stark Sale putting the investment community on notice that Deephaven intends to wind-down its business as promptly as
practicable which could adversely affect Deephavens ability to continue to manage the Deephaven Funds; the public announcement of the proposed Stark Sale may have eliminated other options which Deephaven might have had in respect of managing
the Deephaven Funds going forward; the public announcement of the proposed Stark Sale has resulted, and is expected to continue to result, in the termination of employment of Deephaven personnel and such loss of personnel could adversely affect
Deephavens ability to continue to manage the Deephaven Funds; the public announcement of the proposed Stark Sale may adversely impact the Deephaven Funds financing, brokerage and counterparty relationships; and Deephaven personnel having
devoted a substantial part of their business time to negotiating and completing the Stark Sale may have diverted their attention from other aspects of managing the Deephaven business. If the Stark Sale is not consummated, there can be no assurance
that an alternative can be found or that the financial terms or outcome of such alternatives will not be less favorable to Deephaven, Deephaven investors and us than those that would have resulted from the Stark Sale. If we are unable to exit the
Asset Management business in an orderly fashion, it could have a material and adverse effect on our business, financial condition and operating results.



| |  | Even if the Stark Sale is consummated, Deephaven may still face liabilities and expects to incur significant costs relating to its business, the Stark Sale and the wind-down
of its business
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While the consummation of the
Stark Sale is intended to facilitate Deephavens orderly exit from the Asset Management business, Deephaven will still be subject to potential liabilities relating to its historical business operations and the Stark Sale. The stated purchase
price in the Stark Sale is subject to reduction and offset in certain circumstances, and those reductions are expected to be significant. Under the terms of the Stark Sale, Stark is assuming few, if any, potential historical liabilities of Deephaven
which means that Deephaven will continue to be responsible for any such liabilities. In addition, Deephaven and, in certain instances, the Company are responsible to indemnify Stark against certain potential liabilities and for breaches of
representations, warranties and covenants under the sale agreement. Upon closing, Deephaven will continue to have oversight responsibility for the reduction to cash of the Deephaven Funds whose investors approve Stark, as a sub-advisor to Deephaven,
and elect to reduce their investments to cash. Moreover, to the extent that investors in any other Deephaven Fund(s) (other than the GMS Fund) do not approve such an arrangement, Deephaven, either by itself or through a third-party, will have the
obligation to reduce such Deephaven Fund(s) to cash and return such cash to investors. Following the completion of the Stark Sale, Deephaven will have limited personnel and assets to fulfill any potential obligations. Deephaven may also be subject
to claims by, and liabilities to, various stakeholders or other parties, including Deephaven Fund investors, counterparties, regulatory authorities, owners and employees, resulting from the conduct of its business prior to the Stark Sale, the
consummation of the Stark Sale and the



21



---

##### Table of Contents

terms offered to Deephaven Fund investors thereunder, and/or the wind-down of Deephavens business including the terminations of employment of Deephaven
personnel. In addition to these potential claims and liabilities, as announced in a Form 8-K filed on February 26, 2009, Deephaven expects that it will incur significant costs associated with the wind-down of its operations, including severance,
deferred benefits, retention and other employee benefits, lease and contract termination costs, asset writedowns and professional fees and other associated costs. Any such liabilities and costs may be material and could have a material and adverse
effect on Deephavens and our financial condition and operating results.



| |  | The reduction to cash of the Deephaven Fund portfolios may result in further losses to Fund investors and resulting claims
|- |  | --------------------------------------------------------------------------------------------------------------------------



Whether or not the Stark Sale closes, Deephaven currently intends to promptly
reduce to cash a significant portion, if not all, of the assets under management in the various Deephaven Funds. If the Stark Sale closes, Stark would serve as sub-advisor to Deephaven to reduce to cash those Deephaven Funds whose investors approve
such outcome. If the Stark Sale does not close, Deephaven will need to retain a third party to reduce the Deephaven Funds portfolios to cash. The attempt to reduce such investments to cash in a prompt manner may result in further losses to
investors, including to the Companys corporate investment in the Deephaven Funds. These losses could be exacerbated if trading counterparties take advantage of their knowledge that Deephaven may be reducing positions in the market. Any such
losses may result in claims by Deephaven Fund investors against Deephaven or the Company, whether or not the Stark Sale closes.



| |  | The wind-down of our Asset Management business could cause losses to the Company and could adversely affect our business and financial condition and results
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



Whether or not the Stark Sale closes, the
Company intends to seek a prompt exit from the Asset Management business. Because there are expected to be liabilities at Deephaven in connection with its historical activities and such wind-down, the Company may incur material losses associated
with the Deephaven business. Such potential losses are in addition to any potential losses on the Companys corporate investment in the Deephaven Funds. In addition, because the Company is the 51% owner of Deephaven Holdings, claims may be made
against the Company relating to the Deephaven business, the Stark Sale and/or the wind-down of the business, including if Deephaven is unable to satisfy certain liabilities. There can be no assurance that any such potential losses or claims will not
have a material adverse effect on our business, reputation, financial condition or results of operations.



| |  | Trading strategies within our Asset Management segment expose the business to significant risk
|- |  | ----------------------------------------------------------------------------------------------



As of December 31, 2008, approximately 61% of the Deephaven Funds assets
under management were in the GMS Fund. The investment philosophy for the GMS Fund is to seek to produce returns for its investors using various investment strategies focusing on delivering attractive risk-adjusted rates of return. The performance of
the GMS Fund is intended to be substantially non-correlated with the general debt and equity markets, as well as with a number of other non-traditional investment strategies. Within the GMS Fund, Deephaven generally employs a variety of investment
strategies, including volatility-driven, fundamental equity, event-driven, credit-driven and global relative value macro/fixed income strategies among others. The strategies employed by our Asset Management business could result in substantial risk
of loss both to investors and to the Companys corporate investment in the Deephaven Funds. As the Asset Management business employs leverage as an integral part of its various strategies, the risk of loss and the volatility of the underlying
Deephaven Funds portfolios are increased. There can be no assurance that we will be able to manage such risk successfully or that we will not experience significant losses from such activities which could have a material adverse effect on our
business, financial condition and operating results.



22



---

##### Table of Contents

RISKS RELATED TO THE COMPANY



| |  | We have incurred substantial debt obligations under our Credit Agreement that could adversely affect our operations and financial condition
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2008, we have borrowed the maximum $140.0 million of
indebtedness under our three-year credit facility (the Credit Agreement) we entered into in October 2007. The proceeds of the borrowings under our credit facility have been used to finance share repurchases, finance selective
acquisitions and for general corporate purposes. Incurring substantial indebtedness may have adverse consequences on us, including increasing our vulnerability to general adverse economic and industry conditions; limiting our ability to compete with
other less leveraged competitors and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; limiting our ability to borrow additional funds for working capital, capital expenditures,
acquisitions, expansions and general corporate or other purposes; and exposing us to interest rate risk because the interest rate on borrowings under our credit facility is variable.



Moreover, our ability to repay or refinance our debt will depend on our successful financial and operating performance. In addition,
the Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including, among others, limitations on certain payments, investments and transactions) and events of defaults. The Credit Agreement also
contains financial covenants tied to the maintenance of financial ratios and metrics. These obligations may limit certain activities of the Company, including, but not limited to, certain mergers, acquisitions or dispositions of assets, repurchases
of shares and payment of dividends, in each case above certain threshold amounts as set forth in the Credit Agreement. Our ability to satisfy certain of these covenants can be affected by a number of factors, many of which are beyond our control,
and there can be no assurances that we will be able to satisfy them.



| |  | We are highly dependent on key personnel
|- |  | ----------------------------------------



We are highly dependent on a limited number of key executives. Except for Thomas Joyce, our Chairman of the Board and Chief Executive Officer, who has an employment
contract through December 2012, and the head of our institutional fixed income broker-dealer, no other key executive has an employment contract with the Company. Our success will be dependent to a large degree on our ability to retain the services
of our existing key executives and to attract and retain additional qualified personnel in the future. Competition for such personnel is intense. The loss of the services of any of our key executives or the inability to identify, hire and retain
necessary highly qualified executive management in the future could have a material adverse effect on our business, financial condition and operating results.



Our success also depends, in part, on the highly skilled, and often specialized, individuals we employ. Our ability to attract and retain management, sales,
electronic and voice trading and technology professionals is important to our business strategy. The Company strives to provide high quality services that will allow it to establish and maintain long-term relationships with its clients. The
Companys ability to do so depends, in large part, upon the individual employees who represent the Company in its dealings with such clients. There can be no assurance that the Company will not lose such professionals due to increased
competition or other factors in the future. The loss of sales, trading or technology professionals, particularly senior professionals with broad industry expertise, could have a material adverse effect on the Companys business, financial
condition and operating results.



| |  | Acquisitions, strategic investments and strategic relationships involve certain risks
|- |  | -------------------------------------------------------------------------------------



Over the last several years, we have undertaken several strategic acquisitions, including the completed acquisitions of EdgeTrade and
Knight Libertas. We intend to continue to pursue opportunistic strategic acquisitions of, or investments in, businesses and technologies. Acquisitions may entail numerous risks, including difficulties in assessing values for acquired businesses,
intangible



23



---

##### Table of Contents

assets and technologies, difficulties in the assimilation of acquired operations and products, diversion of managements attention from other business concerns,
assumption of unknown material liabilities of acquired companies, amortization of acquired intangible assets which could reduce future reported earnings, and potential loss of clients or key employees of acquired companies. We may not be able to
integrate successfully any operations, personnel, services or products that we have acquired or may acquire in the future. Strategic investments may also entail some of the risks described above. If these investments are unsuccessful, we may need to
incur charges against earnings. We have also established a number of strategic relationships. These relationships and others we may enter into in the future may be important to our business and growth prospects. We may not be able to maintain these
relationships or develop new strategic alliances.



| |  | International expansion involves certain risks
|- |  | ----------------------------------------------



The Company is expanding its international presence which may expose the Company to cultural, regulatory and governmental risks. The financial services industry in
many foreign countries is heavily regulated, much like the U.S. The varying compliance requirements of these different regulatory jurisdictions and other factors may limit our ability to successfully conduct or expand our business internationally.
Additionally, the expansion into international locations involves substantial operational and execution risk. We may not be able to manage these risks effectively.



| |  | Risks and uncertainties regarding the Companys stock repurchase program
|- |  | ------------------------------------------------------------------------



As of December 31, 2008, the Company had $249.6 million remaining under its $1.0 billion stock repurchase program. The pursuit and
completion of the Companys stock repurchase program is uncertain and subject to a variety of risks, including, without limitation, whether or not the Company will complete the stock repurchase program during any particular time frame or at
all, whether the Companys cash flow from earnings and cash on hand will be sufficient to fund the stock repurchase program, and the effect of pursuing the program on the Companys balance sheet (including the potential use of cash on
the Companys balance sheet and possible incurrence of debt to finance the program). In addition, the pursuit of the program is subject to the impact of market conditions, trading restrictions, legal requirements and
alternative requirements for available cash. It is possible that pursuing the program will limit the ability of the Company to pursue other needs and opportunities that may arise, such as capital expenditures, acquisitions and other
opportunities to grow our business.



| |  | The market price of our common stock could fluctuate significantly
|- |  | ------------------------------------------------------------------



Our Class A Common Stock, and the U.S. securities markets in general, have experienced significant price fluctuations in recent years. The price of our
Class A Common Stock could decrease substantially. Since the market price of our Class A Common Stock tends to fluctuate significantly, we may become the subject of securities class action litigation which may result in substantial costs
and a diversion of managements attention and resources. Our future quarterly operating results may not consistently meet the expectations of securities analysts or investors, which could have a material adverse effect on the market price of
our Class A Common Stock.



Item 1B.Unresolved Staff Comments



None.



Item 2.Properties



Our corporate headquarters are located in Jersey City, New Jersey. We lease approximately 266,000 square feet at 545 Washington Boulevard under a lease that expires
in October 2021. We also collectively lease approximately 121,000 square feet for our other office locations in the U.S. and abroad.



24



---

##### Table of Contents

In 2008, the Company recorded a net benefit of $1.3 million related to lease losses, primarily due to the
adjustment of previously recognized lease losses with respect to our 545 Washington Boulevard property in Jersey City, N.J. The Company entered into two sub-lease agreements in 2007 for 21,171 square feet for which it had previously recorded a lease
loss accrual. The lease loss accrual was adjusted based on the difference between the actual terms of the sub-leases and the assumptions used in the calculation of the lease loss accrual. At December 31, 2008, we have approximately 50,000
square feet of unoccupied space remaining in Jersey City and the Company has engaged a real estate broker to sub-lease this excess space. The balance of the lease loss accrual from the unoccupied space was derived from assumptions and estimates
based on lease terms of an anticipated sub-lease agreement, which assumed a sub-lease would commence at the beginning of 2010, anticipated market prices along the Jersey City waterfront and estimated up-front costs, including broker fees and
build-out allowances. We continually monitor the market and space to assess the reasonableness of our applicable assumptions.



Item 3.Legal Proceedings



From time to time, we and certain of our past and present officers, directors and employees have been named as parties to legal
actions, arbitrations, administrative claims and regulatory reviews and investigations arising in connection with the conduct of our businesses. We are subject to several of these matters at the present time. Although there can be no assurances, at
this time the Company believes, based on information currently available, that the outcome of each of the matters will not have a material adverse effect on the consolidated financial condition of the Company, although they might be material to
operating results for any particular period, depending, in part, upon operating results for that period.



Legal



Eagletech Communications Inc. et al. v. Citigroup, Inc. et al.In this case, which was initially filed in the Circuit Court, Broward County, Florida,
the plaintiffs generally allege that the Company and approximately 20 securities firms participated in a scheme to manipulate Eagletech stock using methods such as naked short selling. Pursuant to an Order dated June 25, 2008, the Court
dismissed with prejudice four of plaintiffs federal claims against Knight and remanded plaintiffs remaining claims to the Clerk of the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. On or about
July 25, 2008, plaintiffs filed a Notice of Appeal. On February 17, 2009, plaintiffs voluntary request to dismiss the Notice of Appeal was granted. The plaintiffs remaining claims are proceeding in state court.



Last Atlantis Capital LLC et al. v. Chicago Board Options Exchange, Inc. et
al.In January 2004, thirty-five securities firms, including the Company and its former operating subsidiary, Knight Financial Products LLC (collectively the market-maker defendants), as well as four options exchanges, were
named in a complaint filed in the United States District Court for the Northern District of Illinois. The plaintiffs in the action allegedly submitted orders to buy and sell options on the four named options exchanges, and the market-maker
defendants were prospective and/or actual counterparties to those orders. The plaintiffs allege that during the period beginning on September 11, 2000 the market-maker defendants, among other things, failed to provide a competitive and orderly
market for the purchase and sale of the options and issued false and misleading price quotations that deceived the plaintiffs. The plaintiffs allege that this conduct violated certain sections of the Sherman and Clayton Acts, the federal securities
laws and Illinois state law, and also should result in common law liability. The plaintiffs requested unspecified monetary damages and injunctive relief. On or about March 30, 2005, the court dismissed the complaint with prejudice and entered
judgment against the plaintiffs. Plaintiffs moved to vacate the judgment and for reconsideration of the dismissal. The court then permitted plaintiffs to file an amended complaint and to add additional parties as plaintiff. Defendants moved to
dismiss the amended complaint. In September 2006, the District Court dismissed, with prejudice, the



25



---

##### Table of Contents

federal causes of action in the consolidated complaint, and dismissed without prejudice, for lack of jurisdiction, the state law causes of action in the consolidated
complaint. Judgment was entered by the court in September 2006. Thereafter, plaintiffs filed post-trial motions seeking reconsideration of the courts decision and requesting the court to vacate its judgment. On March 23, 2007, the court
granted plaintiffs motion for reconsideration in part, by allowing them to file an amended complaint against the market-maker defendants, but not against the options exchanges. The amended complaint, filed April 5, 2007, alleges federal
claims based on the Securities Exchange Act of 1934 and state law claims based on Illinois statutory and common law. On May 25, 2007, the Company and Knight Financial Products LLC answered the amended complaint, denying liability. On
June 13, 2007, the court established a discovery schedule. On November 27, 2007, the defendants moved for reconsideration of the March 23, 2007 order permitting plaintiffs to file the amended complaint, and for dismissal of the
amended complaint. On February 7, 2008, the court reconsidered its March 23, 2007 order and dismissed certain defendants but not others. Knight Financial Products LLC was not among the dismissed defendants, and remains in the
case. Discovery is proceeding and the Company is defending this action vigorously.



Regulatory



We own subsidiaries
including regulated entities that are subject to extensive oversight under federal, state and applicable international laws as well as SRO rules. Changes in market structure and the need to remain competitive require constant changes to our systems
and order handling procedures. We make these changes while continuously endeavoring to comply with many complex laws and rules. Compliance, surveillance and trading issues common in the securities industry are monitored by, reported to, and/or
reviewed in the ordinary course of business by our primary regulators, the SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, and NFA. As a major order flow execution destination, we are named from time to time in, or are asked to respond to a number of
regulatory matters brought by U.S. regulators, foreign regulators and SROs that arise from our trading activity. The Company is currently the subject of various regulatory reviews and investigations. In some instances, these matters may rise to a
SEC, CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA, other SRO disciplinary action and/or civil or administrative action.



In March 2005, NASD (now known as FINRA) announced that it had charged Kenneth Pasternak, former CEO of Knight Securities, L.P. (KSLP) (now known
as KEM), and John Leighton, former head of KSLPs institutional sales desk, in an administrative complaint alleging supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000. Pursuant to
a decision dated April 11, 2007, the majority of a NASD Hearing Panel found that Pasternak and Leighton failed to supervise KSLPs Institutional Sales Department reasonably during the period of January 1999 to September 2000 in violation
of NASD rules. Pasternak and Leighton were each fined $100,000. Pasternak was suspended from acting in all supervisory capacities for two years and Leighton was barred from acting in all supervisory capacities. In May 2007, Pasternak and Leighton
each filed a Notice of Appeal from the NASD Hearing Panels decision and the NASD filed a Notice of Cross-Appeal from the NASD Hearing Panels decision. This matter was heard on July 28, 2008 by a sub-committee of FINRAs
National Adjudicatory Council (the NAC), and we expect the NAC will issue its decision before the end of 2009.



In August 2005, the SEC announced that it had filed a civil fraud action in the United States District Court for the District of New Jersey against Kenneth
Pasternak and John Leighton. Pursuant to an Order filed on June 24, 2008, the Court ordered that judgment be entered in favor of Pasternak and Leighton and against the SEC. The SECs time to appeal this ruling has expired.



In 2006, the Company received a request from the staff of the SEC for voluntary
production of certain documentation related to options activities of its former subsidiary, Knight Financial Products LLC, during the period of time that the subsidiary conducted the Derivative Markets business prior to its



26



---

##### Table of Contents

sale by the Company in December 2004. The Company believes this request is part of a broader review by the staff of the SEC regarding certain trading practices in the
options industry during the period from 1999 to 2005. The Company responded to this request and is cooperating with the staff of the SEC and certain regional exchanges to resolve this matter. For further information regarding this matter, see
Footnote 14 Discontinued Operations and Regulatory Charges and Related Matters, in Part II, Item 8 Financial Statements and Supplementary Data included in this document.



Other Matters



In addition to the matters described above, in the normal course of business, the
Company has been named, from time to time, as a defendant or respondent in various legal actions, including arbitrations, class actions and other litigation arising in connection with its business activities. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. From time to time, Deephaven may be a plaintiff in suits filed in federal or state courts taken in support of activist or other investments
made by one of the funds managed by Deephaven. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, the Company cannot predict with
certainty the eventual loss, or range of loss, or the range of potential recovery, related to such matters. The Company is contesting liability and/or the amount of damages in each pending matter.



Item 4.Submission of Matters to a
Vote of Security Holders



None.



27



---

##### Table of Contents

PART II



Item 5.Market for Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities



Our Class A Common Stock is listed on the Nasdaq Global Select Market under the symbol NITE. Public trading of our Class A Common Stock commenced on July 8, 1998. The following table sets forth, for
the past two years, the high and low quarterly closing sales price per share of the Class A Common Stock as reported by the Nasdaq Global Select Market:



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2008           |  | High |       | Low
|First Quarter  |  | $    | 17.76 |     | $ | 12.52
|Second Quarter |  |      | 19.34 |     |   | 15.00
|Third Quarter  |  |      | 18.02 |     |   | 13.72
|Fourth Quarter |  |      | 16.59 |     |   | 11.84
|               |  |     
|2007           |  |      |       |    
|First Quarter  |  |      | 21.47 |     |   | 15.13
|Second Quarter |  |      | 18.26 |     |   | 15.85
|Third Quarter  |  |      | 16.80 |     |   | 11.65
|Fourth Quarter |  |      | 14.49 |     |   | 12.24



The closing sale price of our
Class A Common Stock as reported by the Nasdaq Global Select Market on February 26, 2009, was $17.36 per share. As of that date there were approximately 416 holders of record of our Class A Common Stock based on information provided
by our transfer agent. The number of stockholders does not reflect the actual number of individual or institutional stockholders that hold our stock because certain stock is held in the name of nominees. Based on information made available to us by
our transfer agent, there are approximately 36,500 beneficial holders of our Class A Common Stock. Restricted stock awards are included in the calculation of holders of record while restricted stock unit awards are not included.



We have never declared or paid a cash dividend on our Class A Common Stock. The
payment of cash dividends is within the discretion of our Board of Directors and will depend on many other factors, including, but not limited to, our results of operations, financial condition, capital requirements, restrictions imposed by
financing arrangements, general business conditions and legal requirements.



28



---

##### Table of Contents

Comparative Stock Performance Graph



The graph below compares the total cumulative return of the Knight Class A Common Stock from December 31, 2003 through December 31,
2008, to the Standard & Poors 500 Index and the SNL Broker/Dealer Index. The graph assumes that dividends were reinvested and is based on an investment of $100 on December 31, 2003.



LOGO



|                           |  |               |  |          |  |          |  |          |  |          |  |         
|-------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                           |  | Period Ending
|Index                      |  | 12/31/03      |  | 12/31/04 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07 |  | 12/31/08
|Knight Capital Group, Inc. |  | 100.00        |  | 74.69    |  | 67.46    |  | 130.76   |  | 98.23    |  | 110.16  
|SNL Broker/Dealer Index    |  | 100.00        |  | 106.77   |  | 128.86   |  | 182.19   |  | 163.61   |  | 54.90   
|S&P 500 Index              |  | 100.00        |  | 110.88   |  | 116.33   |  | 134.70   |  | 142.10   |  | 89.53   



29



---

##### Table of Contents

The following table contains information about our purchases of Class A Common Stock during the fourth quarter
of 2008 (in thousands, except per share amounts):



|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|------------------------------------ |  | ------------------------------ |  | -------------------------- | ----- | ----------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------- | - | -------
|Period                               |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofSharesPurchased asPart of PubliclyAnnouncedPlans orPrograms(1) |     | ApproximateDollar Value ofShares That MayYet Be PurchasedUnder thePlans or Programs
|October 1, 2008 - October 31, 2008   |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Common stock repurchases             |  |                               |  |                            |       |                                                                               |    |                                                                                     | $ | 254,254
|Employee transactions(2)             |  | 21                             |  |                            |       |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Total                                |  | 21                             |  | $                          | 13.69 |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|November 1, 2008 - November 30, 2008 |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Common stock repurchases             |  | 301                            |  |                            |       |                                                                               | 301 |                                                                                     | $ | 249,616
|Employee transactions(2)             |  | 5                              |  |                            |       |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Total                                |  | 306                            |  | $                          | 15.39 |                                                                               | 301 |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|December 1, 2008 - December 31, 2008 |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Common stock repurchases             |  |                               |  |                            |       |                                                                               |    |                                                                                     | $ | 249,616
|Employee transactions(2)             |  | 154                            |  |                            |       |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Total                                |  | 154                            |  | $                          | 15.42 |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Total                                |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Common stock repurchases             |  | 301                            |  |                            |       |                                                                               | 301 |                                                                                     |   |        
|Employee transactions(2)             |  | 180                            |  |                            |       |                                                                               |    |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        
|Total                                |  | 481                            |  | $                          | 15.33 |                                                                               | 301 |                                                                                     |   |        
|                                     |  |                                |  |                            |       |                                                                               |     |                                                                                     |   |        



Totals may not add due to rounding.



|(1) |  | On April 4, 2002, the Companys Board of Directors announced the authorization of a stock repurchase program, which allowed for the purchase of Class A Common Stock up to a
total amount of $35 million. This repurchase program was increased by an aggregate of $965 million to a total of $1 billion by resolutions of the Companys Board of Directors adopted on July 16, 2002, May 12,
2003, April 20, 2004, August 8, 2004, April 19, 2005, October 18, 2005, April 18, 2006 and July 17, 2007. The Company may repurchase shares from time to time in the open market, accelerated
stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under a Rule 10b5-1 plan. The timing and amount of repurchase transactions will be determined by the Companys management
based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. The Company cautions that there are no assurances that any
further repurchases will actually occur. The repurchase program has no set expiration or termination date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents shares of common stock withheld in satisfaction of tax withholding obligations upon vesting of restricted stock.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

Equity Compensation Plan Information



The following table sets forth certain information as of December 31, 2008, regarding the Companys equity compensation
plans for stock-based awards.



|                                                          |  |                                                                                         |  |                                                                         |       |                                                                                                                                         |      
|--------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------- | -----
|Plan Category                                             |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexerciseprice of outstandingoptions, warrantsand rights |       | Number of securitiesremaining available forfuture issuance underequity
compensationplans (excluding securitiesreflected in column(a)(1)
|                                                          |  | (In thousands, except weighted-average exercise price)                                 
|                                                          |  | (a)                                                                                     |  | (b)                                                                     |       | (c)                                                                                                                                    
|Equity compensation plans approved by security holders    |  | 4,748                                                                                   |  | $                                                                       | 13.32 |                                                                                                                                         | 9,838
|Equity compensation plans not approved by securityholders |  |                                                                                        |  |                                                                         |      |                                                                                                                                         |     
|                                                          |  |                                                                                         |  |                                                                         |       |                                                                                                                                         |      
|Total                                                     |  | 4,748                                                                                   |  | $                                                                       | 13.32 |                                                                                                                                         | 9,838
|                                                          |  |                                                                                         |  |                                                                         |       |                                                                                                                                         |      



|(1) |  | Securities remaining available for future issuance under equity compensation plans approved by security holders include 1.6 million shares under the Knight Capital Group, Inc. 1998 Long
Term Incentive Plan, 5.1 million shares under the Knight Capital Group, Inc. 2003 Equity Incentive Plan and 3.1 million shares under the Knight Capital Group, Inc. 2006 Equity Incentive Plan. These plans are discussed further in Footnote
11, Stock-Based Compensation to the Companys Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

Item 6.Selected Financial Data



The following selected consolidated financial data are qualified by the Consolidated
Financial Statements of Knight Capital Group, Inc. and the Notes thereto included elsewhere in this document. The following should be read in conjunction with the Consolidated Financial Statements and the discussion under Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this document. The Consolidated Statements of Operations Data for 2008, 2007 and 2006 and the Consolidated Statements of Financial
Condition Data at December 31, 2008 and 2007 have been derived from our audited Consolidated Financial Statements included elsewhere in this document. The Consolidated Statements of Operations Data for 2005 and 2004 and the Consolidated
Statements of Financial Condition Data at December 31, 2006, 2005 and 2004 are derived from Consolidated Financial Statements not included in this document.



|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                                                                   |  | For the years ended December 31,         |          
|                                                                                   |  | 2008                                     |           |   | 2007 |   |         | 2006 |  | 2005 |         | 2004 |  
|Consolidated Statements of Operations Data(1):                                     |  | (In thousands, except per share amounts) |          
|Revenues                                                                           |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Commissions and fees                                                               |  | $                                        | 538,875   |   |      | $ | 435,966 |      |  | $    | 393,226 |      | $ | 276,117 |  | $ | 253,298 |  
|Net trading revenue                                                                |  |                                          | 446,707   |   |      |   | 286,199 |      |  |      | 243,761 |      |   | 165,614 |  |   | 250,993 |  
|Asset management fees                                                              |  |                                          | 46,344    |   |      |   | 116,777 |      |  |      | 213,888 |      |   | 89,227  |  |   | 77,658  |  
|Interest, net                                                                      |  |                                          | 7,579     |   |      |   | 17,560  |      |  |      | 16,364  |      |   | 9,199   |  |   | 4,986   |  
|Investment (loss) income and other, net                                            |  |                                          | (6,607    | ) |      |   | 28,718  |      |  |      | 72,219  |      |   | 74,541  |  |   | 16,441  |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Total revenues                                                                     |  |                                          | 1,032,898 |   |      |   | 885,220 |      |  |      | 939,458 |      |   | 614,698 |  |   | 603,376 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Transaction-based expenses                                                         |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Execution and clearance fees                                                       |  |                                          | 107,402   |   |      |   | 120,261 |      |  |      | 106,908 |      |   | 99,427  |  |   | 111,788 |  
|Soft dollar expense                                                                |  |                                          | 60,749    |   |      |   | 49,838  |      |  |      | 53,369  |      |   | 43,566  |  |   | 37,405  |  
|Payments for order flow and ECN rebates                                            |  |                                          | 43,639    |   |      |   | 54,564  |      |  |      | 42,191  |      |   | 21,220  |  |   | 36,632  |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Total transaction-based expenses                                                   |  |                                          | 211,790   |   |      |   | 224,663 |      |  |      | 202,468 |      |   | 164,213 |  |   | 185,825 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Revenues, net of transaction-based expenses                                        |  |                                          | 821,108   |   |      |   | 660,557 |      |  |      | 736,990 |      |   | 450,485 |  |   | 417,551 |  
|Other direct expenses                                                              |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Employee compensation and benefits                                                 |  |                                          | 370,778   |   |      |   | 346,476 |      |  |      | 352,353 |      |   | 229,460 |  |   | 244,550 |  
|Communications and data processing                                                 |  |                                          | 47,461    |   |      |   | 36,956  |      |  |      | 33,120  |      |   | 32,513  |  |   | 28,896  |  
|Depreciation and amortization                                                      |  |                                          | 27,494    |   |      |   | 22,075  |      |  |      | 20,641  |      |   | 16,355  |  |   | 14,248  |  
|Occupancy and equipment rentals                                                    |  |                                          | 20,494    |   |      |   | 14,083  |      |  |      | 13,536  |      |   | 13,554  |  |   | 16,852  |  
|Professional fees                                                                  |  |                                          | 19,483    |   |      |   | 19,360  |      |  |      | 20,568  |      |   | 19,555  |  |   | 14,915  |  
|Business development                                                               |  |                                          | 18,221    |   |      |   | 15,997  |      |  |      | 14,343  |      |   | 6,419   |  |   | 8,269   |  
|Interest expense                                                                   |  |                                          | 5,014     |   |      |   | 182     |      |  |      | 337     |      |   | 180     |  |   | 339     |  
|Writedown of assets and lease loss accrual, net                                    |  |                                          | 1,236     |   |      |   | (2,470  | )    |  |      | 8,480   |      |   | 10,055  |  |   | 3,810   |  
|Regulatory charges and related matters                                             |  |                                          |          |   |      |   |        |      |  |      |        |      |   | 5,703   |  |   | 79,342  |  
|Other                                                                              |  |                                          | 12,617    |   |      |   | 15,418  |      |  |      | 17,101  |      |   | 11,541  |  |   | 6,844   |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Total other direct expenses                                                        |  |                                          | 522,798   |   |      |   | 468,077 |      |  |      | 480,479 |      |   | 345,335 |  |   | 418,065 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Other Income                                                                       |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Non-operating gain from subsidiary stock issuance                                  |  |                                          | 15,947    |   |      |   | 8,757   |      |  |      |        |      |   |        |  |   |        |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Income (loss) from continuing operations before income taxes and minority interest |  |                                          | 314,257   |   |      |   | 201,237 |      |  |      | 256,511 |      |   | 105,150 |  |   | (514    | )
|Income tax expense                                                                 |  |                                          | 130,193   |   |      |   | 77,560  |      |  |      | 98,165  |      |   | 38,912  |  |   | 9,258   |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Income (loss) from continuing operations before minority interest                  |  | $                                        | 184,064   |   |      | $ | 123,677 |      |  | $    | 158,346 |      | $ | 66,238  |  | $ | (9,772  | )
|Minority interest expense                                                          |  |                                          | 6,153     |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Income (loss) from continuing operations                                           |  | $                                        | 177,911   |   |      | $ | 123,677 |      |  | $    | 158,346 |      | $ | 66,238  |  | $ | (9,772  | )
|(Loss) income from discontinued operations, net of tax                             |  | $                                        |          |   |      | $ | (1,437  | )    |  | $    |        |      | $ | 122     |  | $ | 100,904 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Net income                                                                         |  | $                                        | 177,911   |   |      | $ | 122,240 |      |  | $    | 158,346 |      | $ | 66,360  |  | $ | 91,132  |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Basic earnings per share from continuing operations                                |  | $                                        | 2.01      |   |      | $ | 1.27    |      |  | $    | 1.56    |      | $ | 0.64    |  | $ | (0.09   | )
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Diluted earnings per share from continuing operations                              |  | $                                        | 1.94      |   |      | $ | 1.23    |      |  | $    | 1.49    |      | $ | 0.62    |  | $ | (0.08   | )
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Basic earnings per share from discontinued operations                              |  | $                                        |          |   |      | $ | (0.01   | )    |  | $    |        |      | $ |        |  | $ | 0.90    |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Diluted earnings per share from discontinued operations                            |  | $                                        |          |   |      | $ | (0.01   | )    |  | $    |        |      | $ |        |  | $ | 0.86    |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Basic earnings per share                                                           |  | $                                        | 2.01      |   |      | $ | 1.26    |      |  | $    | 1.56    |      | $ | 0.64    |  | $ | 0.81    |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Diluted earnings per share                                                         |  | $                                        | 1.94      |   |      | $ | 1.21    |      |  | $    | 1.49    |      | $ | 0.62    |  | $ | 0.77    |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Shares used in computation of basic earnings per share                             |  |                                          | 88,407    |   |      |   | 97,050  |      |  |      | 101,420 |      |   | 103,456 |  |   | 112,423 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Shares used in computation of diluted earnings per share                           |  |                                          | 91,760    |   |      |   | 100,796 |      |  |      | 106,243 |      |   | 106,882 |  |   | 117,636 |  
|                                                                                   |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  



32



---

##### Table of Contents

|                                                          |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                          |  | December 31,
|                                                          |  | 2008         |           | 2007 |   | 2006      |  | 2005 |           | 2004
|Consolidated Statements of Financial Condition Data:      |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|Cash and cash equivalents                                 |  | $            | 440,621   |      | $ | 222,435   |  | $    | 214,760   |      | $ | 230,591   |  | $ | 445,539  
|Securities owned, held at clearing brokers, at fair value |  |              | 476,111   |      |   | 412,565   |  |      | 711,775   |      |   | 380,367   |  |   | 254,473  
|Investment in Deephaven sponsored funds                   |  |              | 47,152    |      |   | 83,732    |  |      | 187,573   |      |   | 281,657   |  |   | 215,330  
|Total assets                                              |  |              | 2,014,575 |      |   | 1,755,813 |  |      | 2,028,215 |      |   | 1,416,016 |  |   | 1,394,020
|Securities sold, not yet purchased, at fair value         |  |              | 385,003   |      |   | 335,280   |  |      | 693,071   |      |   | 345,457   |  |   | 221,421  
|Long term debt                                            |  |              | 140,000   |      |   | 70,000    |  |      |          |      |   |          |  |   |         
|Total stockholders equity                                |  |              | 1,027,358 |      |   | 885,378   |  |      | 962,487   |      |   | 823,448   |  |   | 851,202  



(1) -
Certain prior year amounts have been reclassified to conform to current year presentation.



33



---

##### Table of Contents

Item 7.Managements
Discussion and Analysis of Financial Condition and Results of Operations



Executive Overview



We are a leading financial
services firm that provides electronic and voice access to the capital markets across multiple asset classes for buy-side, sell-side and corporate clients. We also have provided asset management services for institutional and private clients through
our Asset Management segment, which we are in the process of preparing to exit. We continually apply knowledge and innovation to the trade execution process to build lasting client partnerships through consistent performance and superior client
service. We have three operating segments, Global Markets, Asset Management and Corporate.



| |  |  | Global MarketsOur Global Markets segment provides market access and trade execution services in nearly every U.S. equity security and a large number of
international securities, fixed income, foreign exchange, futures and options. Our approach to trading combines deep liquidity with robust trading technology and capital facilitation, when necessary, to deliver high quality trade executions
consistent with client-defined measures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Asset ManagementOur Asset Management segment consists of our 51% ownership of Deephaven Capital Management Holdings LLC (Deephaven Holdings), the
parent company of Deephaven Capital Management LLC and its subsidiaries (collectively, Deephaven), a global, multi-strategy alternative investment manager. Assets under management were $2.0 billion as of December 31, 2008, down from
$3.9 billion of assets under management as of December 31, 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to unprecedented market conditions, pending redemptions and industry-wide changes in margin and finance requirements, and after evaluation of a number of strategic options, the Company concluded that it was in the best
interests of investors in the Deephaven Funds and the Companys shareholders to exit our Asset Management segment. For information regarding our plan to exit from our Asset Management segment, refer to the Deephaven and
Subsequent Events sections within this Managements Discussions and Analysis of Financial Condition and Results of Operations (MD&A).



| |  |  | CorporateOur Corporate segment includes investment income earned on strategic investments and our corporate investment as a limited partner or non-managing
member in funds managed by the Asset Management segment (the Deephaven Funds) and all corporate overhead expenses. Corporate overhead expenses primarily consist of compensation for certain senior executives and other individuals employed
at the corporate holding company, legal and other professional expenses related to corporate matters, directors fees, investor and public relations expenses and directors and officers insurance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

The following table sets forth: (i) Revenues, (ii) Expenses, (iii) Minority interest expense,
(iv) Other income and (v) Pre-tax earnings (loss) after minority interest expense of our segments and on a consolidated basis (in millions):



|                                                        |  |                                  |         |   |      |   |       |  |   |      
|------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ----- |  | - | -----
|                                                        |  | For the years ended December 31,
|                                                        |  | 2008                             |         |   | 2007 |   | 2006 
|Global Markets                                          |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  | $                                | 998.5   |   |      | $ | 739.9 |  | $ | 657.6
|Expenses                                                |  |                                  | 641.1   |   |      |   | 559.6 |  |   | 507.3
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings                                        |  |                                  | 357.5   |   |      |   | 180.4 |  |   | 150.3
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Asset Management                                        |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 33.3    |   |      |   | 118.2 |  |   | 214.9
|Expenses                                                |  |                                  | 52.6    |   |      |   | 101.7 |  |   | 140.1
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings                                 |  |                                  | (19.4   | ) |      |   | 16.5  |  |   | 74.8 
|Minority interest expense                               |  |                                  | 6.2     |   |      |   |      |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings after minority interest expense |  |                                  | (25.5   | ) |      |   | 16.5  |  |   | 74.8 
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Corporate                                               |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 1.1     |   |      |   | 27.1  |  |   | 66.9 
|Expenses                                                |  |                                  | 40.9    |   |      |   | 31.5  |  |   | 35.5 
|Other income                                            |  |                                  | 15.9    |   |      |   | 8.8   |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax (loss) earnings                                 |  |                                  | (23.8   | ) |      |   | 4.3   |  |   | 31.4 
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Consolidated                                            |  |                                  |         |   |      |   |       |  |   |      
|Revenues                                                |  |                                  | 1,032.9 |   |      |   | 885.2 |  |   | 939.5
|Expenses                                                |  |                                  | 734.6   |   |      |   | 692.7 |  |   | 682.9
|Other income                                            |  |                                  | 15.9    |   |      |   | 8.8   |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings                                        |  |                                  | 314.3   |   |      |   | 201.2 |  |   | 256.5
|Minority interest expense                               |  |                                  | 6.2     |   |      |   |      |  |   |     
|                                                        |  |                                  |         |   |      |   |       |  |   |      
|Pre-tax earnings after minority interest expense        |  | $                                | 308.1   |   |      | $ | 201.2 |  | $ | 256.5
|                                                        |  |                                  |         |   |      |   |       |  |   |      



|* |  | Totals may not add due to rounding.
|- |  | -----------------------------------



Consolidated Revenues in 2008 increased $147.7 million, or 16.7% from 2007, consolidated Expenses increased $41.8 million or 6.0% from 2007 and Other income
increased $7.2 million, or 82.1% from 2007. Overall, Consolidated Pre-tax earnings after minority interest expense in 2008 increased $106.9 million, or 53.1% from 2007.



The changes in our Pre-tax earnings after minority interest expense by segment from 2007 to 2008 are summarized as follows:



| |  |  | Global MarketsOur Pre-tax earnings from Global Markets increased in 2008 by $177.1 million, or 98.2%, from 2007. The increase is primarily due to higher average
daily U.S. equity dollar value traded, greater trade volumes and improved trading performance and margins.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Asset ManagementOur Pre-tax results after minority interest expense from Asset Management decreased in 2008 by $42.0 million from the results in 2007. The
decrease is primarily due to lower incentive allocation fees as a result of significantly lower fund returns and lower management fees as a result of a decrease in assets under management, offset in part by a decrease in profitability-based bonuses.
Asset Management revenues in 2008 were also adversely impacted by the announced closing of the Event Fund, as described further under the headings Deephaven and Subsequent Events in this MD&A.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



---

##### Table of Contents

| |  |  | CorporateOur Pre-tax results from our Corporate segment in 2008 decreased by $28.2 million from 2007, primarily due to losses on our corporate investment as a
limited partner or non-managing member in the Deephaven Funds offset, in part by an increase of $7.2 million in pre-tax gains in Other income from the additional partial sale of our equity interest in Direct Edge during 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain Factors Affecting Results of Operations



We may experience significant variation in our future results
of operations. These fluctuations may result from numerous factors, many of which are outside of our control. These factors include, among other things, introductions of or enhancements to trade execution services by us or our competitors; the value
of our securities positions and other instruments and our ability to manage the risks attendant thereto; the volume of our trade execution activities; the dollar value of securities traded; the composition of our order flow; volatility in the
securities markets; our market share with institutional and broker-dealer clients; the performance and size of, and volatility in, our quantitative market-making and program trading portfolios; the performance of our high velocity algorithmic
trading models; the performance of our international operations and cost associated with our international expansion; our ability to manage personnel, overhead and other expenses, including our occupancy expenses under our office leases and expenses
and charges relating to legal and regulatory proceedings; the strength of our client relationships; changes in payments for order flow and clearing, execution and regulatory transaction costs; the level of assets under management and fund returns;
performance of the asset management investment strategies; the addition or loss of executive management, sales, electronic and voice trading, technology and asset management professionals; legislative, legal and regulatory changes; legal and
regulatory matters; geopolitical risk; the amount and timing of capital expenditures, acquisitions and divestitures; the integration, performance and operation of acquired businesses; the incurrence of costs associated with acquisitions and
dispositions; investor sentiment; technological changes and events; seasonality; competition; and market and economic conditions.



Such factors may also have an impact on our ability to achieve our strategic objectives, including, without limitation, increases in our market share, growth and
profitability in our Global Markets segment. If demand for our services declines due to any of the above factors, and we are unable to adjust our cost structure on a timely basis, our operating results could be materially and adversely affected. As
a result of the foregoing factors, period-to-period comparisons of our revenues and operating results are not necessarily meaningful and such comparisons cannot be relied upon as indicators of future performance. There also can be no assurance that
we will be able to continue the rates of revenue growth that we have experienced in the past or that we will be able to improve our operating results.



Trends



Global Economic Trends



Our
businesses are affected by many factors in the global financial markets and worldwide economic conditions. These factors include the growth level of gross domestic product in the U.S., Europe and Asia, and the existence of transparent, efficient and
liquid equity markets and level of trading volumes.



Economic growth
continued to slow during 2008, with weakness becoming more broadly based across global economies in the second half of 2008. The U.S. economy entered a recession in the beginning of 2008 which intensified as the year progressed. Much of the slowdown
was attributable to weakness in credit markets brought on by contraction in the housing market and the associated increase in mortgage defaults. Liquidity and credit concerns were further exacerbated with the



36



---

##### Table of Contents

changing landscape of the U.S. financial services industry. Global financial markets continued to experience substantially increased levels of volatility due to
concerns about the outlook for global growth, inflation, declining asset values, and credit markets continued to experience illiquidity and wider credit spreads.



Trends Affecting Our Company



We believe that our businesses are affected by the aforementioned global economic trends as well as more specific trends. Some of the specific trends that impact
our operations, financial condition and results of operations are:



| |  |  | Broker-dealer clients continue to focus on statistics measuring the quality of equity executions (including speed of execution and price improvement). In an effort to improve
the quality of their executions as well as increase efficiencies, market-makers have increased the level of automation within their operations. Over the past several years, the greater focus on execution quality has resulted in greater competition
in the marketplace, which, along with market structure changes and market conditions, has negatively impacted the revenue capture metrics of the Company and other market-making firms.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Equity transaction volumes executed by broker-dealers have fluctuated over the past few years due to retail investor sentiment, market conditions and a variety of other
factors, resulting in a shift of product mix. Equity transaction volumes may not be sustainable and are not predictable.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been consolidation among market centers over the past several years, and several regional exchanges have entered into joint ventures with broker-dealers to create
their own alternative trading systems (i.e., ECNs) and compete within the OTC and listed trading venues. In addition, there are many new entrants into the market, including Alternative Trading Systems (ATSs) and dark liquidity pools. Further, many
broker-dealers are offering their own internal crossing networks. These factors continue to create further fragmentation in the marketplace.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market structure changes, competition and market conditions have triggered an industry shift toward market-makers charging explicit commissions or commission equivalents to
institutional clients for executions in OTC securities. For the majority of our institutional client orders, we charge explicit fees in the form of commissions or commission equivalents. Institutional commission rates have fallen in the past few
years due to competitive forces and increased electronic trading, and may continue to fall in the future.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market structure changes, competition and technology advancements have also led to a dramatic increase in electronic message traffic. These increases in message traffic place
heavy strains on the technology resources, bandwidth and capacities of market participants.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Due to regulatory scrutiny over the past several years relating to equity sell-side research and the continued focus by investors on execution quality and overall transaction
costs, more institutional clients allocate commissions to broker-dealers based on the quality of executions. In the past, a significant portion of institutional equity commissions were allocated to broker-dealers in exchange for either research or
soft dollar and commission recapture programs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been continued scrutiny of market-makers, specialists and hedge funds by the regulatory and legislative authorities. New legislation or modifications to existing
regulations and rules could occur in the future and could materially impact the Companys revenues and profitability. For example, in November 2008, FINRA enacted rules regarding the OTC Bulletin Board markets which required that all non-Nasdaq
securities be subject to limit order protection. Also, further amendments to Regulation SHO and related short sale rules, could make it much more difficult for market makers to sell securities short.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



---

##### Table of Contents

| |  |  | There continues to be growth in electronic equity trading, as evidenced by increased volumes in direct market access platforms, algorithmic and program trading, and ECNs
and dark liquidity pools. In addition, electronic trading continues to expand to other asset classes, including options, currencies and fixed income. The expansion of electronic trading may result in the growth of innovative
electronic products and competition for order flow.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The macro-economic environment and market conditions have had an adverse impact on the profitability of alternative asset management business, such as Deephaven,
resulting in volatile earnings and increased investor redemptions across the industry.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income Statement Items



The
following section briefly describes the key components of, and drivers to, our significant revenues and expenses.



Revenues



Our revenues consist principally of Commissions and fees and Net trading revenue from Global Markets and Asset management fees from Asset Management.



Revenues on transactions for which we charge explicit commissions or commission
equivalents, which include the majority of our institutional client orders, are included within Commissions and fees. Commissions and fees are primarily affected by changes in our equity transaction volumes with institutional clients, changes in
commission rates, the growth of Knight Direct, Hotspot, Knight BondPoint and Knight Libertas and the level of our soft dollar and commission recapture activity.



Trading profits and losses on principal transactions are included within Net trading revenue. These revenues are primarily affected by changes in the amount and
mix of U.S. equity trade and share volumes, our revenue capture, dollar value of equities traded, our ability to derive trading gains by taking proprietary positions, changes in our execution standards, development of, and enhancement to, our
quantitative market-making models, performance of our high velocity algorithmic trading models that interact with street flow, volatility in the marketplace, our mix of sell- and buy-side clients, regulatory changes and evolving industry customs and
practices.



Asset management fees represent fees earned by Deephaven for
sponsoring and managing the Deephaven Funds as well as fees earned from separately managed accounts. These fees consist of management fees, calculated as fixed percentages of assets under management, and incentive allocation fees, generally
calculated as a percentage of the funds and managed accounts year-to-date profits, if any. Incentive allocation fees may be negative in certain interim periods if the funds or managed accounts lose money for such period; however, such
fees will not be negative on a year-to-date basis.



The Company earns
interest income from our cash held at banks and cash held in trading accounts at clearing brokers. The Companys clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers
for facilitating the settlement and financing of securities transactions. Net interest is primarily affected by interest rates, the level of cash balances held at banks and clearing brokers and our level of securities positions in which we are long
compared to our securities positions in which we are short.



Investment
(loss) income and other, net primarily represents income earned, net of losses, related to our corporate investment as a limited partner or non-managing member in the Deephaven Funds, our strategic investments and returns on deferred compensation
investments. Such (loss) income is



38



---

##### Table of Contents

primarily affected by the level of our corporate investments in our Deephaven Funds and performance by the Deephaven Funds, as well as the performance and activity of
our strategic investments and changes in value of certain deferred compensation investments.



Transaction-based expenses



Transaction-based expenses include variable expenses directly incurred in conjunction with generating Net trading revenue and Commissions and fees and consist of Execution and clearance fees, Soft dollar expense, and Payments for order flow
and ECN rebates.



Execution and clearance fees primarily represent fees
paid to clearing brokers for clearing equities transactions, transaction fees paid to Nasdaq and other exchanges and regulatory bodies, and execution fees paid to third parties, primarily for executing trades on the NYSE and other exchanges, and for
executing orders through third party ECNs. Execution and clearance fees primarily fluctuate based on changes in equity trade and share volume, changes in execution strategies, rate of clearance fees charged by clearing brokers and rate of fees paid
to ECNs, exchanges and certain regulatory bodies.



Soft dollar expense
represents payments to third parties in connection with our commission management programs. Soft dollar expense fluctuates based on U.S. equity share volume executed on behalf our institutional clients who participate in these programs.



Payments for order flow and ECN rebates represent payments to broker-dealer clients,
in the normal course of business, for directing to us their order flow in U.S. equities and rebates for providing liquidity to Direct Edge ECN, which was included as a consolidated subsidiary in the Consolidated Statements of Operations for all
periods presented from the date of acquisition until September 28, 2007 (the Deconsolidation Date). Payments for order flow and ECN rebates fluctuate as we modify our rates and as our percentage of clients whose policy is not to
accept payments for order flow varies. Payments for order flow and ECN rebates also fluctuate based on U.S. equity share volume, our profitability and the mix of market orders and limit orders.



Other direct expenses



Other direct expenses primarily consist of Employee compensation and benefits,
Communications and data processing, Depreciation and amortization, Occupancy and equipment rentals, Professional fees, Business development and Interest expense.



Employee compensation and benefits expense, our largest expense, primarily consists of salaries and wages paid to all employees and
profitability-based compensation, which includes compensation paid to sales personnel, incentive compensation paid to all other employees based on our profitability and changes in value of certain deferred compensation investments. Employee
compensation and benefits expense fluctuates, for the most part, based on changes in our revenues, profitability and the number of employees. Compensation for employees engaged in sales activities is determined primarily based on a percentage of
their gross revenues net of certain transaction-based expenses.



Communications and data processing expense primarily consists of costs for obtaining market data, telecommunications services and systems maintenance.



Depreciation and amortization expense results from the depreciation of fixed assets, which consist of computer hardware, furniture and fixtures, and the
amortization of purchased software, capitalized software development costs, acquired intangible assets and leasehold improvements. We depreciate our fixed assets and amortize our capitalized software development costs and acquired intangible



39



---

##### Table of Contents

assets on a straight-line basis over their expected useful lives. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the
improvement or the remaining term of the lease.



Occupancy and equipment
rentals consist primarily of rent and utilities related to rented premises and office equipment.



Professional fees consist primarily of legal, accounting and consulting fees.



Business development consists primarily of costs related to marketing, conferences and relationship management.



Interest expense consists primarily of cost associated with our credit facilities.



Other income



Other income consists of non-operating gains from subsidiary stock issuances relating
to the partial sales of our ownership of Direct Edge ECN.



Minority
interest expense



Minority interest expense primarily represents the
amounts distributable to the Deephaven Managers, pursuant to the Deephaven Holdings LLC agreement and includes an accrual for a one-time minimum guaranteed distribution for 2008. For a discussion regarding the Deephaven Transaction, see the heading
Deephaven in this MD&A.



40



---

##### Table of Contents

Results of Operations



The following table sets forth the consolidated statements of operations data as a percentage of total revenues:



|                                                                            |  |                                 |   |  |       |   |  |       |  
|--------------------------------------------------------------------------- |  | ------------------------------- | - |  | ----- | - |  | ----- | -
|                                                                            |  | For the years endedDecember 31, |  
|                                                                            |  | 2008                            |   |  | 2007  |   |  | 2006  |  
|Revenues                                                                    |  |                                 |   |  |       |   |  |       |  
|Commissions and fees                                                        |  | 52.2                            | % |  | 49.2  | % |  | 41.9  | %
|Net trading revenue                                                         |  | 43.2                            | % |  | 32.3  | % |  | 25.9  | %
|Asset management fees                                                       |  | 4.5                             | % |  | 13.2  | % |  | 22.8  | %
|Interest, net                                                               |  | 0.7                             | % |  | 2.0   | % |  | 1.7   | %
|Investment (loss) income and other, net                                     |  | 0.6                            | % |  | 3.2   | % |  | 7.7   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Total revenues                                                              |  | 100.0                           | % |  | 100.0 | % |  | 100.0 | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Transaction-based expenses                                                  |  |                                 |   |  |       |   |  |       |  
|Execution and clearance fees                                                |  | 10.4                            | % |  | 13.6  | % |  | 11.4  | %
|Soft dollar expense                                                         |  | 5.9                             | % |  | 5.6   | % |  | 5.7   | %
|Payments for order flow and ECN rebates                                     |  | 4.2                             | % |  | 6.2   | % |  | 4.5   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Total transaction-based expenses                                            |  | 20.5                            | % |  | 25.4  | % |  | 21.6  | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Revenues, net of transaction-based expenses                                 |  | 79.5                            | % |  | 74.6  | % |  | 78.4  | %
|                                                                            |  |                                 |  
|Other direct expenses                                                       |  |                                 |   |  |       |   |  |       |  
|Employee compensation and benefits                                          |  | 35.9                            | % |  | 39.1  | % |  | 37.5  | %
|Communications and data processing                                          |  | 4.6                             | % |  | 4.2   | % |  | 3.5   | %
|Depreciation and amortization                                               |  | 2.7                             | % |  | 2.5   | % |  | 2.2   | %
|Occupancy and equipment rentals                                             |  | 2.0                             | % |  | 1.6   | % |  | 1.4   | %
|Professional fees                                                           |  | 1.9                             | % |  | 2.2   | % |  | 2.2   | %
|Business development                                                        |  | 1.8                             | % |  | 1.8   | % |  | 1.5   | %
|Interest expense                                                            |  | 0.5                             | % |  | 0.0   | % |  | 0.0   | %
|Writedown of assets and lease loss accrual, net                             |  | 0.1                             | % |  | 0.3  | % |  | 0.9   | %
|Other                                                                       |  | 1.2                             | % |  | 1.7   | % |  | 1.8   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Total other direct expenses                                                 |  | 50.6                            | % |  | 52.9  | % |  | 51.1  | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Other Income                                                                |  |                                 |   |  |       |   |  |       |  
|Non-operating gain from subsidiary stock issuance                           |  | 1.5                             | % |  | 1.0   | % |  | 0.0   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Income from continuing operations before income taxes and minority interest |  | 30.4                            | % |  | 22.7  | % |  | 27.3  | %
|Income tax expense                                                          |  | 12.6                            | % |  | 8.8   | % |  | 10.4  | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Income from continuing operations before minority interest                  |  | 17.8                            | % |  | 14.0  | % |  | 16.9  | %
|Minority interest expense                                                   |  | 0.6                             | % |  | 0.0   | % |  | 0.0   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Income from continuing operations                                           |  | 17.2                            | % |  | 14.0  | % |  | 16.9  | %
|Loss from discontinued operations, net of tax                               |  | 0.0                             | % |  | 0.2  | % |  | 0.0   | %
|                                                                            |  |                                 |   |  |       |   |  |       |  
|Net income                                                                  |  | 17.2                            | % |  | 13.8  | % |  | 16.9  | %
|                                                                            |  |                                 |   |  |       |   |  |       |  



Percentages may not add due to rounding.



41



---

##### Table of Contents

Years Ended December 31, 2008 and 2007



Revenues



Global Markets



The results of our Global Markets segment for the year ended December 31, 2008 include the full year results of KEM, KCM, Knight Direct, Hotspot, Knight
BondPoint and KEMIL. EdgeTrade was acquired in January 2008 and merged into Knight Direct in August 2008. Knight Libertas was acquired in July 2008. The results of EdgeTrade and Knight Libertas are consolidated from their respective acquisition
dates for the year ended December 31, 2008.



The results of Direct
Edge ECN were included in the results of our Global Markets segment through the Deconsolidation Date in September 2007 and are recorded under the equity method within the Corporate segment for all periods subsequent to the Deconsolidation Date.



|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|----------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | ----------- | - |  | ----- | -
|                                                                  |  | For the years ended December 31, |         |      |   |         |  |  
|                                                                  |  | 2008                             |         | 2007 |   | Change  |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                | 538.9   |      | $ | 436.0   |  | $ | 102.9       |   |  | 23.6  | %
|Net trading revenue (millions)                                    |  |                                  | 446.7   |      |   | 286.2   |  |   | 160.5       |   |  | 56.1  | %
|Interest, net (millions)                                          |  |                                  | 3.8     |      |   | 14.6    |  |   | (10.7       | ) |  | -73.8 | %
|Investment income and other, net (millions)                       |  |                                  | 9.1     |      |   | 3.2     |  |   | 5.9         |   |  | 185.7 | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|Total Revenues from Global Markets (millions)                     |  | $                                | 998.5   |      | $ | 739.9   |  | $ | 258.6       |   |  | 35.0  | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|Average daily U.S. equity dollar value traded ($ billions)        |  |                                  | 19.2    |      |   | 12.7    |  |   | 6.4         |   |  | 50.4  | %
|Average daily U.S. equity trades (thousands)                      |  |                                  | 2,548.0 |      |   | 1,334.1 |  |   | 1,213.9     |   |  | 91.0  | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                  | 195.7   |      |   | 113.6   |  |   | 82.1        |   |  | 72.2  | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                  | 802.7   |      |   | 821.8   |  |   | (19.1       | ) |  | -2.3  | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                  | 1.5     |      |   | 1.6     |  |   | (0.1        | ) |  | -5.0  | %



Total revenues from the Global
Markets segment, which primarily comprises Commissions and fees and Net trading revenue from our domestic businesses, increased 35.0% to $998.5 million in 2008, from $739.9 million in 2007. Revenues in 2008 were positively impacted by higher average
daily U.S. equity dollar value traded, greater trade volumes, improved results from electronic quantitative market-making efforts, performance of our high velocity algorithmic trading models that interact with street flow and the additions of
EdgeTrade and Knight Libertas offset, in part, by a decrease in revenue capture per U.S. equity dollar value traded, lower share volume in OTC Bulletin Board and Pink Sheet shares and the deconsolidation of Direct Edge ECN in September 2007.



Average revenue capture per U.S. equity dollar value traded was 1.5
basis points (bps) in 2008, down 5.0% from 1.6 bps in 2007. The primary driver for the decrease in revenue capture was a change in the mix of our order flow due to a significant increase in Nasdaq and Listed volumes from an expanded
broker-dealer client base as well as a decrease in OTC Bulletin Board and Pink Sheet shares traded. Average revenue capture per U.S. equity dollar value traded is calculated as the total of net domestic trading revenues plus U.S. institutional
commissions and commission equivalents (included in Commissions and fees), less certain transaction-related regulatory fees (included in Execution and clearance fees), (collectively Core Equity Revenues) divided by the total dollar value
of the related equity transactions. Core Equity Revenues were $721.6 million and $500.8 million in 2008



42



---

##### Table of Contents

and 2007, respectively. Core Equity Revenues do not include revenues from KEMILs European institutional business, Donaldson, Knight Direct, Direct Edge ECN,
Hotspot, Knight BondPoint and Knight Libertas.



Asset Management



|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ----- | -
|                                                                |  | For the years ended December 31, |         |   |      |   |         |        | 
|                                                                |  | 2008                             |         |   | 2007 |   |         | Change |  |   | % of Change |  
|Incentive allocation fees (millions)                            |  | $                                | 12.4    |   |      | $ | 72.4    |        |  | $ | (60.0       | ) |  | -82.8 | %
|Management fees (millions)                                      |  |                                  | 33.9    |   |      |   | 44.3    |        |  |   | (10.4       | ) |  | -23.5 | %
|Interest income and other, net (millions)                       |  |                                  | (13.1   | ) |      |   | 1.4     |        |  |   | (14.5       | ) |  | NM    |  
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|Total Revenues from Asset Management (millions)                 |  | $                                | 33.3    |   |      | $ | 118.2   |        |  | $ | (84.9       | ) |  | -71.8 | %
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|Average month-end balance of assets under management (millions) |  | $                                | 2,993.3 |   |      | $ | 4,087.8 |        |  | $ | (1,094.5    | ) |  | -26.8 | %
|Annual fund return to investors*                                |  |                                  | 32.6   | % |      |   | 6.8     | %      |  |   | -39.4       | % |  | NM    |  



|* |  | Annual fund return represents the blended annual return across all assets under management in the Deephaven Funds.
|- |  | ------------------------------------------------------------------------------------------------------------------

|NMNot |  | meaningful
|------ |  | ----------



Total revenues from the Asset Management segment, which primarily consist of management fees and incentive allocation fees, decreased 71.8% to $33.3 million in 2008, from $118.2 million in 2007. The decrease is primarily due to
substantially lower incentive allocation fees as a result of negative blended fund returns in 2008, a decrease in management fees due to lower average assets under management, and losses associated with deferred compensation investments related to
certain employees which are included in Interest income and other, net in the chart above. Asset management fees were also adversely affected by the announced closing of the Event Fund during the first quarter of 2008. As of February 1, 2008,
and through the period of time Deephaven is returning investors capital, no management or incentive allocation fee is being charged to investors in the Event Fund.



The average month-end balance of assets under management decreased to $3.0 billion in 2008, from $4.1 billion in 2007. The blended annual fund return
across all assets under management for 2008 was a loss of 32.6%, down from a gain of 6.8% in 2007. The returns for 2008 were affected by a difficult market environment, particularly in the second half of the year, which resulted in significant
losses for the various investment strategies.



Corporate



|                                                                       |  |                                  |      |      |   |        |  |   |             |   |  |       |  
|---------------------------------------------------------------------- |  | -------------------------------- | ---- | ---- | - | ------ |  | - | ----------- | - |  | ----- | -
|                                                                       |  | For the years ended December 31, |      |      |   |        |  |  
|                                                                       |  | 2008                             |      | 2007 |   | Change |  |   | % of Change |  
|Total Revenues from Corporate (millions)                               |  | $                                | 1.1  |      | $ | 27.1   |  | $ | (26.0       | ) |  | -96.1 | %
|Total Other income from Corporate (millions)                           |  |                                  | 15.9 |      |   | 8.8    |  |   | 7.2         |   |  | 82.1  | %
|                                                                       |  |                                  |      |      |   |        |  |   |             |   |  |       |  
|                                                                       |  | $                                | 17.0 |      | $ | 35.8   |  | $ | (18.8       | ) |  | -52.5 | %
|                                                                       |  |                                  |      |      |   |        |  |   |             |   |  |       |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                | 68.2 |      | $ | 196.5  |  | $ | (128.4      | ) |  | -65.3 | %



Total revenues from the
Corporate segment, which primarily represents income from our corporate investments as a limited partner or non-managing member in the Deephaven Funds and other strategic investments, decreased 96.1% to $1.1 million, from $27.1 million in 2007.
Income from our



43



---

##### Table of Contents

corporate investments in the Deephaven Funds decreased to a loss of $28.3 million in 2008, down from a gain of $17.8 million in 2007. This decrease was primarily due
to negative investment returns during 2008.



Included in 2008 and 2007
are pre-tax gains of $51.6 million and $13.0 million, respectively, from the partial sales of the Companys investment in Direct Edge. Pursuant to SEC guidance (SAB Topic 5H), of the $51.6 million pre-tax gain in 2008, $15.9 million is reported
as Non-operating gain from subsidiary stock issuance, and $35.7 million is included in Investment (loss) income and other, net on the Consolidated Statements of Operations, while $8.8 million of the $13.0 million pre-tax gain in 2007 is reported as
Non-operating gain from subsidiary stock issuance, and $4.2 million is included in Investment (loss) income and other, net on the Consolidated Statements of Operations.



Transaction-based expenses



Execution and clearance fees decreased 10.7% to $107.4 million in 2008 from $120.3 million in 2007, primarily due to the deconsolidation of Direct Edge ECN in
September 2007 and lower clearing rates offset, in part, by higher trade volumes. As a percentage of total revenue, Execution and clearance fees decreased to 10.4% in 2008 from 13.6% in 2007 primarily due to the deconsolidation of Direct Edge, which
had higher transaction-based expenses as a percentage of revenue, and lower clearing rates offset, in part, by lower asset management fees, which have no associated transaction-based expenses. Execution and clearance fees fluctuate based on changes
in transaction volumes, regulatory fees and operational efficiencies and scale. Soft dollar expense increased 21.9% to $60.7 million in 2008, from $49.8 million in 2007, due to higher institutional volumes within our commission management programs.



Payments for order flow and ECN rebates decreased 20.0% to $43.6 million
in 2008 from $54.6 million in 2007. As a percentage of total revenue, Payments for order flow and ECN rebates decreased to 4.2% in 2008 from 6.2% in 2007. These decreases were primarily due to the deconsolidation of Direct Edge and a decrease in
profitability-based rebates paid to broker-dealer clients offset, in part, by lower asset management fees, which have no associated transaction-based expenses.



Other direct expenses



Employee compensation and benefits expense increased 7.0% to $370.8 million in 2008 from $346.5 million in 2007. As a percentage of total revenue, Employee
compensation and benefits decreased to 35.9% in 2008 from 39.1% in 2007. The increase on a dollar basis was primarily due to increased profitability and an increase in the number of employees offset, in part, by lower profitability-based bonuses at
Deephaven and losses associated with deferred compensation investments related to certain employees. The number of full time employees increased to 1,045 at December 31, 2008, from 868 at December 31, 2007, primarily due to growth in our
Global Markets business as well as the acquisitions of EdgeTrade and Knight Libertas. Employee compensation and benefits expense fluctuates, for the most part, based on changes in our revenues, profitability and the number of employees.



As more fully described under the heading Deephaven below, for periods
after February 1, 2008, profitability-based compensation payable to certain senior Deephaven managers is no longer reported as a component of compensation expense but is instead reported as Minority interest expense on the Consolidated
Statements of Operations.



All other direct expenses increased by 25.0%
or $30.4 million to $152.0 million in 2008 from $121.6 million in 2007. Communications and data processing expense increased primarily due to higher market data and connectivity expenses within our Global Markets segment, as well as additional



44



---

##### Table of Contents

costs related to EdgeTrade and Knight Libertas. Depreciation and amortization expense increased primarily due to fixed asset purchases, capitalized software
development costs and acquired intangible assets. Occupancy and equipment rentals expense increased primarily due to the costs associated with our international expansion efforts and the relocation of certain offices within our Global Markets
segment. Interest expense increased due to borrowings under our credit facilities. Writedown of assets and lease loss accrual, net increased due to the trade name writedown of Direct Trading Institutional, offset by a lease loss accrual adjustment
benefit.



Minority interest expense



For 2008, Minority interest expense of $6.2 million relates to the accrual for the
one-time minimum guaranteed distribution to certain senior Deephaven managers pursuant to the limited liability company agreement for Deephaven Holdings.



Our effective tax rate for 2008 from continuing operations of 41% differed from the federal statutory rate of 35% primarily due to state income taxes and
non-deductible charges.



Years Ended December 31, 2007 and 2006



Revenues



Global Markets



The results of our Global Markets segment for the year ended December 31, 2007 include the full year results of KEM, KCM, Knight
Direct, Hotspot, Knight BondPoint and KEMIL. The results of Direct Edge ECN are included in the results of our Global Markets segment through the Deconsolidation Date and are recorded under the equity method within the Corporate segment subsequent
to the Deconsolidation Date.



The results of our Global Markets segment
for the year ended December 31, 2006 include the full year results of KEM, KCM, Knight Direct, KEMIL and Direct Edge ECN. Hotspot was acquired in April 2006 and Knight BondPoint in October 2006. The results of Hotspot and Knight BondPoint are
consolidated from their respective acquisition dates for the year ended December 31, 2006.



|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|----------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | ----------- | - |  | ----- | -
|                                                                  |  | For the years ended December 31, |         |      |   |         |  |  
|                                                                  |  | 2007                             |         | 2006 |   | Change  |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                | 436.0   |      | $ | 393.2   |  | $ | 42.7        |   |  | 10.9  | %
|Net trading revenue (millions)                                    |  |                                  | 286.2   |      |   | 243.8   |  |   | 42.4        |   |  | 17.4  | %
|Interest, net (millions)                                          |  |                                  | 14.6    |      |   | 12.2    |  |   | 2.4         |   |  | 19.3  | %
|Investment income and other, net (millions)                       |  |                                  | 3.2     |      |   | 8.4     |  |   | (5.2        | ) |  | -62.1 | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|Total Revenues from Global Markets (millions)                     |  | $                                | 739.9   |      | $ | 657.6   |  | $ | 82.3        |   |  | 12.5  | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|Average daily U.S. equity dollar value traded ($ billions)        |  |                                  | 12.7    |      |   | 8.1     |  |   | 4.6         |   |  | 56.6  | %
|Average daily U.S. equity trades (thousands)                      |  |                                  | 1,334.1 |      |   | 902.0   |  |   | 432.1       |   |  | 47.9  | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                  | 113.6   |      |   | 94.3    |  |   | 19.3        |   |  | 20.4  | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                  | 821.8   |      |   | 1,063.1 |  |   | (241.3      | ) |  | -22.7 | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                  | 1.6     |      |   | 2.1     |  |   | (0.5        | ) |  | -25.2 | %



45



---

##### Table of Contents

Total revenues from the Global Markets segment, which primarily comprises Commissions and fees and Net trading
revenue from our domestic businesses, increased 12.5% to $739.9 million in 2007, from $657.6 million in 2006. Revenues in 2007 were positively impacted by higher dollar value traded, greater trade volumes and improved results from electronic
quantitative market-making efforts, offset in part by a decrease in revenue capture per U.S. equity dollar value traded and lower share volume in OTC Bulletin Board and Pink Sheet shares. Revenues were also positively impacted by the growth of
Direct Edge ECN through the Deconsolidation Date as well as Hotspot and Knight BondPoint.



Average revenue capture per U.S. equity dollar value traded was 1.6 basis points (bps) in 2007, down from 2.1 bps in 2006. The primary driver for the decrease in revenue capture was a change in the mix of our order
flow due to a significant increase in volumes from a new broker-dealer client base as well as a decrease in OTC Bulletin Board and Pink Sheet shares traded. Average revenue capture per U.S. equity dollar value traded is calculated as the total of
net domestic trading revenues plus U.S. institutional commissions and commission equivalents (included in Commissions and fees), less certain transaction-related regulatory fees (included in Execution and clearance fees), (collectively Core
Equity Revenues) divided by the total dollar value of the related equity transactions. Core Equity Revenues were $500.8 million and $434.6 million in 2007 and 2006, respectively. Core Equity Revenues do not include revenues from KEMILs
European institutional business, Donaldson, Knight Direct, Direct Edge ECN, Hotspot and Knight BondPoint.



Asset Management



|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ----- | -
|                                                                |  | For the years ended December 31, |         |   |      |   |         |        | 
|                                                                |  | 2007                             |         |   | 2006 |   |         | Change |  |   | % of Change |  
|Incentive allocation fees (millions)                            |  | $                                | 72.4    |   |      | $ | 178.4   |        |  | $ | (105.9      | ) |  | -59.4 | %
|Management fees (millions)                                      |  |                                  | 44.3    |   |      |   | 35.5    |        |  |   | 8.8         |   |  | 24.9  | %
|Interest income and other, net (millions)                       |  |                                  | 1.4     |   |      |   | 1.0     |        |  |   | 0.5         |   |  | 48.5  | %
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|Total Revenues from Asset Management (millions)                 |  | $                                | 118.2   |   |      | $ | 214.9   |        |  | $ | (96.6       | ) |  | -45.0 | %
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|Average month-end balance of assets under management (millions) |  | $                                | 4,087.8 |   |      | $ | 3,420.4 |        |  | $ | 667.4       |   |  | 19.5  | %
|Annual fund return to investors*                                |  |                                  | 6.8     | % |      |   | 22.8    | %      |  |   | -16.0       | % |  | -70.3 | %



|* |  | Annual fund return represents the blended annual return across all assets under management in the Deephaven Funds.
|- |  | ------------------------------------------------------------------------------------------------------------------



Total revenues from the Asset Management segment, which primarily consists of management fees and incentive allocation fees, decreased
45.0% to $118.2 million in 2007, from $214.9 million in 2006. The decrease is primarily due to lower incentive allocation fees as a result of decreased fund returns offset, in part, by an increase in management fees due to higher average assets
under management. The average month-end balance of assets under management increased to $4.1 billion in 2007, from $3.4 billion in 2006. The blended annual fund return across all assets under management for 2007 was a gain of 6.8%, down from a gain
of 22.8% in 2006. The returns for 2007 were affected by the macro-economic environment, particularly in the second half of the year, which resulted in limited profit opportunities for the various investment strategies.



46



---

##### Table of Contents

Corporate



|                                                                       |  |                                  |       |      |   |        |  |   |             |   |  |       |  
|---------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ------ |  | - | ----------- | - |  | ----- | -
|                                                                       |  | For the years ended December 31, |       |      |   |        |  |  
|                                                                       |  | 2007                             |       | 2006 |   | Change |  |   | % of Change |  
|Total Revenues from Corporate (millions)                               |  | $                                | 27.1  |      | $ | 66.9   |  | $ | (39.9       | ) |  | -59.5 | %
|Total Other income from Corporate (millions)                           |  |                                  | 8.8   |      |   |       |  |   | 8.8         |   |  | NM    |  
|                                                                       |  |                                  |       |      |   |        |  |   |             |   |  |       |  
|                                                                       |  | $                                | 35.8  |      | $ | 66.9   |  | $ | (31.1       | ) |  | -46.5 | %
|                                                                       |  |                                  |       |      |   |        |  |   |             |   |  |       |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                | 196.5 |      | $ | 230.2  |  | $ | (33.6       | ) |  | -14.6 | %



NMNot meaningful



Total revenues from the Corporate
segment, which primarily represents income from our corporate investments as a limited partner or non-managing member in the Deephaven Funds and other strategic investments, decreased 59.5% to $27.1 million, from $66.9 million in 2006. Income from
our corporate investments in the Deephaven Funds decreased to $17.8 million in 2007, down from $34.2 million in 2006. This decrease was due to lower returns on a decreased average monthly investment balance.



Included in 2007 is a pre-tax gain of $13.0 million from the partial sale of our
investment in Direct Edge. Pursuant to SEC guidance (SAB Topic 5H), $8.8 million of the $13.0 million pre-tax gain in 2007, is reported as Non-operating gain from subsidiary stock issuance, and $4.2 million is included in Investment (loss) income
and other, net on the Consolidated Statements of Operations. Included in Revenues in 2006 is a pre-tax gain of $30.1 million related to the sale of part of the Companys equity investment in the ISE.



Transaction-based expenses



Execution and clearance fees increased 12.5% to $120.3 million in 2007 from $106.9
million in 2006, primarily due to higher trade volumes and increased business at Direct Edge ECN offset, in part, by lower clearing rates and more efficient trading. As a percentage of total revenue, Execution and clearance fees increased to 13.6%
in 2007, from 11.4% in 2006 primarily due to the decrease in revenues from Asset Management, which have no associated execution and clearance fees. Execution and clearance fees fluctuate based on changes in transaction volumes, regulatory fees and
efficiencies in processing the transactions. Soft dollar expense decreased 6.6% to $49.8 million in 2007, from $53.4 million in 2006, due to lower soft dollar volumes.



Payments for order flow and ECN rebates increased 29.3% to $54.6 million in 2007 from $42.2 million in 2006. As a percentage of total revenue,
Payments for order flow and ECN rebates increased to 6.2% in 2007 from 4.5% in 2006. This expense increased primarily due to increased profitability-based rebates paid to broker-dealer clients and increased third party volumes within Direct Edge
ECN.



Other direct expenses



Employee compensation and benefits expense decreased 1.7% to $346.5 million in 2007
from $352.4 million in 2006. As a percentage of total revenue, Employee compensation and benefits increased to 39.1% in 2007, from 37.5% in 2006. The decrease on a dollar basis was primarily due to lower profitability-based bonuses at Deephaven,
offset by an increase in the number of employees. The number of full time employees in our continuing operations increased to 868 at December 31,



47



---

##### Table of Contents

2007, from 844 at December 31, 2006, primarily related to expansion of our Asset Management and Global Markets offerings in 2007 offset, in part, by the reduction
due to the deconsolidation of Direct Edge ECN in September 2007.



All
other direct expenses decreased by 5.1% or $6.5 million to $121.6 million for the year ended 2007 from $128.1 million for the year ended 2006. Communications and data processing expense increased primarily due to higher market data and connectivity
expenses within our Global Markets segment. Professional fees decreased primarily due to decreases in legal expenses, which fluctuate based on the activity relating to various legal and regulatory proceedings offset, in part, by higher consulting
expenses. Depreciation and amortization expense increased primarily due to fixed asset purchases. Writedown of assets and lease loss accrual, net decreased due to the recording of a benefit of $2.5 million in 2007, compared to a charge of $8.5
million in 2006 primarily relating to costs associated with excess real estate capacity in Jersey City, N.J. During 2007, we entered into two sub-lease agreements for a portion of the premises for which we had previously recorded a lease loss
accrual. The lease loss accrual was adjusted based on the difference between the actual terms of the sub-leases and the assumptions previously used in the calculation of the lease loss accrual. Other expenses in 2007 decreased from 2006 primarily
due to a 2006 short swing profit settlement of approximately $2.8 million relating to trading by two Deephaven funds in the shares of a company while the funds owned in aggregate more than 10% of the outstanding shares of the stock of that company.



Our effective tax rate for 2007 from continuing operations of 39%
differed from the federal statutory rate of 35% primarily due to state income taxes and non-deductible charges.



Deephaven



Exercise of Option by Deephaven Managers



In connection with entering into new long-term employment agreements (the 2006 Employment Agreements) in December 2006, three senior managers of Deephaven (the Deephaven Managers) were granted an option (the
Option) to obtain a 49% interest in Deephaven Holdings to which our interests in Deephaven would be contributed. The Option became exercisable after January 1, 2008 upon Deephaven having met certain requirements regarding minimum assets
under management and employee retention. On January 10, 2008, Deephaven Managing Partners, LLC (Deephaven Partners), an entity owned and controlled by the Deephaven Managers, provided notice to the Company that it was exercising the
Option.



On February 1, 2008, after regulatory and contractual
approvals were received, the Company completed the transaction whereby the Company contributed its interest in Deephaven to Deephaven Holdings and Deephaven Partners acquired a 49% interest in Deephaven Holdings in exchange for the termination of
the Deephaven Managers 2006 Employment Agreements and associated profit sharing bonuses and an equity contribution of $1 million to Deephaven Holdings by Deephaven Partners (the Deephaven Transaction). The Deephaven Transaction did
not affect or result in any change to Deephavens role as investment manager to the funds it managed at that time, or to the manner in which Deephaven carried out its duties as investment manager to those funds.



As part of the Deephaven Transaction, the Company and Deephaven Partners entered into a
new Limited Liability Company Agreement (the New LLC Agreement) for Deephaven Holdings. In addition, the 2006 Employment Agreements terminated and were replaced by new long-term employment agreements between Deephaven Holdings and each
of the Deephaven Managers (the New Employment Agreements). The New Employment Agreements did not include the profit-sharing bonuses provided under the 2006 Employment Agreements; however, the Deephaven Managers continue to be entitled to
participate in certain profit pools relating to specific Deephaven funds.



48



---

##### Table of Contents

Following the Deephaven Transaction, pre-tax earnings are allocated between the Company and, through Deephaven Partners, the Deephaven Managers in a similar manner as
under the 2006 Employment Agreements. Profit-sharing bonuses under the 2006 Employment Agreements had been reported in Employee compensation and benefits on our Consolidated Statements of Operations. As a result of the Deephaven Transaction,
beginning in February 2008, profits or losses allocated to the Deephaven Managers through Deephaven Partners are instead reported as Minority interest expense on our Consolidated Statements of Operations and included as Minority interest on our
Consolidated Statements of Financial Condition. Minority interest expense of $6.2 million recorded for the year ended 2008 represents the accrual for the one-time 2008 minimum distribution to the Deephaven Managers pursuant to the New LLC Agreement.



Under the New LLC Agreement, we own 51% of the shares in Deephaven
Holdings, and Deephaven Partners owns 49% of the shares. We are entitled to appoint a majority of the Board of Managers of Deephaven Holdings. Certain corporate actions require approval of a super-majority of members of the Board of
Managers, including representatives of both Deephaven Partners and us. Neither party is permitted to transfer any of its interests in Deephaven Holdings to any unaffiliated third person without the consent of the other party. Any sale of Deephaven
Holdings requires either (x) the consent of the holders of 75% of the shares or (y) if the aggregate consideration is in excess of $450 million, the approval of only the Deephaven Partners (subject to a right of first refusal for the
benefit of the Company). Pursuant to the New LLC Agreement, proceeds from any sale or liquidation of Deephaven or Deephaven Holdings will be allocated among the Company and Deephaven Partners based upon a formula that takes into account their
capital accounts at the time of such sale or liquidation and relative profit sharing percentages over a defined period of time.



Closing of Deephaven Event Fund



On January 31, 2008, Deephaven announced that it had concluded that it was in the best interests of investors in the Deephaven Event Fund LLC and the Deephaven
Event Fund Ltd. (collectively, the Event Fund) that the Event Fund return investors capital. As a result, redemptions in the Event Fund were suspended, and Deephaven began an orderly process to reduce trading positions to cash and
return investors capital as promptly as reasonably practicable. As of February 1, 2008, and through the period of time Deephaven is returning investors capital, no management or incentive allocation fee will be charged to investors
in the Event Fund.



Suspension of Redemptions in GMS and International
Volatility Strategies Funds



On October 30, 2008, Deephaven
announced the immediate suspension of redemptions and withdrawals from the GMS Fund and International Volatility Strategies Fund effective prior to the October 31, 2008 redemption date. Deephaven concluded that it was in the best interests of
investors in these funds to protect them from being disadvantaged by the combination of the current extreme and unprecedented market conditions, the sudden and material industry-wide changes in margin and financing requirements being imposed by
prime brokers and ISDA counterparties and the impact of pending redemption requests.



Deephaven Asset Sale



For information
regarding our plan to exit from the Asset Management segment, refer to the Subsequent Events section of this MD&A.



49



---

##### Table of Contents

Discontinued Operations



Loss from discontinued operations, net of tax, was $1.4 million for 2007. See Footnote 14 Discontinued Operations and Regulatory Charges and Related
Matters, included in Part II, Item 8 Financial Statements and Supplementary Data of this document.



Financial Condition, Liquidity and Capital Resources



Financial Condition



We have historically maintained a highly liquid balance sheet, with a substantial portion of our total assets consisting of cash, highly liquid marketable
securities and short term receivables. As of December 31, 2008, we had $2.0 billion in assets, 62.4% of which consisted of cash or assets readily convertible into cash, principally receivables from brokers and dealers and securities owned.
Receivables from brokers and dealers include interest bearing cash balances held with clearing brokers, including, or net of, amounts related to securities transactions that have not yet reached their contracted settlement date, which is generally
within three business days of the trade date. Securities owned principally consist of equity securities that trade in Nasdaq, on the OTC Bulletin Board and on the NYSE, NYSE Alternext and NYSE Arca markets.



Asset management fees receivable includes incentive allocation fees and management fees
earned for sponsoring and managing the Deephaven Funds. Deferred compensation investments consists of investments held by us, including investments as a limited partner or non-managing member in the Deephaven Funds, for deferred compensation plans
related to certain of Knights employees and directors. Other assets primarily represent deferred tax assets, deposits and miscellaneous receivables.



Total assets increased $258.8 million, or 14.7%, from $1.8 billion at December 31, 2007 to $2.0 billion at December 31, 2008. The majority of the increase
in assets relates to increases in Cash and cash equivalents, Goodwill and Securities owned, held at clearing brokers, at fair value offset, in part, by decreases in Receivable from Deephaven sponsored funds and Receivable from brokers and dealers.
Cash and cash equivalents increased by $218.2 million, or 98.1%, from $222.4 million at December 31, 2007, to $440.6 million at December 31, 2008, primarily due to our results of operations, the collection of our Receivable from Deephaven
sponsored funds in January 2008, our borrowing of the remaining $70.0 million under our credit facilities and from our partial sale of our investment in Direct Edge. Goodwill increased by $99.4 million, or 74.8% from $132.8 million at
December 31, 2007, to $232.2 million at December 31, 2008, due to the acquisitions of EdgeTrade and Knight Libertas. Securities owned, held at clearing brokers, at fair value increased by $63.5 million, or 15.4% from $412.6 million at
December 31, 2007, to $476.1 million at December 31, 2008, due to an increase in the size of the securities inventory utilized in our market-making, high velocity algorithmic trading activities and trade execution services. Our securities
inventory fluctuates based on trading volumes, market conditions and our pre-determined risk limits. Receivable from brokers and dealers decreased by $41.2 million, or 10.8% from $382.5 million at December 31, 2007, to $341.4 million at
December 31, 2008, due to timing relating to trade date versus settlement date differences.



Total liabilities increased $109.6 million, or 12.6%, from $870.4 million at December 31, 2007 to $980.0 million at December 31, 2008. The majority of the
increase in liabilities relates to increases in Long term debt and Securities sold, not yet purchased, at fair value, offset, in part, by a decrease in Payable to brokers and dealers. Long term debt increased to $140.0 million at December 31,
2008, due to our borrowing of the remaining $70.0 million under our credit facilities during the year. Stockholders equity increased by $142.0 million, from $885.4 million at December 31, 2007 to $1.0 billion at December 31, 2008.
The increase in Stockholders equity from December 31, 2007 was a result of our net income earned during 2008 and the issuance of common stock related to the acquisitions of EdgeTrade and Knight Libertas offset by common stock repurchases
during the period.



50



---

##### Table of Contents

Liquidity and Capital Resources



We have financed our business primarily through cash generated by operations, the proceeds from our stock issuances, the proceeds of
the sale of our Derivative Markets segment in 2004 and the proceeds from our borrowing of $140.0 million under our credit facilities. At December 31, 2008, we had net current assets, which consist of net assets readily convertible into cash
less current liabilities, of approximately $418.0 million.



We have
previously disclosed our intent to pursue selective acquisitions of (or possible joint ventures with) complementary businesses primarily in the markets in which our Global Markets segment operates. We expect to fund the purchase price of any such
acquisition with our current cash position or, in some cases, through the issuance of the Companys stock or debt.



We have acquired several businesses over the last few years. In January 2008, we completed the acquisition of EdgeTrade Inc. for $58.2 million comprising $28.2
million in cash and approximately 2.3 million shares of unregistered Knight common stock valued at $30.0 million. In July 2008, we completed the acquisition of Libertas Holdings LLC for an upfront payment of $75.3 million, comprising $50.3
million in cash and approximately 1.5 million shares of unregistered Knight common stock valued at $25.0 million.



Several of these past acquisitions provided for contingent payments. The acquisition of the business of Direct Trading in 2005 resulted in a final contingent cash
payment of $10.4 million, paid in the third quarter of 2007, based on the profitability of that business during the second year of operation after acquisition. The terms of the Libertas Holdings LLC transaction include a potential earn-out of up to
$75.0 million of unregistered Knight common stock based on the future performance of Knight Libertas during the three-year period following the closing of the transaction.



Income from continuing operations before income taxes and minority interest expense was $314.3 million, $201.2 million and $256.5 million for 2008,
2007 and 2006, respectively. Included in these amounts were certain non-cash expenses such as stock-based compensation, depreciation, amortization and certain non-cash writedowns, and in 2008 and 2007, non-cash gains from subsidiary stock issuances.
Stock-based compensation was $35.0 million, $31.0 million and $20.8 million during 2008, 2007 and 2006, respectively. Depreciation expense was $7.7 million, $6.8 million, and $6.4 million in 2008, 2007 and 2006, respectively. Amortization expense,
which related to software, software development costs, intangible assets and leasehold improvements, was $19.8 million, $15.3 million and $14.2 million during 2008, 2007 and 2006, respectively. Non-cash gains were $15.9 million and $8.8 million
during 2008 and 2007, respectively, representing non-operating gains from subsidiary stock issuances. Non-cash writedown of $2.5 million in 2008 represents the writedown of the Direct Trading Institutional trade name.



Capital expenditures were $38.3 million, $15.1 million and $13.0 million during 2008,
2007 and 2006, respectively. Purchases of strategic investments were $13.4 million, $10.4 million and $38.8 million and proceeds from sale of strategic investments were $48.8 million, $5.5 million and $33.1 million during 2008, 2007 and 2006,
respectively. During 2008 and 2007, we received proceeds of $47.5 million and $12.9 million, respectively, relating to the sales of our investment in ISE Stock Exchange and a portion of our interest in Direct Edge. Payments relating to acquisitions
of businesses were $77.3 million, $10.4 million and $111.3 million during 2008, 2007 and 2006, respectively. Strategic investments and acquisition expenditures primarily relate to outside investments and acquisitions of businesses in support of the
development and growth of our business. Our corporate investment as a limited partner or non-managing member in the Deephaven Funds decreased by $36.6 million in 2008, due to a loss on our investment of $28.3 million and redemptions of $8.4 million
and decreased by $103.8 million in 2007, primarily due to redemptions of $120.0 million.



51



---

##### Table of Contents

In October 2007, we entered into a three-year $140.0 million credit agreement (Credit Agreement) with a
consortium of banks. The Credit Agreement includes a three-year delayed-draw senior secured term loan facility of $70.0 million and a three-year senior secured revolving facility of $70.0 million. As of December 31, 2008, we borrowed the full
$140.0 million under the Credit Agreement. The proceeds of the borrowings under the Credit Agreement were used to finance share repurchases, finance selective acquisitions and for general corporate purposes. These credit obligations may limit our
ability to undertake certain transactions, including, but not limited to, certain mergers, acquisitions or dispositions of assets, repurchases of shares and payment of dividends, each above certain thresholds as set forth in the Credit Agreement.
The borrowings under the Credit Agreement are repayable in full by October 3, 2010. Our ability to repay or refinance borrowings under the Credit Agreement will depend on our financial and operating performance and the credit environment at the
maturity date.



The Credit Agreement includes customary representations,
warranties, affirmative and negative covenants (including, among others, limitations on certain payments, investments and transactions) and events of default. It also contains financial covenants tied to the maintenance of financial ratios and
metrics. As of December 31, 2008, we were in compliance with all covenants of the Credit Agreement.



The Company has an authorized stock repurchase program of $1 billion. We repurchased 7.9 million shares for $124.2 million and 17.5 million shares for
$259.2 million under the stock repurchase program during 2008 and 2007, respectively. Through December 31, 2008, we had repurchased 67.1 million shares for $750.4 million under our stock repurchase program. We may repurchase shares from
time to time in open market transactions, accelerated stock buyback programs, tender offers, privately negotiated transactions or by other means. Repurchases may also be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions
will be determined by our management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. We caution that there
are no assurances that any further repurchases will actually occur. We had approximately 90.1 million shares of Class A Common Stock outstanding as of December 31, 2008.



Our U.S. registered broker-dealers are subject to regulatory requirements intended to
ensure the general financial soundness and liquidity of broker-dealers and require the maintenance of minimum levels of net capital, as defined in SEC Rule 15c3-1. These regulations also prohibit a broker-dealer from repaying subordinated
borrowings, paying cash dividends, making loans to its parent, affiliates or employees, or otherwise entering into transactions which would result in a reduction of its total net capital to less than 120% of its required minimum capital. Moreover,
broker-dealers are required to notify the SEC and FINRA prior to repaying subordinated borrowings, paying dividends and making loans to its parent, affiliates or employees, or otherwise entering into transactions, which, if executed, would result in
a reduction of 30% or more of its excess net capital (net capital less minimum requirement). The SEC has the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the broker-dealer. As of
December 31, 2008, all of our broker-dealers were in compliance with the applicable regulatory net capital rules. The following table sets forth the net capital levels and requirements for the following significant regulated broker-dealer
subsidiaries at December 31, 2008, as reported in their respective regulatory filings (in millions):



|                |  |             |       |                        |   |                    |  |   |      
|--------------- |  | ----------- | ----- | ---------------------- | - | ------------------ |  | - | -----
|Entity          |  | Net Capital |       | Net CapitalRequirement |   | Excess Net Capital
|KEM             |  | $           | 125.5 |                        | $ | 9.5                |  | $ | 115.9
|KCM             |  |             | 157.2 |                        |   | 1.2                |  |   | 155.9
|Knight Direct   |  |             | 20.6  |                        |   | 0.9                |  |   | 19.6 
|Knight Libertas |  |             | 7.9   |                        |   | 0.7                |  |   | 7.2  



52



---

##### Table of Contents

In addition, our foreign registered broker-dealers are subject to certain financial resource requirements of the
FSA and SFC. The following table sets forth the financial resource requirement for the following significant foreign regulated broker-dealer at December 31, 2008 (in millions):



|       |  |                    |      |                     |   |                           |  |   |     
|------ |  | ------------------ | ---- | ------------------- | - | ------------------------- |  | - | ----
|Entity |  | FinancialResources |      | ResourceRequirement |   | Excess FinancialResources
|KEMIL  |  | $                  | 34.7 |                     | $ | 13.7                      |  | $ | 21.0



Contractual Obligations



In connection with its operating activities, the Company enters into certain
contractual obligations. The Companys future cash payments associated with its contractual obligations pursuant to its operating leases, net of sublease obligations and guaranteed employment contracts longer than one year as of
December 31, 2008 are summarized below (in millions):



|                             |  |                  |      |           |   |           |  |                                    |      |       |   |      |  |   |      
|---------------------------- |  | ---------------- | ---- | --------- | - | --------- |  | ---------------------------------- | ---- | ----- | - | ---- |  | - | -----
|                             |  | Payments due in:
|                             |  | 2009             |      | 2010-2011 |   | 2012-2013 |  | Thereafter throughOctober 31, 2021 |      | Total
|Operating lease obligations1 |  | $                | 15.8 |           | $ | 32.5      |  | $                                  | 31.0 |       | $ | 97.9 |  | $ | 177.2
|Other obligations1           |  |                  | 6.3  |           |   | 3.6       |  |                                    | 0.8  |       |   |     |  |   | 10.6 
|                             |  |                  |      |           |   |           |  |                                    |      |       |   |      |  |   |      
|Total                        |  | $                | 22.1 |           | $ | 36.1      |  | $                                  | 31.8 |       | $ | 97.9 |  | $ | 187.8
|                             |  |                  |      |           |   |           |  |                                    |      |       |   |      |  |   |      



|1  -  See |  | Footnote 20, Commitments and Contingent Liabilities to the Consolidated Financial Statements
|--------- |  | ----------------------------------------------------------------------------------------------

|* |  | Totals may not add due to rounding.
|- |  | -----------------------------------



Off-Balance Sheet Arrangements



As of
December 31, 2008, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.



Effects of Inflation



Because the majority of the Companys assets are liquid in nature, they are not significantly affected by inflation. However, the rate of inflation may affect
the Companys expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of the services offered by the Company. To the extent inflation results in rising
interest rates and has other adverse effects on the securities markets, it may adversely affect the Companys financial position and results of operations.



Discontinued Operations



As of the close of business on December 9, 2004, the Company sold substantially all of the assets and certain of the liabilities that comprised the Derivatives
Markets business operated by Knight Financial Products LLC and Knight Execution Partners LLC to Citigroup. The decision to sell the Derivative Markets segment was based on a review of the overall options industry, the capital and risk required
to maintain this business successfully and the business role in the Companys long-term strategy. In 2007, we recorded a charge of $1.4 million, net of tax, related to a regulatory matter involving the Derivative Markets segment.



53



---

##### Table of Contents

Subsequent Events



Deephaven Asset Sale



As disclosed in a Form 8-K furnished by the Company on January 27, 2009, Deephaven announced that it entered into an Asset Purchase Agreement (Purchase
Agreement) along with Stark & Roth, Inc. (together with its affiliates, Stark), Deephaven Managing Partners LLC, the Company and each of the three senior managers of Deephaven, pursuant to which Deephaven has agreed to
sell substantially all of its assets to Stark, and Stark will assume certain limited liabilities of Deephaven.



As consideration for the sale, Deephaven could receive: (i) a payment of up to $7.3 million on the closing date of the transaction, (ii) deferred payments
of up to an additional $20.7 million to be paid between the closing date and 2011, and (iii) an additional payment in 2011 of up to $16.7 million based upon the investment return of certain assets being managed by Stark over the two year period
following the closing of the transaction. Each of these payments (collectively the Purchase Price) is subject to pro ratareduction to the extent that investors in the Deephaven Global Multi-Strategy Fund (GMS Fund)
representing less than $1.4 billion in assets elect to have Stark continue to manage their investment on an on-going basis.



It is currently expected that this formula-based reduction to the three components of the Purchase Price may be significant. In addition, the Purchase Price is
subject to certain offsets. The closing of the transaction is subject to customary conditions, including approval of the GMS Fund investors as further described in the January 27, 2009 Form 8-K.



As disclosed in a Form 8-K filed by the Company on February 26, 2009, on
February 20, 2009, Deephaven committed to begin the process of a wind-down of their business in contemplation of the Stark transaction. On this date, Deephaven began reducing their workforce by 20
employees, representing approximately 15% of their total workforce. Additional workforce reductions are expected during the first half of 2009.



In connection with the Companys exit of the Asset Management business, the Company expects that it will incur the
following pre-tax charges within the Asset Management segment relating to the wind-down:



| |  |  | Employee severance, deferred benefits, and retention and other employee benefit costs between $22 and $26 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Lease and contract termination costs between $6 and $9 million;
| | - |  | ---------------------------------------------------------------



| |  |  | Asset write-down costs between $4 and $5 million; and
| | - |  | -----------------------------------------------------



| |  |  | Professional fees and other associated costs between $3 and $5 million.
| | - |  | -----------------------------------------------------------------------



Although the Company believes that these estimates are appropriate and reasonable based on available information,
actual results could differ from these estimates, including whether the final outcome of the proposed transaction differs from what is currently contemplated by the Purchase Agreement. We currently anticipate that approximately
75% of the above estimated $35 to $45 million in pre-tax charges will result in future cash expenditures, which the Company believes will all be incurred in 2009. These cost estimates exclude the operational results of Deephaven prior to
the completion of the transaction contemplated by the Purchase Agreement.



For further discussion on risks related to the Deephaven Asset Sale, refer to Risk Factors in Part I, Item 1A of this Form 10-K.



54



---

##### Table of Contents

Critical Accounting Estimates



Our Consolidated Financial Statements are based on the application of GAAP which requires us to make estimates and assumptions about future events that affect the
amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ
from those estimates and any such differences may be material to our Consolidated Financial Statements. We believe that the estimates set forth below may involve a higher degree of judgment and complexity in their application than our other
accounting estimates and represent the critical accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments related to these accounting estimates are appropriate. However, if different assumptions
or conditions were to prevail, the results could be materially different from the amounts recorded.



Impairment of Goodwill and Intangible AssetsThe useful lives of intangible assets are determined upon acquisition. Intangible assets are amortized over
their respective lives. Goodwill and the useful lives of intangible assets are tested for impairment, at a minimum, annually or when an event occurs or circumstances change that signifies the existence of impairment.



Goodwill of $232.2 million as of December 31, 2008 is all related to our Global
Markets segment. Goodwill is primarily related to the purchases of our listed equities market-maker, KCM, and the businesses now operating as Donaldson, Knight Direct, Hotspot, Knight BondPoint and Knight Libertas. We performed our annual test for
impairment of goodwill in the second quarter of 2008 and determined that goodwill was not impaired at that time. As part of our test for impairment, we considered the profitability of the applicable reporting unit, an assessment of fair value of the
reporting unit based on various valuation methodologies, as well as the overall market value of the Company, compared to the Companys book value. We believe there was no impairment of the goodwill balance at December 31, 2008.



Intangible assets, less accumulated amortization, of $90.5 million as of
December 31, 2008 are all attributable to our Global Markets segment. Substantially all intangible assets resulted from the purchases of the businesses now operating as Donaldson, Knight Direct, Hotspot, Knight BondPoint and Knight Libertas.
These assets, which primarily consist of customer relationships, are being amortized on a straight-line basis over their useful lives, the majority of which have been determined to range from four to 24 years. We performed our annual test for
impairment of intangible assets with indefinite lives in the second quarter of 2008 and determined that intangible assets were not impaired at that time. Amortizable intangibles are tested for recoverability whenever events indicate that the
carrying amounts may not be recoverable. During 2008, we discontinued the use of the Direct Trading Institutional trade name and wrote off the remaining book value of $2.5 million, and during 2007, we discontinued the use of the ValuBond Securities,
Inc, trade name and wrote off the remaining book value of $110,000. No other events occurred in 2008 or 2007 that would indicate that the carrying amounts of the Companys amortizable intangibles may not be recoverable.



Financial Instruments and Fair ValueIn September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements.



Under
SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. SFAS 157
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are
inputs that market participants would use in pricing the asset or liability developed based on market data obtained from



55



---

##### Table of Contents

sources independent of us. Unobservable inputs are inputs that reflect our beliefs about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:



| |  |  | Level 1Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on
quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
| | - |  | ---------------------------------------------------------------------------------------------------------------



Changes in fair value are recognized in earnings each period for financial instruments
that are carried at fair value.



Our securities owned and securities
sold, not yet purchased will generally be classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations with reasonable levels of price transparency.



The types of instruments that trade in markets that are not considered to be active,
but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy. As of December 31, 2008,
our Investment in Deephaven sponsored funds, one strategic investment, as well as Deferred compensation investments met the definition of Level 2.



Certain instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency.
For those instruments that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In
the absence of such evidence, managements best estimate is used. As of December 31, 2008, we did not hold any financial instruments that met the definition of Level 3.



In February 2008, FASB Staff Position FAS 157-2 (FSP FAS 157-2) was issued. FSP FAS 157-2 delays the
effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The delay was intended to allow additional time to consider
the effect of various implementation issues that have arisen from the application of SFAS 157. FSP FAS 157-2 is effective for fiscal years beginning after November 15, 2008. We believe that FSP FAS 157-2 will not have a material
impact on our Consolidated Financial Statements.



In October 2008,
the FASB issued FASB Staff Position FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS 157 to consider various
inputs in determining fair value under conditions when the market for certain financial assets are not active. FSP FAS 157-3 was effective immediately upon issuance. The implementation of FSP FAS 157-3 did not affect the Companys fair value
measurements of financial assets or its financial condition as of December 31, 2008, nor did it affect the results of its operations for the year ended December 31, 2008.



In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159), which



56



---

##### Table of Contents

provides an option for entities to choose to measure many financial instruments and certain other items at fair value. On January 1, 2008, we elected not to take
the option available under SFAS 159 for the purposes of valuing certain financial instruments at fair value.



Strategic InvestmentsStrategic investments include non-controlling equity ownership interests held by the Company or its non-broker-dealer
subsidiaries, primarily in financial services-related businesses. Strategic investments are accounted for under the equity method, at cost or at fair value. The equity method of accounting is used for investments in limited partnerships and limited
liability companies that are held by the Company or any of its non-broker-dealer subsidiaries. Investments in corporations by such non-broker-dealers are held at amortized cost. The equity method of accounting is used where the Company is considered
to exert significant influence on the investee. Investments are held at adjusted cost when the Company is not considered to exert significant influence on the investee. Investments in liquid investment funds, including deferred compensation
investments in mutual funds, are accounted for at fair value pursuant to SFAS 157.



Strategic investments are reviewed on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If we assess that an impairment loss on a strategic investment has occurred due to a decline
in fair value or other market conditions, the investment is written down to its estimated impaired value.



Asset Management FeesDeephaven earns asset management fees for managing the Deephaven Funds. Management fees, which are received monthly, are recorded
as earned and are calculated as a percentage of each Deephaven Funds monthly net assets.



Incentive allocation fees are earned based upon the performance of the Deephaven Funds and are calculated based upon a percentage of a new high net asset value, as defined in the applicable private placement offering
memorandum, for the six-month performance period ended June 30 or December 31, for some funds, and for the twelve-month performance period ended December 31 for other funds. A new high net asset value is defined as the amount by which
the net asset value of an investors account in a particular Deephaven fund exceeds the greater of either the investors highest previous net asset value in that Deephaven fund or the net asset value at the time the investor made a
purchase.



We record incentive allocation fees in accordance with Method
2 of EITF Topic D-96. Under this methodology, the Company recognizes incentive allocation fee income for each interim period based upon the amount that would be due if the investment advisory relationship with the Deephaven Funds were terminated at
the end of such period.



Incentive allocation fees may increase or
decrease during the year based on the performance of the Deephaven Funds. As such, the incentive allocation fees, in certain circumstances, may be negative for certain periods, but not lower than zero for any six-month performance period ended
June 30 or December 31, for some funds, or the twelve-month performance period ended December 31 for other funds. Incentive allocation fees are paid upon the close of each six-month performance period, or twelve-month performance
period, as the case may be, and are not subject to repayment (i.e., clawback) once such performance period has closed. If a fund which has a six-month performance period incurs losses in the performance period ended December 31, we may make the
determination, at our sole discretion, to return all or a portion of incentive allocation fees collected for the prior six-month performance period ending June 30 of that year.



Lease Loss AccrualIt is our policy to identify excess real estate capacity and where applicable, accrue against such
future costs. In determining the accrual, a nominal cash flow analysis is performed for lease losses initiated prior to December 31, 2002, the effective date of SFAS No. 146 Accounting for Costs Associated with Exit or Disposal
Activities, and costs related to the excess capacity are accrued. For lease losses initiated after December 31, 2002, our policy is to accrue future costs related to excess capacity using a discounted cash flow analysis.



57



---

##### Table of Contents

The Company incurred a charge of $8.3 million in 2006, primarily related to the lease loss accrual on a portion of
our lease at 545 Washington Boulevard in Jersey City, N.J., encompassing approximately 78,000 square feet, all of which was unoccupied at the time. In 2007, we recorded a benefit of $2.6 million for the adjustment of our lease loss accrual. During
2007, we entered into two sub-lease agreements at our 545 Washington Boulevard property in Jersey City, N.J. for a portion of the premises for which we had previously recorded a lease loss accrual. The lease loss accrual was adjusted based on the
difference between the actual terms of the sub-leases and the assumptions used in the calculation of the lease loss accrual.



In 2008, we recorded a net benefit of $1.3 million primarily related to our lease in Jersey City. The accrual on the remaining unoccupied space of approximately
50,000 square feet was derived from assumptions and estimates based on lease terms of an anticipated additional sub-lease agreement, which assumed a sub-lease would commence in the beginning of 2010, anticipated market prices along the Jersey City
waterfront and estimated up-front costs, including broker fees and build-out allowances. We continually monitor the market rates for office space and the amount of available office space in Jersey City, N.J. to assess the reasonableness of our
applicable assumptions.



Market-Making and Trading
ActivitiesSecurities owned and securities sold, not yet purchased, which primarily consist of listed and OTC equities, are carried at fair value and are recorded on a trade date basis. Net trading revenue (trading gains, net of trading
losses) and commissions (which includes commission equivalents earned on institutional client orders) and related expenses are also recorded on a trade date basis. Our clearing agreements call for payment or receipt of interest income, net of
transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions.



Dividend income relating to securities owned and dividend expense relating to securities sold, not yet purchased, derived from our market making activities are
included as a component of Net trading revenue on the Consolidated Statements of Operations.



Other EstimatesThe preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. In addition to the estimates that we make in connection with accounting
for the items noted above, the use of estimates is also important in determining provisions for potential losses that may arise from litigation, regulatory proceedings and tax audits.



SFAS No. 123 (R), Share-Based Payment requires that we make certain estimates and assumptions relating to volatility
and forfeiture rates when determining stock-based employee compensation expense. Volatility is estimated based on several factors including implied volatility of market-traded options on our common stock on the grant date and the historical
volatility of our common stock. Forfeiture rates are estimated based on historical rates of forfeiture of employee stock awards.



A portion of our Employee compensation and benefits expense on the Consolidated Statements of Operations represents discretionary bonuses, which are accrued
throughout the year and paid after the end of the year. Among many factors, discretionary bonus accruals are generally influenced by our overall performance and competitive industry compensation levels.



We estimate and accrue for potential losses that may arise out of litigation,
regulatory proceedings and tax audits to the extent that such losses are probable and can be estimated in accordance with SFAS No. 5 Accounting for Contingencies. Significant judgment is required in making these estimates and our final
liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case-by-case basis and represents an



58



---

##### Table of Contents

estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions
and views of internal and external legal counsel. Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are
sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. For more information on our legal and
regulatory matters, see Legal Proceedings in Part I, Item 3 included in this document.



Recently Issued Accounting Standards



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115(SFAS 159), which permits
entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was effective for the Company on January 1, 2008. The adoption of SFAS 159 did not have a material impact on our Consolidated Financial
Statements.



In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) requires the acquiring entity in a business combination to recognize the acquisition date fair value for all identifiable assets acquired, and liabilities
assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and
development and requires the expensing of acquisition-related and restructuring costs as incurred. SFAS 141(R) is effective as of the beginning of an entitys fiscal year that begins after December 15, 2008. We will apply the
provisions of SFAS 141(R) to business combinations occurring after December 31, 2008. Adoption of SFAS 141(R) will not affect our Consolidated Financial Statements, but may have an effect on accounting for future business combinations.



In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to
the parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective as of the beginning of an entitys first fiscal year beginning after December 15, 2008
with retrospective application. We do not expect the adoption of SFAS 160 to have a material effect on our Consolidated Financial Statements.



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures about an entitys derivative and hedging activities. This statement is effective for financial statements issued for fiscal years beginning after November 15,
2008, with early adoption encouraged. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161 will not affect our Consolidated Financial Statements.



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement of SFAS No. 142,Goodwill and Other Intangible Assetsfor an entity to consider, when determining the useful life of an acquired intangible asset,
whether the intangible asset can be renewed without substantial cost or material



59



---

##### Table of Contents

modifications to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful-life assessment criteria with a
requirement that an entity consider its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. FSP FAS 142-3 is effective for the Company on
December 1, 2009. We are currently evaluating the potential impact of the adoption of FSP FAS 142-3 on our Consolidated Financial Statements.



In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities(FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in calculating earnings per share
under the two-class method described in SFAS No. 128, Earnings per Share. Additionally, FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents
as a separate class of securities in calculating earnings per share and is effective for financial statements issued for fiscal years beginning after December 15, 2008; early adoption is not permitted. We do not expect FSP EITF 03-6-1 to affect
our results of operations or earnings per share.



In September 2008, the
FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45;andClarification of the Effective Date of FASB Statement
No. 161 (FSP FAS 133-1 and FIN 45-4, respectively). FSP FAS 133-1 and FIN 45-4 requires enhanced disclosures about credit derivatives and guarantees and amends FIN 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Othersto exclude credit derivative instruments accounted for at fair value under SFAS No. 133. FSP FAS 133-1 and FIN 45-4 were effective for financial statements issued for
reporting periods ending after November 15, 2008. Since FSP FAS 133-1 and FIN 45-4 only require additional disclosures concerning credit derivatives and guarantees, adoption of FSP FAS 133-1 and FIN 45-4 did not have an effect on our
Consolidated Financial Statements.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



For a further discussion of these and other important factors that could affect our business, see Part I, Item 1A, Risk Factors of this Annual
Report on Form 10-K.



Market Risk



Our market-making and trading activities expose our capital to significant risks.
These risks include, but are not limited to, absolute and relative price movements, price volatility and changes in liquidity, over which we have virtually no control.



For working capital purposes, we invest in money market funds and government securities or maintain interest-bearing balances in our trading accounts
with clearing brokers, which are classified as Cash and cash equivalents and Receivable from brokers and dealers, respectively, on the Consolidated Statements of Financial Condition. These financial instruments do not have maturity dates or present
a material market risk, as the balances are short-term in nature and subject to daily repricing. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored
daily and are not material to the Companys overall cash position.



In Global Markets, we employ proprietary position management and trading systems that provide real-time, on-line position management and inventory control. We monitor our risks by reviewing trading positions and their appropriate risk
measures. We have established a system whereby



60



---

##### Table of Contents

transactions are monitored by senior management and an independent risk control function on a real-time basis as are individual and aggregate dollar and inventory
position totals, capital allocations, and real-time profits and losses. The management of trading positions is enhanced by our review of mark-to-market valuations and position summaries on a daily basis.



In the normal course of business, we maintain inventories of exchange-listed and OTC
equity securities. The fair value of these securities at December 31, 2008 and 2007 was $469.4 million and $406.2 million, respectively, in long positions and $385.0 million and $335.3 million, respectively, in short positions. The potential
change in fair value, using a hypothetical 10% decline in prices, is estimated to be a loss of $8.4 million and $7.1 million as of December 31, 2008 and 2007, respectively, due to the offset of gains in short positions with the losses in long
positions. The following table illustrates, for the period indicated, our average, highest and lowest month-end inventory at market value (based on both the aggregate and the net of the long and short positions of trading securities from our OTC and
listed market-making business) (in millions).



|                  |  |                                    |         |                              |   |                                    |  |                              |         |                                    |   |                              |  |   |         |  |   |     
|----------------- |  | ---------------------------------- | ------- | ---------------------------- | - | ---------------------------------- |  | ---------------------------- | ------- | ---------------------------------- | - | ---------------------------- |  | - | ------- |  | - | ----
|                  |  | 2008                               |         | 2007                         |   | 2006                              
|                  |  | Aggregate ofLong andShortPositions |         | Net ofLong andShortPositions |   | Aggregate ofLong andShortPositions |  | Net ofLong andShortPositions |         | Aggregate ofLong andShortPositions |   | Net ofLong andShortPositions
|Average month-end |  | $                                  | 899.1   |                              | $ | 107.6                              |  | $                            | 1,014.0 |                                    | $ | 29.0                         |  | $ | 1,157.2 |  | $ | 30.5
|Highest month-end |  |                                    | 1,015.3 |                              |   | 198.8                              |  |                              | 1,498.2 |                                    |   | 70.9                         |  |   | 1,564.4 |  |   | 51.4
|Lowest month-end  |  |                                    | 775.4   |                              |   | 14.2                               |  |                              | 679.2   |                                    |   | 8.6                          |  |   | 903.9   |  |   | 7.8 



As of December 31, 2008, we
had a $47.2 million corporate investment as a limited partner or non-managing member in the Deephaven Funds, $24.9 million of which was invested in the Global Multi-Strategy Fund (formerly known as Market Neutral Fund) (the GMS
Fund) with the remaining amount held in smaller single strategy funds. As of December 31, 2008, approximately 61% of the Deephaven Funds assets under management were in the Deephaven GMS Fund. The investment philosophy for the GMS
Fund is to seek to produce returns for its investors using various investment strategies focusing on delivering attractive risk-adjusted rates of return. The performance of the GMS Fund is intended to be substantially non-correlated with the general
debt and equity markets, as well as with a number of other non-traditional investment strategies. Within the GMS Fund, Deephaven generally employs a variety of investment strategies, including volatility- driven, fundamental equity, event-driven,
credit-driven and global relative value macro/fixed income strategies among others. There will be unhedged asset factor risks (i.e., equity, interest rate, foreign exchange) in the GMS Fund.



Deephaven also manages single-strategy funds that pursue investment strategies which
involve substantial risks based on the fact that they are less diversified strategies and could be more vulnerable to structural economic and regulatory changes, or general market conditions. The less diversified nature of these strategies may cause
their performance to be more volatile and result in the incurrence of greater losses during unprofitable periods as compared to a more diversified approach.



Separately, Deephavens business also involves specific categories of trading and operational risk. For example, although Deephaven may attempt to hedge
positions as part of its trading strategies, there is no assurance that adequate hedging opportunities will exist. Moreover, Deephaven relies to a material degree on its prime brokers to provide leverage, custody, execution and other services, but
there is no assurance, especially in light of current market conditions, that the prime brokers will continue to provide the amount of leverage which they have in the past, or on the same terms, or provide any of the other services they currently
provide, on a cost-effective basis. Deephaven also faces significant risk from the fact that any of its trading counterparties could fail, which would likely have the effect of greatly diminishing the value of the assets which are the subject of
trades with that



61



---

##### Table of Contents

counterparty. Finally, if Deephaven does not appropriately structure its use of leverage, the losses the funds incur could be materially exacerbated.



Deephaven monitors its trading risks by reviewing trading positions and their
appropriate risk measures. We have established a system whereby transactions are monitored by management and an independent risk control function, as are individual and aggregate dollar and inventory position totals and profits and losses by
strategy. The management of trading positions is enhanced by review of mark-to-market valuations and position summaries. There can be no assurances that any of the Deephaven Funds strategies will be successful in achieving either risk control
or profit objectives.



Operational Risk



Operational risk can arise from many factors ranging from routine processing errors to
potentially costly incidents arising, for example, from major systems failures. We incur operational risk across all of our business activities, including revenue generating activities as well as support functions. Legal and compliance risk is
included in the scope of operational risk and is discussed below under Legal Risk.



Primary responsibility for the management of operational risk lies with the business segments and supporting functions. The business segments maintain controls designed to manage and mitigate operational risk for existing
activities. As new products and business activities are developed, operational risks are identified and controls are designed to mitigate the identified risks.



Disaster recovery plans are in place for critical facilities related to our primary operations and resources and redundancies are built into the systems as
deemed appropriate. We have also established policies, procedures and technologies to protect our systems and other assets from unauthorized access.



Legal Risk



Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and commercial risk such as the risk that a counterpartys performance
obligations will be unenforceable. We are generally subject to extensive regulation in the different jurisdictions in which we conduct our business (see Government Regulation and Market Structure in Part I, Item 1). We have
established procedures based on legal and regulatory requirements that are designed to foster compliance with applicable statutory and regulatory requirements. We have also established procedures that are designed to require that our policies
relating to conduct, ethics and business practices are followed.



62



---

##### Table of Contents

Consolidated Quarterly Results (unaudited)



The following table sets forth certain unaudited consolidated quarterly statement of operations data for 2008 and 2007. In the opinion of management,
this unaudited information has been prepared on substantially the same basis as the Consolidated Financial Statements appearing elsewhere in this document and includes all adjustments (consisting of normal recurring adjustments) necessary to present
fairly the unaudited consolidated quarterly data. The unaudited consolidated quarterly data should be read in conjunction with the audited Consolidated Financial Statements and notes thereto appearing elsewhere in this document. The results of any
quarter are not necessarily indicative of results for any future period.



|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ------------- | - | ------- | ------------ |  | - | ------------ | - |  | ------------ | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Quarter Ended                            |        
|                                                                            |  | Dec. 31,2008                             |         | Sept. 30,2008 |   |         | Jun. 30,2008 |  |   | Mar. 31,2008 |   |  | Dec. 31,2007 |         |   | Sept. 30,2007 |   |         | Jun. 30,2007 |  |   | Mar. 31,2007 |  
|                                                                            |  | (in thousands, except per share amounts) |        
|Revenues                                                                    |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Commissions and fees                                                        |  | $                                        | 168,092 |               | $ | 148,325 |              |  | $ | 111,850      |   |  | $            | 110,608 |   |               | $ | 102,376 |              |  | $ | 128,527      |   |  | $ | 103,957 |   |  | $ | 101,106 |  
|Net trading revenue                                                         |  |                                          | 142,927 |               |   | 116,830 |              |  |   | 85,433       |   |  |              | 101,517 |   |               |   | 112,709 |              |  |   | 57,660       |   |  |   | 54,193  |   |  |   | 61,637  |  
|Asset management fees, net                                                  |  |                                          | 7,500   |               |   | 9,238   |              |  |   | 14,420       |   |  |              | 15,186  |   |               |   | 28,184  |              |  |   | (1,237       | ) |  |   | 29,116  |   |  |   | 60,714  |  
|Interest, net                                                               |  |                                          | 256     |               |   | 1,543   |              |  |   | 1,967        |   |  |              | 3,813   |   |               |   | 3,902   |              |  |   | 4,645        |   |  |   | 4,169   |   |  |   | 4,844   |  
|Investment income (loss) and other, net                                     |  |                                          | 9,444   |               |   | (14,473 | )            |  |   | 4,023        |   |  |              | (5,601  | ) |               |   | 7,444   |              |  |   | 3,661        |   |  |   | 6,990   |   |  |   | 10,623  |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Total revenues                                                              |  |                                          | 328,219 |               |   | 261,463 |              |  |   | 217,693      |   |  |              | 225,523 |   |               |   | 254,615 |              |  |   | 193,256      |   |  |   | 198,425 |   |  |   | 238,924 |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Transaction-based expenses                                                  |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Execution and clearance fees                                                |  |                                          | 31,288  |               |   | 27,062  |              |  |   | 23,828       |   |  |              | 25,224  |   |               |   | 24,605  |              |  |   | 39,555       |   |  |   | 28,691  |   |  |   | 27,410  |  
|Soft dollar expense                                                         |  |                                          | 15,033  |               |   | 16,009  |              |  |   | 13,399       |   |  |              | 16,308  |   |               |   | 14,248  |              |  |   | 12,310       |   |  |   | 11,496  |   |  |   | 11,784  |  
|Payments for order flow and ECN rebates                                     |  |                                          | 16,301  |               |   | 10,112  |              |  |   | 8,300        |   |  |              | 8,926   |   |               |   | 10,226  |              |  |   | 18,978       |   |  |   | 12,761  |   |  |   | 12,599  |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Total transaction-based expenses                                            |  |                                          | 62,622  |               |   | 53,183  |              |  |   | 45,527       |   |  |              | 50,458  |   |               |   | 49,079  |              |  |   | 70,843       |   |  |   | 52,948  |   |  |   | 51,793  |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Revenues, net of transaction-based expenses                                 |  |                                          | 265,597 |               |   | 208,280 |              |  |   | 172,166      |   |  |              | 175,065 |   |               |   | 205,536 |              |  |   | 122,413      |   |  |   | 145,477 |   |  |   | 187,131 |  
|Other direct expenses                                                       |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Employee compensation and benefits                                          |  |                                          | 97,355  |               |   | 103,647 |              |  |   | 83,353       |   |  |              | 86,423  |   |               |   | 93,761  |              |  |   | 71,785       |   |  |   | 78,697  |   |  |   | 102,233 |  
|Communications and data processing                                          |  |                                          | 13,597  |               |   | 11,982  |              |  |   | 11,754       |   |  |              | 10,128  |   |               |   | 8,922   |              |  |   | 9,948        |   |  |   | 9,387   |   |  |   | 8,699   |  
|Depreciation and amortization                                               |  |                                          | 8,147   |               |   | 7,422   |              |  |   | 6,179        |   |  |              | 5,746   |   |               |   | 5,533   |              |  |   | 5,626        |   |  |   | 5,514   |   |  |   | 5,402   |  
|Occupancy and equipment rentals                                             |  |                                          | 5,516   |               |   | 5,602   |              |  |   | 5,364        |   |  |              | 4,012   |   |               |   | 3,393   |              |  |   | 3,685        |   |  |   | 3,550   |   |  |   | 3,455   |  
|Professional fees                                                           |  |                                          | 3,439   |               |   | 3,377   |              |  |   | 7,581        |   |  |              | 5,086   |   |               |   | 5,399   |              |  |   | 5,281        |   |  |   | 3,191   |   |  |   | 5,489   |  
|Business development                                                        |  |                                          | 5,456   |               |   | 4,298   |              |  |   | 4,553        |   |  |              | 3,914   |   |               |   | 4,193   |              |  |   | 3,532        |   |  |   | 4,493   |   |  |   | 3,779   |  
|Interest expense                                                            |  |                                          | 1,590   |               |   | 1,476   |              |  |   | 891          |   |  |              | 1,057   |   |               |   | 136     |              |  |   | 20           |   |  |   |        |   |  |   | 26      |  
|Writedown of assets and lease loss accrual, net                             |  |                                          | 592     |               |   | 2,516   |              |  |   | (1,872       | ) |  |              |        |   |               |   | (1,116  | )            |  |   | 136          |   |  |   | (1,490  | ) |  |   |        |  
|Other                                                                       |  |                                          | 2,853   |               |   | 4,471   |              |  |   | 3,871        |   |  |              | 1,422   |   |               |   | 6,407   |              |  |   | 3,403        |   |  |   | 2,275   |   |  |   | 3,333   |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Total other direct expenses                                                 |  |                                          | 138,545 |               |   | 144,791 |              |  |   | 121,674      |   |  |              | 117,788 |   |               |   | 126,628 |              |  |   | 103,416      |   |  |   | 105,617 |   |  |   | 132,416 |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Other Income                                                                |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Non-operating gain from subsidiary stock issuance                           |  |                                          | 15,947  |               |   |        |              |  |   |             |   |  |              |        |   |               |   |        |              |  |   | 8,757        |   |  |   |        |   |  |   |        |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and minority interest |  |                                          | 142,999 |               |   | 63,489  |              |  |   | 50,492       |   |  |              | 57,277  |   |               |   | 78,908  |              |  |   | 27,754       |   |  |   | 39,860  |   |  |   | 54,715  |  
|Income tax expense                                                          |  |                                          | 61,395  |               |   | 25,511  |              |  |   | 19,967       |   |  |              | 23,320  |   |               |   | 29,345  |              |  |   | 11,205       |   |  |   | 15,480  |   |  |   | 21,530  |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Income from continuing operations before minority interest                  |  |                                          | 81,604  |               |   | 37,978  |              |  |   | 30,525       |   |  |              | 33,957  |   |               |   | 49,563  |              |  |   | 16,549       |   |  |   | 24,380  |   |  |   | 33,185  |  
|Minority interest expense                                                   |  |                                          | 1,902   |               |   | 1,683   |              |  |   | 1,114        |   |  |              | 1,454   |   |               |   |        |              |  |   |             |   |  |   |        |   |  |   |        |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Income from continuing operations                                           |  |                                          | 79,702  |               |   | 36,295  |              |  |   | 29,411       |   |  |              | 32,503  |   |               |   | 49,563  |              |  |   | 16,549       |   |  |   | 24,380  |   |  |   | 33,185  |  
|Loss from discontinued operations, net of tax                               |  |                                          |        |               |   |        |              |  |   |             |   |  |              |        |   |               |   |        |              |  |   | (104         | ) |  |   |        |   |  |   | (1,333  | )
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Net income                                                                  |  | $                                        | 79,702  |               | $ | 36,295  |              |  | $ | 29,411       |   |  | $            | 32,503  |   |               | $ | 49,563  |              |  | $ | 16,445       |   |  | $ | 24,380  |   |  | $ | 31,852  |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Diluted earnings per share from continuing operations                       |  | $                                        | 0.89    |               | $ | 0.40    |              |  | $ | 0.32         |   |  | $            | 0.35    |   |               | $ | 0.52    |              |  | $ | 0.16         |   |  | $ | 0.24    |   |  | $ | 0.32    |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Diluted earnings per share from discontinued operations                     |  | $                                        |        |               | $ |        |              |  | $ |             |   |  | $            |        |   |               | $ |        |              |  | $ |             |   |  | $ |        |   |  | $ | (0.01   | )
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  
|Diluted earnings per share                                                  |  | $                                        | 0.89    |               | $ | 0.40    |              |  | $ | 0.32         |   |  | $            | 0.35    |   |               | $ | 0.52    |              |  | $ | 0.16         |   |  | $ | 0.24    |   |  | $ | 0.31    |  
|                                                                            |  |                                          |         |               |   |         |              |  |   |              |   |  |              |         |   |               |   |         |              |  |   |              |   |  |   |         |   |  |   |         |  



63



---

##### Table of Contents

Item 8.Financial Statements and Supplementary Data



KNIGHT CAPITAL GROUP, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|Managements Report on Internal Control over Financial Reporting                                                |  | 65  
|Report of Independent Registered Public Accounting Firm                                                         |  | 66  
|Consolidated Statements of Financial Condition as of December 31, 2008 and 2007                                 |  | 67  
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006                      |  | 68  
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2008, 2007 and
2006 |  | 69  
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006                      |  | 70  
|Notes to Consolidated Financial Statements                                                                      |  | 71  



64



---

##### Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Knight Capital Group Inc.s (Knight) management is responsible for
establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or
under the supervision of, the companys principal executive and principal financial officers and effected by the companys board of directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Knight;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of Knight; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material
effect on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Management assessed the effectiveness of Knights internal control over financial reporting as of December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework.



Based on our assessment, Knights management has concluded that, as of December 31, 2008, internal control over financial reporting is effective.



The effectiveness of Knights internal control over financial
reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.



65



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and the Shareholders of

Knight Capital Group, Inc.:



In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Knight
Capital Group, Inc. and its subsidiaries (the Company) at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting appearing on
page 65. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



PRICEWATERHOUSECOOPERS LLP



New York, New York

February 26, 2009



66



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                                                            |  | December 31,2008 |           |   | December 31,2007 |  
|                                                                                                                                                                                                                                                                            |  | (In thousands)   |          
|Assets                                                                                                                                                                                                                                                                      |  |                  |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                                                                                                   |  | $                | 440,621   |   |                  | $ | 222,435   |  
|Securities owned, held at clearing brokers, at fair value                                                                                                                                                                                                                   |  |                  | 476,111   |   |                  |   | 412,565   |  
|Receivable from brokers and dealers                                                                                                                                                                                                                                         |  |                  | 341,350   |   |                  |   | 382,544   |  
|Asset management fees receivable                                                                                                                                                                                                                                            |  |                  | 11,866    |   |                  |   | 27,588    |  
|Investment in Deephaven sponsored funds                                                                                                                                                                                                                                     |  |                  | 47,152    |   |                  |   | 83,732    |  
|Receivable from Deephaven sponsored funds                                                                                                                                                                                                                                   |  |                  |          |   |                  |   | 85,000    |  
|Fixed assets and leasehold improvements, at cost, less accumulated depreciation and amortization of $118,078 in 2008 and $112,032 in
2007                                                                                                                                   |  |                  | 83,831    |   |                  |   | 62,073    |  
|Strategic investments                                                                                                                                                                                                                                                       |  |                  | 83,697    |   |                  |   | 73,704    |  
|Goodwill                                                                                                                                                                                                                                                                    |  |                  | 232,197   |   |                  |   | 132,832   |  
|Intangible assets, less accumulated amortization of $24,853 in 2008 and $12,985 in 2007                                                                                                                                                                                     |  |                  | 90,477    |   |                  |   | 57,845    |  
|Deferred compensation investments                                                                                                                                                                                                                                           |  |                  | 72,690    |   |                  |   | 85,504    |  
|Other assets                                                                                                                                                                                                                                                                |  |                  | 134,583   |   |                  |   | 129,991   |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                                                                                |  | $                | 2,014,575 |   |                  | $ | 1,755,813 |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                                        |  |                  |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                                                                                                 |  |                  |           |   |                  |   |           |  
|Securities sold, not yet purchased, at fair value                                                                                                                                                                                                                           |  | $                | 385,003   |   |                  | $ | 335,280   |  
|Payable to brokers and dealers                                                                                                                                                                                                                                              |  |                  | 98,138    |   |                  |   | 117,001   |  
|Accrued compensation expense                                                                                                                                                                                                                                                |  |                  | 216,024   |   |                  |   | 228,275   |  
|Accrued expenses and other liabilities                                                                                                                                                                                                                                      |  |                  | 140,874   |   |                  |   | 119,879   |  
|Long term debt                                                                                                                                                                                                                                                              |  |                  | 140,000   |   |                  |   | 70,000    |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                                                                           |  |                  | 980,039   |   |                  |   | 870,435   |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Commitments and contingent liabilities (Note 20)                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Minority interest                                                                                                                                                                                                                                                           |  |                  | 7,178     |   |                  |   |          |  
|                                                                                                                                                                                                                                                                            |  |                 
|Stockholders equity                                                                                                                                                                                                                                                        |  |                  |           |   |                  |   |           |  
|Class A Common Stock, $0.01 par value; Shares authorized: 500,000 at December 31, 2008 and December 31, 2007; Shares issued: 154,404 at
December 31, 2008 and 150,801 at December 31, 2007; Shares outstanding: 90,121 at December 31, 2008 and 91,536 at December 31, 2007 |  |                  | 1,544     |   |                  |   | 1,509     |  
|Additional paid-in capital                                                                                                                                                                                                                                                  |  |                  | 648,716   |   |                  |   | 587,025   |  
|Retained earnings                                                                                                                                                                                                                                                           |  |                  | 1,112,010 |   |                  |   | 934,099   |  
|Treasury stock, at cost; 64,283 shares at December 31, 2008 and 59,265 shares at December 31, 2007                                                                                                                                                                          |  |                  | (734,912  | ) |                  |   | (637,255  | )
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                                                                                                  |  |                  | 1,027,358 |   |                  |   | 885,378   |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                  |  | $                | 2,014,575 |   |                  | $ | 1,755,813 |  
|                                                                                                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  



The accompanying notes are an
integral part of these consolidated financial statements.



67



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|--------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | - | -------
|                                                                            |  | For the years ended December 31,       
|                                                                            |  | 2008                                    |           |   | 2007 |   |         | 2006
|                                                                            |  | (In thousands, except per shareamounts)
|Revenues                                                                    |  |                                         |           |   |      |   |         |      |  |   |        
|Commissions and fees                                                        |  | $                                       | 538,875   |   |      | $ | 435,966 |      |  | $ | 393,226
|Net trading revenue                                                         |  |                                         | 446,707   |   |      |   | 286,199 |      |  |   | 243,761
|Asset management fees                                                       |  |                                         | 46,344    |   |      |   | 116,777 |      |  |   | 213,888
|Interest, net                                                               |  |                                         | 7,579     |   |      |   | 17,560  |      |  |   | 16,364 
|Investment (loss) income and other, net                                     |  |                                         | (6,607    | ) |      |   | 28,718  |      |  |   | 72,219 
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Total revenues                                                              |  |                                         | 1,032,898 |   |      |   | 885,220 |      |  |   | 939,458
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Transaction-based expenses                                                  |  |                                         |           |   |      |   |         |      |  |   |        
|Execution and clearance fees                                                |  |                                         | 107,402   |   |      |   | 120,261 |      |  |   | 106,908
|Soft dollar expense                                                         |  |                                         | 60,749    |   |      |   | 49,838  |      |  |   | 53,369 
|Payments for order flow and ECN rebates                                     |  |                                         | 43,639    |   |      |   | 54,564  |      |  |   | 42,191 
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Total transaction-based expenses                                            |  |                                         | 211,790   |   |      |   | 224,663 |      |  |   | 202,468
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Revenues, net of transaction-based expenses                                 |  |                                         | 821,108   |   |      |   | 660,557 |      |  |   | 736,990
|Other direct expenses                                                       |  |                                         |           |   |      |   |         |      |  |   |        
|Employee compensation and benefits                                          |  |                                         | 370,778   |   |      |   | 346,476 |      |  |   | 352,353
|Communications and data processing                                          |  |                                         | 47,461    |   |      |   | 36,956  |      |  |   | 33,120 
|Depreciation and amortization                                               |  |                                         | 27,494    |   |      |   | 22,075  |      |  |   | 20,641 
|Occupancy and equipment rentals                                             |  |                                         | 20,494    |   |      |   | 14,083  |      |  |   | 13,536 
|Professional fees                                                           |  |                                         | 19,483    |   |      |   | 19,360  |      |  |   | 20,568 
|Business development                                                        |  |                                         | 18,221    |   |      |   | 15,997  |      |  |   | 14,343 
|Interest expense                                                            |  |                                         | 5,014     |   |      |   | 182     |      |  |   | 337    
|Writedown of assets and lease loss accrual, net                             |  |                                         | 1,236     |   |      |   | (2,470  | )    |  |   | 8,480  
|Other                                                                       |  |                                         | 12,617    |   |      |   | 15,418  |      |  |   | 17,101 
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Total other direct expenses                                                 |  |                                         | 522,798   |   |      |   | 468,077 |      |  |   | 480,479
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Other Income                                                                |  |                                         |           |   |      |   |         |      |  |   |        
|Non-operating gain from subsidiary stock issuance                           |  |                                         | 15,947    |   |      |   | 8,757   |      |  |   |       
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Income from continuing operations before income taxes and minority interest |  |                                         | 314,257   |   |      |   | 201,237 |      |  |   | 256,511
|Income tax expense                                                          |  |                                         | 130,193   |   |      |   | 77,560  |      |  |   | 98,165 
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Income from continuing operations before minority interest                  |  |                                         | 184,064   |   |      |   | 123,677 |      |  |   | 158,346
|Minority interest expense                                                   |  |                                         | 6,153     |   |      |   |        |      |  |   |       
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Income from continuing operations                                           |  |                                         | 177,911   |   |      |   | 123,677 |      |  |   | 158,346
|Loss from discontinued operations, net of tax                               |  |                                         |          |   |      |   | (1,437  | )    |  |   |       
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Net income                                                                  |  | $                                       | 177,911   |   |      | $ | 122,240 |      |  | $ | 158,346
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Basic earnings per share from continuing operations                         |  | $                                       | 2.01      |   |      | $ | 1.27    |      |  | $ | 1.56   
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Diluted earnings per share from continuing operations                       |  | $                                       | 1.94      |   |      | $ | 1.23    |      |  | $ | 1.49   
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Basic and diluted earnings per share from discontinued operations           |  | $                                       |          |   |      | $ | (0.01   | )    |  | $ |       
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Basic earnings per share                                                    |  | $                                       | 2.01      |   |      | $ | 1.26    |      |  | $ | 1.56   
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Diluted earnings per share                                                  |  | $                                       | 1.94      |   |      | $ | 1.21    |      |  | $ | 1.49   
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Shares used in computation of basic earnings per share                      |  |                                         | 88,407    |   |      |   | 97,050  |      |  |   | 101,420
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        
|Shares used in computation of diluted earnings per share                    |  |                                         | 91,760    |   |      |   | 100,796 |      |  |   | 106,243
|                                                                            |  |                                         |           |   |      |   |         |      |  |   |        



The accompanying notes are an
integral part of these consolidated financial statements.



68



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY



For the Years Ended December 31, 2006, 2007 and 2008

(In thousands)



|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|------------------------------------------------------------------- |  | -------------------- |  | -------------- | ----- | ------ | ------------------------ | - | ---------------- | - | ----------------------------------- | - |  | ----- | ------- |  | - | --------- |  | - | ------- | - |  | - | --------- | -
|                                                                    |  | Class A Common Stock |  | Treasury Stock |       |        | AdditionalPaid-InCapital |   | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome |   |  | Total |        
|                                                                    |  | Shares               |  | Amount         |       | Shares |                          |   | Amount           |   |                                     |   |  |      
|Balance, January 1, 2006                                            |  | 139,746              |  | $              | 1,398 |        | (36,779                  | ) |                  | $ | (294,653                            | ) |  | $     | 452,840 |  | $ | 653,513   |  | $ | 10,350  |   |  | $ | 823,448   |  
|Net income                                                          |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       |        |  |   | 158,346   |  |   |        |   |  |   | 158,346   |  
|Realization of gains on available-for-sale securities, net of taxes |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       |        |  |   |          |  |   | (10,350 | ) |  |   | (10,350   | )
|Common stock repurchased                                            |  |                     |  |                |      |        | (4,519                   | ) |                  |   | (75,959                             | ) |  |       |        |  |   |          |  |   |        |   |  |   | (75,959   | )
|Stock options exercised                                             |  | 4,523                |  |                | 45    |        |                         |   |                  |   |                                    |   |  |       | 26,742  |  |   |          |  |   |        |   |  |   | 26,787    |  
|Income tax benefitstock awards exercised                           |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       | 19,405  |  |   |          |  |   |        |   |  |   | 19,405    |  
|Stock-based compensation                                            |  | 690                  |  |                | 7     |        |                         |   |                  |   |                                    |   |  |       | 20,803  |  |   |          |  |   |        |   |  |   | 20,810    |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|Balance, December 31, 2006                                          |  | 144,959              |  |                | 1,450 |        | (41,298                  | ) |                  |   | (370,612                            | ) |  |       | 519,790 |  |   | 811,859   |  |   |        |   |  |   | 962,487   |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|Net income                                                          |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       |        |  |   | 122,240   |  |   |        |   |  |   | 122,240   |  
|Common stock repurchased                                            |  |                     |  |                |      |        | (17,967                  | ) |                  |   | (266,643                            | ) |  |       |        |  |   |          |  |   |        |   |  |   | (266,643  | )
|Stock options exercised                                             |  | 3,487                |  |                | 35    |        |                         |   |                  |   |                                    |   |  |       | 21,040  |  |   |          |  |   |        |   |  |   | 21,075    |  
|Income tax benefitstock awards exercised                           |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       | 15,172  |  |   |          |  |   |        |   |  |   | 15,172    |  
|Stock-based compensation                                            |  | 2,355                |  |                | 24    |        |                         |   |                  |   |                                    |   |  |       | 31,023  |  |   |          |  |   |        |   |  |   | 31,047    |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|Balance, December 31, 2007                                          |  | 150,801              |  |                | 1,509 |        | (59,265                  | ) |                  |   | (637,255                            | ) |  |       | 587,025 |  |   | 934,099   |  |   |        |   |  |   | 885,378   |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|Net income                                                          |  |                     |  |                |      |        |                         |   |                  |   |                                    |   |  |       |        |  |   | 177,911   |  |   |        |   |  |   | 177,911   |  
|Common stock repurchased                                            |  |                     |  |                |      |        | (8,756                   | ) |                  |   | (138,229                            | ) |  |       |        |  |   |          |  |   |        |   |  |   | (138,229  | )
|Reissuance of treasury shares                                       |  |                      |  |                |      |        | 3,738                    |   |                  |   | 40,572                              |   |  |       | 14,428  |  |   |          |  |   |        |   |  |   | 55,000    |  
|Stock options exercised                                             |  | 1,187                |  |                | 11    |        |                         |   |                  |   |                                    |   |  |       | 10,349  |  |   |          |  |   |        |   |  |   | 10,360    |  
|Income tax benefitstock awards exercised                           |  |                      |  |                |      |        |                         |   |                  |   |                                    |   |  |       | 6,117   |  |   |          |  |   |        |   |  |   | 6,117     |  
|Stock-based compensation                                            |  | 2,416                |  |                | 24    |        |                         |   |                  |   |                                    |   |  |       | 30,797  |  |   |          |  |   |        |   |  |   | 30,821    |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  
|Balance, December 31, 2008                                          |  | 154,404              |  | $              | 1,544 |        | (64,283                  | ) |                  | $ | (734,912                            | ) |  | $     | 648,716 |  | $ | 1,112,010 |  | $ |        |   |  | $ | 1,027,358 |  
|                                                                    |  |                      |  |                |       |        |                          |   |                  |   |                                     |   |  |       |         |  |   |           |  |   |         |   |  |   |           |  



The accompanying notes are an
integral part of these consolidated financial statements.



69



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                        |  | For the years endedDecember 31, |         
|                                                                                                        |  | 2008                            |          |   | 2007 |   |          | 2006 | 
|                                                                                                        |  | (In thousands)                  |         
|Cash flows from operating activities                                                                    |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                              |  | $                               | 177,911  |   |      | $ | 122,240  |      |  | $ | 158,346  |  
|Loss from discontinued operations, net of tax                                                           |  |                                 |         |   |      |   | (1,437   | )    |  |   |         |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Income from continuing operations                                                                       |  |                                 | 177,911  |   |      |   | 123,677  |      |  |   | 158,346  |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities |  |                                 |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                           |  |                                 | 27,494   |   |      |   | 22,075   |      |  |   | 20,641   |  
|Stock-based compensation                                                                                |  |                                 | 34,970   |   |      |   | 31,047   |      |  |   | 20,810   |  
|Deferred income taxes                                                                                   |  |                                 | 6,874    |   |      |   | (13,183  | )    |  |   | (23,846  | )
|Deferred rent                                                                                           |  |                                 | 1,222    |   |      |   | 438      |      |  |   | 780      |  
|Writedown of assets and lease loss accrual, net                                                         |  |                                 | 1,236    |   |      |   | (2,470   | )    |  |   | 8,480    |  
|Realized gain from sale of subsidiary stock                                                             |  |                                 |         |   |      |   | (4,223   | )    |  |   |         |  
|Realized gain from sale of strategic investments                                                        |  |                                 | (35,635  | ) |      |   |         |      |  |   | (30,133  | )
|Non-operating gain from subsidiary stock issuance                                                       |  |                                 | (15,947  | ) |      |   | (8,757   | )    |  |   |         |  
|Unrealized loss (gain) on strategic investments                                                         |  |                                 | 6,226    |   |      |   | (397     | )    |  |   | 789      |  
|Unrealized loss (gain) on investments in Deephaven sponsored funds                                      |  |                                 | 28,195   |   |      |   | (17,786  | )    |  |   | (34,182  | )
|Minority interest expense                                                                               |  |                                 | 6,153    |   |      |   | (337     | )    |  |   |         |  
|Operating activities from discontinued operations                                                       |  |                                 |         |   |      |   | (1,437   | )    |  |   |         |  
|(Increase) decrease in operating assets, net of acquisitions and disposals                              |  |                                 |          |   |      |   |          |      |  |   |          |  
|Securities owned                                                                                        |  |                                 | (63,500  | ) |      |   | 299,209  |      |  |   | (331,408 | )
|Receivable from brokers and dealers                                                                     |  |                                 | 47,010   |   |      |   | (28,376  | )    |  |   | (142,397 | )
|Asset management fees receivable                                                                        |  |                                 | 15,722   |   |      |   | 87,451   |      |  |   | (65,740  | )
|Deferred compensation investments                                                                       |  |                                 | 12,814   |   |      |   | (53,918  | )    |  |   | (14,395  | )
|Other assets                                                                                            |  |                                 | (9,622   | ) |      |   | (33,606  | )    |  |   | (4,511   | )
|Increase (decrease) in operating liabilities, net of acquisitions and disposals                         |  |                                 |          |   |      |   |          |      |  |   |          |  
|Securities sold, not yet purchased                                                                      |  |                                 | 49,723   |   |      |   | (357,791 | )    |  |   | 347,614  |  
|Payable to brokers and dealers                                                                          |  |                                 | (18,863  | ) |      |   | 70,625   |      |  |   | 12,700   |  
|Accrued compensation expense                                                                            |  |                                 | (21,316  | ) |      |   | 1,659    |      |  |   | 109,318  |  
|Accrued expenses and other liabilities                                                                  |  |                                 | 5,139    |   |      |   | 37,352   |      |  |   | (17,210  | )
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                               |  |                                 | 255,806  |   |      |   | 151,252  |      |  |   | 15,656   |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities                                                                    |  |                                 |          |   |      |   |          |      |  |   |          |  
|Investments in Deephaven sponsored funds                                                                |  |                                 |         |   |      |   |         |      |  |   | (1,310   | )
|Redemption of Deephaven sponsored funds                                                                 |  |                                 | 93,385   |   |      |   | 35,000   |      |  |   | 129,575  |  
|Purchases of fixed assets and leasehold improvements                                                    |  |                                 | (38,308  | ) |      |   | (15,098  | )    |  |   | (12,976  | )
|Purchases of strategic investments                                                                      |  |                                 | (13,442  | ) |      |   | (10,400  | )    |  |   | (38,771  | )
|Proceeds from cash distribution and sale of strategic investments                                       |  |                                 | 48,805   |   |      |   | 5,534    |      |  |   | 33,082   |  
|Purchases of businesses, net of cash acquired                                                           |  |                                 | (77,308  | ) |      |   | (30      | )    |  |   | (95,809  | )
|Contingent payment on purchases of businesses                                                           |  |                                 |         |   |      |   | (10,363  | )    |  |   | (15,511  | )
|Proceeds from issuance of subsidiary stock                                                              |  |                                 |         |   |      |   | 31,667   |      |  |   |         |  
|Proceeds from sale of subsidiary stock                                                                  |  |                                 |         |   |      |   | 12,750   |      |  |   |         |  
|Cash retained by deconsolidated entity                                                                  |  |                                 |         |   |      |   | (32,241  | )    |  |   |         |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                                     |  |                                 | 13,132   |   |      |   | 16,819   |      |  |   | (1,720   | )
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities                                                                    |  |                                 |          |   |      |   |          |      |  |   |          |  
|Proceeds from long-term debt borrowing                                                                  |  |                                 | 70,000   |   |      |   | 70,000   |      |  |   |         |  
|Capital contribution from Deephaven Managing Partners, LLC                                              |  |                                 | 1,000    |   |      |   |         |      |  |   |         |  
|Stock options exercised                                                                                 |  |                                 | 10,360   |   |      |   | 21,075   |      |  |   | 26,787   |  
|Income tax benefit on stock awards exercised                                                            |  |                                 | 6,117    |   |      |   | 15,172   |      |  |   | 19,405   |  
|Cost of common stock repurchased                                                                        |  |                                 | (138,229 | ) |      |   | (266,643 | )    |  |   | (75,959  | )
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                                                   |  |                                 | (50,752  | ) |      |   | (160,396 | )    |  |   | (29,767  | )
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                        |  |                                 | 218,186  |   |      |   | 7,675    |      |  |   | (15,831  | )
|Cash and cash equivalents at beginning of period                                                        |  |                                 | 222,435  |   |      |   | 214,760  |      |  |   | 230,591  |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                                              |  | $                               | 440,621  |   |      | $ | 222,435  |      |  | $ | 214,760  |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                                       |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                                                  |  | $                               | 5,014    |   |      | $ | 285      |      |  | $ | 408      |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash paid for income taxes                                                                              |  | $                               | 114,618  |   |      | $ | 73,544   |      |  | $ | 120,747  |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of investing activities:                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Goodwill                                                                                                |  | $                               | 99,364   |   |      | $ | 30       |      |  | $ | 69,849   |  
|Intangible assets                                                                                       |  |                                 | 44,500   |   |      |   |         |      |  |   | 38,740   |  
|Other assets                                                                                            |  |                                 | 9,298    |   |      |   |         |      |  |   | 1,803    |  
|Accrued expenses and other liabilities                                                                  |  |                                 | (20,854  | ) |      |   |         |      |  |   | (14,583  | )
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|                                                                                                        |  |                                 | 132,308  |   |      |   | 30       |      |  |   | 95,809   |  
|Issuance of common stock in connection with acquisitions                                                |  |                                 | (55,000  | ) |      |   |         |      |  |   |         |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  
|Purchases of businesses, net of cash acquired                                                           |  | $                               | 77,308   |   |      | $ | 30       |      |  | $ | 95,809   |  
|                                                                                                        |  |                                 |          |   |      |   |          |      |  |   |          |  



The accompanying notes are an
integral part of these consolidated financial statements.



70



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Organization and Description of the Business



Knight Capital Group, Inc. (collectively with its subsidiaries, the
Company) has three operating segments, Global Markets, Asset Management and Corporate. As of December 31, 2008, the Companys operating segments comprised the following subsidiaries:



Global Markets



| |  |  | Knight Equity Markets, L.P. (KEM) primarily operates as a market-maker in over-the-counter (OTC) equity securities, primarily those traded in the
Nasdaq Stock Market and on the OTC Bulletin Board. KEM also operates the Companys primary domestic institutional sales business. Donaldson & Co., a division of KEM, offers soft dollar and commission recapture services. KEM is a
broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and is a member of the Nasdaq Stock Exchange (Nasdaq), the New York Stock Exchange (NYSE), Financial Industry Regulatory Authority
(FINRA), the International Securities Exchange, LLC (ISE), the National Stock Exchange (NSX), the Chicago Board Options Exchange (CBOE), the National Futures Association (NFA), Nasdaq OMX
and Nasdaq OMX BX.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Capital Markets LLC (KCM) primarily operates as a market-maker in the over-the-counter market for NYSE, NYSE Alternext and NYSE Arca listed securities. KCM
is a broker-dealer registered with the SEC and is a member of Nasdaq and FINRA.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Equity Markets International Limited (KEMIL) is a U.K. registered broker-dealer that provides execution services for institutional and broker-dealer
clients in U.S., European and international equities. KEMIL is authorized and regulated by the U.K. Financial Services Authority (FSA) and is a member of the London Stock Exchange, Deutsche Börse AG, Euronext N.V. (incorporating
Euronext Amsterdam, Euronext Brussels, Euronext Lisbon and Euronext Paris), Borsa Italiana, OMX (incorporating the Copenhagen Stock Exchange, Helsinki Stock Exchange and Stockholm Stock Exchange), Oslo Børs, SWX Europe Limited, Weiner
Börse, Chi-X Europe Limited and Turqouise.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Direct LLC (Knight Direct) provides institutions with direct market access trading through Knight Direct EMSTM, an advanced electronic platform. EdgeTrade, LLC (EdgeTrade), an agency-only trade execution and algorithmic software firm that allows buy- and sell-side
clients to more effectively source liquidity and manage the trading process as well as maintain anonymity, reduce market impact and lower transaction costs, was acquired by the Company in January 2008 and merged into Knight Direct in August 2008.
Knight Direct is a broker-dealer registered with the SEC and is a member of Nasdaq, FINRA and the NFA.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hotspot FX, Inc. and its subsidiaries (Hotspot) provide institutions and dealers with spot foreign exchange executions through advanced, fully electronic
platforms. One Hotspot subsidiary is regulated by the FSA, and another Hotspot subsidiary is a Futures Commission Merchant (FCM) registered with the Commodity Futures Trading Commission (CFTC) and is a member of the NFA.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight BondPoint, Inc. (Knight BondPoint) (formerly known as ValuBond Securities, Inc.) provides electronic access and trade execution products for the retail
fixed income market. Knight BondPoint is a broker-dealer registered with the SEC and is a member of FINRA and the Municipal Securities Rulemaking Board (MSRB).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



71



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



| |  |  | Knight Libertas Holdings LLC (formerly known as Libertas Holdings LLC) and its subsidiaries (collectively, Knight Libertas) provide trade execution services and
investment research across a broad range of fixed income securities, including high-yield and high-grade corporate bonds, distressed debt, asset- and mortgage-backed securities, convertible bonds and syndicated loans. Knight Libertas also provides
capital markets services to growing companies in need of financing to support expansion. One Knight Libertas domestic subsidiary is a broker-dealer registered with the SEC and is a member of FINRA and MSRB, while its U.K. subsidiary is regulated by
the FSA. Knight Libertas also has a Hong Kong registered broker-dealer that is regulated by the Securities and Futures Commission (SFC). Knight Libertas was acquired by the Company in July 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Direct Edge ECN LLC (Direct Edge ECN) operates as an electronic
communications network (ECN). Direct Edge ECN is a liquidity destination offering the ability to match and route trades in Nasdaq, NYSE, NYSE Alternext and NYSE Arca listed securities. Direct Edge ECN is a broker-dealer registered with
the SEC and is a member of Nasdaq and FINRA.



At the close of business on
September 28, 2007 (the Deconsolidation Date) the Company deconsolidated Direct Edge ECN as it no longer controlled Direct Edge ECN as of that date. The results of Direct Edge ECNs operations have been included in the
Consolidated Statements of Operations up through the Deconsolidation Date. The Company accounts for its interest in Direct Edge Holdings LLC (Direct Edge Holdings), the newly formed immediate parent company of Direct Edge ECN (together,
Direct Edge) under the equity method for periods subsequent to the Deconsolidation Date. See Footnote 10 Direct Edge ECN for further discussion of Direct Edge ECN.



Asset Management



Deephaven Capital Management LLC (Deephaven) is the registered investment adviser to, and sponsor of, the Deephaven investment funds (the
Deephaven Funds). In addition to being registered as an Investment Adviser with the SEC, Deephaven is also registered with the CFTC as a commodity pool operator and a commodity trading adviser, and is a member of
the NFA. Due to the nature of Deephavens investor base, however, Deephaven is not registered as either a FCM or Introducing Broker with the CFTC or NFA and is exempt from many of the CFTC and NFA regulations. Deephaven also has a
U.K. registered investment adviser subsidiary, which is regulated by the FSA, and a Hong Kong registered investment adviser subsidiary, which is regulated by the SFC.



Prior to February 1, 2008, Deephaven was a wholly-owned subsidiary of the Company. On February 1, 2008, the Company
contributed its interest in Deephaven to Deephaven Capital Management Holdings LLC (Deephaven Holdings) in exchange for a 51% interest in Deephaven Holdings. In addition, certain Deephaven managers acquired a 49% interest in Deephaven
Holdings in exchange for the termination of their employment agreements and associated profit sharing bonuses and an equity contribution. See Footnote 19 Deephaven Transaction for a further discussion of Deephaven.



On January 27, 2009, Deephaven entered into an Asset Purchase Agreement along with
Deephaven Managing Partners, LLC (Deephaven Partners), the Company, and each of the three Deephaven managers to sell substantially all of its assets to Stark & Roth, Inc. (Stark) with Stark assuming certain limited
liabilities of Deephaven. See Footnote 25 Subsequent Events for a further discussion of the Deephaven Asset Sale.



72



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Corporate



The Corporate segment includes investment income earned on strategic investments, corporate investment in the Deephaven Funds and all corporate overhead expenses.
Corporate overhead expenses primarily consist of compensation for certain senior executives and other individuals employed at the corporate holding company, legal and other professional expenses related to corporate matters, directors fees,
investor and public relations expenses and directors and officers insurance.



Discontinued Operations



The Company completed the sale
of its Derivative Markets business to Citigroup Financial Products Inc. (Citigroup) in December of 2004. Costs associated with the Derivative Markets segment have been included within discontinued operations. For a further
discussion of the sale of the Companys Derivative Markets business and its associated accounting treatment, see Footnote 14 Discontinued Operations and Regulatory Charges and Related Matters.



2.    Significant Accounting Policies



Basis of consolidation and form of presentation



The accompanying Consolidated Financial Statements, prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP), include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company records
Minority interest expense on the Consolidated Statements of Operations, which reflects the portion of earnings of consolidated subsidiaries that are applicable to the minority interest owners.



Certain reclassifications have been made to the prior years Consolidated
Financial Statements in order to conform to the current year presentation. Such reclassifications are immaterial to both current and all previously issued financial statements taken as a whole and had no effect on previously reported Net income.
These reclassifications are as follows:



| |  |  | In 2008, the Company reclassified costs incurred during the year related to its commission recapture activity. The Company determined that it would be appropriate to report
commissions associated with this activity net of the associated commission recapture payments instead of reporting such amounts on a gross basis, pursuant to the guidance provided in EITF Issue No. 01-9 Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of the Vendors Products). This reclassification resulted in a reduction of our reported Commissions and fees and Total revenues of approximately $11.5 million and $17.2 million for 2007 and
2006, respectively, with an equal and offsetting reduction in Soft dollar expense.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company reclassified the Consolidated Statements of Cash Flows for the year ended December 31, 2007 to reflect Cash retained by deconsolidated entity as a component
within Cash flows from investing activities rather than as a separate line item outside of Cash flows from operating, investing and financing activities. This presentation represents a change in classification of information rather than a change in
accounting principle.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the years ended December 31, 2008 and 2007, the Company reported Non-operating gains from subsidiary stock issuance pursuant to SAB Topic 5J of $15.9 million and
$8.8
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



73



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



| | million, respectively, as described in Footnote 10, Direct Edge ECN. The 2007 Non-operating gain from subsidiary stock issuance, which had previously been
reported as a separate line item within Revenues of the Consolidated Statements of Operations, has been reclassified to Other Income on such statement. The 2008 Non-operating gain from subsidiary stock issuance is also reported as Other Income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash and cash equivalents



Cash and cash equivalents include money market accounts, which are payable on demand,
and short-term investments with an original maturity of less than 90 days. The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments.



Market-making, trading and sales activities



Securities owned and securities sold, not yet purchased, which primarily consist of
listed and OTC equities, are carried at market value and are recorded on a trade date basis. Net trading revenue (trading gains, net of trading losses) and commissions (which includes commission equivalents earned on institutional client orders) and
related expenses are also recorded on a trade date basis. The Companys clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and
financing of securities transactions. Such, interest expense, which has been netted against interest income on the Consolidated Statements of Operations, was $7.5 million, $18.2 million and $15.2 million in 2008, 2007 and 2006, respectively.



Dividend income relating to securities owned and dividend expense
relating to securities sold, not yet purchased, derived from the Companys market making activities are included as a component of Net trading revenue on the Consolidated Statements of Operations. Net trading revenue includes dividend income of
$20.1 million, $5.5 million and $6.2 million in 2008, 2007 and 2006, respectively. Net trading revenue includes dividend expense of $11.7 million, $5.2 million and $6.8 million in 2008, 2007 and 2006, respectively.



Payments for order flow and ECN rebates represent payments to broker-dealer clients, in
the normal course of business, for directing their order flow in U.S. equities to the Company, and rebates for providing liquidity to Direct Edge ECN through the Deconsolidation Date. Soft dollar expense represents payments to or on behalf of
institutions in connection with soft dollar programs.



Asset
management fees



Deephaven earns asset management fees for managing
the Deephaven Funds. Management fees, which are received monthly, are recorded as earned and are calculated as a percentage of each Deephaven Funds monthly net assets.



Incentive allocation fees are earned based upon the performance of the Deephaven Funds and are calculated based upon a percentage of a
new high net asset value as defined in the applicable private placement offering memorandum, for the six-month performance period ended June 30 or December 31, for some funds, and for the twelve-month performance period ended
December 31 for other funds. A new high net asset value is defined as the amount by which the net asset value of an investors account in a particular Deephaven fund exceeds the greater of either the investors highest previous net
asset value in that Deephaven fund or the net asset value at the time the investor made a purchase.



74



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The Company records incentive allocation fees in accordance with Method 2 of Emerging Issues Task Force
(EITF) Topic D-96. Under this methodology, the Company recognizes incentive allocation fee income for each interim period based upon the amount that would be due if the investment advisory relationship with the Deephaven Funds were
terminated at the end of such period.



Incentive allocation fees may
increase or decrease during the year based on the performance of the Deephaven Funds. As such, the incentive allocation fees, in certain circumstances, may be negative for certain periods, but not lower than zero for any six-month performance period
ended June 30 or December 31, for some funds, or the twelve-month performance period ended December 31 for other funds. Incentive allocation fees are paid upon the close of each six-month performance period, or twelve-month
performance period, as the case may be, and are not subject to repayment (i.e., clawback) once such performance period has closed. If a fund which has a six-month performance period incurs losses in the performance period ended December 31, the
Company may make the determination, at its sole discretion, to return all or a portion of incentive allocation fees collected for the prior six-month performance period ended June 30 of that year.



Estimated fair value of financial instruments



In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements(SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements.



Under SFAS 157, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset
or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys belief about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:



| |  |  | Level 1Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on
quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
| | - |  | ---------------------------------------------------------------------------------------------------------------



Changes in fair value are recognized in earnings each period for financial instruments
that are carried at fair value.



The Companys securities owned and
securities sold, not yet purchased will generally be classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations with reasonable levels of price transparency.



75



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The types of instruments that trade in markets that are not considered to be active, but are valued based on
quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy. As of December 31, 2008, the Companys
Investment in Deephaven sponsored funds, one strategic investment, as well as Deferred compensation investments met the definition of Level 2.



Certain instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency.
For those instruments that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In
the absence of such evidence, managements best estimate is used. As of December 31, 2008, the Company did not hold any financial instruments that met the definition of Level 3.



In February 2008, FASB Staff Position FAS 157-2 (FSP FAS 157-2) was issued. FSP FAS 157-2 delays the
effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The delay was intended to allow additional time to consider
the effect of various implementation issues that have arisen from the application of SFAS 157. FSP FAS 157-2 is effective for fiscal years beginning after November 15, 2008. The Company believes that FSP FAS 157-2 will not have a
material impact on the Companys Consolidated Financial Statements.



In October 2008, the FASB issued FASB Staff Position FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of
SFAS 157 to consider various inputs in determining fair value under conditions when the market for certain financial assets are not active. FSP FAS 157-3 was effective immediately upon issuance. The implementation of FSP FAS 157-3 did not affect the
Companys fair value measurements of financial assets or its financial condition as of December 31, 2008, nor did it affect the results of its operations for the year ended December 31, 2008.



In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115(SFAS 159), which provides an option for entities to choose to measure many financial instruments and certain other items at fair
value. On January 1, 2008, the Company elected not to take the option available under SFAS 159 for the purposes of valuing certain financial instruments at fair value.



Strategic investments



Strategic investments include non-controlling equity ownership interests held by the Company or its non-broker-dealer subsidiaries, primarily in financial
services-related businesses. Strategic investments are accounted for under the equity method, at cost or at fair value. The equity method of accounting is used for investments in limited partnerships and limited liability companies that are held by
the Company or any of its non-broker-dealer subsidiaries. Investments in corporations by such non-broker-dealers are held at amortized cost. The equity method of accounting is used where the Company is considered to exert significant influence on
the investee. Investments are held at adjusted cost when the Company is not considered to exert significant influence on the investee. Investments in liquid investment funds, including deferred compensation investments in mutual funds, are accounted
for at fair value pursuant to SFAS 157.



76



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Strategic investments are reviewed on an ongoing basis to ensure that the carrying values of the investments
have not been impaired. If the Company assesses that an impairment loss on a strategic investment has occurred due to a decline in fair value or other market conditions, the investment is written down to its estimated impaired value.



Goodwill and intangible assets



The Company applies the provisions of SFAS No. 142 Goodwill and Other
Intangible Assets,which requires that goodwill and intangible assets with an indefinite useful life to be tested for impairment annually or when an event occurs or circumstances change that signify the existence of impairment. Other intangible
assets are amortized on a straight line basis over their useful lives and, as required by SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144),are tested for recoverability whenever events
indicate that the carrying amounts may not be recoverable.



Deferred
compensation investments



The Company has several deferred
compensation plans related to certain employees and directors that provide a return to the participants based upon the performance of various investments. In order to hedge its liability under these plans, the Company generally acquires the
underlying investments and holds such investments until the deferred compensation liabilities are satisfied. Changes in value of such investments are recorded in Investment (loss) income and other, net, with a corresponding charge or credit to
Employee compensation and benefits on the Consolidated Statements of Operations.



Treasury stock



The Company records its purchases of
treasury stock at cost as a separate component of Stockholders equity. The Company obtains treasury stock through purchases in the open market or through privately negotiated transactions. The Company may re-issue treasury stock, at average
cost, related to the acquisition of new businesses.



Foreign
currencies



The functional currency of the Companys foreign
subsidiaries is the U.S. dollar. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars using current exchange rates at the date of the Consolidated Statements of Financial Condition. Revenues and expenses are
translated at average rates during the periods. Gains or losses resulting from foreign currency transactions are included in Investment (loss) income and other, net on the Consolidated Statements of Operations.



Soft dollar expense



Under a commission management program, the Company allows institutional clients to
allocate a portion of their gross commissions to pay for research and other services provided by third parties. These payments are classified as Soft dollar expense on the Consolidated Statements of Operations and are reported gross of the related
commission income pursuant to EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.



77



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Depreciation, amortization and occupancy



Fixed assets are depreciated on a straight-line basis over their estimated useful lives of three to seven years. Leasehold
improvements are being amortized on a straight-line basis over the shorter of the life of the related office lease or the expected useful life of the assets. The Company capitalizes certain costs associated with the acquisition or development of
internal-use software and amortizes the software over its estimated useful life of three years, commencing at the time the software is placed in service.



The Company follows SFAS No. 13 Accounting for Leases, as clarified by EITF and FASB Technical Bulletins, which states that rent expense under operating
leases with fixed rent escalations, lease incentives and free rent periods should be recognized on a straight-line basis over the lease term beginning on the date the lessee takes possession of or controls the use of the space, including during free
rent periods.



Lease loss accrual



It is the Companys policy to identify excess real estate capacity and where
applicable, accrue for such future costs. In determining the accrual, a nominal cash flow analysis is performed for lease losses initiated prior to December 31, 2002, the effective date of SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, and costs related to the excess capacity are accrued. For lease losses initiated after December 31, 2002, the Companys policy is to accrue future costs related to excess capacity using a discounted
cash flow analysis. In an event the Company is able to sublease the excess real estate after recording a lease loss accrual, such lease loss accrual is adjusted to the extent the actual terms of sub-leased property differ from the assumptions used
in the calculation of the lease loss accrual.



Income taxes



Pursuant to SFAS No. 109 Accounting for Income Taxes,
the Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measures them using the enacted tax rates and laws
that will be in effect when such differences are expected to reverse. The Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary
differences and forecasted operating earnings. Net deferred tax assets and liabilities are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Statements of Financial Condition.



On January 1, 2007 the Company adopted FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes (FIN 48). The Company recognized an immaterial adjustment in the liability for unrecognized income tax benefits as a result of the implementation of FIN 48.



Discontinued operations



In accordance with SFAS 144, the revenues and expenses associated with a separate
segment or reporting unit that has been disposed of through closure or sale are included in Loss from discontinued operations, net of tax, on the Consolidated Statements of Operations.



78



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Stock-based compensation



On January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified
prospective method. Under SFAS 123(R), the grant date of stock-based employee awards that require future service is amortized over the relevant service period.



Upon the adoption of SFAS 123(R), the Company changed its expense attribution method for options. For option awards granted subsequent
to the adoption of SFAS 123(R), compensation cost is recognized on a straight-line basis over the requisite service period for the entire award, which is the same methodology that the Company uses to account for restricted share awards. For unvested
option awards granted prior to the adoption of SFAS 123(R), the Company continues to recognize compensation cost using a graded-vesting method (as it had on a pro-forma basis previously). The graded-vesting method recognizes compensation cost
separately for each vesting tranche.



SFAS 123(R) requires expected
forfeitures to be considered in determining stock-based employee compensation expense. Prior to the adoption of SFAS 123(R), forfeiture benefits were recorded as a reduction to the Companys actual compensation expense in the case of restricted
shares, or pro-forma compensation expense in the case of options, when an employee left the Company and forfeited the award. For all years presented, the Company recorded a benefit for expected forfeitures on all outstanding stock-based awards. The
benefit recorded did not have a material impact on the results of operations in any of the years presented.



For stock-based payments issued after the adoption of SFAS 123(R), the Company applies a non-substantive vesting period approach whereby the expense is accelerated
for those employees and directors that receive options and restricted stock units (RSUs) and are eligible to retire prior to the options or RSUs vesting. Prior to the adoption of SFAS 123(R), the Company applied a nominal vesting
approach for employee stock-based compensation awards with retirement eligible provisions. Under the nominal vesting approach, the Company recognized actual and pro-forma compensation cost over the vesting period and, if the employee retired before
the end of the vesting period, the Company recognized any remaining unrecognized compensation cost at the date of retirement. The impact of this change in the vesting period approach did not have a material impact on the results of operations for
the periods presented herein.



Use of estimates



The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.



Recently issued accounting standards



In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115(SFAS 159), which permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 was effective for the Company beginning on January 1, 2008. The adoption of SFAS 159 did not have a material impact on the Companys Consolidated Financial Statements.



In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations (SFAS 141(R)). SFAS 141(R) requires the acquiring entity in a business combination to recognize the acquisition date fair value for all identifiable assets acquired, and liabilities assumed,
any noncontrolling



79



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



interest in the acquiree and the goodwill acquired. SFAS 141(R) changes the recognition of assets acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and development and requires the expensing of acquisition-related and restructuring costs as incurred. SFAS 141(R) is effective as of the beginning of an entitys fiscal year that begins
after December 15, 2008. The Company will apply the provisions of SFAS 141(R) to business combinations occurring after December 31, 2008. Adoption of SFAS 141(R) will not affect our Consolidated Financial Statements, but may have an
effect on accounting for future business combinations.



In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 states that accounting and reporting for minority
interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective as of the beginning of an entitys
first fiscal year beginning after December 15, 2008 with retrospective application. The Company does not expect the adoption of SFAS 160 to have a material effect on its Consolidated Financial Statements.



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activitiesan amendment of FASB Statement No. 133(SFAS 161). SFAS 161 requires enhanced disclosures about an entitys derivative and hedging activities. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161 will not
affect our Consolidated Financial Statements.



In April 2008, the FASB
issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement of SFAS No. 142, Goodwill and Other Intangible Assets for an entity to consider, when
determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3
replaces the previous useful-life assessment criteria with a requirement that an entity consider its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions
regarding renewal. FSP FAS 142-3 is effective for the Company on December 1, 2009. The Company is currently evaluating the potential impact of the adoption of FSP FAS 142-3 on its Consolidated Financial Statements.



In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to
vesting and therefore need to be included in calculating earnings per share under the two-class method described in SFAS No. 128, Earnings per Share. Additionally, FSP EITF 03-6-1 requires companies to treat unvested share-based payment
awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share and is effective for financial statements issued for fiscal years beginning after December 15, 2008;
early adoption is not permitted. The Company does not expect FSP EITF 03-6-1 to affect its results of operations or earnings per share.



80



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45;and Clarification of the Effective Date of FASB Statement No. 161(FSP FAS 133-1 and FIN 45-4). FSP FAS 133-1 and FIN
45-4 require enhanced disclosures about credit derivatives and guarantees and amends FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersto exclude credit
derivative instruments accounted for at fair value under SFAS No. 133. FSP FAS 133-1 and FIN 45-4 were effective for financial statements issued for reporting periods ending after November 15, 2008. Since FSP FAS 133-1 and FIN 45-4 only
require additional disclosures concerning credit derivatives and guarantees, adoption of FSP FAS 133-1 and FIN 45-4 did not have an effect on our Consolidated Financial Statements.



3.    Fair Value of Financial Instruments



The Companys financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with SFAS 157,
as described more fully in Footnote 2 Significant Accounting Policies. The following fair value hierarchy table presents information about the Companys financial assets and liabilities measured at fair value on a recurring basis
(in millions):



|                                                           |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|---------------------------------------------------------- |  | ----------------------------------------------------------------- | ----- | ------- | - | ------- |  | ----- | - |  | - | -----
|                                                           |  | Assets and Liabilities Measured atFair Value on a Recurring Basis
|December 31, 2008                                          |  | Level 1                                                           |       | Level 2 |   | Level 3 |  | Total
|Assets                                                     |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Securities owned, held at clearing brokers, at fair value: |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Equities (1)                                               |  | $                                                                 | 469.4 |         | $ |        |  | $     |  |  | $ | 469.4
|U.S. government obligations                                |  |                                                                   | 6.7   |         |   |        |  |       |  |  |   | 6.7  
|Investment in Deephaven sponsored funds                    |  |                                                                   |      |         |   | 47.2    |  |       |  |  |   | 47.2 
|Strategic investment                                       |  |                                                                   |      |         |   | 27.9    |  |       |  |  |   | 27.9 
|Deferred compensation investments                          |  |                                                                   |      |         |   | 72.7    |  |       |  |  |   | 72.7 
|                                                           |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Total fair value of financial instrument assets            |  | $                                                                 | 476.1 |         | $ | 147.8   |  | $     |  |  | $ | 623.9
|                                                           |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Liabilities                                                |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Securities sold, not yet purchased, at fair value:         |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Equities (1)                                               |  | $                                                                 | 385.0 |         | $ |        |  | $     |  |  | $ | 385.0
|                                                           |  |                                                                   |       |         |   |         |  |       |   |  |   |      
|Total fair value of financial instrument liabilities       |  | $                                                                 | 385.0 |         | $ |        |  | $     |  |  | $ | 385.0
|                                                           |  |                                                                   |       |         |   |         |  |       |   |  |   |      



|(1) |  | Equities of $93.8 million have been netted by their respective long and short positions as of December 31, 2008.
|--- |  | ----------------------------------------------------------------------------------------------------------------



81



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



4.    Receivable from/Payable to Brokers and Dealers



Amounts receivable from and payable to brokers and dealers consist of the following
(in millions):



|                                 |  |                  |       |                  |   |      
|-------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                 |  | December 31,2008 |       | December 31,2007
|Receivable:                      |  |                  |       |                  |   |      
|Clearing brokers and other       |  | $                | 281.9 |                  | $ | 207.1
|Securities failed to deliver     |  |                  | 47.6  |                  |   | 134.3
|Deposits for securities borrowed |  |                  | 11.8  |                  |   | 41.1 
|                                 |  |                  |       |                  |   |      
|                                 |  | $                | 341.4 |                  | $ | 382.5
|                                 |  |                  |       |                  |   |      
|Payable:                         |  |                  |       |                  |   |      
|Securities failed to receive     |  | $                | 32.6  |                  | $ | 79.5 
|Clearing brokers and other       |  |                  | 65.5  |                  |   | 37.5 
|                                 |  |                  |       |                  |   |      
|                                 |  | $                | 98.1  |                  | $ | 117.0
|                                 |  |                  |       |                  |   |      



Totals may
not add due to rounding.



5.    Investment in and Receivable from
Deephaven Sponsored Funds and Asset Management Fees



Deephaven is
the registered investment adviser and sponsor of the Deephaven Funds, which engage in various trading strategies involving equities, debt instruments and derivatives. The underlying investments in the Deephaven Funds are carried at market value. Of
the $2.0 billion and $3.9 billion of assets under management in the Deephaven Funds as of December 31, 2008 and 2007, respectively, the Company had corporate investments as a limited partner or non-managing member of $47.2 million and $83.7
million, respectively. At December 31, 2007, the Company also had an $85.0 million receivable from Deephaven sponsored funds, which represented a redemption that was effective December 31, 2007 and was received in January 2008. Deferred
compensation investments on the Consolidated Statements of Financial Condition at December 31, 2008 and 2007 included $35.8 million and $49.8 million, respectively, of investments as a limited partner or non-managing member in the Deephaven
Funds related to employee and director deferred compensation plans. Separately, certain officers, directors and employees of the Company held direct investments of approximately $47.1 million and $27.6 million as limited partners or non-managing
members in the Deephaven Funds, in the aggregate, as of December 31, 2008 and 2007, respectively.



Asset management fees represent fees earned by Deephaven for sponsoring and managing the Deephaven Funds as well as fees earned from separately managed accounts.
These fees consist of management fees, calculated as fixed percentages of assets under management, and incentive allocation fees, generally calculated as a percentage of the funds and managed accounts year-to-date profits, if any.
Incentive allocation fees may be negative in certain interim periods if the funds or managed accounts lose money for such period; however, such fees will not be negative on a year-to-date basis. Management fees were $33.9 million, $44.3 million and
$35.5 million for 2008, 2007 and 2006, respectively. Incentive allocation fees were $12.4 million, $72.5 million and $178.4 million for 2008, 2007 and 2006, respectively.



Included in Investment (loss) income and other, net on the Companys Consolidated Statements of Operations is (loss) income from the
Companys corporate investments in the Deephaven Funds of



82



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



($28.3) million, $17.8 million and $34.2 million for 2008, 2007 and 2006, respectively. For additional information on Deephaven, see Footnote 19, Deephaven
Transaction and Footnote 25, Subsequent Events.



6.    Fixed Assets and Leasehold Improvements



Fixed assets and leasehold improvements comprise the following (in millions):



|                                               |  |                    |      |              |       |  |   |      
|---------------------------------------------- |  | ------------------ | ---- | ------------ | ----- |  | - | -----
|                                               |  | DepreciationPeriod |      | December 31,
|                                               |  |                    | 2008 |              | 2007 
|Computer hardware and software                 |  | 3 years            |      | $            | 110.8 |  | $ | 101.9
|Leasehold improvements                         |  | *                  |      |              | 69.5  |  |   | 52.5 
|Telephone systems                              |  | 5 years            |      |              | 9.5   |  |   | 9.6  
|Furniture and fixtures                         |  | 7 years            |      |              | 9.5   |  |   | 7.5  
|Trading systems and equipment                  |  | 5 years            |      |              | 2.7   |  |   | 2.6  
|                                               |  |                    |      |              |       |  |   |      
|                                               |  |                    |      |              | 201.9 |  |   | 174.1
|LessAccumulated depreciation and amortization |  |                    |      |              | 118.1 |  |   | 112.0
|                                               |  |                    |      |              |       |  |   |      
|                                               |  |                    |      | $            | 83.8  |  | $ | 62.1 
|                                               |  |                    |      |              |       |  |   |      



* -
Shorter of life of lease or useful life of assets



7.    Strategic
Investments



Strategic investments of $83.7 million at
December 31, 2008 consisted of a $27.9 million short-term investment in a liquid investment fund carried at fair value, $49.8 million in seven limited liability companies, limited partnership investments and a corporation accounted for under
the equity method, $1.0 million investment in common stock of two private companies representing less than 20% equity ownership which is held at cost, and $5.0 million in three debt instruments, which are held at adjusted cost. See Footnote 2
Significant Accounting Policies for a discussion of valuation of Strategic investments. Included in the $49.8 million investment in limited liability companies at December 31, 2008 is a $33.7 million equity investment in Direct Edge
ECN, which is described further in Footnote 10 Direct Edge ECN.



Strategic investments of $73.7 million at December 31, 2007 consisted of a $30.8 million short-term investment in a liquid investment fund carried at fair value, $37.4 million in eight limited liability companies, limited partnership
investments and a corporation accounted for under the equity method, and $5.5 million in common stock of two private companies representing less than 20% equity ownership, which are held at cost. Included in the $37.4 million investment in limited
liability companies at December 31, 2007 is a $19.1 million equity investment in Direct Edge ECN.



8.    Goodwill and Intangible Assets



Goodwill and intangible assets with indefinite useful lives are tested for impairment annually or when an event occurs or circumstances change that signify the existence of impairment. As part of the test for impairment, the
Company considers the profitability of the respective segment or reporting unit, an assessment of the fair value of the respective segment or reporting unit as well as the overall market value of the Company compared to its net book value. In June
2008 and 2007, the Company



83



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



tested for the impairment of goodwill and intangible assets with indefinite lives and concluded that there was no impairment. Amortizable intangibles are tested for
recoverability whenever events indicate that the carrying amounts may not be recoverable. In 2008, the Company discontinued the use of the Direct Trading Institutional trade name and wrote off the remaining book value of $2.5 million. In 2007, the
Company wrote off $110,000 related to the discontinued use of the trade name of ValuBond Securities, Inc. No other events occurred in 2008 or 2007 that would indicate that the carrying amounts of the Companys goodwill or intangible assets may
not be recoverable.



The goodwill balances of $232.2 million and $132.8
million at December 31, 2008 and 2007, respectively, relate to the Global Markets segment. Goodwill increased by $99.4 million during 2008, due to the acquisitions of EdgeTrade and Knight Libertas. Goodwill primarily represents the
Companys purchases of the businesses now operating as KCM, Knight Direct, Hotspot, Donaldson, Knight BondPoint and Knight Libertas.



The Company had intangible assets, net of accumulated amortization, of $90.5 million and $57.8 million at December 31, 2008 and 2007, respectively, all
included within the Global Markets business segment. Intangible assets increased by $32.6 million during 2008, primarily due to the acquisitions of EdgeTrade and Knight Libertas offset, in part, by the 2008 amortization expense and the writedown of
the Direct Trading Institutional trade name. Intangible assets primarily represent client relationships and are being amortized over their remaining useful lives, the majority of which have been determined to range from four to 24 years. The
weighted average remaining life of the Companys intangible assets at December 31, 2008 and 2007 is approximately 12 and 16 years, respectively.



In 2008, the Company recorded amortization expense, related to its intangible assets of $9.4 million. The estimated amortization expense relating to the intangible
assets for each of the next five years approximates $10.8 million in 2009, $10.6 million in 2010, $10.4 million in 2011, $10.1 in 2012 and $8.6 million in 2013.



The following chart summarizes the Companys Goodwill and Intangible assets, net of accumulated amortization, as of December 31, 2008 and 2007 (in
millions):



|                                                         |  |                  |       |                  |   |      
|-------------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|Goodwill                                                 |  | December 31,2008 |       | December 31,2007
|Purchase of Trimark business                             |  | $                | 10.1  |                  | $ | 10.1 
|Purchase of Tradetech business                           |  |                  | 3.0   |                  |   | 3.0  
|Purchase of Donaldson business                           |  |                  | 3.6   |                  |   | 3.6  
|Purchase of remaining shares in Knight Roundtable Europe |  |                  | 2.5   |                  |   | 2.5  
|Purchase of Direct Trading business                      |  |                  | 43.8  |                  |   | 43.8 
|Purchase of Hotspot business                             |  |                  | 55.7  |                  |   | 55.7 
|Purchase of Knight BondPoint business                    |  |                  | 14.2  |                  |   | 14.2 
|Purchase of EdgeTrade business                           |  |                  | 51.7  |                  |   |     
|Purchase of Knight Libertas business                     |  |                  | 47.6  |                  |   |     
|                                                         |  |                  |       |                  |   |      
|Total                                                    |  | $                | 232.2 |                  | $ | 132.8
|                                                         |  |                  |       |                  |   |      



84



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



|                          |  |                          |  |                  |       |   |                  |   |       |  
|------------------------- |  | ------------------------ |  | ---------------- | ----- | - | ---------------- | - | ----- | -
|Intangible Assets(1)      |  |                          |  | December 31,2008 |       |   | December 31,2007 |  
|Customer relationships(2) |  | Gross carrying amount    |  | $                | 84.8  |   |                  | $ | 51.9  |  
|                          |  | Accumulated amortization |  |                  | (15.4 | ) |                  |   | (9.1  | )
|                          |  |                          |  |                  |       |   |                  |   |       |  
|                          |  | Net carrying amount      |  |                  | 69.4  |   |                  |   | 42.8  |  
|                          |  |                          |  |                  |       |   |                  |   |       |  
|Trade names(3)            |  | Gross carrying amount    |  |                  | 14.5  |   |                  |   | 9.7   |  
|                          |  | Accumulated amortization |  |                  | (4.1  | ) |                  |   | (0.9  | )
|                          |  |                          |  |                  |       |   |                  |   |       |  
|                          |  | Net carrying amount      |  |                  | 10.4  |   |                  |   | 8.8   |  
|                          |  |                          |  |                  |       |   |                  |   |       |  
|Other(4)                  |  | Gross carrying amount    |  |                  | 16.1  |   |                  |   | 9.2   |  
|                          |  | Accumulated amortization |  |                  | (5.4  | ) |                  |   | (2.9  | )
|                          |  |                          |  |                  |       |   |                  |   |       |  
|                          |  | Net carrying amount      |  |                  | 10.7  |   |                  |   | 6.3   |  
|                          |  |                          |  |                  |       |   |                  |   |       |  
|Total                     |  | Gross carrying amount    |  |                  | 115.3 |   |                  |   | 70.8  |  
|                          |  | Accumulated amortization |  |                  | (24.9 | ) |                  |   | (13.0 | )
|                          |  |                          |  |                  |       |   |                  |   |       |  
|                          |  | Net carrying amount      |  | $                | 90.5  |   |                  | $ | 57.8  |  
|                          |  |                          |  |                  |       |   |                  |   |       |  



(1)  -  The weighted average remaining life of the Companys intangible assets at December 31, 2008 is approximately 12 years.

(2)  -  Customer relationships primarily relate to the Donaldson, Direct Trading, Hotspot, EdgeTrade and Knight Libertas
acquisitions. The weighted average remaining life is approximately 12 years as of December 31, 2008 and 16 years as of December 31, 2007. Lives may be reduced depending upon actual retention rates.

(3)  -  Trade names relate to the acquisitions of Donaldson, Hotspot, EdgeTrade and Knight Libertas. The weighted average
remaining life is approximately 19 years as of December 31, 2008 and 25 years as of December 31, 2007. During 2008, the Direct Trading Institutional trade name with an unamortized cost of $2.5 million was written off. During 2007, the
ValuBond Securities, Inc. trade name with unamortized cost of $110,000 was written off. See Footnote 13, Writedown of Assets and Lease Loss Accrual.

(4)  -  Other includes technology, non-compete agreements and domain name rights acquired by the Company. The weighted average
remaining life is approximately six years as of December 31, 2008 and five years as of December 31, 2007.



Totals may not add due to rounding.



9.    Long Term Debt



On October 9, 2007, the Company entered into a three-year $140.0 million credit agreement (Credit Agreement) with a consortium of banks led by
JPMorgan Chase Bank, N.A. (JPM). The Credit Agreement includes a three-year delayed-draw senior secured term loan facility of $70.0 million and a three-year senior secured revolving facility of $70.0 million. The proceeds of the credit
facilities were used to finance share repurchases, finance selective acquisitions and for general corporate purposes. These credit facilities are repayable in full by October 3, 2010. Interest on the credit facilities is paid quarterly.



During the fourth quarter of 2007, the Company borrowed $70.0 million
under the three year delayed-draw senior secured term loan facility. During the second quarter of 2008, the Company borrowed $70.0 million under the senior secured revolving facility, bringing the total amount borrowed at December 31, 2008 to
$140.0 million.



85



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Under the terms of the Credit Agreement, at the Companys option, it may choose an interest rate based on
the JPM Prime Rate or LIBOR rate. The interest and commitment fee rates vary based on changes in certain of the Companys financial covenant ratios. The interest rate can range from the JPM Prime Rate plus 0.25% to 0.50% or London Interbank
Offered Rate (LIBOR) plus 1.25% to 1.50%. The commitment fee can range from 0.30% to 0.35% on the average daily unused portion of the delayed-draw senior secured term loan facility and the senior secured revolving facility.



As of December 31, 2008 the $140.0 million loan facilities bear interest at
2.78% per annum, which is based on the three month LIBOR rate plus 1.25% and will reset at the lower of the JPM Prime Rate or LIBOR rate prevailing in March 2009. Approximately $4.8 million and $132,000 of interest expense was recorded in 2008
and 2007, respectively.



The Company was charged a commitment fee of 0.3%
on the unused portion of the credit facilities. For the years ended December 31, 2008 and 2007, the Company recorded commitment fees of approximately $0.1 million each year, which has been included in Other expenses on the Consolidated
Statements of Operations.



Under the Credit Agreement, substantially all
of the Companys material subsidiaries, other than its foreign subsidiaries, registered broker-dealer subsidiaries and subsidiaries thereof, guarantee the repayment of loans made pursuant to the credit facilities. Pursuant to the Credit
Agreement, the credit facilities have been secured by substantially all of the assets of the Company.



The Credit Agreement includes customary representations, warranties, affirmative and negative covenants (including, among others, limitations on certain payments,
investments and transactions) and events of default. It also contains financial covenants tied to the maintenance of financial ratios and metrics. As of December 31, 2008 and 2007, the Company was in compliance with all covenants of the Credit
Agreement.



10.    Direct Edge ECN



Following the close of business on July 23, 2007, Direct Edge Holdings issued
1.33 million LLC units and a warrant to purchase an additional 1.9 million LLC units for $20 million (the Warrant) to Citadel in exchange for cash of $11.7 million. On September 28, 2007 (the
Deconsolidation Date), Direct Edge Holdings issued an additional 1.9 million LLC units to Citadel in exchange for $20 million cash upon exercise of the Warrant. Immediately following the September 28, 2007 issuance to Citadel, the
Company and Citadel sold a portion of their equity interests (1.2 million units and 1.0 million units, respectively) to Goldman Sachs for $12.75 million and $10.5 million cash, respectively.



As a result of Direct Edge Holdings issuance of equity interest to Citadel, the
Company recognized, pursuant to SEC Staff Accounting Bulletin Topic 5-H, a pre-tax non-operating gain from subsidiary stock issuance of $8.8 million in the third quarter of 2007. The Company also realized a pre-tax gain of $4.2 million from the sale
of a portion of its interest in Direct Edge Holdings to The Goldman Sachs Group, Inc., which is included in Investment (loss) income and other, net for the year ended December 31, 2007. As a result of these transactions, the Company, through
one of its non-broker-dealer subsidiaries, owned 38% of the LLC units of Direct Edge Holdings following the Deconsolidation date.



86



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



On December 23, 2008, Direct Edge Holdings and the International Securities Exchange Holdings, Inc.
(ISE) completed a transaction through which the ISE Stock Exchange became a wholly owned subsidiary of Direct Edge Holdings and the ISE gained a significant equity stake in Direct Edge Holdings. In conjunction with the closing of
this transaction, the Company sold approximately 0.9 million of its 2.8 million Direct Edge Holdings units and its interest in the ISE Stock Exchange to the ISE for cash of $47.5 million and recognized a pre-tax gain, which is subject to
adjustment pending finalization of Direct Edge Holdings purchase accounting, of $51.6 million of which $35.7 million is included in Investment (loss) income and other, net and $15.9 million is reported as Non-operating gain from subsidiary
stock issuance. As a result of these transactions, the Company, through one of its non-broker-dealer subsidiaries, reduced its interest in Direct Edge Holdings from approximately 38% to 19.9%.



As Direct Edge was a subsidiary of the Company prior to the Deconsolidation Date, the
results of its operations through the Deconsolidation Date are included in the Consolidated Statements of Operations for all periods presented. The Company recorded a minority interest benefit of $337,000 which represents Citadels minority
interest share of Direct Edges pre-tax losses for the period July 24, 2007 through the Deconsolidation Date. This amount has been included within Other expenses on the Consolidated Statements of Operations for this period.



Since the Company no longer controls Direct Edge as of the Deconsolidation Date, it is
no longer a consolidated subsidiary. The Company accounts for its investment in Direct Edge under the equity method following the Deconsolidation Date, and such investment is included in Strategic investments on the December 31, 2007 and 2008
Consolidated Statements of Financial Condition.



As required by SEC
Regulation S-X, summarized financial information of Direct Edge is as follows (in millions):



|                                      |  |                                    |      
|------------------------------------- |  | ---------------------------------- | -----
|                                      |  | December 31,2008                  
|Total assets                          |  | $                                  | 197.6
|                                      |  |                                    |      
|Total liabilities                     |  | $                                  | 27.7 
|Members equity                       |  |                                    | 169.9
|                                      |  |                                    |      
|Total liabilities and Members equity |  | $                                  | 197.6
|                                      |  |                                    |      
|                                      | 
|                                      |  | For the year endedDecember 31,2008
|Total revenue                         |  | $                                  | 392.3
|Total expenses                        |  |                                    | 373.3
|                                      |  |                                    |      
|Net income                            |  | $                                  | 19.1 
|                                      |  |                                    |      



11.    Stock-Based
Compensation



The Company has established the Knight Capital Group,
Inc. 1998 Long Term Incentive Plan, the Knight Capital Group, Inc. 1998 Nonemployee Director Stock Option Plan, the Knight Capital Group, Inc. 2003 Equity Incentive Plan and the Knight Capital Group, Inc. 2006 Equity Incentive Plan (the 2006
Plan) (collectively, the Stock Plans). The purpose of the Stock Plans is to provide long-term incentive compensation to employees and directors of the Company. The Stock Plans are



87



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



administered by the Compensation Committee of the Companys Board of Directors, and allow for the grant of options, stock appreciation rights (2006 Plan only),
restricted stock and restricted stock units (collectively, the awards), as defined by the Stock Plans. The Stock Plans limit the number of awards that may be granted to a single individual as well as limit the amount of options, stock
appreciation rights (2006 Plan only) or shares of restricted stock or restricted stock units that may be awarded. As of December 31, 2008, the Company has not issued any stock appreciation rights.



Restricted Awards



Eligible employees and directors receive restricted shares and/or restricted stock units, (collectively restricted awards) as a portion
of their total compensation. The substantial majority of restricted awards generally vest ratably over three years. The Company has the right to fully vest employees and directors in their restricted stock units upon retirement and in certain other
circumstances. Restricted awards are otherwise canceled if employment is terminated before the end of the relevant vesting period.



The Company measures compensation cost related to restricted awards based on the fair value of the Companys common stock at the date of grant, which the Stock
Plans define as the average of the high and low sales price on the business day prior to the grant date. In 2008, 2007 and 2006, the Company recorded compensation expense relating to restricted awards of $31.4 million, $25.4 million and $14.0
million, respectively, the majority of which has been included in Employee compensation and benefits on the Consolidated Statements of Operations. The total income tax benefit recognized on the Consolidated Statements of Operations related to
restricted awards was $12.5 million, $10.1 million and $5.6 million in 2008, 2007 and 2006, respectively.



The following table summarizes restricted awards activity in 2008, 2007 and 2006 (awards in thousands):



|                           |  |                 |   |      |                                      |       |                 |          |   |                                      |   |                 |  |         |                                      |  |   |      
|-------------------------- |  | --------------- | - | ---- | ------------------------------------ | ----- | --------------- | -------- | - | ------------------------------------ | - | --------------- |  | ------- | ------------------------------------ |  | - | -----
|                           |  | 2008            |   | 2007 |                                      | 2006 
|                           |  | Number ofAwards |   |      | Weighted-AverageGrant dateFair Value |       | Number ofAwards |          |   | Weighted-AverageGrant dateFair Value |   | Number ofAwards |  |         | Weighted-AverageGrant dateFair Value
|Outstanding at January 1   |  | 3,648.9         |   |      | $                                    | 15.19 |                 | 2,711.1  |   |                                      | $ | 11.55           |  | 3,026.7 |                                      |  | $ | 10.31
|Granted                    |  | 2,567.8         |   |      |                                      | 16.32 |                 | 2,564.4  |   |                                      |   | 18.20           |  | 1,093.9 |                                      |  |   | 13.42
|Vested                     |  | (2,034.4        | ) |      |                                      | 13.73 |                 | (1,416.8 | ) |                                      |   | 13.86           |  | (995.7  | )                                    |  |   | 10.25
|Forfeited                  |  | (151.3          | ) |      |                                      | 14.57 |                 | (209.8   | ) |                                      |   | 14.06           |  | (413.8  | )                                    |  |   | 10.54
|                           |  |                 |   |      |                                      |       |                 |          |   |                                      |   |                 |  |         |                                      |  |   |      
|Outstanding at December 31 |  | 4,031.0         |   |      | $                                    | 16.95 |                 | 3,648.9  |   |                                      | $ | 15.19           |  | 2,711.1 |                                      |  | $ | 11.55
|                           |  |                 |   |      |                                      |       |                 |          |   |                                      |   |                 |  |         |                                      |  |   |      



The weighted-average fair value
of restricted awards granted in 2008, 2007 and 2006 was $16.32, $18.20 and $13.42, respectively. Based upon the value at date of vest, the cumulative fair value of restricted awards that vested in 2008, 2007 and 2006 was $33.5 million, $22.9 million
and $13.3 million, respectively.



There is $48.7 million of unamortized
compensation related to the unvested restricted awards outstanding at December 31, 2008. The cost of these unvested restricted shares is expected to be recognized over a weighted average life of 1.9 years.



88



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Stock Options



The Companys policy is to grant options for the purchase of shares of Class A Common Stock at not less than market value, which the Stock Plans define as
the average of the high and low sales price on the business day prior to the grant date. Options generally vest ratably over a three or four-year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the
applicable option award agreement. The Company has the right to fully vest employees in their options upon retirement and in certain other circumstances. Options are otherwise canceled if employment is terminated before the end of the relevant
vesting period. The Companys policy is to issue new shares upon share option exercises by its employees.



The fair value of each option granted is estimated as of its respective grant date using the Black-Scholes option-pricing model. Stock options granted have exercise
prices equal to the market value of the Companys common stock at the date of grant as defined by the Stock Plans. The principal assumptions utilized in valuing options and the methodology for estimating such model inputs include: 1) risk-free
interest rateestimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option; 2) expected volatilityestimate is based on several factors including implied volatility of market-traded
options on the Companys common stock on the grant date and the historical volatility of the Companys common stock; and 3) expected option lifeestimate is based on internal studies of historical experience and projected exercise
behavior based on different employee groups and specific option characteristics, including the effect of employee terminations. Based on the results of the model, the weighted-average fair value of the stock options granted in 2008, 2007 and 2006
was $5.45, $6.09 and $4.63, respectively. The weighted-average assumptions used were as follows in 2008, 2007 and 2006:



|                         |  |      |   |  |      |   |  |      |  
|------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | 2008 |   |  | 2007 |   |  | 2006 |  
|Dividend yield           |  | 0.0  | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility      |  | 40.0 | % |  | 40.0 | % |  | 40.0 | %
|Risk-free interest rate  |  | 2.6  | % |  | 4.3  | % |  | 4.7  | %
|Expected life (in years) |  | 3.5  |   |  | 3.5  |   |  | 3.5  |  



The Company recorded
compensation expense relating to options of $3.1 million, $5.7 million and $6.8 million in 2008, 2007 and 2006, respectively, all of which was recorded in Employee compensation and benefits on the Consolidated Statements of Operations. The total
income tax benefit recognized on the Consolidated Statements of Operations related to stock options was $1.3 million, $2.3 million and $2.7 million in 2008, 2007 and 2006, respectively.



89



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The following table summarizes stock option activity and stock options exercisable in 2008, 2007 and 2006
(options in thousands):



|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|--------------------------------------------- |  | --------------------- | - |  | ----------------------------- | ----- | ------------------------------------ | - | ------------------------------------- |  | ----
|2006                                          |  | Number ofStockOptions |   |  | Weighted-AverageExercisePrice |       | AggregateIntrinsicValue(in millions) |   | Weighted-AverageRemainingLife (years)
|Outstanding at January 1,                     |  | 13,283.8              |   |  | $                             | 8.26  |                                      |   |                                       |  |     
|Granted at market value                       |  | 1,161.0               |   |  |                               | 13.24 |                                      |   |                                       |  |     
|Exercised                                     |  | (4,522.9              | ) |  |                               | 5.92  |                                      |   |                                       |  |     
|Forfeited or expired                          |  | (1,092.7              | ) |  |                               | 13.80 |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Outstanding at December 31,                   |  | 8,829.2               |   |  | $                             | 9.43  |                                      | $ | 92.5                                  |  | 4.93
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Vested at December 31,                        |  | 5,404.5               |   |  | $                             | 8.61  |                                      | $ | 62.8                                  |  | 2.94
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Available for future grants at December 31, * |  | 13,967.2              |   |  |                               |       |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|                                              |  |                       |   | 
|2007                                          |  |                       |   |  |                               |       |                                      |   |                                      
|Outstanding at January 1,                     |  | 8,829.2               |   |  | $                             | 9.43  |                                      |   |                                       |  |     
|Granted at market value                       |  | 609.8                 |   |  |                               | 17.39 |                                      |   |                                       |  |     
|Exercised                                     |  | (3,487.3              | ) |  |                               | 6.05  |                                      |   |                                       |  |     
|Forfeited or expired                          |  | (236.1                | ) |  |                               | 13.82 |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Outstanding at December 31,                   |  | 5,715.7               |   |  | $                             | 12.16 |                                      | $ | 21.0                                  |  | 6.28
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Vested at December 31,                        |  | 3,355.5               |   |  | $                             | 12.11 |                                      | $ | 19.7                                  |  | 6.17
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Available for future grants at December 31, * |  | 11,672.1              |   |  |                               |       |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|                                              |  |                       |   | 
|2008                                          |  |                       |   |  |                               |       |                                      |   |                                      
|Outstanding at January 1,                     |  | 5,715.7               |   |  | $                             | 12.16 |                                      |   |                                       |  |     
|Granted at market value                       |  | 312.5                 |   |  |                               | 16.88 |                                      |   |                                       |  |     
|Exercised                                     |  | (1,186.8              | ) |  |                               | 8.82  |                                      |   |                                       |  |     
|Forfeited or expired                          |  | (93.1                 | ) |  |                               | 11.16 |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Outstanding at December 31,                   |  | 4,748.3               |   |  | $                             | 13.32 |                                      | $ | 19.2                                  |  | 5.93
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Vested at December 31,                        |  | 3,697.1               |   |  | $                             | 12.60 |                                      | $ | 18.0                                  |  | 5.51
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     
|Available for future grants at December 31, * |  | 9,838.2               |   |  |                               |       |                                      |   |                                       |  |     
|                                              |  |                       |   |  |                               |       |                                      |   |                                       |  |     



*  -  represents both options and awards available for grant



|                         |  |                        |  |                                          |  |                               |       |                              |       |                               |   |      
|------------------------ |  | ---------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ---------------------------- | ----- | ----------------------------- | - | -----
|                         |  | Options Outstanding    |  | Options Exercisable                     
|Range of Exercise Prices |  | Outstandingat 12/31/08 |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercisePrice |       | NumberExercisableat 12/31/08 |       | Weighted-AverageExercisePrice
|$  4.57-$9.52            |  | 839.3                  |  | 6.18                                     |  | $                             | 8.16  |                              | 839.3 |                               | $ | 8.16 
|$  9.81-$9.90            |  | 910.0                  |  | 4.57                                     |  |                               | 9.86  |                              | 793.3 |                               |   | 9.86 
|$10.24-$10.30            |  | 813.2                  |  | 5.86                                     |  |                               | 10.24 |                              | 813.2 |                               |   | 10.24
|$10.30-$16.32            |  | 869.5                  |  | 6.60                                     |  |                               | 13.37 |                              | 626.8 |                               |   | 13.11
|$16.43-$17.97            |  | 1,004.8                |  | 7.99                                     |  |                               | 17.42 |                              | 344.6 |                               |   | 17.42
|$18.91-$71.38            |  | 311.5                  |  | 0.92                                     |  |                               | 32.04 |                              | 279.8 |                               |   | 33.51



90



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The aggregate intrinsic value is the amount by which the closing price of the Companys common stock
exceeds the exercise price of the stock options multiplied by the number of shares. The total intrinsic value of options exercised in 2008, 2007 and 2006 was $9.8 million, $37.9 million and $46.1 million, respectively. Cash received from the
exercise of stock options in 2008 totaled $10.4 million.



There is $3.1
million of unrecognized compensation related to the unvested stock options outstanding at December 31, 2008. The cost of these unvested awards is expected to be recognized over a weighted average life of 1.3 years.



12.    Employee Benefit Plan



The Company sponsors a 401(k) profit sharing plan (the Plan) in which
substantially all of its employees are eligible to participate. Under the terms of the Plan, the Company is required to make annual contributions to the Plan equal to 100% of the contributions made by its employees, up to annual limits. The total
expense, from continuing operations, recognized with respect to the Plan and included in Employee compensation and benefits on the Consolidated Statements of Operations, was as follows (in millions):



|                                     |  |   |    
|------------------------------------ |  | - | ---
|For the year ended December 31, 2008 |  | $ | 4.9
|For the year ended December 31, 2007 |  |   | 4.4
|For the year ended December 31, 2006 |  |   | 4.1



13.    Writedown of
Assets and Lease Loss Accrual



The Writedown of assets and lease
loss accrual, net during 2008, 2007 and 2006 was $1.2 million, ($2.5 million), and $8.5 million, respectively. The charge in 2008 was primarily related to the Companys decision to discontinue the use of the Direct Trading Institutional trade
name, offset by a benefit related to an adjustment of a previously recognized lease loss with respect to the Companys 545 Washington Boulevard property in Jersey City, N.J.



The benefit in 2007 was primarily related to an adjustment of previously recognized lease losses with respect to the Companys
545 Washington Boulevard property in Jersey City, N.J. During 2007, the Company entered into two sub-lease agreements for a portion of the premises for which it had previously recorded a lease loss accrual. The lease loss accrual was adjusted based
on the difference between the actual terms of the sub-leases and the assumptions previously used in the calculation of the lease loss accrual.



The charges in 2006 primarily related to costs associated with excess real estate capacity at the Companys 545 Washington Boulevard facility in Jersey City,
N.J.



14.    Discontinued Operations and Regulatory Charges and
Related Matters



The Company completed the sale of its Derivative
Markets business to Citigroup in December 2004. In accordance with SFAS 144, the results of the Derivative Markets operating segment, the revenues and expenses associated with these businesses as well as all costs associated with the sale
transaction have been included in Loss from discontinued operations, net of tax on the Consolidated Statements of Operations for all periods presented.



In 2006, the Company received a request from the staff of the SEC for voluntary production of certain documentation related to options activities of its former
Derivative Markets operating segment



91



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



which, prior to its sale by the Company in December 2004, was primarily operated through Knight Financial Products LLC. The Company believes this request is part of a
broader review by the staff of the SEC regarding certain trading practices in the options industry during the period from 1999 to 2005. The Company responded to this request and is cooperating with the staff of the SEC and certain regional exchanges
to resolve this matter. During 2007, the Company recorded a pre-tax charge of $2.1 million ($1.4 million, net of tax) relating to this matter. The charge of $1.4 million has been reported in Loss from discontinued operations, net of tax on the
Consolidated Statements of Operations. There were no further updates on this matter in 2008.



15.    Income Taxes



The Company and
its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In other jurisdictions, the Company and its subsidiaries file separate company income tax returns.



The provision for income taxes from continuing operations consists of (in millions):



|                           |  |      |       |      |   |       |      |  |   |       |  
|-------------------------- |  | ---- | ----- | ---- | - | ----- | ---- |  | - | ----- | -
|                           |  | 2008 |       | 2007 |   |       | 2006 | 
|Current:                   |  |      |       |      |   |       |      |  |   |       |  
|U.S. federal               |  | $    | 94.8  |      | $ | 73.4  |      |  | $ | 106.6 |  
|U.S. state and local       |  |      | 25.3  |      |   | 13.1  |      |  |   | 7.9   |  
|Non U.S.                   |  |      | 3.2   |      |   | 4.4   |      |  |   | 7.4   |  
|                           |  |      |       |      |   |       |      |  |   |       |  
|                           |  |      | 123.3 |      |   | 90.9  |      |  |   | 121.9 |  
|                           |  |      |       |      |   |       |      |  |   |       |  
|Deferred:                  |  |      |       |      |   |       |      |  |   |       |  
|U.S. federal               |  |      | 4.4   |      |   | (12.5 | )    |  |   | (27.0 | )
|U.S. state and local       |  |      | 2.5   |      |   | (0.7  | )    |  |   | 3.2   |  
|Non U.S.                   |  |      | 0.0   |      |   | (0.1  | )    |  |   | 0.1   |  
|                           |  |      |       |      |   |       |      |  |   |       |  
|                           |  |      | 6.9   |      |   | (13.3 | )    |  |   | (23.7 | )
|                           |  |      |       |      |   |       |      |  |   |       |  
|Provision for income taxes |  | $    | 130.2 |      | $ | 77.6  |      |  | $ | 98.2  |  
|                           |  |      |       |      |   |       |      |  |   |       |  



The preceding table does not
reflect the tax effects of unrealized gains on available for sale securities, which was recorded directly in Stockholders equity. Stockholders equity decreased by $7.1 million in 2005, as a result of the tax effects of unrealized gains
on available for sale securities and increased by $7.1 million in 2006 as such securities were sold. These tax effects are reported in the Consolidated Statements of Changes in Stockholders Equity as a component of Accumulated other
comprehensive income, net of tax.



The following table reconciles income
tax expense from continuing operations at the U.S. federal statutory rate to the Companys Income tax expense (in millions):



|                                                                                         |  |      |       |   |      |   |      |      |  |   |     
|---------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ----
|                                                                                         |  | 2008 |       |   | 2007 |   |      | 2006
|U.S. federal income tax expense at statutory rate                                        |  | $    | 110.0 |   |      | $ | 70.4 |      |  | $ | 89.8
|U.S. state and local income tax expense (benefit), net of U.S. federal income tax effect |  |      | 18.1  |   |      |   | 8.1  |      |  |   | 7.2 
|Non U.S.                                                                                 |  |      | 1.0   |   |      |   | 0.6  |      |  |   |    
|Nondeductible charges                                                                    |  |      | 3.3   |   |      |   | 0.6  |      |  |   | 0.5 
|Other, net                                                                               |  |      | (2.2  | ) |      |   | (2.1 | )    |  |   | 0.7 
|                                                                                         |  |      |       |   |      |   |      |      |  |   |     
|Income tax expense                                                                       |  | $    | 130.2 |   |      | $ | 77.6 |      |  | $ | 98.2
|                                                                                         |  |      |       |   |      |   |      |      |  |   |     



92



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Companys deferred tax assets and liabilities at
December 31, 2008 and 2007 are as follows (in millions):



|                                                              |  |      |       |   |      |   |       |  
|------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                              |  | 2008 |       |   | 2007 |  
|Deferred tax assets:                                          |  |      |       |   |      |   |       |  
|Employee compensation and benefit plans                       |  | $    | 45.6  |   |      | $ | 48.0  |  
|Fixed assets and other amortizable assets                     |  |      | 3.5   |   |      |   | 3.0   |  
|Reserves                                                      |  |      | 6.1   |   |      |   | 10.3  |  
|Valuation of investments                                      |  |      | 5.5   |   |      |   | 1.8   |  
|Net operating loss carryforwards                              |  |      | 41.3  |   |      |   | 40.7  |  
|Less: Valuation allowance on net operating loss carryforwards |  |      | (41.3 | ) |      |   | (40.1 | )
|                                                              |  |      |       |   |      |   |       |  
|Total Deferred tax assets                                     |  |      | 60.7  |   |      |   | 63.7  |  
|                                                              |  |      |       |   |      |   |       |  
|Deferred tax liabilities                                      |  |      |       |   |      |   |       |  
|Fixed assets and other amortizable assets                     |  |      | 19.2  |   |      |   | 14.0  |  
|Valuation of investments                                      |  |      | 8.3   |   |      |   | 2.7   |  
|                                                              |  |      |       |   |      |   |       |  
|Total deferred tax liabilities                                |  |      | 27.5  |   |      |   | 16.7  |  
|                                                              |  |      |       |   |      |   |       |  
|Net deferred tax assets                                       |  | $    | 33.2  |   |      | $ | 47.0  |  
|                                                              |  |      |       |   |      |   |       |  



At December 31, 2008, the
Company had U.S. federal net operating loss carryforwards, resulting from acquisitions, of $35.0 million. The Company recorded a related deferred tax asset of $12.3 million as of December 31, 2008, and an offsetting valuation allowance as
these net operating loss carryforwards are considered more likely than not to expire unutilized. These carryforwards are subject to annual limitations on utilization and will begin to expire in 2019.



At December 31, 2008, the Company had state net operating loss carryforwards of
$97.8 million of which $33.5 million resulted from acquisitions. The Company recorded a related deferred tax asset of $5.6 million as of December 31, 2008, and an offsetting valuation allowance as these net operating loss carryforwards are
considered more likely than not to expire unutilized. Certain of these carryforwards are subject to annual limitations on utilization and will begin to expire in 2011.



At December 31, 2008, the Company had U.K. net operating loss carryforwards of $78.0 million. The Company recorded a related deferred tax
asset of $23.4 million as of December 31, 2008, and an offsetting valuation allowance as these net operating loss carryforwards are considered more likely than not to remain unutilized. These net operating losses may be carried forward
indefinitely.



Effective January 1, 2007, the Company adopted FIN
48. The Company recognized no material adjustment in the liability for unrecognized income tax benefits as a result of the implementation of FIN 48. At the adoption date of January 1, 2007 and at December 13, 2008, the Company had $0.9
million of unrecognized tax benefits, all of which would impact the Companys effective tax rate if recognized.



As of December 31, 2008, the Company is subject to U.S. federal income tax examinations for the tax years 2005 and 2007, and to non-U.S. income tax
examinations for the tax years 2002 through 2007. In addition, the Company is subject to state and local income tax examinations in various



93



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



jurisdictions for the tax years 2000 through 2007. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments
to the unrecognized tax benefits, if any, will not result in a material change to the results of operations or financial condition.



The Companys policy for recording interest and penalties associated with audits is to record such items as a component of Income from continuing operations
before income taxes and minority interest. Penalties are recorded in Other expenses, interest paid is recorded as Interest expense and interest received is recorded in Interest, net on the Consolidated Statements of Operations.



16.    Earnings per Share



Basic earnings per common share (EPS) has been calculated by dividing net
income by the weighted average shares of Class A Common Stock outstanding during each respective period. Diluted EPS reflects the potential reduction in EPS using the treasury stock method to reflect the impact of common stock equivalents if
stock options were exercised and restricted stock awards were to vest.



The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for 2008, 2007 and 2006 (in millions, except per share data):



|                                               |  |                                  |       |                     |   |                      |  |                    |       |                      |   |                    |  |   |       |  |   |      
|---------------------------------------------- |  | -------------------------------- | ----- | ------------------- | - | -------------------- |  | ------------------ | ----- | -------------------- | - | ------------------ |  | - | ----- |  | - | -----
|                                               |  | For the years ended December 31,
|                                               |  | 2008                             |       | 2007                |   | 2006                
|                                               |  | Numerator/net income             |       | Denominator/ shares |   | Numerator/net income |  | Denominator/shares |       | Numerator/net income |   | Denominator/shares
|Income and shares used in basic calculations   |  | $                                | 177.9 |                     |   | 88.4                 |  | $                  | 122.2 |                      |   | 97.1               |  | $ | 158.3 |  |   | 101.4
|Effect of dilutive stock based awards          |  |                                  |      |                     |   | 3.4                  |  |                    |      |                      |   | 3.7                |  |   |      |  |   | 4.8  
|                                               |  |                                  |       |                     |   |                      |  |                    |       |                      |   |                    |  |   |       |  |   |      
|Income and shares used in diluted calculations |  | $                                | 177.9 |                     |   | 91.8                 |  | $                  | 122.2 |                      |   | 100.8              |  | $ | 158.3 |  |   | 106.2
|                                               |  |                                  |       |                     |   |                      |  |                    |       |                      |   |                    |  |   |       |  |   |      
|Basic earnings per share                       |  |                                  |       |                     | $ | 2.01                 |  |                    |       |                      | $ | 1.26               |  |   |       |  | $ | 1.56 
|                                               |  |                                  |       |                     |   |                      |  |                    |       |                      |   |                    |  |   |       |  |   |      
|Diluted earnings per share                     |  |                                  |       |                     | $ | 1.94                 |  |                    |       |                      | $ | 1.21               |  |   |       |  | $ | 1.49 
|                                               |  |                                  |       |                     |   |                      |  |                    |       |                      |   |                    |  |   |       |  |   |      



The above calculations exclude
options that could potentially dilute EPS in the future but were antidilutive for the periods presented. The number of such options excluded was approximately 1.4 million, 1.1 million and 0.5 million in 2008, 2007 and 2006,
respectively.



94



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



17.    Comprehensive Income



Comprehensive income includes net income and changes in equity except those resulting from investments by, or distributions to,
stockholders. Comprehensive income is as follows (in millions):



|                                                                                  |  |                                  |       |      |   |       |  |   |       |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ----- |  | - | ----- | -
|                                                                                  |  | For the years ended December 31, |      
|                                                                                  |  | 2008                             |       | 2007 |   | 2006  | 
|Net income                                                                        |  | $                                | 177.9 |      | $ | 122.2 |  | $ | 158.3 |  
|Other comprehensive income, net of tax:                                           |  |                                  |       |      |   |       |  |   |       |  
|Realization of gains on sales of investment securities held as available-for-sale |  |                                  |      |      |   |      |  |   | (10.3 | )
|                                                                                  |  |                                  |       |      |   |       |  |   |       |  
|Total comprehensive income, net of tax                                            |  | $                                | 177.9 |      | $ | 122.2 |  | $ | 148.0 |  
|                                                                                  |  |                                  |       |      |   |       |  |   |       |  



Other comprehensive income, net
of tax, represents net unrealized gains on the Companys strategic investment in the ISE at December 31, 2005 and the subsequent realization of such gains in 2006.



18.    Significant Clients and Investors



The Company considers significant clients to be those clients who account for 10% or more of the total U.S. equity dollar value traded by the Company
during the period. No client accounted for more than 10% of the total U.S. equity dollar value traded during 2008 and 2007. One client accounted for approximately 10.9% of the Companys U.S. equity dollar value traded during 2006.



The Company considers significant investors to be those investors who account for
10% or more of assets under management in the Deephaven Funds. Two investors each accounted for more than 10% of the Deephaven Funds asset under management as of December 31, 2008. One investor accounted for more than 10% of the Deephaven
Funds asset under management as of December 31, 2007.



19.    Deephaven Transaction



In
2003, the Company entered into long-term employment contracts with certain senior managers of Deephaven. In December 2006, the Company entered into new long-term employment agreements (the 2006 Employment Agreements) with three senior
managers of Deephaven (the Deephaven Managers), two of whom were parties to the agreements entered into in 2003. The 2006 Employment Agreements, which became effective on January 1, 2007, were for three-year terms and included a
right of renewal by the Deephaven Managers through 2012 under certain circumstances. The 2006 Employment Agreements provided profit-sharing bonuses based on the financial performance of Deephaven. According to the terms of the 2006 Employment
Agreements, the Deephaven Managers were entitled to receive 50% of the first $60 million, and 75% thereafter, of pre-tax earnings prior to the profit-sharing bonuses, subject to certain guaranteed minimums. Upon entering the 2006 Employment
Agreements, the Deephaven Managers also received one million shares of Knight restricted common stock, which vest ratably over three years.



Effective January 1, 2007, the Deephaven Managers were also granted an option (the Option), exercisable after January 1, 2008 and until
December 31, 2012, and conditioned on meeting certain requirements, to obtain a 49% interest in Deephaven Holdings, to which the Companys interests in Deephaven would be contributed in exchange for the termination of their new employment
agreements and associated profit-sharing bonuses. The agreement also provided that in the event of a change of



95



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



control of the Company prior to December 31, 2012, the Deephaven Managers would have the option (the Change of Control Option), in exchange for the
termination of their 2006 Employment Agreements and associated profit-sharing bonuses, to obtain a 51% interest in Deephaven Holdings or, if the Option had already been exercised, to increase their 49% interest resulting from the exercise of the
Option by an additional 2%. Following any exercise of the Option or Change of Control Option by the Deephaven Managers, pre-tax earnings prior to profit sharing would be allocated between Knight and the Deephaven Managers in the same manner as under
the 2006 Employment Agreements.



Exercise of Option by Deephaven
Managers



On January 10, 2008, Deephaven Managing Partners, LLC
(Deephaven Partners), an entity owned and controlled by the Deephaven Managers, provided notice to the Company that it was exercising the Option.



On February 1, 2008, after regulatory and contractual approvals were received, the Company completed the transaction whereby the Company contributed its
interest in Deephaven to Deephaven Holdings, and Deephaven Partners acquired a 49% interest in Deephaven Holdings in exchange for the termination of the Deephaven Managers 2006 Employment Agreements and associated profit sharing bonuses and an
equity contribution of $1 million to Deephaven Holdings by Deephaven Partners (the Deephaven Transaction). The Deephaven Transaction did not affect or result in any change to Deephavens role as investment manager to the funds it
managed, or to the manner in which Deephaven carried out its duties as investment manager to those funds.



As part of the Deephaven Transaction, the Company and Deephaven Partners entered into a new Limited Liability Company Agreement (the New LLC Agreement)
for Deephaven Holdings. In addition, the 2006 Employment Agreements terminated and were replaced by new long-term employment agreements between Deephaven Holdings and each of the Deephaven Managers (the New Employment Agreements). The
New Employment Agreements do not include the profit-sharing bonuses provided under the 2006 Employment Agreements; however, the Deephaven Managers continue to be entitled to participate in certain profit pools relating to specific Deephaven funds.
Following the Deephaven Transaction, pre-tax earnings are allocated between the Company and, through Deephaven Partners, the Deephaven Managers in a similar manner as under the 2006 Employment Agreements. Profit-sharing bonuses under the 2006
Employment Agreements had been reported in Employee compensation and benefits on the Companys Consolidated Statements of Operations. As a result of the Deephaven Transaction, beginning in February 2008, profits or losses allocated to the
Deephaven Managers are instead reported as Minority interest expense on the Companys Consolidated Statements of Operations and included as Minority interest on the Companys Consolidated Statements of Financial Condition. Minority
interest expense of $6.2 million in 2008 represents the accrual for the one-time 2008 minimum distribution to the Deephaven Managers pursuant to the New LLC Agreement.



Under the New LLC Agreement, the Company owns 51% of the shares in Deephaven Holdings, and Deephaven Partners owns 49% of the shares. The Company is
entitled to appoint a majority of the Board of Managers of Deephaven Holdings. Certain corporate actions require approval of a super-majority of members of the Board of Managers, including representatives of both Deephaven Partners and
the Company. Neither party is permitted to transfer any of its interests in Deephaven Holdings to any unaffiliated third person without the consent of the other party. Any sale of Deephaven Holdings requires either (x) the consent of the
holders of 75% of the shares or (y) if the aggregate consideration is in excess of $450 million, the approval of only Deephaven Partners (subject to a right of first refusal



96



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



for the benefit of the Company). Pursuant to the New LLC Agreement, proceeds from any sale or liquidation of Deephaven or Deephaven Holdings will be allocated among
the Company and Deephaven Partners based upon a formula that takes into account their capital accounts at the time of such sale or liquidation and relative profit sharing percentages over a defined period of time.



See Footnote 20 Commitments and Contingent Liabilities for a discussion of
the closing of the Deephaven Event Fund. Also, see Footnote 25 Subsequent Events for discussion of the Companys plan to exit from the Asset Management business.



20.    Commitments and Contingent Liabilities



In the ordinary course of business, the nature of the Companys business subjects it to claims, lawsuits, regulatory examinations
and other proceedings. The Company is subject to several of these matters at the present time. The results of these matters cannot be predicted with certainty, and the Company cannot estimate a possible range of loss for these matters at this time.
There can be no assurance that these matters will not have a material adverse effect on the Companys results of operations in any future period and a material judgment could have a material adverse impact on the Companys financial
condition and results of operations. However, it is the opinion of management, after consultation with legal counsel that, based on information currently available, the ultimate outcome of these matters will not have a material adverse impact on the
business, financial condition or operating results of the Company although they might be material to the operating results for any particular period, depending, in part, upon operating results for that period.



As described in Footnote 2 Significant Accounting Policies, if a Deephaven
fund which has a six-month performance period incurs losses in the performance period ended December 31, the Company may make the determination, at its sole discretion, to return all or a portion of incentive allocation fees collected for the
prior six-month performance period ending June 30 of that year.



Based upon market conditions and industry practice, in August 2007, the Company, at its sole discretion, made the determination that if a Deephaven fund with a six-month performance period incurred losses in the performance period ending
December 31, 2007, Deephaven would return all or a portion of the incentive allocation fees collected from investors in that fund for the six-month performance period ended June 30, 2007. Of the $68.4 million of incentive allocation fees
recorded for the six-month period ended June 30, 2007, Deephaven repaid approximately $19.0 million in the fourth quarter of 2007.



The Company leases office space under noncancelable operating leases. Certain office leases contain fixed dollar-based escalation clauses. Rental expense from
continuing operations under the office leases was $11.9 million, $9.1 million and $8.6 million in 2008, 2007 and 2006, respectively, and is included in Occupancy and equipment rentals on the Consolidated Statements of Operations. The Company has
sublet a portion of its excess office space to third parties.



97



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The Company leases certain computer and other equipment under noncancelable operating leases and has entered
into guaranteed employment contracts with certain of its employees. As of December 31, 2008, future minimum rental commitments under all noncancelable office, computer and equipment leases (Gross Lease Obligations), Sublease Income
and guaranteed employment contracts longer than one year (Other Obligations) were as follows (in millions):



Lease & Contract Obligations



|                                    |  |                        |       |                |   |                      |  |                  |       |  |   |     
|----------------------------------- |  | ---------------------- | ----- | -------------- | - | -------------------- |  | ---------------- | ----- |  | - | ----
|                                    |  | Gross LeaseObligations |       | SubleaseIncome |   | Net LeaseObligations |  | OtherObligations
|Year ending December 31, 2009       |  |                        | 16.8  |                |   | 1.0                  |  |                  | 15.8  |  |   | 6.3 
|Year ending December 31, 2010       |  |                        | 17.1  |                |   | 0.9                  |  |                  | 16.1  |  |   | 2.9 
|Year ending December 31, 2011       |  |                        | 17.4  |                |   | 0.9                  |  |                  | 16.4  |  |   | 0.8 
|Year ending December 31, 2012       |  |                        | 17.4  |                |   | 1.0                  |  |                  | 16.4  |  |   | 0.8 
|Year ending December 31, 2013       |  |                        | 15.6  |                |   | 1.1                  |  |                  | 14.6  |  |   |    
|Thereafter through October 31, 2021 |  |                        | 102.8 |                |   | 4.9                  |  |                  | 97.9  |  |   |    
|                                    |  |                        |       |                |   |                      |  |                  |       |  |   |     
|                                    |  | $                      | 187.1 |                | $ | 9.9                  |  | $                | 177.2 |  | $ | 10.6
|                                    |  |                        |       |                |   |                      |  |                  |       |  |   |     



During the normal course of
business, the Company collateralizes certain leases or other contractual obligations through letters of credit or segregated funds held in escrow accounts. As of December 31, 2008, the Company has provided a letter of credit for $4.1 million,
collateralized by U.S. Treasury Bills, as a guarantee for one of the Companys lease obligations.



Closing of Deephaven Event Fund



On
January 31, 2008, Deephaven announced that it had concluded that it is in the best interests of investors in the Deephaven Event Fund LLC and the Deephaven Event Fund Ltd. (collectively, the Event Fund) that the Event Fund return
investors capital. As a result, redemptions in the Event Fund were suspended with immediate effect and Deephaven began an orderly process to reduce trading positions to cash and return investors capital as promptly as reasonably
practicable. As of February 1, 2008, and through the period of time Deephaven is returning investors capital, no management or incentive allocation fee will be charged to investors in the Event Fund.



21.    Net Capital Requirements



The Companys U.S. registered broker-dealers are subject to the SECs
Uniform Net Capital Rule, which requires the maintenance of minimum net capital. As of December 31, 2008, all of the Companys broker-dealer subsidiaries were in compliance with their capital adequacy requirements. The following table sets
forth the net capital levels and requirements for the following significant U.S. registered broker-dealer subsidiaries at December 31, 2008 as filed in their respective regulatory filings (in millions):



|                |  |             |       |                        |   |                   |  |      
|--------------- |  | ----------- | ----- | ---------------------- | - | ----------------- |  | -----
|Entity          |  | Net Capital |       | Net CapitalRequirement |   | Excess NetCapital
|KEM             |  | $           | 125.5 |                        | $ | 9.5               |  | 115.9
|KCM             |  |             | 157.2 |                        |   | 1.2               |  | 155.9
|Knight Direct   |  |             | 20.6  |                        |   | 0.9               |  | 19.6 
|Knight Libertas |  |             | 7.9   |                        |   | 0.7               |  | 7.2  



98



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



In addition, the Companys foreign registered broker-dealers are subject to certain financial resource
requirements of the FSA and SFC. The following table sets forth the financial resource requirement for the following significant foreign regulated broker-dealer at December 31, 2008 (in millions):



|       |  |                    |      |                     |   |                          |  |   |     
|------ |  | ------------------ | ---- | ------------------- | - | ------------------------ |  | - | ----
|Entity |  | FinancialResources |      | ResourceRequirement |   | ExcessFinancialResources
|KEMIL  |  | $                  | 34.7 |                     | $ | 13.7                     |  | $ | 21.0



22.    Financial
Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk



As a market-maker of equities, the majority of the Companys securities transactions are conducted as principal or riskless principal with broker-dealer and institutional counterparties primarily located in the United States. The
Company clears the majority of its securities transactions through clearing brokers. Foreign transactions are settled pursuant to a global custody and clearing agreement with a major U.S. bank. Substantially all of the Companys credit
exposures are concentrated with its clearing brokers and the bank (the clearing agents). These clearing agents may re-hypothecate certain securities held on behalf of the Company. Additionally, pursuant to the terms of the agreements
between the Company and the clearing agents, the clearing agents have the right to charge the Company for all losses that result from a counterpartys failure to fulfill its contractual obligations. The Company has the ability to pursue
collection from or performance with regard to this right. The Companys policy is to monitor the credit standing of the clearing agents and all counterparties with which it conducts business.



In the normal course of its operations, the Company enters into contracts that contain
a variety of representations and warranties which provide general indemnifications. The Companys maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet
occurred. However, based on experience, the Company believes the risk of loss is minimal.



Securities sold, not yet purchased represent obligations to purchase such securities (or underlying securities) at a future date. The Company may incur a loss if the market value of the securities subsequently increases.



During the normal course of business, the Company may enter into certain
futures contracts. These financial instruments are subject to varying degrees of risks whereby the fair value of the securities underlying the financial instruments, may be in excess of, or less than, the contract amount. The Company is obligated to
post collateral against certain futures contracts. As of December 31, 2008, the Company was a party to futures contracts having a notional value of $51.1 million and a fair value of $124,000, which is recorded in Receivable from brokers and
dealers on the Consolidated Statements of Financial Condition, net of cash collateral, with realized and unrealized gains and losses recognized in Net trading revenue on the Consolidated Statements of Operations.



The Company currently has no loans outstanding to any former or current executive
officer or director.



99



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



23.    Acquisitions



EdgeTrade



On January 14, 2008, the Company completed the acquisition of EdgeTrade for $58.2 million comprised of $28.2 million in cash and approximately 2.3 million
shares of unregistered Knight common stock valued at $30.0 million. Goodwill and intangible assets recognized upon the closing of the transaction amounted to $69.0 million. None of the goodwill is expected to be deductible for tax purposes.



In August 2008, the business of EdgeTrade, an agency-only trade
execution and algorithmic software firm that allows buy- and sell-side clients to more effectively source liquidity and manage the trading process as well as maintain anonymity, reduce market impact and lower transaction costs, merged into Knight
Direct. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in millions):



|                                       |  |   |       |  
|-------------------------------------- |  | - | ----- | -
|Agreed purchase price                  |  | $ | 59.5  |  
|Adjustment for working capital         |  |   | (2.0  | )
|                                       |  |   |       |  
|Adjusted purchase price                |  |   | 57.5  |  
|Acquisition costs                      |  |   | 0.7   |  
|                                       |  |   |       |  
|Purchase of business                   |  | $ | 58.2  |  
|                                       |  |   |       |  
|                                       | 
|Cash                                   |  | $ | 1.0   |  
|Goodwill                               |  |   | 51.7  |  
|Intangible assets                      |  |   | 17.3  |  
|Other assets                           |  |   | 3.9   |  
|Accrued expenses and other liabilities |  |   | (15.7 | )
|                                       |  |   |       |  
|Purchase of business                   |  | $ | 58.2  |  
|                                       |  |   |       |  



Knight Libertas



On July 11, 2008, the Company acquired Libertas Holdings LLC
and its subsidiaries, a boutique institutional fixed income brokerage firm, for $50.3 million in cash and approximately 1.5 million shares of unregistered Knight common stock valued at $25.0 million. The terms of the agreement include a
potential earn-out of up to $75.0 million of unregistered Knight common stock based on the future performance of Knight Libertas during the three-year period following the closing of the transaction. Goodwill and intangible assets recognized upon
the closing of the transaction amounted to $73.8 million. The majority of goodwill is expected to be deductible for tax purposes.



100



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Knight Libertas is a riskless principal fixed income broker-dealer specializing in high-yield and high-grade
corporate bonds, distressed debt, asset- and mortgage-backed securities, convertible bonds and syndicated loans. Knight Libertas provides clients with proprietary research reports on companies and target sectors. Upon acquisition, Libertas Holdings
LLC was renamed Knight Libertas Holdings LLC and its U.S. broker-dealer subsidiary was renamed Knight Libertas LLC (together with its affiliates, Knight Libertas). The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed (in millions):



|                                       |  |   |      |  
|-------------------------------------- |  | - | ---- | -
|Agreed purchase price                  |  | $ | 75.2 |  
|Adjustment for working capital         |  |   | (0.7 | )
|                                       |  |   |      |  
|Adjusted purchase price                |  |   | 74.5 |  
|Acquisition costs                      |  |   | 0.8  |  
|                                       |  |   |      |  
|Purchase of business                   |  | $ | 75.3 |  
|                                       |  |   |      |  
|                                       | 
|Cash                                   |  | $ | 1.3  |  
|Goodwill                               |  |   | 47.6 |  
|Intangible assets                      |  |   | 26.2 |  
|Other assets                           |  |   | 5.5  |  
|Accrued expenses and other liabilities |  |   | (5.3 | )
|                                       |  |   |      |  
|Purchase of business                   |  | $ | 75.3 |  
|                                       |  |   |      |  



24.    Business Segments



The Company currently has three operating segments, Global Markets,
Asset Management and Corporate. The Global Markets segment provides market access and trade execution services in nearly every U.S. equity security and a large number of international securities, fixed income, foreign exchange, futures and options.
The Asset Management segment consists of the Companys 51% ownership interest in Deephaven Holdings, which owns Deephaven, the investment manager and sponsor of the Deephaven Funds. The Corporate segment includes all corporate investment income
earned on strategic investments, the Companys corporate investment as a limited partner or non-managing member in the Deephaven Funds and corporate overhead expenses. Corporate overhead expenses primarily consist of compensation for certain
senior executives and other individuals employed at the corporate holding company, legal and other professional expenses relating to corporate matters, directors fees, investor and public relations expenses and directors and
officers insurance.



101



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



The Companys revenues, income (loss) from continuing operations before income taxes and minority interest
(Pre-tax earnings) and total assets by segment are summarized below (in millions):



|                                      |  |               |         |                 |   |       |           |  |   |                   |   |  |   |        
|------------------------------------- |  | ------------- | ------- | --------------- | - | ----- | --------- |  | - | ----------------- | - |  | - | -------
|                                      |  | GlobalMarkets |         | AssetManagement |   |       | Corporate |  |   | ConsolidatedTotal
|For the year ended December 31, 2008: |  |               |         |                 |   |       |           |  |   |                   |   |  |   |        
|Revenues                              |  | $             | 998.5   |                 | $ | 33.3  |           |  | $ | 1.1               |   |  | $ | 1,032.9
|Pre-tax earnings(1)                   |  |               | 357.5   |                 |   | (19.4 | )         |  |   | (23.8             | ) |  |   | 314.3  
|Total assets                          |  |               | 1,867.9 |                 |   | 73.6  |           |  |   | 73.1              |   |  |   | 2,014.6
|For the year ended December 31, 2007: |  |               |         |                 |   |       |           |  |   |                   |   |  |   |        
|Revenues                              |  | $             | 739.9   |                 | $ | 118.2 |           |  | $ | 27.1              |   |  | $ | 885.2  
|Pre-tax earnings                      |  |               | 180.4   |                 |   | 16.5  |           |  |   | 4.3               |   |  |   | 201.2  
|Total assets                          |  |               | 1,435.6 |                 |   | 170.8 |           |  |   | 149.5             |   |  |   | 1,755.8
|For the year ended December 31, 2006: |  |               |         |                 |   |       |           |  |   |                   |   |  |   |        
|Revenues                              |  | $             | 657.6   |                 | $ | 214.9 |           |  | $ | 66.9              |   |  | $ | 939.5  
|Pre-tax earnings                      |  |               | 150.3   |                 |   | 74.8  |           |  |   | 31.4              |   |  |   | 256.5  
|Total assets                          |  |               | 1,672.8 |                 |   | 199.1 |           |  |   | 156.3             |   |  |   | 2,028.2



Totals may
not add due to roundings.



|(1) |  | Asset Management excludes $6.2 million in Minority interest expense relating to the one-time minimum distribution for the year ended December 31, 2008.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



25.    Subsequent Events



Deephaven Asset Sale



As disclosed in a Form 8-K furnished by the Company on January 27, 2009,
Deephaven announced that it entered into an Asset Purchase Agreement (Purchase Agreement) along with Stark & Roth, Inc. (together with its affiliates, Stark), Deephaven Partners, the Company and each of the Deephaven
Managers, pursuant to which Deephaven has agreed to sell substantially all of its assets to Stark, and Stark will assume certain limited liabilities of Deephaven.



As consideration for the sale, Deephaven could receive: (i) a payment of up to $7.3 million on the closing date of the
transaction, (ii) deferred payments of up to an additional $20.7 million to be paid between the closing date and 2011, and (iii) an additional payment in 2011 of up to $16.7 million based upon the investment return of certain assets being
managed by Stark over the two year period following the closing of the transaction. Each of these payments (collectively the Purchase Price) is subject to pro ratareduction to the extent that investors in the Deephaven Global
Multi-Strategy Fund (GMS Fund) representing less than $1.4 billion in assets elect to have Stark continue to manage their investment on an on-going basis.



It is currently expected that this formula-based reduction to the three components of the Purchase Price may be significant. In
addition, the Purchase Price is subject to certain offsets. The closing of the transaction is subject to customary conditions, including approval of the GMS Fund investors as further described in the January 27, 2009 Form 8-K.



On February 20, 2009, Deephaven committed to begin the process of a wind-down of their
business in contemplation of the Stark transaction. On this date, Deephaven began reducing their workforce by 20 employees, representing approximately 15% of their total workforce. Additional workforce reductions are expected during the first half
of 2009.



102



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



26.    Condensed Financial Statements of Knight Capital Group, Inc. (parent only)



Presented below are the Condensed Statements of Financial Condition, Operations and
Cash Flows for the Company on an unconsolidated basis.



Statements of
Financial Condition



Knight Capital Group, Inc. (parent only)



|                                                                                                                                  |  |                  |           |                  |   |          
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---------
|                                                                                                                                  |  | December 31,2008 |           | December 31,2007
|                                                                                                                                  |  | (in thousands)  
|Assets                                                                                                                            |  |                  |           |                  |   |          
|Cash and cash equivalents                                                                                                         |  | $                | 64,619    |                  | $ | 43,759   
|Securities owned, at fair value                                                                                                   |  |                  | 6,721     |                  |   | 6,400    
|Investments in subsidiaries, equity method                                                                                        |  |                  | 1,098,546 |                  |   | 831,591  
|Fixed assets and leasehold improvements, at cost, less accumulated depreciation and amortization of $349 in 2008 and $132 in 2007 |  |                  | 537       |                  |   | 191      
|Investments in Deephaven sponsored funds                                                                                          |  |                  | 47,152    |                  |   | 83,732   
|Receivable from Deephaven sponsored funds                                                                                         |  |                  |          |                  |   | 85,000   
|Strategic investments                                                                                                             |  |                  | 50,029    |                  |   | 54,603   
|Other assets                                                                                                                      |  |                  | 60,956    |                  |   | 29,209   
|                                                                                                                                  |  |                  |           |                  |   |          
|Total assets                                                                                                                      |  | $                | 1,328,560 |                  | $ | 1,134,485
|                                                                                                                                  |  |                  |           |                  |   |          
|Liabilities and Stockholders Equity                                                                                              |  |                  |           |                  |   |          
|Liabilities                                                                                                                       |  |                  |           |                  |   |          
|Accrued compensation expense                                                                                                      |  | $                | 57,419    |                  | $ | 21,710   
|Accrued expenses and other liabilities                                                                                            |  |                  | 2,815     |                  |   | 10,094   
|Payable to subsidiaries                                                                                                           |  |                  | 75,897    |                  |   | 123,276  
|Income taxes payable                                                                                                              |  |                  | 25,071    |                  |   | 24,027   
|Long term debt                                                                                                                    |  |                  | 140,000   |                  |   | 70,000   
|                                                                                                                                  |  |                  |           |                  |   |          
|Total liabilities                                                                                                                 |  |                  | 301,202   |                  |   | 249,107  
|Total stockholders equity                                                                                                        |  |                  | 1,027,358 |                  |   | 885,378  
|                                                                                                                                  |  |                  |           |                  |   |          
|Total liabilities and stockholders equity                                                                                        |  | $                | 1,328,560 |                  | $ | 1,134,485
|                                                                                                                                  |  |                  |           |                  |   |          





The accompanying notes are an integral part of these condensed financial statements.



103



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Statements of Operations



Knight Capital Group, Inc. (parent only)



|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|------------------------------------------------------------------------ |  | -------------------------------- | ------- | - | ---- | - | ------- |  | - | -------
|                                                                         |  | For the years ended December 31,
|                                                                         |  | 2008                             |         |   | 2007 |   | 2006   
|                                                                         |  | (in thousands)                  
|Revenues                                                                 |  |                                  |         |   |      |   |         |  |   |        
|Corporate management fees                                                |  | $                                | 28,000  |   |      | $ | 28,165  |  | $ | 28,000 
|Investment income and other, net                                         |  |                                  | (40,092 | ) |      |   | 22,631  |  |   | 14,975 
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|Total revenues                                                           |  |                                  | (12,092 | ) |      |   | 50,796  |  |   | 42,975 
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|Expenses                                                                 |  |                                  |         |   |      |   |         |  |   |        
|Compensation expense                                                     |  |                                  | 21,599  |   |      |   | 20,505  |  |   | 20,915 
|Professional fees                                                        |  |                                  | 8,333   |   |      |   | 6,492   |  |   | 10,161 
|Business development                                                     |  |                                  | 849     |   |      |   | 432     |  |   | 597    
|Interest expense                                                         |  |                                  | 5,008   |   |      |   | 161     |  |   | 281    
|Other                                                                    |  |                                  | 5,010   |   |      |   | 3,815   |  |   | 3,785  
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|Total expenses                                                           |  |                                  | 40,799  |   |      |   | 31,405  |  |   | 35,739 
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|(Loss) income before income taxes and equity in earnings of subsidiaries |  |                                  | (52,891 | ) |      |   | 19,391  |  |   | 7,236  
|Income tax (benefit) expense                                             |  |                                  | (14,233 | ) |      |   | 5,062   |  |   | 444    
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|(Loss) income before equity in earnings of subsidiaries                  |  |                                  | (38,658 | ) |      |   | 14,329  |  |   | 6,792  
|Equity in earnings of subsidiaries                                       |  |                                  | 216,569 |   |      |   | 107,911 |  |   | 151,554
|                                                                         |  |                                  |         |   |      |   |         |  |   |        
|Net income                                                               |  | $                                | 177,911 |   |      | $ | 122,240 |  | $ | 158,346
|                                                                         |  |                                  |         |   |      |   |         |  |   |        



The accompanying notes are an
integral part of these condensed financial statements.



104



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Statements of Cash Flows



Knight Capital Group, Inc. (parent only)



|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                           |  | For the years ended December 31, |         
|                                                                                           |  | 2008                             |          |   | 2007 |   |          | 2006 | 
|                                                                                           |  | (in thousands)                   |         
|Cash flows from operating activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                 |  | $                                | 177,911  |   |      | $ | 122,240  |      |  | $ | 158,346  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities |  |                                  |          |   |      |   |          |      |  |   |          |  
|Equity in earnings of subsidiaries                                                         |  |                                  | (216,569 | ) |      |   | (107,911 | )    |  |   | (151,554 | )
|Depreciation and amortization                                                              |  |                                  | 651      |   |      |   | 239      |      |  |   | 71       |  
|Stock-based compensation                                                                   |  |                                  | 5,310    |   |      |   | 4,539    |      |  |   | 3,998    |  
|Unrealized loss (gain) on investments in Deephaven sponsored funds                         |  |                                  | 28,195   |   |      |   | (17,786  | )    |  |   | (12,669  | )
|Realized (gain) on strategic investments                                                   |  |                                  | (1,547   | ) |      |   |         |      |  |   |         |  
|Unrealized loss (gain) on strategic investments                                            |  |                                  | 13,288   |   |      |   | (688     | )    |  |   | 1,119    |  
|(Increase) decrease in operating assets                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Securities owned                                                                           |  |                                  | (321     | ) |      |   | (57      | )    |  |   | 2,013    |  
|Other assets                                                                               |  |                                  | (32,185  | ) |      |   | (7,314   | )    |  |   | (3,790   | )
|Increase (decrease) in operating liabilities                                               |  |                                  |          |   |      |   |          |      |  |   |          |  
|Accrued compensation expense                                                               |  |                                  | 35,709   |   |      |   | 396      |      |  |   | 8,406    |  
|Accrued expenses and other liabilities                                                     |  |                                  | (7,279   | ) |      |   | 6,921    |      |  |   | 568      |  
|Payable to subsidiaries                                                                    |  |                                  | (18,200  | ) |      |   | 55,612   |      |  |   | 20,296   |  
|Income taxes payable                                                                       |  |                                  | 1,044    |   |      |   | 4,865    |      |  |   | (5,746   | )
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by operating activities                                        |  |                                  | (13,993  | ) |      |   | 61,056   |      |  |   | 21,058   |  
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of fixed assets and leasehold improvements                                       |  |                                  | (562     | ) |      |   | (14      | )    |  |   | (310     | )
|Redemptions in Deephaven sponsored funds                                                   |  |                                  | 93,385   |   |      |   | 35,000   |      |  |   | 19,575   |  
|Investment in Deephaven sponsored funds                                                    |  |                                  |         |   |      |   |         |      |  |   | (1,310   | )
|Proceeds from sale of strategic investments                                                |  |                                  | 6,275    |   |      |   | 5,534    |      |  |   |         |  
|Purchases of strategic investments                                                         |  |                                  | (13,442  | ) |      |   | (10,400  | )    |  |   | (38,750  | )
|Dividends received from subsidiaries                                                       |  |                                  | 123,503  |   |      |   | 129,324  |      |  |   | 250,514  |  
|Capital contributions to subsidiaries                                                      |  |                                  | (122,554 | ) |      |   | (21,252  | )    |  |   | (235,735 | )
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                        |  |                                  | 86,605   |   |      |   | 138,192  |      |  |   | (6,016   | )
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Stock options exercised                                                                    |  |                                  | 10,360   |   |      |   | 21,075   |      |  |   | 26,787   |  
|Income tax benefit on stock awards exercised                                               |  |                                  | 6,117    |   |      |   | 15,172   |      |  |   | 19,405   |  
|Proceeds from long term debt borrowing                                                     |  |                                  | 70,000   |   |      |   | 70,000   |      |  |   |         |  
|Cost of common stock repurchased                                                           |  |                                  | (138,229 | ) |      |   | (266,643 | )    |  |   | (75,959  | )
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                                      |  |                                  | (51,752  | ) |      |   | (160,396 | )    |  |   | (29,767  | )
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                           |  |                                  | 20,860   |   |      |   | 38,852   |      |  |   | (14,725  | )
|Cash and cash equivalents at beginning of the year                                         |  |                                  | 43,759   |   |      |   | 4,907    |      |  |   | 19,632   |  
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of the year                                               |  | $                                | 64,619   |   |      | $ | 43,759   |      |  | $ | 4,907    |  
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                          |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                                     |  | $                                | 5,008    |   |      | $ | 97       |      |  | $ | 408      |  
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash paid for income taxes                                                                 |  | $                                | 112,749  |   |      | $ | 66,826   |      |  | $ | 102,747  |  
|                                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  



The accompanying notes are an
integral part of these condensed financial statements.



105



---

##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued



Notes to Condensed Financial Statements



Knight Capital Group, Inc. (parent only)



A.    General



The condensed financial statements of Knight Capital Group, Inc. (parent only; the Parent Company) should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto.



B.    Income taxes



As stated in
Footnote 15, Income Taxes, the Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In other jurisdictions, the Company and its subsidiaries
file separate income tax returns. As such, both federal and state income taxes attributable to subsidiaries are accrued at the subsidiary level and are therefore, included in Equity in earnings of subsidiaries on the Condensed Financial Statements.
Income tax (benefit) expense included on the Parent Companys Condensed Statements of Operations represents only the income taxes attributable to the Parent Company.



106



---

##### Table of Contents

Item 9.Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures



None



Item 9A.Controls and Procedures



(a) Disclosure Controls and Procedures. Knights
management, with the participation of Knights Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Knights disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Knights Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, Knights disclosure controls and procedures are effective.



(b) Managements Report on Internal Control Over Financial Reporting. See report included in Item 8 of this Annual Report on Form 10-K.



(c) Changes in Internal Control Over Financial Reporting. There have not been any
changes in Knights internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, Knights internal control over financial reporting.



Item 9B.Other Information



None



PART IIIITEMS 10, 11, 12, 13 and 14



The Companys Proxy Statement for its 2009 Annual Meeting of Stockholders, which,
when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III
(Items 10, 11, 12, 13 and 14).



107



---

##### Table of Contents

PART IV



Item 15.Exhibits and Financial Statement Schedules



(a)    The following documents are filed as part of this report:



Consolidated Financial Statements and Financial
Statement Schedules. See Part II Item 8, Financial Statements and Supplementary Data



(c)    INDEX TO EXHIBITS



|                                                        |  |                                                                                                                                                                                                                                                                                                                                                               
|------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                       
|2.2                                                     |  | Asset Purchase Agreement, dated as of August 8, 2004, by and among Citigroup Financial Products Inc. and KFP Holdings I LLC, Knight Financial Products LLC and Knight Execution Partners LLC.
(Incorporated herein by reference to Exhibit 2.1 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated August 9, 2004).              
|                                                        | 
|2.3                                                     |  | Amendment No. 1 to the Asset Purchase Agreement by and among Citigroup Financial Products Inc. and KFP Holdings I LLC, Knight Financial Products LLC and Knight Execution Partners LLC dated December 9,
2004. (Incorporated herein by reference to Exhibit 2.2 to Knights Current Report on Form 8-K (Commission file number 001-14223), December 15, 2004).
|                                                        | 
|3.1                                                     |  | Amended and Restated Certificate of Incorporation of Knight/Trimark Group, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knights Current Report on Form 8-K (Commission file number
001-14223), dated January 6, 2000).                                                                                                                           
|                                                        | 
|3.2**                                                   |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Knight Trading Group, Inc., filed May 12, 2005.                                                                                                                                                                                                                          
|                                                        | 
|3.3                                                     |  | Amended and Restated By-Laws of the Registrant dated January 19, 2005. (Incorporated herein by reference to Exhibit 3.2 to Knights Annual Report on Form 10-K (Commission file number 001-14223),
dated March 15, 2005).                                                                                                                                     
|                                                        | 
|10.1                                                    |  | License Agreement between Automated Securities Clearance, Ltd. and Knight Securities, L.P., dated April 5th, 1995. (Incorporated herein by reference to Exhibit 10.8 to Amendment 1 to the Registration
Statement on Form S-1 (Registration number 333-51653), filed with the SEC on May 22, 1998).                                                           
|                                                        | 
|10.2*                                                   |  | Form of Registrants 1998 Long Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.15 to Amendment 1 to the Registration Statement on Form S-1 (Registration number 333-51653),
filed with the SEC on May 22, 1998).                                                                                                                         
|                                                        | 
|10.3*                                                   |  | Form of Registrants 1998 Nonemployee Director Stock Option Plan. (Incorporated herein by reference to Exhibit 10.16 to Amendment 1 to the Registration Statement on Form S-1 (Registration number
333-51653), filed with the SEC on May 22, 1998).                                                                                                           



108



---

##### Table of Contents

|                                                        |  |                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                                      
|                                                        | 
|10.4                                                    |  | Clearing Agreement between Knight Securities, L.P. and Broadcort Capital Corp. (the Knight Clearing Agreement), dated September 28, 1999. (Incorporated herein by reference to Exhibit 10.1
to Knights Quarterly Report on Form 10-Q (Commission file number 001-14223), for the quarter ended September 30, 1999).                                                       
|                                                        | 
|10.5                                                    |  | Amendment to the Knight Clearing Agreement, dated October 18, 1999. (Incorporated herein by reference to Exhibit 10.2 to Knights Quarterly Report on Form 10-Q (Commission file number 001-14223),
for the quarter ended September 30, 1999).                                                                                                                               
|                                                        | 
|10.6                                                    |  | Lease Agreement between Newport Office Center IV, Co., LLC and Knight Securities, L.P., dated May 11, 2000, for office space situated at 545 Washington Boulevard, Jersey City, New Jersey 07310.
(Incorporated herein by reference to Exhibit 10.25 to Knights Annual Report on Form 10-K (Commission file number 001-14223), for the fiscal year ended December 31, 2002).
|                                                        | 
|10.7                                                    |  | Form of Indemnification Contract entered into by members of the Registrants Board of Directors. (Incorporated herein by reference to Exhibit 10.26 to Knights Quarterly Report on Form 10-Q
(Commission file number 001-14223), for the quarter ended June 30, 2003).                                                                                                      
|                                                        | 
|10.8*                                                   |  | Amended and Restated 2003 Equity Incentive Plan of the Registrant. (Incorporated herein by reference to Exhibit 10.28 to Knights Quarterly Report on Form 10-Q (Commission file number 001-14223),
for the quarter ended June 30, 2003).                                                                                                                                    
|                                                        | 
|10.9                                                    |  | U.S. Securities and Exchange Commission Order. (Incorporated herein by reference to Exhibit 10.1 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated December 17,
2004).                                                                                                                                                                        
|                                                        | 
|10.10                                                   |  | NASD Letter of Acceptance, Waiver and Consent. (Incorporated herein by reference to Exhibit 10.2 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated December 17,
2004).                                                                                                                                                                        
|                                                        | 
|10.11*                                                  |  | Form of Non-Qualified Stock Option Agreement under the 2003 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to Knights Current Report on Form 8-K (Commission file number
001-14223), dated April 4, 2005).                                                                                                                                        
|                                                        | 
|10.12*                                                  |  | Form of Restricted Stock Award Agreement under the 2003 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to Knights Current Report on Form 8-K (Commission file number
001-14223), dated April 4, 2005).                                                                                                                                            
|                                                        | 
|10.13*                                                  |  | Employment Letter Agreement, dated as of December 2, 2005, between Thomas M. Joyce and Knight Capital Group, Inc. (Incorporated herein by reference to Exhibit 10.1 to Knights Current Report on
Form 8-K (Commission file number 001-14223), dated December 5, 2005).                                                                                                      
|                                                        | 
|10.14*                                                  |  | Form of Non-Qualified Stock Option Agreement under the 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to Knights Current Report on Form 8-K (Commission file
number 001-14223), dated December 5, 2005).                                                                                                                                  



109



---

##### Table of Contents

|                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                        | 
|10.15*                                                  |  | Form of Restricted Stock Award Agreement under the 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to Knights Current Report on Form 8-K (Commission file number
001-14223), dated December 5, 2005).                                                                                                                                                                                                   
|                                                        | 
|10.16*                                                  |  | Option Agreement among Deephaven Managing Partners, LLC, Deephaven Capital Management LLC, Knight Capital Group, Inc., KFP Holdings I LLC, Colin Smith, Shailesh Vasundhra and Matthew Nunn, dated
December 21, 2006. (Incorporated herein by reference to Exhibit 1.1 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated December 22, 2006).                                                               
|                                                        | 
|10.17*                                                  |  | 2006 Equity Incentive Plan of the Registrant. (Incorporated herein by reference from Exhibit A to Knights Definitive Proxy Statement on Schedule 14A (Commission file number 001-14223), filed
April 5, 2006).                                                                                                                                                                                                                           
|                                                        | 
|10.18                                                   |  | Credit Agreement among Knight Capital Group, Inc., as Borrower, The Several Lenders from Time to Time Party Hereto, TD Banknorth, N.A and Wachovia Bank, National Association as Co-Syndication Agents,
and JPMorgan Chase Bank, N.A, as Administrative Agent, dated October 3, 2007. (Incorporated herein by reference to Exhibit 10.1 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated October 9,
2007).
|                                                        | 
|10.19                                                   |  | Limited Liability Company Agreement of Deephaven Capital Management Holdings LLC among Knight Capital Group, Inc., KFP Holdings I LLC, Deephaven Managing Partners, LLC, Colin Smith, Shailesh Vasundhra
and Matthew Nunn, dated February 1, 2008. (Incorporated herein by reference to Exhibit 1.1 to Knights Current Report on Form 8-K (Commission file number 001-14223), dated February 7, 2008).                                   
|                                                        | 
|10.20*                                                  |  | Form of Non-Qualified Stock Option Agreement under the 2006 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.20 to Knights Annual Report on Form 10-K (Commission file number
001-14223), dated February 29, 2008).                                                                                                                                                                                                
|                                                        | 
|10.21*                                                  |  | Form of Restricted Stock Award Agreement under the 2006 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.21 to Knights Annual Report on Form 10-K (Commission file number
001-14223), dated February 29, 2008).                                                                                                                                                                                                    
|                                                        | 
|10.22*                                                  |  | Employment Letter Agreement, dated as of December 24, 2008, between Thomas M. Joyce and Knight Capital Group, Inc. (Incorporated herein by reference to Exhibit 10.1 to Knights Current Report on
Form 8-K (Commission file number 001-14223), dated December 24, 2008).                                                                                                                                                                 
|                                                        | 
|10.23*                                                  |  | Form of Restricted Stock Unit Award Agreement under the 2003 Equity Incentive Plan and 2006 Equity Incentive Plan, with deferral feature. (Incorporated herein by reference to Exhibit 10.2 to
Knights Current Report on Form 8-K (Commission file number 001-14223), dated December 24, 2008).                                                                                                                                          



110



---

##### Table of Contents

|                                                        |  |                                                                                                                                                                                                                                                                                                    
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                            
|                                                        | 
|10.24*                                                  |  | Form of Restricted Stock Unit Award Agreement under the 2003 Equity Incentive Plan and 2006 Equity Incentive Plan, without deferral feature. (Incorporated herein by reference to Exhibit 10.3 to
Knights Current Report on Form 8-K (Commission file number 001-14223), dated December 24, 2008).
|                                                        | 
|10.25**                                                 |  | Performance Restricted Stock Unit Agreement with Thomas M. Joyce, dated December 31, 2008, under the 2006 Equity Incentive Plan.                                                                                                                                                                   
|                                                        | 
|21.1**                                                  |  | Subsidiaries of the Registrant as of December 31, 2008.                                                                                                                                                                                                                                            
|                                                        | 
|23.1**                                                  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                          
|                                                        | 
|24.1**                                                  |  | Powers of Attorney (included on signature page).                                                                                                                                                                                                                                                   
|                                                        | 
|31.1**                                                  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                
|                                                        | 
|31.2**                                                  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                
|                                                        | 
|32.1**                                                  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                 
|                                                        | 
|32.2**                                                  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                 



|* |  | Management contract or compensatory plan or arrangement identified in compliance with Item 15(c) of the rules governing the preparation of this report.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Filed herewith.
|-- |  | ---------------



111



---

##### Table of Contents

SIGNATURES



Pursuant 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 behalf by the undersigned, thereunto duly authorized, in the City of Jersey City, State of New Jersey, on this 27th day of February, 2009.



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|KNIGHT CAPITAL GROUP, INC.
|                           | 
|By:                        |  | /s/    THOMAS M.
JOYCE                           
|                           |  | Chairman of the Board and Chief Executive Officer



POWER OF ATTORNEY



KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas M. Joyce and Steven Bisgay, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in
any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and
Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and
agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this Registration Statement has been signed by the following persons in the capacities and on
the date indicated.



|                                                 |  |                                                                                                   |  |                  
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | -----------------
|Name                                             |  | Title                                                                                             |  | Date             
|                                                 |  |                                                                                                  
|/s/    THOMAS M.
JOYCE Thomas M. Joyce           |  | Chairman of the Board and Chief Executive Officer (Principal Executive Officer)                   |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    STEVEN
BISGAY Steven Bisgay               |  | Senior Managing Director and Chief Financial Officer (Principal Financial and Accounting Officer) |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    WILLIAM L.
BOLSTER William L. Bolster     |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    GARY R.
GRIFFITH Gary R. Griffith         |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    ROBERT M.
LAZAROWITZ Robert M. Lazarowitz |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    JAMES W.
LEWIS James W. Lewis             |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    THOMAS C.
LOCKBURNER Thomas C. Lockburner |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    JAMES T.
MILDE James T. Milde             |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    CHRISTOPHER C.
QUICK Christopher C. Quick |  | Director                                                                                          |  | February 27, 2009
|                                                 |  |                                                                                                  
|/s/    LAURIE M.
SHAHON Laurie M. Shahon         |  | Director                                                                                          |  | February 27, 2009



112